In construction, the suite of construction contract published by the International Federation of Consulting Engineers (“Fédération Internationale des Ingénieurs – Conseils” abbreviated as FIDIC) have become internationally recognized and widely used across numerous jurisdictions. Among these, the Red Book (for building and engineering works designed by the Employer), the Yellow Book (for Plant and Design-Build contracts), and the Silver Book (for EPC/Turnkey Projects) are the most commonly adopted. In Vietnam, the 1999 edition of the Red Book (hereinafter referred to as “FIDIC Red Book 1999”) is particularly prevalent due to its compatibility and suitability with the local construction market.

One of the most practically significant yet frequently disputed provisions in the performance of construction contracts is the clause on delay damages, as stipulated in Clause 8.7 of the FIDIC Red Book 1999. This article aims to analyze and clarify the legal aspects of this provision under applicable Vietnamese laws and its practical implementation.

1. Delay Damages under the FIDIC Red Book 1999:

According to Clause 8.7 of the FIDIC Red Book 1999, delay damages are a form of pre-agreed compensation payable by the Contractor to the Employer for failing to meet the Time for Completion. These are pre-determined daily amounts applied from the date the works should have been completed to the actual date of completion. Typically, the Particular Conditions of Contract will stipulate a cap on the total amount of delay damages.

Importantly, the Employer is not entitled to any additional compensation, and the Contractor is not liable for any further damages arising from the delay. This clause does not apply in cases where the contract is terminated before the works are completed and taken over.

2. Delay Damages and Related Legal Mechanisms under Vietnamese Law:

2.1. Delay Damages:

Within construction contracts, delay damage clauses serve as a key mechanism for protecting the Employer’s interests when the Contractor fails to meet agreed-upon timelines.

Under FIDIC Red Book 1999, delay damages are considered liquidated damages, i.e., a pre-agreed amount payable by the defaulting party to compensate for losses. However, Vietnamese law does not explicitly recognize or regulate this concept. This legal gap highlights a point of divergence between FIDIC Red Book 1999 and Vietnamese legislation.

2.2. Compensation for Damages:

Under Vietnamese law, compensation for damages refers to the legal obligation of a party to remedy and compensate for material and/or moral losses caused by its breach of contractual or legal obligations.

To establish a party’s liability for compensation, the following conditions must be satisfied: (i) actual damage occurred; (ii) there is a breach of obligation; (iii) a causal link exists between the breach and the damage; and (iv) the fault of the breaching party must be considered when determining liability.

Actual damages are understood as specific, quantifiable losses—whether physical, financial, or emotional—suffered by a party due to another’s actions. These must be fully and promptly compensated to restore the injured party to their prior position. This requirement distinguishes Vietnamese law’s damage compensation from the liquidated damages under Clause 8.7 of the FIDIC Red Book 1999.

2.3. Penalty for Breach of Contract

A penalty for breach is a pre-agreed monetary amount the breaching party must pay the non-breaching party, based on their contractual agreement. It serves punitive and deterrent functions, ensuring the breaching party fulfills its contractual obligations.

Under commercial relationships, the law allows parties to agree on a penalty amount for a specific breach or multiple breaches of contractual obligations, not exceeding 8% of the value of the breached obligation. Additionally, the Law on Construction 2014 provides that in projects using state capital, the penalty must not exceed 12% of the value of the breached portion of the contract. However, the Civil Code 2015 does not impose any limit on contractual penalties.

Therefore, the delay damages under Clause 8.7 of the FIDIC Red Book 1999 differs significantly from Vietnamese legal frameworks on damages and contractual penalties.

3. Practical Application in Vietnam

In judicial practice, disputes over delay damages under Clause 8.7 of the FIDIC Red Book 1999 have not been applied consistently by Vietnamese adjudicative bodies. For many years, courts have inclined toward the view that all claims for damages must be substantiated by proof of actual loss, in line with the general principles of civil liability.

In Cassation Decision No. 15/2016/KDTM-GĐT dated 07 September 2016, the Supreme People’s Court held that Clause 8.7 of the FIDIC Red Book 1999 constitutes a form of penalty for delay, not compensation for damages. This position was reiterated in Cassation Decision No. 10/2020/KDTM-GĐT dated 14 August 2020, where the Court affirmed that liquidated damages clauses should be treated as penalty provisions under Vietnamese law.

However, in Appellate Judgment No. 660/2022/KDTM-PT dated 10 November 2022 issued by the Ho Chi Minh City People’s Court, the trial panel recognized the legality of a liquidated damages clause and upheld the claim without requiring proof of actual damages. The panel based its decision on the principle of freedom of contract and the parties’ right to determine the terms of their civil transactions. It also found that liquidated damages are not inconsistent with the nature of compensation for damages, provided the pre-agreed amount is not unreasonably disproportionate to the actual loss.

4. Recommendations from Pros Legal

Delay damages under Clause 8.7 of the FIDIC Red Book 1999 serve as an essential mechanism to protect the Employer’s interests in the event of delay by the Contractor. However, the application of this clause in Vietnam faces significant legal challenges due to its incompatibility with the statutory principles of damage compensation.

While recent judgments indicate a shift toward accepting liquidated damages provisions, inconsistent application persists and poses risks for both parties in the event of a dispute.

In this context, a safer approach for parties is to revise the title and content of the delay damages clause to clearly define it as a penalty for breach, aligning with Vietnamese legal terminology. Moreover, the penalty amount should be expressed as a percentage (%) of the relevant contractual value, and must not exceed the statutory limits.

By proactively adapting and localizing FIDIC provisions, parties can not only safeguard their legitimate interests but also enhance the enforceability and effectiveness of their contracts under Vietnamese law.