1. Overview of legal risks in contract drafting and execution

1.1. The legal nature of contracts and the principle of freedom of contract

 In the business environment, a contract is the central legal instrument to record agreements, establish, alter, or terminate rights and obligations between participating parties. The foundational principle of the current civil legal system is the respect for freedom and voluntary commitment and agreement. However, this freedom must remain within a framework that does not violate statutory prohibitions or contravene social morals.

1.2. Legal consequences of failing to control contract risks

Many businesses today frequently skip the detailed review process of contract clauses due to time pressure or a lack of legal expertise. Accepting unfavorable terms not only generates direct financial losses but also leads to the risk of the contract being declared void, the loss of the right to sue, or sanctions from state regulatory agencies. This article provides an in-depth analysis of the 10 clauses with the highest hidden risks that businesses must pay special attention to during negotiation and execution.

2. Comprehensive liability exemption clauses

2.1. Identifying liability exemption clauses

These clauses are often inserted into contracts by the party with the upper hand in negotiations, using absolute linguistic structures, typically such as:

• “Party A shall bear no liability under any circumstances.”
• “Complete exemption from the obligation to compensate for damages.”
• “Not liable for any direct or indirect damages arising.”

2.2. Risk assessment and legality under current regulations

 From a legal perspective, this clause completely strips the business of its right to claim compensation when the partner breaches their obligations, even in cases where the partner acts with intentional fault or breaches the most fundamental obligations of the contract. Legally, comprehensive liability exemption agreements run a high risk of being declared void by the Court. According to the provisions of the current Civil Code regarding invalid civil transactions, agreements aimed at evading statutory obligations or contravening basic principles of civil law hold no legal validity. Notably, in transactions governed by the Law on Protection of Consumers’ Rights (Law No. 19/2023/QH15), clauses in standard form contracts that exclude the liability of business organizations or individuals toward consumers will be considered entirely void.

2.3. Recommended negotiation solutions

To ensure fairness and legality, businesses should:

• Require limiting the scope of liability exemptions to specific, clear cases (e.g., exemption only due to force majeure events).
• Ensure the maintenance of compensation remedies in cases of breach due to intentional fault or material breach of obligations.
• Replace “complete exemption” clauses with “limitation of liability” clauses (e.g., capping the maximum compensation amount at the contract value).

3. Vague payment clauses and lack of late payment penalties

 3.1. Identifying a lack of transparency in payment clauses

 Indeterminate payment clauses often use qualitative phrases such as:

• “Payment within a reasonable time.”
• “Payment upon certain conditions or upon receipt of payment from the project owner (Back-to-back payment).”
• “Payment according to a schedule to be agreed upon later.”

3.2. Legal implications and cash flow risks

Financially vague clauses lead to direct risks to the business’s cash flow. Partners may cite this lack of clarity to delay payment obligations without being considered in breach of contract. When a dispute arises, the dispute resolution body will have to spend significant time gathering evidence and determining trade usages to interpret the concept of a “reasonable time,” causing disadvantages for the creditor.

3.3. Solutions to standardize payment clauses

• Stipulate absolute payment milestones (e.g., “Within 30 days from the date of issuing a valid invoice”).
• Clearly define the payment method, currency, and beneficiary account information.
• Establish late payment penalties: Add clauses calculating late payment interest on the delayed amount based on the provisions of the current Commercial Law and Civil Code to deter the misappropriation of capital.
• Divide payment milestones proportionally corresponding to each completed and accepted phase of work.

4. Disproportionate penalty clauses exceeding statutory limits

4.1. Identifying unreasonable penalty clauses

 Asymmetry in penalty clauses is demonstrated by the following signs:

• Applying penalties for breach to only one party, while the drafting party is exempted.
• Stipulating penalty levels applied to even the most minor faults.
• Establishing excessively high penalty levels that are disproportionate to the nature of the breach.

4.2. Legal framework adjusting maximum penalty limits

A common practical misconception regarding the Court’s authority to reduce penalty levels needs correction. Under the principles of the Civil Code, parties have the right to freely agree on the penalty level unless specialized laws provide otherwise. However, for commercial transactions (having a profit-making purpose with at least one party being a merchant), this freedom of agreement is strictly limited by the Commercial Law. Current commercial law stipulates that the penalty for breach of contractual obligations must not exceed 8% of the value of the breached contractual obligation portion (except in cases of breaching assessment results). If the parties agree on a 15% or 20% penalty, upon a dispute, the dispute resolution body will declare the portion exceeding 8% void and unrecognized, affecting the business’s projected damage recovery.

4.3. Negotiation strategy and setting penalties

• Ensure the principle of equality: The obligation to bear penalties for breach must be applied proportionately to both parties when a breach occurs.
• Comply with statutory limits: Negotiate reasonable penalty levels, ensuring they do not exceed 8% of the value of the breached obligation portion for commercial contracts.
• Combine with compensation for damages: It is necessary to clearly record the agreement to simultaneously apply both the penalty for breach and compensation for damages. According to the Civil Code (applicable to civil contracts), if a penalty is agreed upon without mentioning compensation, the breaching party will not have to compensate for damages. Although the Commercial Law allows the application of both remedies even if only a penalty clause is recorded, a clear written agreement is mandatory to preempt the risk of disputes regarding which law applies.

5. Overly broad confidentiality clauses and data regulation violations

 5.1. Signs of unlimited confidentiality clauses

 Non-Disclosure Agreements (NDAs) are often designed with an overly broad scope, including requirements such as:

• “Keep all information related to the contract confidential indefinitely.”
• “Do not disclose any data to any third party in any form.”
• “Confidentiality obligations apply automatically to all personnel, partners, and subcontractors.”

5.2. Conflict with personal data protection laws

Defining the scope of confidential information generically not only hinders the normal business operations of the enterprise (such as providing records for auditors, legal counsels, or competent state agencies) but also poses a potential risk of violating newly enacted specialized laws. Specifically, with the introduction of the Law on Personal Data Protection (Law No. 91/2025/QH15) taking official effect from January 1st of the following consecutive year, all activities involving the collection, transfer, and processing of personal information must strictly adhere to the principle of clear, transparent consent from the data subject. If a contract’s confidentiality clause compels a party to process or store personal data without establishing a lawful permission mechanism, or prohibits reporting when a data leak incident occurs, that clause will severely violate the Law on Personal Data Protection and incur heavy administrative or criminal sanctions.

5.3. Recommendations for setting confidentiality boundaries

• Accurately define the categories of information considered “Trade Secrets” or “Confidential Information.”
• Establish exceptions allowing information disclosure: Provision to legal advisors, auditors, or provision upon mandatory request by state regulatory agencies or courts.
• Limit the effective duration of the confidentiality obligation (usually 2 to 5 years after contract termination).
• Incorporate standard clauses on data de-identification and compliance with the Law on Personal Data Protection during information processing.

6. Unlimited exclusivity clauses and competition risks

 6.1. Identifying restrictions on the freedom of business

 Unfavorable exclusivity clauses often contain commitments such as:

• “Commit not to cooperate or transact with any other partner in the same field.”
• “The exclusive right to supply/distribute applies indefinitely globally.”
• “Not allowed to do business in or develop similar products in the future.”

6.2. Risks of market control and violating the Competition Law

 Accepting an exclusivity clause without spatial and temporal limits will severely narrow the business’s opportunities for market expansion. If the partner breaches payment obligations or ceases operations, the business will fall into a state of stagnation because it is bound by the commitment not to cooperate with third parties. Furthermore, under competition law, agreements restricting goods distribution, limiting markets, or abusing a dominant market position to prevent other businesses from entering the market can all be investigated and penalized by competition authorities.

6.3. Solutions for controlling exclusive commitments

• Limit the scope of exclusivity specifically: Apply exclusivity only within a certain geographical area or for a specific product line.
• Stipulate a defined exclusivity term (usually 1 to 3 years) and set conditions for renewal.
• Establish conditions to maintain exclusivity: Require the partner to achieve minimum sales KPIs or order volumes per quarter/year to continue maintaining the privilege.
• Clearly define the right to unilaterally terminate the exclusivity regime early if the partner fails to fulfill business performance commitments.

7. Clauses on amending terms, durations, and assigning contracts

 7.1. Unilateral amendment clauses

• Risk sign: The contract states, “Party A has the right to amend, supplement clauses, or change the pricing schedule at any time without Party B’s prior consent.”
• Legal analysis: A contract is fundamentally a consensus of wills. A clause allowing one party to arbitrarily change the contract’s contents destroys equality and severely infringes on the rights of the other party. In standard form contracts, clauses allowing unilateral changes to trading rules without justifiable reasons and prior notice may be deemed invalid.
• Solution: Mandate that all contract amendments and supplements must be made in writing and signed by authorized representatives of both parties. In the context of the current Law on Electronic Transactions (Law No. 20/2023/QH15), it must be clearly stated that any amendment agreements via email or messaging apps (Zalo, Telegram…) are only legally valid when confirmed by a formal written document or a data message with a secure digital/electronic signature. Clearly outline the process for sending proposed amendment notices and the right to terminate the contract if one party does not accept the change.

7.2. Term and automatic renewal clauses

• Risk sign: “The contract automatically renews for identical cycles unless a termination notice is given 6 to 12 months in advance.”
• Legal analysis: Demanding an excessively long notice period combined with an automatic renewal mechanism easily causes a business to miss the deadline for sending the notice, leading to being forced to continue executing a commercially ineffective contract.
• Solution: Restrict the use of automatic renewal mechanisms. If mandatory, shorten the non-renewal notice period to a reasonable timeframe (from 30 to 90 days) and add the right to review financial terms before the contract enters a new renewal cycle.

7.3. Unequal assignment of rights and obligations clauses

• Risk sign: The contract allows one party to freely assign the entire contract to any third party but strictly prohibits the other party from exercising the same right.
• Legal analysis: Under the current Civil Code, an obligor may only transfer a civil obligation to a substitute obligor with the consent of the obligee. If a partner arbitrarily assigns the contract to an entity with weak financial or technical capabilities, the business will bear all execution risks.
• Solution: Require that the assignment of all or part of the contract must be approved in advance in writing by the other party. Add a condition stating that the assignor must continue to bear joint liability for obligations that the assignee fails to fully perform.

8. Impractical warranties and unfavorable dispute resolution clauses

8.1. Absolute commitments and warranty clauses

• Risk sign: Making absolute commitments such as: “Commit that the product has absolutely no defects,” “Guarantee absolutely no complaints will arise,” “Commit to achieving the exact projected profit.”
• Legal analysis: These are commitments beyond the business’s actual control capabilities. Accepting these clauses means the business voluntarily waives the right to invoke force majeure events or objective obstacles under civil law to be exempted from liability when a breach occurs.
• Solution: Convert absolute commitment language into best-effort obligations, for example: “Party A shall use its best commercially reasonable efforts to…”, or “Ensure quality conforms to the current technical standards of the industry.” Closely integrate liability exemption clauses due to force majeure events. Crucially, explicitly stipulate the procedure for notifying force majeure events (e.g., written notice within 3-5 working days) and the obligation to provide confirming evidence. According to Article 295 of the Commercial Law, failure to provide timely notice may result in the breaching party losing the right to invoke force majeure for liability exemption.

8.2. Unfavorable dispute resolution mechanism clauses

• Risk sign: The contract designates a Court or Arbitration Center in a distant foreign country, applies a foreign legal system, or states that “the losing party must bear all litigation costs and attorney fees of the winning party.”
• Legal analysis: Resolving disputes at an unfavorable jurisdictional body will cause travel costs, attorney fees, and translation fees to skyrocket, creating a prohibitive barrier for small and medium-sized enterprises to protect their legitimate rights.
• Solution: Always prioritize applying Vietnamese law for contracts performed within Vietnamese territory. Agree on the dispute resolution body as the People’s Court or Commercial Arbitration Center in the locality where the business is headquartered. Record a pre-litigation mechanism: oblige the parties to make efforts to negotiate and mediate within a certain time limit before initiating a lawsuit.

9. Contract review process and common mistakes to avoid

9.1. Effective contract review process for businesses

To neutralize risks from the 10 hazardous clause groups mentioned above, a business’s contract operation and control process must follow 5 basic steps:

• Step 1: Read and comprehensively review the document. Businesses must absolutely not sign without carefully reading the entire contract text, paying special attention to clauses printed in small fonts, footnotes, and the entire system of attached appendices.
• Step 2: Extract crucial clauses. Clearly identify clauses regarding rights, obligations, payment methods, penalty for breach, compensation for damages, and contract termination mechanisms.
• Step 3: Assess legal and commercial risks. Cross-reference the rights and obligations of both parties to determine balance, evaluate the capacity to execute commitments, and forecast financial consequences if a breach occurs.
• Step 4: Formulate negotiation and amendment strategies. Classify risk clauses by priority, prepare reasonable alternative clauses, and keep a written trail of all amendment agreement documents.
• Step 5: Seek professional consultation. For contracts with complex structures or high value, consulting with a team of commercial lawyers, financial audit departments, and technical experts is a mandatory requirement to assess legality and feasibility.

9.2. Common mistakes to completely overcome

• Mistakes due to complaisance: Businesses often assume that a close partnership will substitute for the strictness of a contract. In reality, a contract with clear boundaries of rights and obligations is the tool to protect and maintain a long-term cooperative relationship.
• Mistakes from using cookie-cutter templates: Copying exact contract templates from the Internet and applying them to specific transactions without refinement will lead to contract clauses directly conflicting with real-world situations and the latest legal regulations.
• Mistakes due to time pressure: Accepting to sign a contract under urging pressure from partners to quickly close a deal while skipping the legal due diligence phase is the leading cause of risks.
• Mistakes in archiving: Lacking a system to store original copies of the main contract and amended appendices, leading to the loss of the most important evidence to present before the Court when a dispute arises.
• Mistakes from ignoring “Standard” clauses: Many businesses neglect reviewing clauses that partners assert are “general market standards.” Every clause, even if customary, must still be thoroughly appraised to eliminate detrimental traps.

By establishing a strict internal control process and accurately identifying hazardous clauses, businesses will build a solid legal defense mechanism, maximize the protection of financial interests, and elevate their negotiating position in the marketplace.

This article is for informational purposes only and does not replace professional legal advice. For support tailored to your situation, please contact a lawyer or legal professional.

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