7 key risks in payment clauses that businesses often overlook

In a commercial contract, the payment clause is the lifeblood of cash flow. It shows directly whether the deal makes economic sense. Yet negotiators and drafters often focus only on the amount and the method of payment (bank transfer, L/C, cash). They pay little attention to the conditions that trigger the payment obligation, the document mechanism and the monetary remedies.

Below is an in-depth analysis of 7 key risks in payment clauses that businesses often overlook. Each is linked to current law, case law precedents (án lệ) and court and arbitration practice.

1. Risk of linking the payment obligation to issuing the VAT invoice

The risk

Many contracts make payment depend on the invoice: “The Buyer shall pay only within X days of receiving a valid VAT invoice issued by the Seller.” When a dispute arises or the buyer has cash problems, the buyer often says it has “not received the VAT invoice”, “the invoice has an error in the name or address” or “the seller has not issued the invoice”. It then delays paying the full value of the goods or services it has already received.

Legal basis and court practice

In legal terms, issuing an invoice is the trader’s tax obligation to the State under the Law on Tax Administration and the decrees on invoices and documents. The payment obligation, by contrast, arises because the seller has delivered the goods, or the service provider has completed work that has been accepted, under Articles 50 and 85 of the Commercial Law 2005.

Courts and arbitral tribunals usually find that a seller’s late VAT invoice is only a breach of a tax obligation (which may be handled under tax law). It does not release the buyer from paying once the buyer has actually received and used the goods or services. A buyer that holds back 100% of the contract value only because the VAT invoice is missing will be found in breach of its payment obligation and must pay late-payment interest.

How to protect your business

• The seller should agree a clear separation: the VAT invoice is issued only after a payment request is sent, or after the buyer has paid (especially for advance payments).
• State clearly: “If there is an error in the VAT invoice, the Buyer may only withhold the amount corresponding to the VAT (usually 8% to 10%). The Buyer has no right to delay payment of the pre-tax value of the goods or services.”

2. Risk from “pay-when-paid” and “pay-if-paid” clauses in subcontracts

The risk

These clauses are common in construction, processing and logistics. The main contractor often imposes a clause such as: “The Main Contractor is only obliged to pay the Subcontractor after the Employer has accepted the works and paid the Main Contractor.” If the employer runs into legal problems with the project, runs out of cash or has a dispute with the main contractor, the subcontractor’s money is locked up for a long time. Its cash flow may break down.

Legal basis and court practice

Vietnamese law recognises freedom of contract in commercial dealings (Article 11 of the Commercial Law 2005 and Article 3 of the Civil Code 2015). No legal instrument prohibits pay-when-paid clauses.

However, if the clause is worded as pay-when-paid (it only sets the timing: payment when the money is received), courts tend to treat it as extending the payment deadline for a reasonable period. It does not mean the main contractor is released from the debt for ever if the employer goes bankrupt or delays without good reason.

How to protect your business

• A subcontractor should never accept a pay-if-paid clause (payment only if the main contractor is paid). This shifts 100% of the employer’s financial risk to the subcontractor.
• If you must accept a pay-when-paid clause, always add a cut-off date: “In any event, the Main Contractor shall pay the Subcontractor no later than 60 days after the Main Contractor accepts the Subcontractor’s work, whether or not the Employer has paid the Main Contractor.”

3. Risk of leaving out or getting wrong the late-payment interest mechanism (Article 306 of the Commercial Law and Precedent No. 09/2016/AL)

The risk

Contracts often say only: “The party that pays late shall pay interest as provided by law.” Or they set a very high rate (3% to 5% per month). Both lead to heated arguments when the dispute is resolved.

Legal basis and court practice

• No specific agreement on interest: under Article 306 of the Commercial Law 2005 and Article 11 of Resolution No. 01/2019/NQ-HĐTP, the court calculates interest using the average market rate for overdue debt of at least 3 large commercial banks (Vietcombank, Agribank, VietinBank, etc.) in the locality where the first-instance trial takes place. Sending official letters to the banks to obtain their rates makes the proceedings much longer.
• An agreed interest rate: under Clause 2, Article 357 and Clause 1, Article 468 of the Civil Code 2015, the agreed rate may not exceed the cap of 20% per year. An agreed rate above the cap may be reduced by the court to the legal cap.
• The trap of charging interest on penalties (Precedent No. 09/2016/AL): when suing to recover a debt, claimants often add together the principal, the contractual penalty and the damages, and then charge interest on the total. In Precedent No. 09/2016/AL, the Council of Judges of the Supreme People’s Court held that the obligor does not have to pay late-payment interest on the contractual penalty or on the damages.

How to protect your business

• Set a clear, fixed overdue interest rate in the contract: “If the Buyer pays late, the Buyer shall pay overdue interest equal to 150% of the commercial lending rate, or a fixed 1.5% per month (but not more than the 20% per year cap under Article 468 of the Civil Code 2015), on the unpaid principal for each day of delay.”
• When preparing the statement of claim, separate the principal on which interest is charged. Never charge interest on the contractual penalty, in line with Precedent No. 09/2016/AL.

4. Risk of breaching foreign exchange rules when agreeing the payment currency

The risk

Domestic businesses price contracts in USD, agree to pay in USD, or agree to pay in VND “converted at Vietcombank’s USD exchange rate on the payment date” to protect against a fall in the dong.

Legal basis and court practice

Under Article 22 of Ordinance No. 28/2005/PL-UBTVQH11 on Foreign Exchange (amended and supplemented in 2013) and Circular No. 32/2013/TT-NHNN of the State Bank of Vietnam, residents in Vietnam may not carry out transactions, make payments, list prices or price contracts in foreign currency, except in cases permitted by the State Bank.

A domestic contract priced in foreign currency risks being declared wholly void, or void as to the price clause, by the court. This makes it hard to recover exchange rate differences and exposes the business to an administrative penalty in the monetary field.

International exception: under Judgment No. 02/2022/KDTM-ST of the People’s Court of Bình Dương Province, an agreement to pay in USD between a Vietnamese business and a foreign (Chinese) business was fully lawful and protected under Article 50 of the Commercial Law 2005 and the CISG.

How to protect your business

• Domestic transactions: use VND for 100% of pricing and payment. If you want to protect value against inflation, use a price adjustment formula linked to the consumer price index (CPI) or to reference prices of goods on a domestic exchange, instead of pegging to the USD rate.

5. Misunderstanding the independence of letters of credit (L/C) and bank guarantees

The risk

• Letters of credit: a buyer that receives defective goods believes it can ask the issuing bank to stop payment, or ask the court to order the L/C frozen to “keep the money”.
• Performance guarantees: the beneficiary assumes every guarantee is paid immediately. In fact it has signed up to a conditional guarantee linked to the underlying contract.

Legal basis and court practice

• Precedent No. 13/2017/AL confirms the principle that an L/C is fully independent under UCP 600. The bank deals only with the face of the documents presented. It is not bound by quality problems with the goods or by a court declaring the underlying sale contract rescinded. A first-instance court’s interim measure freezing payment under an L/C was set aside by the Council of Judges of the Supreme People’s Court.
• Guarantee rules under Circular No. 61/2024/TT-NHNN and URDG 758: if the guarantee does not refer to the international URDG 758 rules (an independent on-demand guarantee), the bank pays only when the beneficiary presents full evidence that the other party is at fault under the underlying contract. This process stalls if the counterparty sues and asks the court for an interim measure freezing payment under the guarantee.

How to protect your business

• If you are the seller: negotiate a confirmed irrevocable L/C.
• If you are the beneficiary of a guarantee: require the bank to issue an independent on-demand guarantee subject to URDG 758, with the commitment: “The Bank shall pay unconditionally upon receiving the Beneficiary’s first written demand, without any confirmation or consent from the Applicant.”

6. Gaps in controlling the original documents under documentary collection (D/P) and deferred T/T

The risk

An exporter uses documents against payment (D/P) or lets a foreign buyer pay after delivery (T/T after delivery), but does not control how the original ocean bill of lading is sent and handed over.

Legal basis and court practice

• The lawful holder of the original bill of lading is the person entitled to collect the goods from the carrier at the port of destination, under the Vietnam Maritime Code and international maritime practice.
• The case of 100 containers of cashew nuts exported to Italy and Turkey is a typical example of a gap in controlling payment in international trade. Vietnamese exporters sent the original documents by international express courier to the collecting bank in Italy on D/P terms. Fraudsters manipulated the courier delivery, took the original bills of lading and collected the goods at the port without paying the collecting bank. This pushed the Vietnamese businesses into a cross-border legal crisis.

How to protect your business

• For new customers or high-risk markets: firmly refuse D/P or deferred T/T. Use a deposit combined with a sight L/C.
• If you use D/P: name a top-tier international bank as the collecting bank, track the courier tracking number closely, and state that the documents must be received by staff of the collecting bank’s international payments department.
• Issue the bill of lading “to order” of the issuing bank instead of a straight bill of lading naming the buyer.

7. Overlooking set-off and the order of payment allocation when there are several financial obligations

The risk

• Unilateral set-off: when goods or works are defective, the buyer deducts its losses or a contractual penalty from the final payment of principal, although the contract has no set-off clause. The seller immediately sues the buyer for late payment of the principal and claims overdue interest.
• No order of payment allocation: when the buyer pays small amounts after months of delay, the parties argue over whether the money goes to the principal, the overdue interest or the contractual penalty.

Legal basis and court practice

Under Article 378 of the Civil Code 2015, civil obligations end by set-off when the parties owe each other property of the same kind and both obligations are due. However, if one obligation is disputed (for example, a penalty or damages that the seller has not accepted, or that no court has decided), the buyer does not automatically have the right to set it off unilaterally against the payment for goods that is already due.

Setting off an unclear amount on your own may lead the court to find that the buyer breached its payment obligation for the principal it held back.

How to protect your business

Design a right to set-off clause:

“The Buyer may set off any contractual penalty, cost of repairing defects or damages that both parties have confirmed in writing against any amount due to the Seller under this Contract.”

Set an order of payment allocation (priority of payment):

“Any amount the Buyer pays after the due date shall be allocated in the following strict order of priority: (1) reasonable legal and debt collection costs; (2) late-payment interest under Article 306 of the Commercial Law; (3) the principal due.”

8. Summary table of the 7 payment clause risks

Reviewing and tightly controlling these 7 risks in the payment clause gives a business a firm financial “safety valve”. It protects working capital as far as possible and closes legal loopholes before the transaction moves into performance.