Under Vietnam law, there are three methods for determining compensation. First, the total damage calculation as outlined above. This is the most damaging to the breaching party. Second, limitation by law. Third, agreement by the parties.

Total damages for breach of contract include physical damage, spiritual damage, the benefits that would have been enjoyed by the non-breaching party if the contract had not been breached, and the non-redundant costs of putting the non-breaching party in the same position as if the contract had been performed.

Physical damage is “those actual physical losses, comprising loss of property, reasonable expenses to prevent, mitigate or restore damage, and the actual loss or reduction of income.” Spiritual damage is losses related to life, health, honor, dignity or reputation and other personal benefits of an entity.”

This total damage liability may potentially be immense and completely out of proportion to the expected costs and values of the original contract. It would make sense for there to be ways for the parties to contract away from this liability. And there are.

The parties to a contract, then, can anticipate the possibility of breach and define the damages for which a breaching party will be liable. In most contracts, except for those formed due to unilateral intention, there is an exchange of acts. Whether the payment of money or the provision of goods or services, there is usually a back and forth between the parties to the contract. This is called a consideration.

In general, a party would seek to limit his liability to the reasonable value of his consideration. But sometimes there may be major consequences for failure to perform that party’s consideration. Consider, for example, a party contracted to provide concrete to pour foundations for a large shopping mall. There are many ways in which this contract may be breached, but to keep it simple the party fails to pour the concrete. This creates a major delay in the construction process and causes the shopping mall to open two months late. During those two months it is estimated that the mall would have made a million dollars. The cost of pouring the concrete was 10,000 USD.

If the provider of the concrete failed to limit his liability under the contract, he may be responsible for a million dollars plus the cost of paying to have someone else pour the concrete. It is in the interest of the provider of concrete to limit his liability in the contract. Instead of paying a million dollars he can agree to a lesser amount, something specific, that he will pay if he fails to pour the concrete on time. An example of such a limitation would be for the cost of the contract, the costs incurred by the mall in having someone else pour the concrete, and a fixed fine. So, say, a total of 20,000 USD.

This amount is beneficial to the pourer of concrete because if limits his liability in that he would not be liable in the amount of a million dollars. It is also beneficial to the mall in that it provides a specific and actual amount to discourage the pourer of concrete from defaulting or breaching his contract to pour the foundations.

This type of agreement is called a limitation of liability and can be—and generally should be—included in a contract before either party begins performance of its obligations under that contract.