Resolving disputes over liability for compensation under processing contracts

Disputes over liability for compensation under processing contracts are among the most common types of disputes arising in commercial practice, occurring when one party breaches contractual obligations and causes damage to the other party.

I. Current situation of disputes over liability for compensation under processing contracts

In the context of economic integration and development, processing activities have become increasingly common across various manufacturing and business sectors, particularly in garments, mechanical engineering, agricultural processing, and supporting industries.

Processing contracts are inherently flexible and based on the division of labour and production specialisation; however, they also involve considerable legal risks, among which disputes concerning liability for damages remain the most prominent.

1. Common types of disputes

In practice, disputes regarding liability for compensation under processing contracts mainly focus on the following matters:

• Violation of product quality requirements: Products fail to meet technical specifications, designs, or agreed quality standards, resulting in losses to the ordering party.
• Delay or failure to deliver products on time: Such breaches may cause additional costs, lost business opportunities, and compensation claims.
• Loss of or damage to materials due to inadequate preservation by the processor: Materials supplied by the ordering party for contract performance are damaged or depleted, leading to compensation obligations.
• Insufficient evidence proving actual damage or fault: It often creates significant controversy in determining compensation liability during dispute resolution proceedings.

2. Causes leading to disputes

Disputes regarding compensation liability under processing contracts arise from various factors:

• Processing contracts often lack detailed provisions regarding quality standards, inspection methods, and remedies for contractual breaches.
• Many parties involved in processing arrangements have insufficient understanding of legal regulations governing contracts and compensation liability, leading to ineffective dispute resolution.
• Compliance with regulations concerning consumer protection, technical standards, and product safety is sometimes neglected, adversely affecting contractual performance and liability obligations.

3. Methods of dispute resolution

Currently, disputes over liability for compensation under processing contracts are commonly resolved through:

• Negotiation and mediation between the parties before bringing the matter to arbitration or court.
• Commercial arbitration, particularly in contracts involving foreign elements or where businesses utilise arbitration services.
• Litigation before the Court to request determination of liability and compensation in accordance with legal provisions.

II. Understanding disputes over liability for compensation under processing contracts

1. What is a dispute over liability for compensation under a processing contract?

Pursuant to Article 542 of the Civil Code 2015, a processing contract is an agreement whereby the processor performs work to create products according to the ordering party’s requirements, and the ordering party receives the products and pays processing fees.

A dispute over liability for compensation under a processing contract refers to a dispute arising between parties to such a contractual relationship where one party breaches contractual obligations and causes damage, resulting in one or more parties requesting compensation from the breaching party.

2. How is the limitation period for initiating legal proceedings regulated in disputes over compensation liability under processing contracts?

The limitation period for legal action is a significant factor directly affecting the right to request dispute resolution by the Court or Arbitration.

• For processing contracts of a commercial nature (between traders or for profit-making purposes), the limitation period is governed by Article 319 of the Commercial Law 2005 and is 02 years from the date on which lawful rights and interests are infringed.
• For civil processing contracts (non-commercial in nature), the limitation period is governed by Article 588 of the Civil Code 2015 and is 03 years from the date on which the entitled person knew or should have known that their lawful rights and interests had been infringed.

3. Who has the authority to decide compensation clauses when disputes arise?

As a matter of principle, parties to a processing contract are free to agree on compensation provisions, including:

• Conditions for compensation liability;
• Scope and amount of compensation;
• Method of compensation;
• Circumstances for exemption or reduction of liability.

In cases where:

• The contract contains clear compensation provisions, dispute resolution shall prioritise the parties’ agreement provided that such agreement does not violate mandatory legal provisions or social ethics.
• The contract contains no provisions or unclear provisions, the Court or Arbitration Tribunal shall determine compensation liability based on applicable laws and evidence submitted by the parties.

4. How is the extent of compensation determined in disputes over liability for compensation under processing contracts?

Pursuant to Article 361 of the Civil Code 2015, damage resulting from breach of obligations includes both material damage and non-material (moral) damage. Accordingly, material damage refers to actual and quantifiable economic losses, including loss of property; reasonable expenses incurred to prevent, mitigate, or remedy damage; and actual income lost or reduced. Non-material damage refers to mental suffering caused by infringement upon life, health, honour, dignity, reputation, and other personal rights.

In addition, under Clause 2, Article 302 of the Commercial Law 2005, compensation includes:

• The actual and direct losses suffered by the injured party due to the breach; and
• The direct profits that the injured party would have earned had the breach not occurred.

Determining the extent of compensation requires sufficient proof of actual damage, fault, and causation, which remains one of the most disputed issues in practice concerning processing contract disputes.

III. Legal regulations relevant to disputes over liability for compensation under processing contracts

1. Which laws govern disputes over liability for compensation under processing contracts in Vietnam?

In Vietnam, disputes concerning liability for compensation under processing contracts are primarily governed by:

• Civil Code 2015: The principal legislation governing contractual relationships in general, including processing contracts (Articles 542-553) and compensation for breach of contractual obligations (Articles 351, 360, and 361).
• Commercial Law 2005: Governing processing contracts in commercial activities (Articles 178-184), compensation for damages (Articles 302-303), and commercial dispute resolution (Article 317).
• Civil Procedure Code 2015, amended in 2025: Governing jurisdiction over processing contract disputes (Clause 3, Article 26).
• Law on Commercial Arbitration 2010: Governing jurisdiction and conditions for resolving processing contract disputes where arbitration agreements exist (Articles 2 and 5).

2. What is the current procedure for resolving disputes over compensation liability under processing contracts?

Pursuant to Article 317 of the Commercial Law 2005, disputes may be resolved through:

• Negotiation and mediation between the parties;
• Resolution through commercial arbitration;
• Initiating proceedings before a competent Court.

The dispute resolution process must comply with principles of equality, voluntariness, respect for party autonomy, and lawful and objective adjudication.

3. What types of breaches may lead to disputes over compensation liability under processing contracts?

In practice, various breaches may result in compensation disputes, including:

• Breaches relating to quality of processed products;
• Breaches of contractual deadlines;
• Breaches of obligations to preserve materials, machinery, and equipment supplied by the ordering party;
• Breaches of confidentiality obligations concerning information and production know-how;
• Breaches of payment obligations or cooperation obligations by the ordering party disrupting contractual performance.

IV. Questions regarding disputes over liability for compensation under processing contracts

1. How may the Processor protect its rights and interests when a dispute over liability for compensation under a processing contract arises?

Where a dispute concerning compensation liability arises, the processor is entitled to apply various legal measures to protect its legitimate interests, including: 

• Demonstrating that the Processor has properly performed its contractual obligations; 
• Proving that the Processor doesn’t contribute into faults, or that the damage did not result from its conduct; and 
• Invoking agreed provisions on exemption, limitation, or reduction of liability as stipulated in the contract.

In addition, the Processor may require the ordering party to fully prove all elements giving rise to compensation liability, including actual damage, causation, and fault.

2. Are there circumstances where the processor may be accused of liability but is not required to pay compensation in disputes concerning compensation liability under processing contracts?

Pursuant to Clauses 2 and 3, Article 351 of the Civil Code 2015, if an obligor fails to properly perform obligations due to a force majeure, such party shall not take civil liability unless otherwise agreed or otherwise provided by law. In addition, an obligor shall likewise not take civil liability if it can prove that non-performance resulted entirely from the fault of the obligee.

Furthermore, under Article 294 of the Commercial Law 2005, a breaching party may be exempted from liability in the following circumstances:

• The occurrence of an agreed exemption event;
• The occurrence of force majeure;
• The breach is entirely attributable to the fault of the other party;
• The breach results from compliance with a decision of a competent State authority which the parties could not reasonably have foreseen at the time of contract execution.

3. By which methods may disputes over liability for compensation under processing contracts be resolved?

Article 317 of the Commercial Law 2005 permits parties to select various methods for resolving disputes under processing contracts, including negotiation and mediation; resolution through commercial arbitration where an arbitration agreement exists; or litigation before a competent court where arbitration is unavailable or inapplicable.

The choice of dispute resolution mechanism depends on contractual agreements, the nature of the dispute, and the parties’ preferences regarding timing, cost efficiency, and confidentiality.

4. What agreements may parties include in a processing contract to minimise disputes concerning compensation liability?

To reduce the likelihood of disputes, parties may proactively agree on the following matters within the processing contract:

• Product quality standards;
• Inspection and acceptance procedures;
• Obligations regarding preservation and management of materials;
• Clauses relating to contractual penalties, compensation for damages, and limitation of liability;
• Circumstances exempting liability; and
• Dispute resolution mechanisms.

Clear and detailed contractual arrangements provide an important basis for determining liability when disputes arise and significantly reduce legal risks.

5. May the ordering party be considered in breach if it fails to notify the other party of conduct causing damage in disputes concerning compensation liability under processing contracts? How will such conduct be treated?

Within contractual relationships, parties are obliged to cooperate and adopt reasonable measures to mitigate losses. If the ordering party becomes aware of a breach or a risk of damage but fails to promptly notify the processor, resulting in increased damage, the ordering party may be deemed to have breached its duty of cooperation.

In such circumstances, the portion of losses arising from the failure to provide timely notice may not be recoverable or may lead to a reduction in the amount of compensation awarded.

V. Are you looking for an experienced and reputable lawyer to assist with issues relating to disputes over liability for compensation under processing contracts?

Disputes concerning liability for compensation under processing contracts often involve complex legal issues, including determination of fault, assessment of damages, causation, and enforceability of contractual provisions. Obtaining support from lawyers specialising in contract and commercial law can help parties accurately assess legal risks, select appropriate dispute resolution strategies, and effectively protect their lawful rights and interests.

The above information is provided for reference purposes only. Should you require detailed advice regarding a specific matter, please contact NPLAW Firm for prompt consultation.