Vu Le Bang
Nishimura & Asahi, Ho Chi Minh City

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Vietnam’s new law on construction: key changes for international construction projects

Vietnam’s new Law on Construction No 135/2025/QH15 (the ‘New LOC’) took effect entirely on 1 July 2026. The New LOC comprehensively overhauls the legal framework governing construction activities within the country’s territory, streamlines administrative procedures and, most significantly, introduces advanced regimes applicable to international construction projects. This article outlines key reforms and notable considerations for implementing construction projects involving foreign elements (also known as international construction projects) in Vietnam.

Background information on the New LOC

Vietnam’s construction sector has developed significantly in recent years, driven by major infrastructure projects that have attracted active participation from both domestic and foreign investors.^[1] Dispute resolution statistics also reflect this trend. In 2025, construction disputes were the second-most prevalent type of dispute handled by commercial arbitration, accounting for 23 per cent of the caseload, second only to sale-of-goods disputes.^[2]

Against this backdrop, there is a need to enhance the legal framework to better align with international standards and contracting practices, including those of the International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils or FIDIC). This requirement is further underscored by the limitations and shortcomings of Vietnam’s current Law on Construction No 50/2014/QH13 (the ‘Current LOC’).^[3] In this context, the enactment of Vietnam’s new Law on Construction No 135/2025/QH15 (the ‘New LOC’) represents a necessary step towards comprehensive reform and harmonisation of Vietnam’s construction legal framework, including the adoption of new decrees and circulars that provide detailed implementing rules and guidance.

Key changes for international construction projects

Applicable law for construction contracts: a clearer hierarchy under domestic law

The first significant development under the New LOC is the clarification of the applicable legal framework governing construction contracts where the Current LOC is silent. Under the Current LOC, the determination of applicable law for matters not governed by construction regulations was controversial, as it led to differing interpretations of the interaction between civil law, commercial law and construction law. In some cases, this uncertainty led the courts to take different approaches in the same dispute. For instance, in one specific case, the first instance and appellate courts applied commercial law. By contrast, the Supreme People’s Court, in reviewing such a case, held that the dispute related to construction activities and should therefore be resolved under construction law and, where construction law was silent, the Civil Code.^[4]

The New LOC addresses this issue by expressly providing the rule that construction contracts are subsequently governed by the Civil Code, unless construction instruments contain specific provisions governing those matters. This approach clarifies the relationship between the general substantive framework and sector-specific rules, thereby ensuring a consistent interpretation and application of the relevant legal framework.^[5]

Language for construction contracts: greater freedom to agree on controlling language

The New LOC permits contracting parties to agree on the priority order of the languages used in a construction contract involving foreign parties. In particular, according to Article 80.3 of the New LOC, the contract shall be drafted in Vietnamese and another language as agreed, and the parties may designate the foreign language as the prevailing language. In the absence of such an agreement, the Vietnamese version prevails. This represents a meaningful refinement of Article 138.4 of the Current LOC, which requires the use of Vietnamese and permits an additional foreign-language version, but does not expressly address which version prevails.

With this change, for international construction projects, the parties may therefore designate the foreign-language version, often based on international model wording, as the prevailing text. This reduces the risk that translation discrepancies distort the parties’ allocation and performance of rights and obligations, helps avoid disputes and retains a Vietnamese version for domestic administrative, regulatory and dispute-resolution purposes.

Contractual construction risk allocation: liquidated damages and performance security mechanisms

Historically, Vietnamese law explicitly recognised only two forms of monetary remedies for breach of contract: compensation for actual damages and contractual penalties. Vietnamese courts have often declined to enforce pre-agreed damage amounts, that is, liquidated damages, and claims based on such amounts have generally been dismissed^[6] or treated as unenforceable penalties.^[7]

First, the New LOC introduces a landmark reform by recognising liquidated damages in construction contracts. According to Article 86.2 of the New LOC, three elements now determine compensation for damage: (1) the actual damage incurred; (2) the rate of predetermined damages corresponding to the breached contractual obligation; and (3) the degree of breach. While this provision represents a significant step towards recognising liquidated damages in Vietnamese construction law, several interpretive issues remain, including divergent interpretations of the term ‘degree of breach’ and the possibility that predetermined damages may coexist with contractual penalties or other traditional remedies.^[8] Despite these uncertainties, the reform brings Vietnam’s construction contract regime closer to internationally accepted standards, particularly those commonly found in FIDIC contracts, where liquidated damages for delay are standard practice.

Second, performance security and payment security for construction contracts are currently regulated in Articles 16 and 17 of Decree No 37/2015/ND-CP detailing the construction contracts (‘Decree 37’), which guides the Current LOC, and adopts a relatively restrictive approach to its formulation and implementation. In particular, concerning performance security for the contractor’s obligations, Decree 37 limits the permissible forms of performance security to three instruments, which are: (1) deposit; (2) escrow; or (3) guarantee, without any guidance for those applications, while the payment security for the employer’s obligation requires a guarantee from a credit institution. Furthermore, the value of performance security is statutorily set at two to ten per cent of the contract price. It may be increased to 30 per cent for high-risk projects, but the payment security thresholds remain silent. Compared with the more flexible regime under FIDIC Red Book 2017, these statutory thresholds for performance security significantly constrain party autonomy in structuring performance security. By contrast, the payment security appears to align with the employer’s obligations under the FIDIC Red Book 2017 regarding financial arrangements.

The New LOC elevates such provisions on performance security and payment security under Decree 37 to the level of statutory law. Concerning performance security, although the New LOC does not specify a statutory threshold, Article 13.2 (dd) of Decree No 210/2026/ND-CP (‘Decree 210’), which shall replace Decree 37 and provide guidance on the implementation of the New LOC as from 1 July 2026, retains the statutory thresholds of two per cent to ten per cent, consistent with Decree 37.

Dispute resolution mechanisms for construction contracts: permission of models under international practices

The New LOC takes a big dispute resolution step forward compared to the construction dispute resolution methods under the Current LOC. Article 86.5 of the New LOC officially recognises a variety of dispute resolution models as forming part of ‘international practices’. This provision also removes the requirement for negotiation as a mandatory precondition under Article 146.8 of the Current LOC. Specifically, the new framework’s explicit reference to ‘dispute resolution models under international practices’ creates statutory space for mechanisms such as dispute avoidance/adjudication boards (DAABs) and multi-tier procedures, including arbitration models as found in the FIDIC Red Book 2017. In this regard, Article 17.3 of Decree 210 further affirms that such ‘international dispute resolution models’ include DAABs.

Although Article 17.3 of Decree 210 does not prescribe detailed procedures for DAAB proceedings, it establishes an effective legal framework for adopting internationally recognised DAAB practices, including those under the FIDIC Red Book 2017. Accordingly, the parties may agree on: (1) the timing for establishing a DAAB; (2) the selection process and composition of its members (including number, qualifications and expertise); (3) the binding effect of its decisions or recommendations; and (4) subsequent steps in the event of dissatisfaction. This flexibility enables parties to align their agreed framework closely with the FIDIC DAAB mechanism. Furthermore, under parties’ agreement, the interim binding effect of DAAB decisions or recommendations can be recognised, thereby facilitating the practical application of the ‘pay now, argue later’ principle. This addresses a key shortcoming under Decree 37, pursuant to which dispute boards were characterised as mediation mechanisms, lacked a basis for interim binding effect, and did not fully align with FIDIC standards.

Notably, for public investment and public–private partnership projects, a more cautious approach applies: (1) the parties should prioritise domestic arbitration; and (2) international dispute resolution models may only be used where required by international treaties or approved by the investment decision-maker. Dispute resolution costs may now be included in the project’s total investment capital.

Conclusion

The New LOC is an important step in improving Vietnam’s legal framework for construction projects involving foreign elements. Its reforms on applicable law, contract language, security, predetermined damages and dispute resolution should provide greater certainty for foreign investors and international contractors. Beyond these technical improvements, the New LOC also signals Vietnam’s broader policy effort to align with international practice, especially in a period when foreign investment, international contracting structures and cross-border project financing increasingly shape major construction and infrastructure projects.

However, the New LOC is only the beginning of the next phase of reform. Implementing decrees and circulars will be critical, and some provisions will need to be tested in court and arbitral practice. For now, parties preparing projects in Vietnam should review their contract templates, bilingual drafting practices, security packages and dispute resolution clauses to ensure they make the most of the new framework.

Vu Le Bang is a partner at Nishimura & Asahi in Ho Chi Minh City. He can be contacted at v.l.bang@nishimura.com.