Break fees and deposits give an acquisition process discipline: they signal that a bidder is serious, compensate a seller for taking its business off the market, and put a price on walking away. Badly drafted, they do the opposite and become the first thing the parties litigate about.
In Vietnam the drafting has to engage two specific legal points. A payment characterised as a deposit under the Civil Code carries its own statutory consequences, and a payment characterised as a contractual penalty is subject to the cap in the Commercial Law. Break fees copied from an English or Singaporean precedent, without deciding which of those characterisations is intended, frequently cannot be enforced as written.
Characterisation decides whether the payment is enforceable. Photo: Pexels.
Deposits and break fees can give a Vietnam acquisition process discipline, but poorly designed provisions may create more disputes than certainty. Their commercial purpose, payment mechanics and legal consequences should be agreed with the transaction structure, regulatory pathway and financing plan in mind.
Why parties use deposits and break fees
A buyer may offer a deposit to demonstrate commitment, secure exclusivity or give the seller confidence that transaction costs will not be wasted. A seller may seek break fees if the buyer walks away without an agreed justification. Buyers sometimes negotiate reverse break fees where the seller accepts a competing proposal, breaches exclusivity or cannot deliver the agreed corporate approvals.
These tools are not substitutes for a carefully drafted term sheet, a realistic due diligence plan or clear conditions precedent. They allocate specific process risks and should remain proportionate to the loss that a party may reasonably suffer.
Deposits, break fees and reverse break fees distinguished
The agreement should state whether money is an advance payment toward the purchase price, a refundable security deposit, a non-refundable commitment payment, agreed compensation, or another form of payment. Labels alone are not decisive. The surrounding obligations, refund events and consequences of breach should be internally consistent.
Where a deposit forms part of the purchase price, the documents should explain how it is credited at closing. If the deal terminates, the parties need an objective refund process, a deadline and a designated bank account. Escrow can reduce collection risk, particularly where the parties dispute whether a termination event has occurred.
Define the trigger events precisely
A break fee should not become payable simply because closing does not occur. The agreement should connect payment to defined events such as an unjustified buyer withdrawal, failure to obtain committed financing where financing risk sits with the buyer, seller acceptance of a superior offer, or a material breach that prevents closing.
Equally important are the exceptions. A fee generally should not apply where a required Vietnam regulatory approval is refused despite compliant efforts, due diligence identifies a specified serious issue, a condition precedent fails for reasons outside the paying party’s control, or the counterparty is itself in material breach.
Coordinate deposits with exclusivity
Exclusivity and the money should expire together. A deposit or break fee arrangement that outlives the exclusivity period leaves a buyer paying for protection it no longer has, while an exclusivity period that runs past the point at which the deposit is refundable gives the seller the benefit without the risk. Tie both to the same long-stop date, and where an extension is agreed because a regulatory filing is still pending, extend the exclusivity and the break fees provisions in the same document.
If a buyer pays for an exclusive negotiation period, the exclusivity obligations must be measurable. The seller should know whether it may respond to unsolicited approaches, and the buyer should know what happens if the seller shares information, solicits another proposal or changes the deal timetable. The relationship between the deposit and the remedies for breaching exclusivity should be explicit.
Deposits are usually held in escrow rather than by the seller. Photo: Pexels.
Address regulatory and foreign-investment timing
Approval risk is the single most common reason a Vietnamese transaction fails through nobody’s fault, so deposits and break fees have to be drafted around it. Identify at the outset which approvals are required for this target and this buyer, set the long-stop date from a realistic estimate of those timetables, and state expressly that expiry of the long-stop date without clearance returns the deposit and triggers no break fees, while a failure caused by the buyer’s own identity, structure or non-cooperation does.
Vietnam acquisitions may require merger-control, foreign-investment or sector approvals. Payment provisions should account for the possibility that an authority requests additional information, imposes conditions or takes longer than the commercial timetable. A long-stop date should allow an agreed extension where the approval process is progressing and neither party has caused the delay.
For cross-border payments, the parties should confirm the permitted payment route, currency, bank documentation and any foreign-exchange requirements before funds are transferred. A payment that cannot be lawfully received or returned through the intended account creates avoidable closing risk.
Set a proportionate amount and liability framework
The amount should reflect genuine process costs, opportunity costs and the value of exclusivity without becoming punitive. Parties should also state whether the fee is the sole remedy for the triggering event or whether the recipient may claim additional damages, specific performance or injunctive relief. Double recovery should be excluded.
Tax treatment, interest on late repayment, bank charges and withholding obligations should be allocated. If money is held by an escrow agent, the release instructions should cover joint directions, documentary evidence, disputes and the agent’s liability.
Proportionality is a legal question in Vietnam, not only a commercial one. Where the payment is drafted as a penalty for breach of a commercial contract, the Commercial Law 2005 caps the agreed penalty at eight per cent of the value of the breached obligation, and a higher figure risks being reduced. Where it is drafted as agreed compensation for loss, it should be supported by a genuine pre-estimate of costs such as adviser fees, financing commitments and management time. Sellers and buyers negotiating break fees on Vietnamese deals therefore commonly settle in the range of one to three per cent of equity value, with the underlying cost analysis recorded.
Draft the termination procedure
Termination should be mechanical. State who may serve notice, on what grounds, in what form and within what period; require the notice to specify the trigger relied on; and set a short cure period where the breach is capable of remedy. The clause should then say precisely what happens to the escrowed funds on each route, so the escrow agent can act on the notice without a further agreement. Break fees that depend on the parties reaching a fresh agreement after termination are, in practice, unenforceable commercially even where they are valid legally.
A workable clause identifies who may terminate, the notice method, the facts that must be stated, any cure period and the date on which payment or refund is due. It should also preserve confidentiality, dispute resolution and other provisions intended to survive termination. The confidentiality framework should align with the parties’ separate confidentiality agreement.
Negotiation checklist for deposits and break fees
- Confirm the legal and commercial character of every payment.
- List each payment, refund and forfeiture trigger.
- Allocate regulatory, financing and shareholder-approval risk.
- Use an escrow structure where repayment or enforcement risk is material.
- Coordinate the clause with exclusivity, termination and dispute resolution.
- Specify currency, bank route, taxes, charges and payment deadlines.
- Prevent double recovery and clarify whether the fee is the exclusive remedy.
Practical conclusion
Deposits and break fees work best when they reinforce a balanced acquisition process rather than punish a change in commercial circumstances. In Vietnam M&A, careful drafting should connect the payment to defined conduct, regulatory realities and an executable transfer mechanism. Parties should test every trigger against the full transaction timetable before signing.
Frequently asked questions about break fees
Are break fees enforceable in Vietnam?
They can be, but the characterisation determines the outcome. A payment framed as a penalty for breach falls within the Commercial Law cap of eight per cent of the value of the breached obligation. A payment framed as agreed compensation should reflect a genuine estimate of loss, and one framed as a deposit under the Civil Code is governed by the deposit rules. Break fees drafted without choosing between these routes are the ones most often challenged.
How is a deposit treated if the deal does not proceed?
Under the Civil Code 2015 the default position is that a deposit is forfeited to the recipient if the party that paid it refuses to enter into or perform the contract, and must be returned along with an equivalent sum if the recipient is the one who refuses. The parties may agree different consequences, so the agreement should state expressly what happens on each termination event, including failure of a regulatory condition where neither side is at fault.
What triggers should apply to break fees?
Objective, testable events only. Typical seller-side triggers are accepting a competing offer, breaching exclusivity, or withdrawing without cause. Typical buyer-side triggers for a reverse fee are failure to obtain committed financing or failure to secure merger control or investment approval within the long-stop period. Avoid subjective triggers such as failure to negotiate in good faith, which simply moves the dispute from the payment to the trigger.
Should the deposit be held in escrow?
Almost always. Paying a deposit directly to a Vietnamese seller creates recovery risk, particularly where the seller is an individual or a holding vehicle without assets. An escrow with a bank or law firm, with release instructions matching the trigger events in the agreement, means the money moves automatically on the agreed facts rather than after a dispute. Where the buyer is offshore, the escrow arrangements should also be checked against the foreign exchange rules before funds are remitted.
How do regulatory delays affect break fees?
They should be dealt with expressly, because approval timetables in Vietnam are outside both parties’ control. The usual approach is that if merger control clearance or an amended registration certificate is not obtained by the long-stop date, and neither party is in breach, the deposit is returned and no break fee is payable. Where the buyer’s own status or structure is the reason approval fails, a reverse fee is defensible.
Next step
Decide the characterisation before the amount. Write down whether the payment is a deposit, a penalty or agreed compensation, then draft the triggers as objective events and put the money in escrow. Check the approval and registration steps that will set the long-stop date, including the corporate resolutions required under the Law on Enterprises, so the timetable and the payment provisions match.
IVLF Lawyer drafts deposit, escrow and break fee arrangements for acquisitions in Vietnam and advises on enforceability under the Civil Code and the Commercial Law. An experienced Vietnam M&A lawyer will structure the payment so it survives challenge. See our legal services or contact IVLF Lawyer.
Related reading: Essential clauses in a Vietnam share purchase agreement, Conditions precedent vs closing conditions in Vietnam M&A, and Renegotiating purchase price after a performance shortfall.
This article is provided for general information only and does not constitute legal advice for any specific case. Regulations may change – please consult a qualified professional before acting. Should further analysis be required, please contact one of our lawyers below.
