The Necessity of Precedent No. 06/2024 – Applicable Law for Construction Contracts
The approval of Draft of Precedent No. 06/2024 is considered important and necessary because applicable law has, for a long time, been a topic of debate with multiple conflicting interpretations.
Specifically, in cases where the specialized law, namely, the Law on Construction[1] does not provide detailed regulations, whether the Law on Commerce[2] or the Civil Code with its role as general law would be applied. Regarding this matter, conflicting views are not only observed among scholars or practitioners but also among the Courts, thereby causing the determination of applicable law for construction contracts to be laden with confusion and challenges. What deteriorates the problem is that the determination of applicable law for construction contracts is a fundamental and influential issue for the signing and implementation of the contract, as well as the resolution of emerging disputes.
However, these unnecessary debates will be altogether addressed when the Draft of Precedent No. 06/2024 on the applicable law for construction contracts (“Draft of Precedent No. 06/2024”) is approved by the Supreme People’s Court (“TANDTC”), in the near future. This Draft of Precedent No. 06/2024 is based on Cassation Decision No. 12/2019/DS-GDT dated 24, September 2019 by the Council of Judges of TANDTC.
Context of Precedent No. 06/2024 on construction contracts
Cassation Decision regarding disputes emerging from a contract violation between the claimant, Q Construction Joint Stock Company, and the respondent, V Mining Chemical Industry Holding Corporation Ltd. To be specific, the disputes between the parties originated from a breach of contract by both parties pertaining to the implementation schedule and payment obligations.
The first instance involved commercial judgment No. 02/2016/KDTM-ST dated 18, May 2016, in which the People’s Court of Pleiku City, Gia Lai Province resolved the dispute via the Law on Commerce. This judgment was also endorsed and upheld by the appellate court.
However, this approach is not endorsed by the Council of Judges of TANDTC in the Cassation Decision.
To be specific, in paragraph 5 of the “Whereas”, the Court reasoned that “Contract No. 16/HDTC/12, dated 22, February 2012, between Company Q and Company T, is about construction activities, established and based on a Contract for Construction No. 01/HP-XD/HD dated 18, August 2011, between M Electric Joint Stock Company and Company Q, however, the first-instance made the mistake of applying the Law on Commerce to resolve the case. In this case, it should be determined that the dispute is related to the construction field, therefore, construction laws should be applied. If construction laws have no provision, the Civil Code would be applied, instead”.
TANDTC’s reasoning is that of the content recommended for potential precedent in the Draft of Precedent No. 06/2024.
In the Draft of Precedent No. 06/2024, the reason for approval is that current construction laws have yet to acknowledge many issues, including the penalty amount for contractual breaches (for non-state-funded projects[3]), interest on delayed payments and statute of limitations. This has led to the inconsistent application of either the Law on Commerce or the Civil Code to resolve disputes arising out of construction contracts. Since there are differences between the Law on Commerce and the Civil Code, the application of either law would undoubtedly result in different outcomes.
In the Cassation Decision, the Council of Judges provided a definite approach to the resolution(s) of disputes emerging from construction contracts, which is the application of the Civil Code over the Law on Commerce. This decision is the most important content of the Precendent’s Draft and the development of said content into a precedent is necessary for the resolution of similar cases.
Prior to Precedent No. 06/2024, the applicable law for construction contracts is a controversial topic
For years, there have been various debates among scholars, practitioners, and the Courts regarding the matter of: cases in which the Law on Construction fails to provide for certain issues, would (1) the Law on Commerce be applied to construction contracts, or would (2) the Civil Code be applied instead?
Scholars who support (1) claim that in cases where the relationship between parties to a construction contract falls within the scope of the Law on Commerce (the most evident one being construction contracts between 2 enterprises), the Law on Commerce, as the general law in the field of commerce, is applied.
Meanwhile, scholars who support (2) cite Article 138 of the Law on Construction, which provides that “construction contracts are civil contracts” to claim that the specialized law itself (Law on Construction”) has specified the “civil” nature of construction contracts. Thus, the Civil Code is applied rather than the Law on Commerce whenever there are issues not provided for by the Law on Construction.
The determination of applicable law for construction contracts not only leads to debates and disagreements among scholars and legal practitioners but also the inconsistency of documents issued by the Ministry of Construction – the highest administrative state agency in the field of construction as well as the Court system.
To be specific, in Dispatchment No. 1123/BXD-KTXD dated 13, May 2019 sent to the Government Office by the Ministry of Construction on the response to the proposal pertaining to rewards and penalties in construction contracts, the Ministry of Construction has affirmed that “For issues not provided for in this Decree [Decree No. 37/2015/ND-CP on detailed regulations on construction contracts], parties are to act in accordance with the relevant laws (Law on Commerce, Civil Code, etc.)”[4]. In other words, in this document, the Ministry of Construction opined that the Law on Commerce may also be applied should the specialized law fail to cover it.
However, just a few months later, the Ministry of Construction issued Dispatch No. 48/BXD-KTXD dated 03, September 2019, in response to whether a penalty amount of 20-percent (20%) of the contract value is appropriate. Accordingly, the Ministry of Construction responded that: “for non-state-funded projects, penalties are applied in accordance with the concluded contract”.[5] Although it was not explicitly expressed, by this response, the Ministry of Construction decided not to apply the penalty amount for the contractual breach as specified in the Law on Commerce, which is 8-percent (8%) of the value of the breached portion.[6]
Similarly, in templates for construction contracts enclosed with Circular No. 02/2023/TT-BXD dated 03, March 2023 and issued by the Ministry of Construction, the Law on Commerce is not recognized as one of the bases for the establishment of the contract, instead, it is the Civil Code (and other specialized legal documents) that is listed.
In the Court system, it could be observed that the prominent approach of TANDTC – which is demonstrated in the Draft of Precedent No. 06/2024 – is the decision not to apply the Law on Commerce to construction contracts. This approach has been shown not only in the Cassation Decision on which the Draft of Precedent No. 06/2024 is based, but also in previous decisions of TANDTC – to name a few, Decision No. 11/2014/KDTM-GDT dated 09, July 2014, or Decision No. 03/2013/KDTM-GDT dated 08, January 2013.
On the contrary, there are local courts that apply the Law on Commerce to construction contracts, and yet, the judgments given by these courts remain valid and not withdrawn by TANDTC, such as Judgment No. 660/2022/KDTM-PT dated 10, November 2022, of the People’s Court of Ho Chi Minh City, or Judgment No. 10/2020/KDTM-PT dated 10, June 2020, of the People’s Court of Da Nang City.
In summary, the determination of applicable law in construction contracts remains a topic of debate with a plethora of conflicting views. With that being the case, per the recommendation of the Draft of Precedent No. 06/2024, the findings and analyses of the Council of Judges of TANDTC could be considered fairly reasonable and have been referenced by many local courts for application. Therefore, these findings and analyses should be made into a precedent for future application.[7]
Significance Of Approving Precedent No. 06/2024 Regarding Construction Contract
In the event the Draft of Precedent No. 06/2024 gets the “green light”, the implementation of contractual provisions and resolution of disputes arising from construction contracts will be unified, synchronized, and optimized. Developing the Draft of Precedent No. 06/2024 into Precedent is essential, especially for issues that the Law on Construction does not acknowledge, including the three legal issues that parties often encounter in practice: (1) Statute of limitations; (2) Penalty amount(s) for contractual breach(es); and (3) Interest on delayed payment(s).
- Statute of limitations
Current construction laws do not particularly specify the statute of limitations, instead, said issues are referred to other relevant laws. In particular, Article 45.3 of Decree No. 37/2015/NĐ-CP (“Decree No. 37”) stipulates: “Statute of limitations for filing a case to arbitration or to the court for resolving construction disputes is instructed by relevant law provisions”.
In other words, it is necessary for courts or arbitrations to rely on the Law on Commerce or the Civil Code to determine the statute of limitations. While the statute of limitations under the Law on Commerce is 2-years, the statute of limitations specified in the Civil Code is 3-years. This difference usually ignites conflict between the parties when performing dispute resolution via litigation and impacts the likelihood of reaching a settlement.
When the Draft of Precedent No. 06/2024 is approved, the statute of limitations will be calculated in accordance with the Civil Code, i.e. 3-years, from the date on which the party entitled to request knows or should show that their legal rights and interests are infringed upon.[8]
- Cap on penalty amounts for contractual breaches regarding construction contracts for non-state-funded projects
Article 146.2 of the Law on Construction stipulates that the penalty amount for a contractual breach must not exceed 12-percent (12%) of the breached portion’s value. However, this amount solely applies to construction projects using state capital. The Law on Construction does not particularly specify the limit of penalty amount in the case of construction contracts for non-state-funded projects (referred to as “privately-funded”). The question is the existence of the limit on the penalty amount specified in construction contracts for privately-funded projects and the legal basis for such limits.
This is another controversial issue regarding the application of the Civil Code or the Law on Commerce. If the Civil Code governs construction contracts, the parties are entitled to agree on the penalty amount without any upper limit.[9] In contrast, the penalty amount will be capped at 8-percent (8%) of the breached contractual portion’s value if the construction contract is under the Law on Commerce.
Therefore, the approval of the Draft of Precedent No. 06/2024 will help the parties of construction contracts to determine the applicable law when agreeing on the penalty amount for contractual breaches based on the nature of the capital source of the construction projects, thereby avoiding conflict when applying provisions on the cap of the penalty amount.
- Interest on delayed payments.
While the Law on Construction outlines the obligation for principals to compensate contractors in case of payment default,[10] it does not specifically stipulate the interest on delayed payment.
Decree No. 37 provides further guidance that in case of delayed payment, the principal must compensate the contractor by paying “interest on delayed payment at the commercial bank where the contractor opens its payment account respectively to delayed period”.[11] However, the application of such provision on interest is limited to state-funded construction projects and public-private partnership (PPP) projects. Privately-funded projects are not included within the scope of said provision.
Similar to the cap on penalty amounts for contractual breaches, the determination of additional sources of laws stipulating interest on delayed payments to be applied in privately-funded projects are not unified. Under the Law on Commerce, such interest must be applied based on “the average interest on outstanding debt applicable to the market at the time of payment for the delayed period”.[12] This determination for interest on delayed payments is guided, and interpreted by Precedent No. 09/2016/AL developed from Resolution No. 01/2019/NQ-HĐTP dated 11, January 2019.
Conversely, if the Civil Code governs construction contracts, the parties can agree on interest rates,[13] capped at 20-percent (20%) per year. Whenever there is an absence of agreements, the interest rate will default to 10-percent 1(0%).[14]
For that reason, if the Draft of Precedent No. 06/2024 is approved, it will tackle conflicts that arise from discrepancies between provisions on interest on delayed payments in the Law on Commerce and the Civil Code when the parties do not have any agreement.
Conclusion: Draft of Precedent No. 06/2024 must be approved
The endorsement of he Draft of Precedent No. 06/2024 is seen as both essential and significant.
Vietnam’s construction sector has experienced substantial growth, playing an integral role in advancing the economy and infrastructure. Consequently, the processes of drafting, managing, and resolving disputes arising from construction contracts are required to be executed efficiently and contribute to project value.
Nevertheless, the crucial matter of determining the applicable law for such contracts remains unresolved, causing obstacles for the involved parties. Therefore, the development of the content within the Draft of Precedent No. 06/2024, a Cassation Decision issued by the Supreme People’s Court, is vital and meaningful to Vietnam’s construction market.
Download PDF file here: Precedent No. 06/2024 – Applicable Law for Construction Contracts
Written by
 |
Senior Associate Tran Pham Hoang Tung
Phone: (84) 28 6276 9900 Email: tung.tran@cnccounsel.com |
 |
Legal Assistant Nguyen Thi Phuong Thao
Phone: (84) 28 6276 9900 Email: thao.nguyen@cnccounsel.com |
[1] Law on Construction 2014, amended and supplemented in 2020 and guidance documents
[2] Law on Commerce 2005
[3] For convenience, the term “public investment capital, state capital for non-public investment” in construction contracts is referred to as “state fund”
[4] Section 2, Dispatch No. 1123/BXD-KTXD on the response to the proposal of Tan Hoa Automation Joint Stock Company
[5] Dispatch No. 48/BXD-KTXD on the response to the doubts of Dai Tin Construction and Steel Structure Joint Stock Company
[6] Law on Commerce 2005
[7] Do Van Dai, “Xác định Pháp luật Điều chỉnh Hợp đồng Xây dựng”, People’s Court Journal, No. 24 (Session II, December 12/2023), page 23
[8] Article 429, the Civil Code 2015.
[9] Article 418, the Civil Code 2015.
[10] Article 146.4(d), Law on Construction.
[11] Article 43.2, Decree No. 37/2015/NĐ-CP
[12] Article 306, Law on Commerce 2005
[13] Article 357.2, the Civil Code 2015.
[14] Article 468.2, the Civil Code 2015.
