How to determine overdue payment interest, fine for breaching contract and compensation in commercial relation under Judicial Precedent No. 09/2016/AL?

Writer: Thao Bui

When signing a commercial contract, the involving parties all want to reach their own purpose and interests over that contract. However, not all cases the parties comply with what they agreed, so they can breach the contract. Disputes regarding payment and goods delivery obligations are very common. A question is how to calculate overdue payment interest, fine for breaching contract and compensation? We would like to introduce you Judicial Precedent No. 09/2016/AL (“Judicial Precedent 09”) effective from 01 December 2016 to solve this question.

By this post, BLawyers Vietnam’s litigation lawyers would highlight some points of the Judicial Precedent 09.

overdue payment interest, fine for breaching contract and compensation in commercial contract

1. How does the law regulate on overdue payment interest, fine for breaching contract and compensation in commercial contracts?

a. Interest on overdue payment

In a commercial contract, the purchaser has obligation to pay to the seller under period, location and amount as their agreement. If the purchaser does not fulfill payment obligation, they would pay an amount for overdue payment. The involving parties can make agreement on overdue payment interest. Otherwise, such interest is determined by the average interest rate of overdue debts in market at the time of payment.

However, in practice there are two issues that are not clearly defined by the law as follows:

(i) Determination of the average interest rate of overdue debts in market

Neither Law on Commerce 2005 nor Civil Code 2015 has specific provisions for this issue. A relevant party cannot know how to refer banks’ interests to take the interest rate. In addition, that party may confuse which area of banks they need to take such rate.

(ii) Time of taking the average interest rate of overdue debts in market

According to Law on Commerce 2005, such time is the time of payment. In practice, in a dispute, it is difficult for the relevant parties to determine such time.

b. Interest on fine for breaching contract and compensation

Fine for breaching is an agreement of contractual parties, the violating party shall pay a fine to the other party. To claim fine for breach, the involving parties must have an agreement on such fine when breaching contract. They also can choose the fine level but not exceeding 8% of the value of the breached contractual obligation.

Compensation is an amount that the breaching party must pay to the other party for the damage caused by that party. Liability to pay compensation shall arise upon existence of these elements: (i) Breach of the contract; (ii) Actual damage; and (iii) Act of breaching is the direct cause of the damage.

When a party breaches the contract, payment obligation for fine for breaching and compensation can arise. However, when it makes a late payment, can an overdue interest be applied on such amount? Prevailing law does not regulate this matter.

Hence, determination of overdue interest is a common issue in disputes as well.

2. How does the Judicial Precedent 09 regulate on this matter?

a. Judicial Precedent 09 has recorded a dispute regarding purchase contract with the following contents:

Viet Y Joint Stock Company – the buyer (“Viet Y”) and Hung Yen Joint Stock Company – the seller (“Hung Yen”) signed a purchase contract on 03 October 2016. Viet Y made full payment to Hung Yen. Hung Yen did not deliver enough goods to Viet Y as agreement, lack of more 7 tons, equivalent around VND48 million. After that, both parties signed many similar contracts. Viet Y paid Hung Yen for these contracts in advance. However, Hung Yen did not fulfill their obligation to deliver the goods. Viet Y sued and requested Hung Yen to pay for: (i) insufficient delivery; (ii) fine for breaching contract; and (iii) compensation for damage. According to Viet Y’s request, they charged overdue interest on 3 above amounts.

The first instance Court accepted the request of Viet Y and forced Hung Yen to pay full amount. Hung Yen appealed and the Appeal Court decided to cancel the first instance judgment.

The Chief Justice of the Supreme People’s Court requested the Council of Judges of the Supreme People’s Court to reconsider under cassation procedure. The Chief Justice had given some notes to resolve the disputes, as follows:

(i) When calculating overdue interest on the advance payment without receiving the goods, the First Instance Court had made wrong decision. They did not take the average interest rate of overdue debts in market at the time of payment to calculate. They applied the rate of 10.5%/ year which is the base interest rate announced by the State Bank. In this case, the Court should take the average interest rate of overdue debts of at least three local banks (Agribank, Vietcombank, Viettin Bank, etc.). Court shall consider such rate at the time of the trial.

(ii) It is incorrect for the First Instance Court to charge interest on the fine for breaching contract and compensation.

b. From Judicial Precedent 09, the involving parties can determine clearly interest on overdue payment, fine for breaching contract and compensation.

Specifically, the involving parties calculate the overdue interest as follows:

(i) Overdue interest rate depends on the average interest rate of overdue debts of at least three local banks at the time of the trial. Such rate is used in case both parties do not have any agreement on it. The law still prevails the agreement of the parties.

(ii) Fine for breaching contract and compensation cannot be charged overdue payment interest.

In conclusion, Judicial Precedent 09 solved some matters that make the parties confuse when charging overdue interest. Such precedent provides a specific way of determining rate of interest.

Should you have any questions on this matter, please contact us at consult@blawyersvn.com. We appreciate your concern and are more than happy to support you.

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