“During the covid-19 pandemic, enterprises are striving to maintain production and service to ensure their survival. However, the difficulties caused by the pandemic still affect the production, business, and financial situation of enterprises. This leads to a lot of problems, particularly the problem of late payment in commercial domestic transactions as well as foreign transactions. This article discusses the issue of late payment and proposes a few options to deal with this issue within the scope of application of the Law on Commerce No. 36/2005/QH11 (“Law on Commerce“).”
Firstly, a party is considered to have made late payment when the party has not been able to make payment on schedule, or made incomplete, or did not make the payment as agreed upon by the parties. As payment obligations are one of the important obligations forming commercial transactions, when a party commits late payment, it will be considered a breach of contract in accordance with the ‘Law on Commerce’.
According to “Article 3. Interpretation of terms” :
“[…] 12. Breach of contract means one party fails to perform, or does not perform fully, an obligation in accordance with an agreement of the parties or in accordance with this Law.”
The Law on Commerce also provides parties may apply the following sanctions in case one of the parties commits a breach of contract, namely:
This is the most basic option when one party finds that the other party does not perform its obligations. Accordingly, the aggrieved party requests the defaulting party to implement properly the contract or to take other measures to perform the contract, and the defaulting party shall bear any costs incurred.
In case of late payment, the aggrieved party may ask the defaulting party to make the payment and may extend the time to make the payment by a reasonable period.
Where the parties agree that a fine must be paid for late payment under the contract, the aggrieved party may request the defaulting party to pay the penalties as prescribed in the contract. However, the penalties for breach shall not exceed 8% of the value of such breach. Therefore, the penalty shall not be more than 8% of the originally due amount.
In addition to sanctioning for breach of contract, the aggrieved party may also request the defaulting party to compensate for losses caused by late payment. Accordingly, the value of the damages includes the value of actual and direct losses incurred by the aggrieved party caused by the defaulting party. This includes the direct benefit that the aggrieved party should have enjoyed if there was no breach. Accordingly, the defaulting party’s liability to compensate for damage arises when all the following factors arise:
Accordingly, the aggrieved party must prove the loss, the extent of the loss caused by the violation and the direct benefit that the aggrieved party should have enjoyed if there was no breach.
The aggrieved party may choose to temporarily cease/terminate the performance of the contract if the parties have agreed that the late payment act is a condition for such temporary cessation/termination of performance of the contract.
In addition, the Law on Commerce also stipulates that one party may temporarily cease/terminate the performance of the contract if the other party violates the basic obligations under the contract. However, late payment is a violation of the basic obligations of the contract. Thus, it is necessary to consider the concept of “fundamental breach” prescribed by the Law on Commerce:
“Fundamental breach means breach of contract by one party causing loss to the other party to the extent that such other party is not able to achieve its objective of entering into the contract.”
The factor of ‘damage to the point of not being able to achieve its objective of entering the contract’ is difficult to determine, since the late payment of one party may not cause enough damage to the other party to not able to achieve its objective of the contract. Therefore, to be able to temporarily cease/terminate the performance of the contract, the act of late payment should be specified in the contract between the parties as a condition for the temporary cessation/termination of the performance of the contract.
In addition to the above sanctions, the Law on Commerce also stipulates that the aggrieved party has the right to request the defaulting party to pay interest on such late payment amount. Accordingly, the parties can agree on the overdue debt interest rate in case of late payment. If there is no agreement on interest rates, the average overdue debt interest rate on the market at the time corresponding to the late payment period, or another rate of interest, if otherwise prescribed by law, is applicable.
When late payment occurs, the violating party has many options to deal with the situation if in the process of signing the contract, the parties have clear provisions, pertaining to the effects of late payment.
However, in practice, not all contracts can fully regulate the sanctions mentioned above. This is because if the regulations are too strict and binding, the parties will find it difficult to achieve the original purpose of entering the contract.
During the current pandemic period, when there is late payment, if the level of violation is not too serious and the party obliged to pay is experiencing financial difficulties, the aggrieved party should opt for ‘Specific performance of contracts’ and expand the payment schedule instead of applying strict sanctions that could affect transactions between the parties in the present and the future.
Besides, the parties should also stipulate in the contract that the late payment can serve as a basis for temporary cessation/termination the performance of the contract to limit the damage to the aggrieved party in case the other party cannot perform the payment obligation. For contracts involving many stages, this also limits the breach of the defaulting party because if the aggrieved party continues to perform its obligations but does not receive payment from the defaulting party, the due amount keeps piling up on the defaulting party.
As the pandemic caused many complications, affecting the activities of businesses, it may be difficult for the parties to a transaction to strictly ensure the performance of their obligations.
Therefore, to limit risks, enterprises need to focus on the stipulations of contracts signed during this period. Contracts should specify the effects of breach of obligation(s), especially for important obligations such as payment, and the problems that may arise due to such breach(es). In addition, the parties also need to have timely exchanges and announcements to minimize consequences in case of a violation.
The article is based on the current laws at the time of drafting as noted above and may no longer be appropriate at the time the reader accesses this article due to changes in applicable law and specific cases that the reader wants to apply. Thus, the article is for informational reference only.