DEBT RECOVERY IN CONSTRUCTION CONTRACTS – COMMON LEGAL RISKS AND PRACTICAL SOLUTIONS

The construction industry has always been one of the most attractive investment channels in the Vietnamese market due to its large scale, complex nature, and the involvement of various parties. Given the characteristics of this sector, construction contracts often have lengthy implementation periods and are subject to numerous fluctuations, which in turn give rise to various risks – particularly in relation to debt recovery under construction contracts. In the course of recovering debts arising from construction contracts, enterprises must not only ensure strict compliance with the law but also remain proactive in identifying potential legal risks that may occur. This article provides guidance on Dept Recovery In Construction Contracts – Common Legal Risks And Practical Solutions, with a view to ensuring that enterprises comply with the law while safeguarding their legitimate rights and interests.

Debt recovery under construction contracts in Vietnam

Debt recovery refers to the process by which a creditor requests the debtor to make payment of amounts or deliver assets that have become due or overdue in accordance with the debtor’s contractual obligations. In the construction sector, debt recovery may arise among various parties, including: (i) the project owner; (ii) the main contractor; (iii) subcontractors; and (iv) other relevant parties (if any). Furthermore, construction contracts in Vietnam often involve other stakeholders such as state authorities in public investment projects and foreign investors in foreign direct investment (FDI) projects. Examples may include the following

Debt recovery between the Project Owner and the Main Contractor: The project owner engages the main contractor to carry out the project under a construction contract. The project owner is responsible for making payments in accordance with the contract, including deposits, advance payments, or prepayments as agreed by the parties. Conversely, the main contractor has the obligation to deliver the project in a timely manner as committed. A failure by either party to perform its contractual obligations may result in outstanding debts arising under the construction contract between the parties.

Debt recovery between the Main Contractor and Subcontractors: In most cases, for specialised works or specific components of the project, the main contractor enters into one or more subcontract agreements. Consequently, debts may arise in relation to payments or the handover of completed work items in accordance with the subcontract terms. A breach of contractual obligations by either the main contractor or a subcontractor not only affects their own rights and obligations but may also delay the overall progress of the project with the project owner.

Debt recovery of advance capital sourced from the State budget: The recovery of advance capital derived from the State budget shall be carried out in accordance with the provisions of applicable law[1].

Certain notes on the contents of construction contracts

Cost estimates in debt recovery under construction contracts

The construction cost estimate constitutes a crucial financial element in the implementation of a construction work or package. It is determined based on calculations relating to the project’s design, engineering, construction methods, specific requirements, applicable norms, and construction prices at the time of performance. The contents of such cost estimates must be evaluated and approved in accordance with the provisions of the construction law. In the event of a debt recovery dispute arising from a construction contract, the construction cost estimate serves as one of the key pieces of evidence for determining the financial obligations of the parties and identifying which party is at fault during the process of recovering debts arising under the construction contract.

Unit prices in debt recovery under construction contracts

The construction unit price is determined based on the agreement between the parties, taking into account various factors such as market prices, construction norms, material costs, labour costs at the time of contract conclusion, and other factors consistent with the prevailing market price level. In addition, the Government has established a system of construction norms and pricing frameworks for project owners to apply or refer to when entering into construction contracts[2]. Accordingly, during the debt recovery process, the recovered amount must be consistent with the agreed unit prices, the contract performance schedule, and the payment conditions stipulated in the construction contract.

Payment terms

When conducting debt recovery under a construction contract, the parties should also pay careful attention to the payment terms, which include the method of payment, payment deadlines, payment conditions, and the supporting documents and payment records in compliance with Vietnamese law. Certain types of contracts – such as lump-sum contracts, fixed unit price contracts, adjustable unit price contracts, time-based contracts, and cost-reimbursable contracts – each contain different payment conditions. Enterprises must ensure that they have fulfilled the payment conditions as stipulated in the construction contract to establish a legal basis for debt recovery.

Measures for addressing risks related to debt recovery under construction contracts

From the foregoing analysis, it is evident that debt recovery in the construction sector involves not only numerous variables concerning the contractual content and performance, but is also affected by economic fluctuations, changes in legal and policy frameworks, market price movements, and both domestic and foreign sources of capital. Accordingly, in order to achieve effective debt recovery, enterprises should take note of the following key considerations:

Periodic reconciliation of outstanding debts

For construction contracts, accurately determining the outstanding amount corresponding to the performance progress and the recovery timeline is of utmost importance. Accordingly, the creditor may only recover debts that have met the contractual recovery conditions and have become due or overdue for payment. Based on this, the creditor may submit supporting documents evidencing the debtor’s payment obligations to request payment in accordance with the contract..

Verification of the debtor’s financial status and debt repayment capacity

In business operations, enterprises must assess the financial capacity of their counterparties in order to adopt appropriate debt recovery strategies. This approach helps to avoid resource wastage and the implementation of ineffective recovery methods that may not be suitable for the debtor’s actual circumstances. In the construction sector, the assessment of financial status should not only be based on assets and profitability, but also on the number and scale of ongoing projects and contracts in which the debtor is involved. There have been numerous cases where contractors have become insolvent due to their inability to perform awarded projects, thereby creating legal risks for other contracting parties who had previously entered into agreements with them..

Application of certain measures for debt recovery

When facing existing legal risks in the course of debt recovery, enterprises may apply certain measures to recover debts promptly and effectively, as follows:

Compulsory performance of the contract[3]: The creditor may require the debtor to perform the contract in accordance with its terms and bear any arising costs, by sending a written notice, an electronic communication, or other legally recognised means.

Compensation for damages[4]: In cases where the debt is not recovered on time, resulting in losses including the actual damages incurred and the direct profits that the creditor would have been entitled to had the debt been duly recovered, the creditor may seek compensation. Such measures must comply with the laws on contracts and compensation for damages.

Interest for late paymentf[5]: The creditor may also claim interest on late payment, calculated on the amount owed and any other related expenses (excluding contractual penalties and compensation for damages[6]).

The above-mentioned measures may be applied either concurrently or separately, depending on the actual circumstances of the enterprise and the debtor. Accordingly, the enterprise may request the debtor to negotiate directly in order to reach an agreement on the amount of debt, repayment term, and repayment method, or may seek mediation conducted by a mediator, or initiate legal proceedings before a competent court or commercial arbitration centre. The selection and application of these measures should be carried out in accordance with the enterprise’s established debt recovery strategy, or through experienced and reputable lawyers or legal professionals to ensure greater efficiency. Nevertheless, enterprises should carefully consider the extent of bad debt, recovery costs, and the financial condition of the debtor when choosing the most appropriate course of action.

Debt management and recovery constitute critical components of an enterprise’s financial health. These activities often consume substantial resources, costs, and time, comparable to the performance of the contract itself. Therefore, enterprises should adopt and implement the above measures in an optimal and efficient manner in order to maximise the effectiveness of their debt recovery efforts..

In conclusion, debt recovery under construction contracts has never been a straightforward matter. Each year in Vietnam, numerous debt recovery disputes cause significant losses not only to the assets of enterprises but also to urban infrastructure, public order, and local socio-economic stability. Accordingly, enterprises operating in the construction sector should establish sound internal policies and ensure full compliance with contractual obligations, while remaining flexible and proactive in identifying and addressing potential risks during the debt recovery process. Once debt recovery is conducted promptly and effectively, the enterprise’s construction business can progress in line with the planned schedule, thereby reducing unnecessary costs and legal risks that may otherwise arise..

The above is an overview of Dept Recovery In Construction Contracts – Common Legal Risks And Practical Solutions.  If you have difficulties in finding a Law Firm to advise and support in the relevant legal field, please contact us. Phuoc & Partners is a professional consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms in Vietnam with highly specialised teams in top legal fields such as Labour and Employment, Taxation, Merger and acquisition, Litigation. We are confident in providing customers with optimal and effective service

[1] Section B Part 2 of the Circular No. 86/2011/TT-BTC

[2] Chapter 4 of the Decree No. 10/2021/ND-CP

[3] Article 297 of the 2005 Law on Commercial

[4] Clause 1 Article 302 of the Law on Commercial

[5] Article 306 of the 2005 Law on Commercial

[6] Precedent No. 09/2016/AL