Differences in legal remedy and penalty for contract violations between Circular 04/2017/TT-BKHDT and Circular No. 08/2022/TT-BKHDT

Circular No. 08/2022/TT-BKHDT issued by the Ministry of Planning and Investment on May 31, 2022 takes effect from August 1, 2022 (“Circular 08”) and replaces Circular No. 04/2017/TT-BKHDT dated November 15, 2017 (“Circular 04”) on selecting the Consultant on the national bidding network system.

Differences can be seen in terms of legal remedy and penalty for contract violations between Circular 04 and Circular 08. This article will focus on E-GCC 13 of the Electronic Standard Bidding Documents for Consulting services (Form 06) of Circular 04 and E-GCC 16, E-PCC 16 of the Electronic Standard Bidding Documents for Consulting services (Form 4A) of Circular 08 to clarify the above differences.

According to E-GCC 13 of Circular 04, except for force majeure events, the Investor is entitled to claim damages in case the Consultant fails to perform part or all of the work under the contract within the contract term. Specifically, the Investor may deduct from the contract price an amount of damages corresponding to a percentage of the value of the late work as prescribed in E-PCC 13 calculated for each week of late performance or another agreed period until such work is performed. The maximum percentage deduction is specified in E-PCC 13, and when the maximum is reached, the Investor may consider terminating the contract.

Regarding the drafting origin, the regulation on damages in E-GCC 13 is drafted based on GCC-27.1, which stipulates liquidated damages in the Harmonized Standard Bidding Documents for Procurement of Goods and Works in ADB/WB[1] Financed Projects (“ADB/WB Form”).

Liquidated damages is a fairly common clause in the common law system whose primary purpose is to compensate the aggrieved party for damage arising from a party’s breach without the need to prove the actual damage occurred.

However, Vietnamese law does not have a specific provision for recognizing the liquidated damages agreement. This is reflected in Article 303 of the Vietnamese Commercial Law 2005, whereby liability for damages only arises when actual damage occurs. Although Articles 13 and Article 360 of the Vietnamese Civil Code 2015 (“Civil Code”) do regulate liability for damages in a more open way, whereby the parties have the right to agree otherwise on damages, there is not yet any legal regulation affirming that “otherwise agreed” means that the parties have the right to agree on liquidated damages. As a result, a liquidated damages agreement often runs the risk of not being recognized when referred to a dispute resolution body.

Thus, although E-GCC 13 of Circular 04 and GCC 27.1 of the ADB/WB Form are similar in content, E-GCC 13 is not considered a liquidated damages clause. Instead, E-GCC 13 is often applied as a penalty clause for breach of contract. Accordingly, the Investor imposes a percentage (%) of the penalty on the Consultant for the value of the late work calculated for each week of delay and a maximum percentage (%) of the penalty on the Consultant. In addition, with regard to the procurement of consulting services on making design documents, cost estimates, bidding documents, and requests for proposals for installation in a lump sum contract, the Consultant must also compensate the Investor in case of incorrect calculation of quantity and volume of work.

When compared with E-GCC 13 of Circular 04, E-GCC 16 of Circular 08 has clearer regulations for applying the legal remedy and penalty. The E-PCC 16 of Circular 08 offers three options, including (i) applying only penalty; (ii) applying only compensation for damage; or (iii) applying both penalty and compensation for damage, which is completely consistent with clause 3 of Article 418 of the Civil Code. Besides, Circular 08 no longer stipulates the Contractor’s obligation to compensate the Investor in case of incorrect calculation of the quantity and volume of work in the procurement of consulting services on making design documents, estimates, bidding documents, and requests for proposals for installation in a lump sum contract.

More importantly, E-PCC 16 of Circular 08 has recognized the parties’ right to agree on a liquidated damages clause, specifically as follows:

“In case of applying compensation for damage, the clause shall be in one of the following ways:

– Compensate on the basis of the actual damage;

– Compensate on the basis of a specified amount. In this case, clearly state the compensation level, compensation method… in accordance with civil law.”

This creates a useful tool for the Investor to estimate the loss corresponding to the damage in advance without having to prove the actual damage, especially for complex construction projects, whose actual damage is not easy to determine.

Not stopping there, the liquidated damages clause also helps the Consultants be more serious about performing the contract on schedule and in accordance with their contractual obligations when being aware of the damages they are likely to suffer in the event of a breach of contract. At the same time, this clause also helps the Consultant limit the level of damages when the actual damage may go beyond his capacity to pay.

In addition, Circular 08 has created a balance between the Investor and the Consultant in case of a breach of contract. Specifically, E-PCC 16 of Circular 08 has added regulation on calculating interest on late payments in case the Investor is late in performing his obligations. Accordingly, the Investor must pay the Consultant the interest at the base interest rate announced by the State Bank of Vietnam from the first date of late payment until the date of full payment to the Consultant.

Reported by Thuy Tien and Bao Khanh