Precedent No. 08/2016/AL on Determining Interest Rates and Adjusting Interest Rates in Credit Contracts from the Day Following the First-Instance Trial in Vietnam

Precedent No. 08/2016/AL, adopted by the Judicial Council of the Supreme People’s Court on October 17, 2016, and promulgated pursuant to Decision No. 698/QD-CA dated October 17, 2016, issued by the Chief Justice of the Supreme People’s Court.

1. Definition of a Precedent

A precedent refers to the legal reasoning and rulings contained in a legally effective judgment or decision of a court regarding a specific case, selected by the Judicial Council of the Supreme People’s Court and promulgated by the Chief Justice of the Supreme People’s Court as a precedent for courts to study and apply in adjudication. (Article 1, Resolution No. 04/2019/NQ-HDTP)

A precedent must meet the following criteria:

• It clarifies legal provisions subject to differing interpretations, provides analysis and explanation of legal issues and events, and indicates principles, guidelines for adjudication, or applicable legal norms in a specific case, or reflects fairness in matters not specifically regulated by law;
• It is normative;
• It provides guidance for the uniform application of law in adjudication.

2. Precedent No. 08/2016/AL on Determining Interest Rates and Adjusting Interest Rates in Credit Contracts from the Day Following the First-Instance Trial

2.1. Source of the Precedent

Cassation Decision No. 12/2013/KDTM-GDT dated May 16, 2013, issued by the Judicial Council of the Supreme People’s Court regarding the business and commercial case “Dispute over a Credit Contract” in Hanoi City, between the plaintiff, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), and the defendant, Kaoli Pharmaceutical Joint Stock Company (Kaoli Company); with Ms. Nguyen Thi Phuong, Mr. Nguyen Dang Duyen, and Ms. Do Thi Loan as persons with related rights and obligations.

Location of the Precedent Content

Paragraph 16 of the “Findings” section of the aforementioned cassation decision.

2.2. Summary of Precedent No. 08/2016/AL

Precedent Situation:

In a credit contract, the parties agreed on lending interest rates, including: the interest rate for on-time repayment, the interest rate for overdue debts, and the adjustment of the lending interest rate periodically by the bank or lending credit institution, where, at the time of the first-instance trial, the borrower has not repaid or has insufficiently repaid the principal and interest as per the credit contract.

Legal Solution:

In such cases, the borrower must continue to pay the bank or lending credit institution the outstanding principal, interest on the principal for on-time repayment (if any), and overdue interest on the unpaid principal at the interest rates agreed in the contract until the principal is fully repaid. If the parties agreed to adjust the lending interest rate periodically according to the bank or lending credit institution’s rates, the interest rate the borrower must continue to pay, as decided by the court, shall be adjusted in accordance with the bank or lending credit institution’s rate adjustments.

Relevant Legal Provisions:

• Articles 471, 474, and 476 of the Civil Code of Vietnam 2005;
• Clause 2, Article 91 of the Law on Credit Institutions of Vietnam 2010;
• Clause 1, Article 1 of Circular No. 12/2010/TT-NHNN dated April 14, 2010, of the State Bank of Vietnam guiding credit institutions on lending in Vietnamese Dong to customers at agreed interest rates;
• Clause 2, Article 11 of the Regulation on Lending by Credit Institutions to Customers, issued under Decision No. 1627/2001/QD-NHNN dated December 31, 2001, of the Governor of the State Bank, as amended and supplemented by Decision No. 127/2005/QD-NHNN dated February 3, 2005.

Keywords of the Precedent:

“Interest rate”; “Outstanding principal”; “Credit contract”; “Interest rate adjustment”; “Overdue interest rate.”

CASE DETAILS

Based on the lawsuit filed on July 20, 2010, and the documents and evidence in the case file, it is noted:

The Joint Stock Commercial Bank for Foreign Trade of Vietnam – Thang Long Branch (hereinafter Vietcombank) and Kaoli Pharmaceutical Joint Stock Company (hereinafter Kaoli Company) entered into four credit contracts: Credit Contract No. 03/07/NHNT-TL dated December 25, 2007; No. 04/07/NHNT-TL dated December 28, 2007; No. 144/08/NHNT-TL dated March 28, 2008; and No. 234/08/NHNT-TL dated May 27, 2008. These credit contracts were secured by assets, specifically ownership rights to houses and land use rights at:

• No. 122, Doi Can Street, Doi Can Ward, Ba Dinh District, Hanoi City (land plot Nos. 46B+39C+37C, map sheet No. 19), owned and used by Ms. Nguyen Thi Phuong (under Mortgage Contract No. 1678.2008/HDTC dated June 25, 2008; securing a loan and guarantee up to 4,605,000,000 VND; detailed loan conditions to be specified in banking documents signed by Vietcombank and the guaranteed party (Kaoli Company) at Vietcombank’s headquarters (Clause 1.3, Article 1); asset value at 4,605,000,000 VND per Asset Valuation Minutes No. 105/08/NHNT.TL; mortgage term of five years from the date the guaranteed party receives the loan; contract effective upon registration at the Land Use Rights Registration Office (Clause 10.1, Article 10)). The contract was notarized by a notary at Hanoi Notary Office No. 3 on June 25, 2008, and certified for mortgage registration by the Ba Dinh District Department of Natural Resources and Environment on July 10, 2008. Previously, on September 3, 2007, Ms. Phuong and Vietcombank signed a Minutes of Handover of Secured Asset Documents, stating: “Both parties proceed to hand over original documents of the following secured assets to secure Kaoli Company’s obligations at Vietcombank – Thang Long Branch; asset: Ownership rights to house and land use rights at No. 122, Doi Can Street, Doi Can Ward, Ba Dinh District, Hanoi” (case file page 52).
• Cluster 13, Group 2, Nhat Tan Ward, Tay Ho District, Hanoi City, owned and used by Mr. Nguyen Dang Duyen and his wife, Ms. Do Thi Loan (under Mortgage Contract No. 1677.2008/HDTC dated June 25, 2008; securing a loan and guarantee up to 1,250,000,000 VND; detailed loan conditions to be specified in banking documents signed by Vietcombank and the guaranteed party (Kaoli Company) at Vietcombank’s headquarters (Clause 1.3, Article 1); asset value at 1,250,000,000 VND per Asset Valuation Minutes No. 106/08/NHNT.TL dated September 3, 2007 (Clause 3.1, Article 3); mortgage term of five years from the date the guaranteed party receives the loan; contract effective upon registration at the Land Use Rights Registration Office (Clause 10.1, Article 10)). The contract was notarized by a notary at Hanoi Notary Office No. 3 on June 25, 2008, and certified for mortgage registration by the Ba Dinh District Department of Natural Resources and Environment on July 1, 2008. Previously, on September 3, 2007, Mr. Nguyen Dang Duyen and Vietcombank – Thang Long Branch signed a Minutes of Handover of Secured Asset Documents, stating: “Both parties proceed to hand over original documents of the following secured assets to secure Kaoli Company’s obligations at Vietcombank – Thang Long Branch; asset: Ownership rights to house and land use rights at Cluster 13, Group 2, Nhat Tan Ward, Tay Ho District, Hanoi” (case file page 58a).

Additionally, the loans under these credit contracts were secured by assets including houses and land owned by Mr. Cao Ngoc Minh and his wife, Ms. Doan Thi Thanh Thuy; houses and land of Mr. Giang Cao Thang and his wife, Ms. Duong Thi Sinh (released from mortgage); land use rights of Mr. Chu Quoc Khanh; and houses and land of Ms. Chu Thi Hong and Mr. Nguyen Van Minh.

Under the contracts, Vietcombank – Thang Long Branch disbursed the loan amounts to Kaoli Company. Kaoli Company repaid only a portion of the principal and interest. Vietcombank filed a lawsuit requesting the court to compel Kaoli Company to pay the outstanding amount of 8,197,957,837 VND under the four credit contracts (including principal of 5,457,000,000 VND, on-time interest of 397,149,467 VND, and overdue interest up to the first-instance trial of 2,343,808,370 VND) and to liquidate the mortgaged assets of Ms. Nguyen Thi Phuong, Mr. Nguyen Dang Duyen, and Ms. Do Thi Loan to recover the debt.

The defendant’s representative, Mr. Do Van Chinh, Director of Kaoli Company, stated: He acknowledged Kaoli Company’s debt to Vietcombank for principal, on-time interest, and overdue interest as presented by Vietcombank. He confirmed Kaoli Company’s responsibility to repay under the four credit contracts and requested a five-year repayment schedule.

If Kaoli Company fails to repay or repays insufficiently, Vietcombank’s request to liquidate the secured assets of Ms. Nguyen Thi Phuong, Mr. Nguyen Dang Duyen, and Ms. Do Thi Loan should be resolved per legal regulations. Mr. Chinh confirmed Vietcombank disbursed funds before signing Mortgage Contract No. 1678.2008/HDTC and No. 1677.2008/HDTC on June 25, 2008. From June 25, 2008, onward, Kaoli Company did not borrow additional funds or sign other credit contracts with Vietcombank.

Persons with related rights and obligations stated:

• Mr. Nguyen Van Nghi (authorized representative of Ms. Nguyen Thi Phuong) stated: He opposed Vietcombank’s lawsuit against Kaoli Company and its request to liquidate Ms. Phuong’s assets if Kaoli Company fails to repay, as Ms. Phuong signed the mortgage contract on June 25, 2008, and should not be liable for guaranteeing Kaoli Company’s loans under the four credit contracts. He requested the court to compel Vietcombank to release the mortgage and return the Certificate of Land Use Rights and House Ownership to Ms. Phuong.
• Mr. Nguyen Dang Duyen and Ms. Do Thi Loan stated: They signed the Mortgage Contract on June 25, 2008, securing Kaoli Company’s loans at Vietcombank, bearing responsibility for obligations arising from June 25, 2008, to April 25, 2009, but not for credit contracts signed before June 25, 2008. Vietcombank confirmed no further credit contracts were signed with Kaoli Company after June 25, 2008, so their legal liability has not arisen. They requested the court to compel Vietcombank to release the mortgage per the June 25, 2008, contract.

At First-Instance Business and Commercial Judgment No. 32/2011/KDTM-ST dated March 24, 2011, the Hanoi City People’s Court decided:

“1. To partially accept Vietcombank’s lawsuit against Kaoli Company, compelling Kaoli Company to pay Vietcombank a total of 8,197,957,837 VND in principal and interest.

2. To reject Vietcombank’s request to liquidate the assets, specifically the ownership rights to houses and land use rights at land plot Nos. 46B+39C+37C, map sheet No. 19, No. 122, Doi Can Street, Doi Can Ward, Ba Dinh District, Hanoi, per Certificate No. 10101132587 issued by the Ba Dinh District People’s Committee on April 27, 2004, to Ms. Nguyen Thi Phuong, and at Cluster 13, Group 2, Nhat Tan Ward, Tay Ho District, Hanoi, per Certificate No. 10103090899 issued by the Hanoi City People’s Committee on March 23, 2004, to Mr. Nguyen Dang Duyen and Ms. Do Thi Loan.

Vietcombank shall return all documents of house ownership and land use rights and complete procedures to release the mortgaged assets for Ms. Nguyen Thi Phuong, Mr. Nguyen Dang Duyen, and Ms. Do Thi Loan.”

The first-instance court also decided on court fees and the parties’ appeal rights per legal regulations.

On April 4, 2011, Vietcombank appealed.

At Appellate Business and Commercial Judgment No. 148/2011/KDTM-PT dated August 17, 2011, the Appellate Court of the Supreme People’s Court in Hanoi, pursuant to Clause 2, Article 275, and Clause 1, Article 276 of the Civil Procedure Code of Vietnam 2004, decided:

“To amend First-Instance Business and Commercial Judgment No. 32/2011/KDTM-ST dated March 23 and 24, 2011, of the Hanoi City People’s Court regarding the guarantee obligations of Ms. Nguyen Thi Phuong, Mr. Nguyen Dang Duyen, and Ms. Do Thi Loan, as follows:

To rule: The Minutes of Handover of Secured Asset Documents dated September 3, 2007, between Vietcombank – Thang Long Branch and Ms. Nguyen Thi Phuong, and Mr. Nguyen Dang Duyen and Ms. Do Thi Loan, are guarantee contracts (case file pages 52, 58a).

To compel Kaoli Company to pay Vietcombank a total of 8,197,957,837 VND in principal and interest…

If Kaoli Company fails to fulfill or insufficiently fulfills its repayment obligations to Vietcombank, Vietcombank may request the Hanoi City Civil Judgment Enforcement Agency to liquidate the guaranteed assets per the Law on Civil Judgment Enforcement to recover the debt under the guarantors’ responsibilities.

…From the date the judgment takes legal effect and the judgment creditor requests enforcement, the judgment debtor must pay interest on the delayed amount at the basic interest rate announced by the State Bank corresponding to the delay period.”

The appellate court also decided on court fees and enforcement procedures.

After the appellate trial, Ms. Nguyen Thi Phuong, Mr. Nguyen Dang Duyen, and Ms. Do Thi Loan submitted multiple requests for cassation review of the appellate judgment.

In Protest Decision No. 34/2012/KDTM-KN dated October 15, 2012, the Chief Justice of the Supreme People’s Court proposed that the Judicial Council conduct a cassation review to annul Appellate Business and Commercial Judgment No. 148/2011/KDTM-PT dated August 17, 2011, and remand the case to the Appellate Court in Hanoi for re-adjudication at the appellate level per legal regulations.

At the cassation hearing, the Supreme People’s Procuracy representative agreed with the Chief Justice’s protest.

The Judicial Council of the Supreme People’s Court determined:

Regarding the Mortgage Contracts for land use rights and attached assets to guarantee third-party bank loans (Notary Nos. 1677.2008/HDTC and 1678.2008/HDTC, both dated June 25, 2008):

Both mortgage contracts do not specify which credit contracts they secure and were signed after Vietcombank – Thang Long Branch disbursed funds for the four Credit Contracts (No. 03/07/NHNT-TL dated December 25, 2007; No. 04/07/NHNT-TL dated December 28, 2007; No. 144/08/NHNT-TL dated March 28, 2008; and No. 234/08/NHNT-TL dated May 27, 2008). Per Clause 1.3, Article 1 of both mortgage contracts, “Detailed loan conditions for the aforementioned amount (secured obligation up to 4,605,000,000 VND…; Clause 1.2, Article 1) will be specified in banking documents signed by Party B (Vietcombank – Thang Long Branch) and the guaranteed party at Party B’s headquarters,” implying Ms. Phuong, Mr. Duyen, and Ms. Loan guaranteed Kaoli Company’s loans under credit contracts signed after June 25, 2008, not the four prior contracts.

Vietcombank relied on Clause 6.2, Article 6 of the four credit contracts, stating (handwritten): “Detailed agreements on assets, rights, and obligations are specified in…Mortgage Contract No. 1677.2008/HDTC and No. 1678.2008/HDTC dated June 25, 2008,” to request the court to hold Ms. Phuong, Mr. Duyen, and Ms. Loan liable for Kaoli Company’s loans. However, Vietcombank’s representative at the first-instance trial stated this was “written by the bank’s accountant.” Mr. Do Van Chinh, Kaoli Company’s Director, stated at the first-instance trial: “Kaoli Company was unaware of this addition” and “disagreed with the bank’s liquidation request, as Ms. Phuong, Mr. Duyen, and Ms. Loan’s assets were added by the bank to the credit contracts.”

At the appellate trial, Ms. Phuong’s representative stated she received no credit contracts from Vietcombank, while Mr. Duyen and Ms. Loan received them. Thus, Mr. Chinh, Ms. Phuong, Mr. Duyen, and Ms. Loan were unaware of the accountant’s handwritten additions, did not sign the credit contracts, and there is no basis to confirm the credit contracts were secured by Mortgage Contracts No. 1677.2008/HDTC and No. 1678.2008/HDTC dated June 25, 2008.

Besides these mortgage contracts, the case file includes two sets of mortgage-related documents: one for Ms. Phuong and one for Mr. Duyen and Ms. Loan, each containing Asset Valuation Minutes and Handover Minutes dated September 3, 2007, and Mortgage Registration Requests (January 29, 2008, for Ms. Phuong; June 25, 2008, for Mr. Duyen and Ms. Loan). These documents do not specify which credit contracts they secure.

The appellate court determined (summarized): “The Handover Minutes of Secured Asset Documents dated September 3, 2007, between Vietcombank – Thang Long Branch and Ms. Phuong, Mr. Duyen, and Ms. Loan, involve mortgage, pledge, and guarantee for Kaoli Company’s obligations at the bank…thus deemed a contract…” and ruled: “The Handover Minutes dated September 3, 2007, are guarantee contracts (case file pages 52, 58a)” and “If Kaoli Company fails to fulfill or insufficiently fulfills its repayment obligations, Vietcombank may request the Hanoi City Civil Judgment Enforcement Agency to liquidate the guaranteed assets per the Law on Civil Judgment Enforcement to recover the debt under the guarantors’ responsibilities.”

This appellate court’s determination and ruling lack basis and are legally incorrect because:

• The Handover Minutes of Secured Asset Documents dated September 3, 2007, between Ms. Phuong (and Mr. Duyen and Ms. Loan) and Vietcombank – Thang Long Branch are not guarantee contracts, as determined by the appellate court.

At the appellate trial on August 17, 2011, Vietcombank’s representative only stated: “The Handover and Valuation Minutes are inseparable parts of the mortgage contract.”

• Per the Handover Minutes, Valuation Minutes, and Vietcombank’s appellate trial statements, the handover and valuation occurred on September 3, 2007. However, the mortgage contracts with Ms. Phuong (and Mr. Duyen and Ms. Loan) were signed on June 25, 2008, after the Handover and Valuation Minutes, so these minutes cannot be inseparable parts of the mortgage contracts. The appellate court also determined: “The June 25, 2008, mortgage contracts…are unrelated to the Handover Minutes…”
• Per the minutes’ dates and Vietcombank’s appellate trial statements, the handover of original Certificates of House Ownership and Land Use Rights and valuation occurred on September 3, 2007. However, the Valuation Minutes reference: “Based on the Land Price Table for Hanoi Districts issued with Decision No. 150/2007/QDUBND dated December 28, 2007, by the Hanoi City People’s Committee,” and state they are inseparable from Mortgage Contracts No. 1678.2008/HDTC and No. 1677.2008/HDTC dated June 25, 2008. For Ms. Phuong, the land use rights value was based on a Land Price Confirmation Minutes dated September 4, 2007, and her Mortgage Registration Request dated January 29, 2008, states: “Mortgage Contract No. 1678.2008/HDTC signed on June 25, 2008.” Additionally, per Ms. Phuong, Mr. Duyen, and Ms. Loan’s statements and documents, on September 3, 2007, Ms. Phuong’s house and land were mortgaged at the Quang An Branch of the Agriculture and Rural Development Bank, Tay Ho District, released on January 11, 2008; and Mr. Duyen and Ms. Loan’s house and land were mortgaged at the Thang Long Branch of the Vietnam Private Joint Stock Commercial Bank, released on January 16, 2008.

Based on this evidence, it is concluded: The Handover and Valuation Minutes were not created on September 3, 2007, the Certificates were not handed over on that date, and the valuation was not conducted on September 3, 2007, as Vietcombank stated and the appellate court accepted.

On September 3, 2007, mortgage and guarantee contracts for land use rights and attached assets required notarization and registration per Subpoint a, Clause 1, Article 130 of the Land Law of Vietnam 2003; Subpoint a, Section 1, Article 12 of Decree No. 163/ND-CP dated December 29, 2006; and Subsection 2.4, Section 2 of Joint Circular No. 03/2006/TTLT-BTP-BTNMT dated June 13, 2006, contrary to the appellate court’s determination.

The appellate court failed to clarify whether other documents or evidence indicated that Ms. Phuong, Mr. Duyen, and Ms. Loan’s mortgage contracts guaranteed Kaoli Company’s four credit contracts, incorrectly deeming the Handover Minutes as guarantee contracts in both form and content.

• If there were grounds to conclude the June 25, 2008, mortgage contracts guaranteed the credit contracts, Ms. Phuong’s contract secured up to 4,605,000,000 VND, and Mr. Duyen and Ms. Loan’s contract secured up to 1,250,000,000 VND. However, the appellate court’s ruling that the September 3, 2007, Handover Minutes were guarantee contracts, stating: “If Kaoli Company fails to fulfill or insufficiently fulfills its repayment obligations, Vietcombank may request the Hanoi City Civil Judgment Enforcement Agency to liquidate the guaranteed assets to recover the debt under the guarantors’ responsibilities,” implies Ms. Phuong, Mr. Duyen, and Ms. Loan are liable for Kaoli Company’s entire debt without delineating their guarantee responsibilities, which is incorrect.

Additionally, the first-instance and appellate courts’ ruling: “From the date the judgment takes legal effect and the judgment creditor requests enforcement, the judgment debtor must pay interest on the delayed amount at the basic interest rate announced by the State Bank corresponding to the delay period,” is incorrect. For loans from banks or credit institutions, beyond principal, on-time interest, overdue interest, and fees payable up to the first-instance trial, from the day following the first-instance trial, the borrower must continue to pay overdue interest on the unpaid principal at the agreed contract rate until the principal is fully repaid. If the credit contract includes an agreement to adjust the lending interest rate periodically per the lending bank’s rates, the interest rate the borrower must pay, as decided by the court, shall be adjusted accordingly.

For the foregoing reasons, pursuant to Clause 3, Article 291, Clause 3, Article 297, and Article 299 of the Civil Procedure Code of Vietnam 2004 (as amended in 2011),

DECISION:

1. To annul Appellate Business and Commercial Judgment No. 148/2011/KDTM-PT dated August 17, 2011, of the Appellate Court of the Supreme People’s Court in Hanoi regarding the business and commercial dispute over a credit contract between the plaintiff, Vietcombank, the defendant, Kaoli Company, and persons with related rights and obligations, Ms. Nguyen Thi Phuong, Mr. Nguyen Dang Duyen, and Ms. Do Thi Loan.

2. To remand the case file to the Appellate Court of the Supreme People’s Court in Hanoi for re-adjudication at the appellate level per legal regulations.

CONTENT OF THE PRECEDENT

The first-instance and appellate courts’.Concurrent ruling: “From the date the judgment takes legal effect and the judgment creditor requests enforcement, the judgment debtor must pay interest on the delayed amount at the basic interest rate announced by the State Bank corresponding to the delay period,” is incorrect. For loans from banks or credit institutions, beyond principal, on-time interest, overdue interest, and fees payable up to the first-instance trial, from the day following the first-instance trial, the borrower must continue to pay overdue interest on the unpaid principal at the agreed contract rate until the principal is fully repaid. If the credit contract includes an agreement to adjust the lending interest rate periodically per the lending bank’s rates, the interest rate the borrower must pay, as decided by the court, shall be adjusted accordingly.