Precedent No. 09/2016/AL on Determining the Average Market Overdue Interest Rate and Payment of Interest on Penalties for Breach and Damages in Vietnam

Precedent No. 09/2016/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. 09/2016/AL on Determining the Average Market Overdue Interest Rate and Payment of Interest on Penalties for Breach and Damages in Vietnam

2.1. Source of the Precedent

Cassation Decision No. 07/2013/KDTM-GDT dated March 15, 2013, issued by the Judicial Council of the Supreme People’s Court regarding the business and commercial case “Dispute over a Sale of Goods Contract” in Bac Ninh Province, between the plaintiff, Viet Y Steel Joint Stock Company, and the defendant, Hung Yen Metal Joint Stock Company; with Ms. Le Thi Ngoc Lan and Mr. Le Van Dung as persons with related rights and obligations.

Location of the Precedent Content

Paragraphs 4, 5, and 6 of Section 2 of the “Findings” section of the aforementioned cassation decision.

2.2. Summary of Precedent No. 09/2016/AL

Precedent Situation 1:

A sale of goods contract is breached because the seller fails to deliver or delivers insufficient goods to the buyer, resulting in the seller’s obligation to refund the advance payment and pay interest for late payment.

Legal Solution 1:

In such cases, interest for late payment is calculated based on the average market overdue interest rate, determined as the average overdue interest rate of at least three banks in the locality at the time of payment (first-instance trial), unless otherwise agreed or provided by law.

Precedent Situation 2:

A sale of goods contract gives rise to an obligation to pay penalties for breach and damages.

Legal Solution 2:

In such cases, the party obligated to pay penalties for breach or damages is not required to pay interest on the amount of such penalties or damages.

Relevant Legal Provisions:

• Articles 34, 37, Clause 3 of Article 297, Articles 300, 301, 302, 306, and 307 of the Commercial Law of Vietnam 2005;
• Articles 307, 422, 474, and 476 of the Civil Code of Vietnam 2005.

Keywords of the Precedent:

“Sale of goods contract”; “Contract breach”; “Refund of advance payment”; “Interest for late payment”; “Overdue interest rate”; “Average market overdue interest rate”; “Penalty for breach”; “Damages.”

CASE DETAILS

Based on the lawsuit filed on July 7, 2007, the request to amend the lawsuit on October 10, 2007, the case file documents, and the plaintiff’s representative’s statements:

On October 3, 2006, Viet Y Steel Joint Stock Company (hereinafter Viet Y Company) signed Economic Contract No. 03/2006-HDKT with Hung Yen Metal Joint Stock Company (hereinafter Hung Yen Company), represented by Mr. Nguyen Van Tinh, Deputy General Director, under Authorization Letter No. 621 dated September 10, 2005, from Hung Yen Company’s General Director. Under this contract, Viet Y Company (Party A) purchased continuous cast steel billets CTS-5SP/PS, loose, per GOST 380-94 standard, from Hung Yen Company (Party B) for 3,000 tons +/- 5%, at 6,750,000 VND per ton; delivery from October 25 to 31, 2006; total contract value of 20,250,000,000 VND +/- 5%.

On October 4, 2006, Viet Y Company transferred 20,250,000,000 VND to Hung Yen Company via a payment order through Hai Duong Foreign Trade Bank. Hung Yen Company delivered 2,992.820 tons of steel billets to Viet Y Company, short by 7.180 tons, equivalent to 48,465,000 VND.

On December 20, 2006, the parties signed Contract No. 05/2006-HDKT, represented by Mr. Le Van Manh, Deputy General Director of Hung Yen Company, under Authorization Letter No. 1296/UQ/HYM from the General Director. Viet Y Company purchased 5,000 tons of steel billets (same standard as Contract No. 03) at 7,290,000 VND per ton (including VAT and transport costs). The contract value was 36,450,000,000 VND +/- 5%; delivery from January 18 to 30, 2007; Viet Y Company would advance 500,000,000 VND to Hung Yen Company upon signing, with the remainder paid in two installments after receiving goods. The contract stipulated Hung Yen Company would incur a 2% penalty on the contract value for failing to deliver the correct type or quantity. Viet Y Company’s representative stated that on December 21, 2006, Viet Y Company transferred 500,000,000 VND as an advance, but Hung Yen Company failed to perform without reason.

On the same day, December 20, 2006, Viet Y Company signed Contract No. 06/2006 with Hung Yen Company, represented by Mr. Le Van Manh, to purchase 3,000 tons of steel billets at 7,200,000 VND per ton. The contract value was 21,600,000,000 VND; delivery from January 5 to 15, 2007.

On December 22, 2006, Viet Y Company transferred 21,600,000,000 VND to Hung Yen Company via a payment order at Techcombank’s Hung Yen Branch. Hung Yen Company delivered 2,989.890 tons, short by 7.640 tons, equivalent to 55,008,000 VND.

On February 1, 2007, Viet Y Company signed Contract No. 01/2007 with Hung Yen Company, represented by Mr. Le Van Manh, to purchase 5,000 tons of steel billets at 7,800,000 VND per ton. The contract value was 39,000,000,000 VND +/- 5%. Viet Y Company transferred 37,710,000,000 VND to Hung Yen Company, which delivered 3,906.390 tons, valued at 30,469,842,000 VND. Hung Yen Company failed to deliver 928.25538 tons, equivalent to 7,240,158,000 VND.

Viet Y Company sent multiple requests for Hung Yen Company to fulfill the contracts, but Hung Yen Company failed to comply, forcing Viet Y Company to purchase steel billets from other suppliers to ensure production and business operations.

Due to Hung Yen Company’s breaches, Viet Y Company filed a lawsuit requesting Hung Yen Company to pay and compensate for damages from breaches of Contracts No. 03/2006, 05/2006, 06/2006, and 01/2007, totaling 12,874,298,683 VND at the time of filing, including goods value for 1,777.020 kg of steel billets (11,181,662,503 VND), penalties for breach (1,316,490,480 VND), and overdue interest (376,145,700 VND).

At the first-instance trial on September 3, 2009, Viet Y Company’s representative requested Hung Yen Company to pay 28,145,956,647 VND as of the trial date and issue VAT invoices for goods delivered under Contract No. 06/2006 (21,544,992,000 VND) and Contract No. 01/2007 (30,469,842,000 VND).

In statements, mediation minutes, and trial minutes, the defendant’s representative stated:

At the time of signing the contracts, Ms. Le Thi Ngoc Lan was Hung Yen Company’s General Director, and Mr. Le Van Dung (her husband) was a business advisor. On March 22, 2007, Ms. Lan transferred her shares to Ms. Nguyen Thi Toan, who became Acting General Director from April 2, 2007. In their marital property division agreement and Hung Yen Company’s debt commitment, Mr. Le Van Dung agreed to assume all debts established before April 1, 2007. Hung Yen Company opposed Viet Y Company’s lawsuit, arguing liability lies with Mr. Dung, Ms. Lan, and former managers. Hung Yen Company was negotiating with Mr. Dung for him to pay Viet Y Company directly or reimburse Hung Yen Company to pay Viet Y Company.

Hung Yen Company requested the court to assess the legal validity of Contracts No. 03/2006, 05/2006, 06/2006, and 01/2007 signed by Mr. Tinh and Mr. Manh on behalf of Hung Yen Company, and evaluate the liability of Mr. Dung, Mr. Manh, Mr. Tinh, and Ms. Lan. At the first first-instance trial, Hung Yen Company generally agreed with Viet Y Company’s contract performance data but not financial figures due to unverified debts; interest calculations needed review. For Contract No. 05, Hung Yen Company disagreed, claiming both parties agreed to cancel it, with the 500,000,000 VND advance redirected to Contract No. 01/2007, thus no breach occurred.

Person with related rights and obligations – Ms. Le Thi Ngoc Lan stated: In early 2004, she and her husband acquired shares from Mr. Nguyen Luong Tuan and Mr. Nguyen Van Thanh in Hung Yen Company, then under construction. She became General Director and Chairman, with Mr. Dung as a business advisor. Due to marital disputes, on September 5, 2005, they signed a marital property division agreement at Hong Ha Law Firm (Hanoi Bar Association), allocating the house at No. 250, Ba Trieu Street, to Ms. Lan, and 48 billion VND in Hung Yen Company shares to Mr. Dung, who assumed debts from the construction of Hung Tai Steel Plant (owned by Hung Yen Company). Having transferred her shares, Ms. Lan authorized Mr. Tinh, then Mr. Manh, to manage the company, though she remained General Director nominally, with actual operations handled by Mr. Dung, Mr. Tinh, and Mr. Manh. In July 2007, she transferred debts and her position to Ms. Toan. Ms. Lan confirmed Mr. Manh and Mr. Tinh’s authority to sign contracts with Viet Y Company but asserted debt repayment to Viet Y Company was not her obligation.

Person with related rights and obligations – Mr. Le Van Dung stated: Despite the marital property division giving him Hung Yen Company shares, he was only a business advisor without authority to sign contracts or settle accounts, thus bearing no liability. He opposed Hung Yen Company’s claim that he was responsible, asserting liability lay with Hung Yen Company and Ms. Toan. He confirmed signing a commitment with Ms. Nguyen Thi Toan on April 1, 2007, for internal debt settlement purposes, not involving share sales, and was unaware of share transfers between Ms. Lan and Ms. Toan. He argued Hung Yen Company, as a legal entity, was liable for Viet Y Company’s claims, and he had no obligations to clients or partners, only internal obligations to Hung Yen Company. He requested absence from all hearings.

At First-Instance Business and Commercial Judgment No. 01/2007/KDTM-ST dated November 14, 2007, the Bac Ninh Province People’s Court decided: “To compel Hung Yen Company to pay Viet Y Company a total of 24,674,428,500 VND for Contracts No. 03/2006 dated October 3, 2006; No. 05/2006 dated December 20, 2006; No. 06/2006 dated December 20, 2006; and No. 01/2007 dated February 1, 2007.” The court also decided on court fees and appeal rights.

On November 27, 2007, Hung Yen Company appealed.

At Appellate Business and Commercial Judgment No. 120/2008/KDTM-PT dated June 18, 2008, the Appellate Court of the Supreme People’s Court in Hanoi decided: “To annul First-Instance Business and Commercial Judgment No. 01/2007/KDTM-ST dated November 14, 2007, and remand the case to the Bac Ninh Province People’s Court for re-adjudication per legal regulations,” reasoning that the first-instance court failed to obtain statements from Ms. Lan, Mr. Dung, Ms. Toan, Mr. Tinh, and Mr. Manh to clarify liability, and documents like debt commitments and authorizations were unverified photocopies.

At First-Instance Business and Commercial Judgment No. 09/2008/KDTM-ST dated October 23, 2008, the Bac Ninh Province People’s Court decided: “To compel Hung Yen Company to pay Viet Y Company 31,902,035,179.56 VND for Contracts No. 03/2006 dated October 3, 2006; No. 05/2006 dated December 20, 2006; No. 06/2006 dated December 20, 2006; and No. 01/2007 dated February 1, 2007.”

On November 5, 2008, Hung Yen Company appealed.

At Appellate Business and Commercial Judgment No. 32/2009/KDTM-PT dated February 19, 2009, the Appellate Court decided: “1. To annul First-Instance Business and Commercial Judgment No. 09/2008/KDTM-ST dated October 23, 2008, for the dispute over a sale of goods contract between Hung Yen Company and Viet Y Company. 2. To remand the case to the first-instance court for re-adjudication,” reasoning that General Director Dinh Van Vi sued for 12,874,298,683 VND, but the authorized representative’s repeated amendments exceeded the lawsuit’s scope, violating Clause 1, Clause 2, Article 164 of the Civil Procedure Code and Resolution No. 02/2006/NQ-HDTP dated May 12, 2006, rendering the first-instance court’s acceptance of these amendments a serious procedural violation.

At First-Instance Business and Commercial Judgment No. 18/2009/KDTM-ST dated September 3, 2009, the Bac Ninh Province People’s Court decided: “1. To compel Hung Yen Company to pay Viet Y Company 28,145,956,647 VND for Economic Contracts No. 03/2006 dated October 3, 2006; No. 05/2006 dated December 20, 2006; No. 06/2006 dated December 20, 2006; and No. 01/2007 dated February 1, 2007, and to issue VAT invoices for Contract No. 06/2006 (21,544,992,000 VND) and Contract No. 01/2007 (30,469,842,000 VND).” The court also decided on court fees, enforcement, and appeal rights.

On September 23, 2009, Hung Yen Company appealed.

At Appellate Business and Commercial Judgment No. 63/KDTM-PT dated April 5, 2010, the Appellate Court decided: “To annul First-Instance Business and Commercial Judgment No. 18/2009/KDTM-ST dated September 3, 2009, and remand the case to the Bac Ninh Province People’s Court for re-adjudication.”

On July 25, 2010, the Bac Ninh Province People’s Court issued Letter No. 110/2010/CV-TA requesting the Chief Justice to review the appellate judgment under cassation procedures.

In Protest Decision No. 17/2012/KDTM-KN dated June 25, 2012, the Chief Justice proposed that the Judicial Council conduct a cassation review to annul Appellate Business and Commercial Judgment No. 63/KDTM-PT dated April 5, 2010, 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:

1. From October 2006 to February 2007, Viet Y Company and Hung Yen Company signed four economic contracts (No. 03/2006-HDKT dated October 3, 2006; No. 05/2006-HDKT and No. 06/2006-HDKT dated December 20, 2006; and No. 01/2007-HDKT dated February 1, 2007).

At the time of signing, Ms. Le Thi Ngoc Lan was Hung Yen Company’s legal representative (per Business Registration Certificates amended on August 12, 2005, and July 6, 2007, and Decision No. 140/QD-HDCD dated July 2, 2007). Under Authorization Letter No. 621/UQ-KKHY dated September 10, 2005, Ms. Lan authorized Mr. Nguyen Van Tinh to manage and operate Hung Yen Company, including representing the company in dealings with banks, organizations, and individuals, and conducting civil, economic, and commercial transactions within the company’s business scope. On November 20, 2006, Authorization Letter No. 1296/UQ/HYM authorized Mr. Le Van Manh similarly.

Ms. Lan’s authorizations to Mr. Tinh and Mr. Manh, Deputy General Directors, to sign economic contracts were lawful. As they signed on behalf of the legal entity, not personally, they have no related rights or obligations in this case, contrary to the defendant’s request and the appellate court’s determination.

The appellate court’s reliance on the marital property division agreement between Ms. Lan and Mr. Le Van Dung and the debt commitment between Mr. Dung and Ms. Nguyen Thi Toan to deem them persons with related rights and obligations was incorrect. The division of marital property and debt agreements are internal to Hung Yen Company, and the debt commitment was not agreed to by Viet Y Company, the entitled party. Per Clause 1, Article 315 of the Civil Code of Vietnam 2005, “The obligated party may transfer a civil obligation to a substitute with the entitled party’s consent.” Ms. Lan and Mr. Dung clarified the property division, contract signing, and Hung Yen Company’s obligations, and Mr. Dung requested not to attend hearings. Thus, summoning them for statements and confrontation, as the appellate court determined, was unnecessary. The appellate court’s annulment of First-Instance Judgment No. 18/2009/KDTM-ST dated September 3, 2009, and remand to Bac Ninh Province People’s Court was unlawful.

2. On the merits: Viet Y Company transferred funds to Hung Yen Company via payment orders, and Hung Yen Company delivered goods (per delivery minutes bearing Hung Yen Company’s stamp). Per Clause 1, Article 93 of the Civil Code of Vietnam 2005, “A legal entity is civilly liable for the exercise of rights and obligations established or performed by its representative on its behalf.” Thus, Hung Yen Company is liable to pay debts to Viet Y Company.

Hung Yen Company’s failure to deliver sufficient goods constituted a breach, justifying Viet Y Company’s lawsuit to compel repayment of funds for undelivered goods, interest for late payment, contract penalties, and damages (due to purchasing from others at higher prices), per Articles 34, Clause 3 of Article 297, Articles 300, 301, 302, 306, and 307 of the Commercial Law of Vietnam 2005.

However, the first-instance court’s calculations were inaccurate:

For advance payments not matched by delivered goods across the four contracts, the first-instance court correctly determined the amount Hung Yen Company must refund to Viet Y Company. However, in calculating interest for late payment, despite applying Article 306 of the Commercial Law of Vietnam 2005, the court used the basic interest rate announced by the State Bank at the first-instance trial (10.5% per year) per the plaintiff’s request, not the average market overdue interest rate at the time of payment (first-instance trial). The court should use the average overdue interest rate of at least three local banks (e.g., Vietnam Bank for Agriculture and Rural Development, Vietcombank, VietinBank) to calculate interest correctly.

On contract penalties: The parties agreed Hung Yen Company would incur a 2% penalty on the confirmed order value for delivering incorrect goods or failing to deliver. Hung Yen Company’s shortfall triggered a 2% penalty on the breached obligation’s value, per Articles 300 and 301 of the Commercial Law of Vietnam 2005. The first-instance court’s acceptance of Viet Y Company’s penalty claim was grounded but incorrectly applied interest on the penalty amount.

On damages: Viet Y Company stated Hung Yen Company’s breach forced it to purchase steel billets from others at higher prices to ensure production. The first-instance court relied solely on Viet Y Company’s contracts with other suppliers to order Hung Yen Company to pay the price difference, without verifying whether these purchases were to cover the shortfall for planned production. The court should require Viet Y Company to provide evidence (e.g., third-party orders, production plans) to prove actual damages, ensuring accurate compensation. Additionally, applying interest to the damages amount violated Article 302 of the Commercial Law of Vietnam 2005.

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:

To annul Appellate Business and Commercial Judgment No. 63/KDTM-PT dated April 5, 2010, of the Appellate Court of the Supreme People’s Court in Hanoi, and First-Instance Business and Commercial Judgment No. 18/2009/KDTM-ST dated September 3, 2009, of the Bac Ninh Province People’s Court; to remand the case to the Bac Ninh Province People’s Court for re-adjudication at the first-instance level per legal regulations.

CONTENT OF THE PRECEDENT

For advance payments not matched by delivered goods across the four economic contracts, the first-instance court correctly determined the amount Hung Yen Company must refund to Viet Y Company. However, in calculating interest for late payment, despite applying Article 306 of the Commercial Law of Vietnam 2005, the court used the basic interest rate announced by the State Bank at the first-instance trial (10.5% per year) per the plaintiff’s request, not the average market overdue interest rate at the time of payment (first-instance trial). The court should use the average overdue interest rate of at least three local banks (e.g., Vietnam Bank for Agriculture and Rural Development, Vietcombank, VietinBank) to calculate interest correctly.

The first-instance court’s acceptance of Viet Y Company’s penalty claim was grounded but incorrectly applied interest on the penalty amount.

The first-instance court’s application of interest to the damages amount violated Article 302 of the Commercial Law of Vietnam 2005.