When does a contractual penalty become a legal trap for the claimant?

⚖️ SUPREME COURT OVERTURNS CONSTRUCTION DISPUTE RULING – A CASE STUDY IN PENALTY & DEBT OFFSET PROCEDURE

🔍 CASE SUMMARY

In Decision No. 15/2016/KDTM-GĐT, the Supreme People’s Court of Vietnam reviewed a construction dispute between Company A (Vietnam) and Company B (China) over a subcontract for MEP works worth USD 5.1 million. The dispute arose from:

🔹 Additional works increasing the contract value by ~USD 600,000.

🔹Company A completed the project and obtained final acceptance.

🔹However, Company B only paid USD 5.2 million, leaving USD 549,978 unpaid.

🔹Company B claimed it had offset penalties for delays and quality issues, totaling USD 357,988, and recognized only USD 133,000 in remaining warranty-related debt.

Lower courts rejected Company A’s claim for the full amount, concluding that the penalty offsets were valid.

🧑‍⚖️ THE SUPREME COURT’S VIEWS

✅ On Liquidated Damages (5% Delay Penalty):

🔸 The Supreme Court found that the lower courts failed to verify whether the penalties were properly imposed according to contract terms, including:

– Timely notification of delay,

– Decisions by the Project Manager in accordance with Clause 3.5, and

– Presence of a valid claim or payment certificate.

🔸 Evidence showed Company A only accepted part of the penalty, not the full 5%.

✅ On Debt Offset Procedure:

🔸The court emphasized that offsetting debts requires:

– Mutual acknowledgment of amounts owed,

– Adherence to contractual procedures, and

– Transparent account reconciliation.

🔸No clear proof was presented that offsetting was agreed before or after reconciliation.

✅ On Judicial Oversight:

🔸The Supreme Court invoked Articles 337, 343, and 345 of the Civil Procedure Code (2015) to annul the judgments and return the case for retrial by the Hanoi People’s Court.

📌 KEY LEGAL LESSONS

✅ For Subcontractors:

Never assume silence means agreement. Always demand formal documentation for penalties and ensure timely dispute resolution clauses are followed.

✅ For Contractors & Employers:

Even with clear contract clauses, procedural compliance is critical when applying penalties or offsets. Unilateral deductions without due process are risky.

✅ For Legal Practitioners & Courts:

Do not treat internal reports or payment logs as definitive. Due diligence in contractual enforcement and dispute procedures is fundamental, especially in FIDIC construction contracts.

Link PDF: https://drive.google.com/file/d/1e3HhN7cOGGl-wxDtKWf88RusmOM6ar4q/view?usp=sharing

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