Key Considerations in Resolving Credit Contract Disputes

 Dispute resolution arising from credit contracts remains a primary concern for credit institutions, enterprises, and individual borrowers. To best protect their legal rights and interests, the involved parties must clearly understand common types of disputes, appropriate resolution methods, as well as common mistakes in judicial practice. In the article below, TNTP will analyze the critical issues to consider when handling credit contract disputes, thereby providing readers with a comprehensive overview and clear direction for each specific situation.

1.Common Types of Credit Contract Disputes

A credit contract is a legally binding document between the lending institution (e.g. a bank or financial company) and the borrower (e.g. individual or enterprise). Under such a contract, the lender provides a loan amount to the borrower, and the borrower is responsible for fully repaying both the principal and interest in full within the agreed period.

Credit contract disputes arise when disagreements occur between banks, credit institutions, and borrowers concerning rights and obligations within the credit relationship. Common types of disputes include:

• Disputes over principal and interest payment obligations: This is the most prevalent dispute type, occurring when borrowers either fail to repay or inadequately repay the principal and interest debts. The causes may stem from ineffective use of capital leading to insolvency or deliberate avoidance of obligations. Additionally, in some cases, borrowers argue that the applied interest rate deviates from the agreed terms or exceeds the statutory limit. Pursuant to Resolution No. 01/2019/NQ-HDTP, the overdue interest rate must not exceed 150% of the contractual interest rate at the time the debt becomes overdue. Disputes over principal and interest payment obligations may also arise where borrowers claim that the lender applied incorrect interest rates, compounded interest unlawfully, or imposed fees and penalties that do not comply with regulations.
• Disputes over secured assets: These disputes often stem from disagreements regarding the validity of mortgage agreements, the scope of secured obligations, or asset disposal. The most contentious subjects of mortgage contracts are land use rights and associated property assets when these constitute shared marital or household property but only one person enters into the mortgage agreement. Additional disputes may arise where the credit institution disposes of the collateral in contravention of regulations or where the parties cannot agree on the asset’s valuation at the time of enforcement.
• Disputes involving third parties: According to Article 335 Civil Code 2015, individuals or organizations may act as guarantors for a borrower’s obligations. For credit contracts with third-party guarantees, disputes typically concern the scope of liability of the third party and the validity of guarantee or mortgage contracts.

2.Methods of Resolving Credit Contract Disputes

When a dispute arises under a credit contract, the parties may choose among four principal dispute resolution methods: negotiation, mediation, arbitration or litigation in court.

• Resolution by Negotiation
• Negotiation is encouraged due to its flexibility, speed, and its ability to preserve long-term cooperative relationships between the parties. During negotiation, the parties discuss and negotiate freely, unconstrained by formal procedures.
• In practice, many credit institutions have developed internal procedures for negotiation and debt restructuring for customers facing financial difficulties. Negotiated solutions may include extensions of repayment terms, interest waivers or reductions, debt restructuring or agreements on disposing of collateral to recover debt.
• Resolution by Mediation

Mediation involves a neutral third party (a mediator or mediation center) assisting the parties in reaching a mutually agreed solution. Like negotiation, mediation outcomes are non-binding and depend on the goodwill of the parties to implement the agreement.

• Resolution by Arbitration
• To apply arbitration, the parties must have an arbitration agreement, which may be stipulated in the credit contract or agreed upon separately after the dispute arises.
• Arbitration offers several advantages, including final and binding awards; flexible procedures; faster resolution compared to court litigation; and confidentiality, which is particularly valued by businesses.
• However, arbitration costs are typically high and require parties have a valid agreement to resolve disputes through arbitration.
• Resolution by Court Litigation
• When the above methods are not suitable for application, one of the parties may choose to file a lawsuit in court. Court litigation is a dispute resolution method commonly preferred by parties in many credit contract disputes, applied after the parties can not reach a mutual settlement. Pursuant to the Civil Procedure Code 2015, the court reviews the case file, evaluates evidence and renders a judgment in accordance with the law.
• However, litigation is often time-consuming, costly, and lacks confidentiality. Specifically, in credit contract disputes, prolonged litigation may increase the borrower’s repayment obligations due to accruing interest and penalties.

3.Key Considerations When Resolving Credit Contract Disputes

Resolving credit contract disputes requires a thorough understanding of the law, meticulous evidence evaluation, and selection of an appropriate resolution strategy. Key considerations include:

• First, verify the legality of the credit contract: Some credit contracts may be declared partially or entirely void if they violate legal provisions regarding form, content, or conditions of contract formation. Parties involved in dispute resolution must review the legality of contract terms, contract form, signing authority, and applicable lending interest rates.
• Second, assess the actual performance of obligations under the contract: Disputes frequently stem from the borrower’s failure to repay on time or from the lender’s imposition of unfavorable terms. Effective resolution requires reconciling contract terms with actual performance, identifying payments made and outstanding balances, and verifying the appropriateness of applied penalty interest rates.
• Third, prepare complete and thorough documentary evidence: The collection and assessment of evidence is vital to the success of the case. Parties should diligently gather documents to substantiate their rights and obligations, including the credit contract, loan repayment transaction records, meeting minutes between the parties, and documents relating to secured assets (if any).
• Fourth, select an appropriate dispute resolution method: The choice of method should take into account the seriousness of the dispute and the willingness of the parties to cooperate. Parties should prioritize negotiation for swift resolution and preservation of business relationships. In the absence of goodwill, other avenues such as arbitration, or litigation should be considered.
• Fifth, properly determine the legal standing of the litigants: Correct identification of the litigants’ legal status is essential in court proceedings. Some notes include:
• Under the law, branches and transaction offices of credit institutions do not possess legal personality, so the credit institution itself must be the litigant. However, the credit institution may authorize branch representatives to participate in legal proceedings on its behalf.
• Similarly, in the case of private enterprises, which lack legal personality, the business owner is the sole proprietor of all assets and is personally liable for the enterprise’s obligations. Thus, the litigant must be the owner of the private enterprise.
• In disputes involving mortgaged assets, it is necessary to determine whether the mortgaged property is jointly or separately owned, ensuring that all property rights holders participate in legal proceedings when necessary.

Resolving credit contract disputes requires mastery of legal regulations, rigorous evaluation of evidence, and careful selection of the appropriate resolution method. Proactively reviewing contracts, clearly identifying the rights and obligations of the parties, and selecting a suitable resolution approach can help minimize risks and achieve optimal outcomes.

The foregoing is TNTP’s analysis of the key considerations in resolving credit contract disputes. We hope this information proves helpful to our esteemed readers. Should you require assistance, please do not hesitate to contact us.

Sincerely,