Payment in construction activities in many cases may not be made in accordance with the contract. When one party is late in payment, the rights of the other party will be affected. In this article, TNTP’s lawyers will give ours views to answer the question: What should the contractor do when the investor is late in payment?
1. The contracting party and the contractor in construction activities
• According to the provisions of Clause 1, Article 2 of Decree 37/2015/ND-CP dated April 22, 2015 (“Decree 37”) on the interpretation of terms, a construction contract is a civil contract agreed upon in writing between the contracting party and the contractor to perform part or all of the work in construction investment activities.
• At the same time, Clause 2 and Clause 3 of Decree 37 are applied, the contracting party can be the investor or the investor’s representative. The contractor is the general contractor or main contractor when the contracting party is the investor.
Accordingly, in a construction contract where the contracting party is the investor, the contractor will be the general contractor or main contractor.
It can be seen that when signing a construction contract, the contracting party is the investor and the contractor is the contractor. The Investor is the party using the Contractor’s services in part or all of a number of activities in construction activities including: Consulting, construction, installation, equipment supply, construction design, technological equipment supply and construction of works, etc. After the Contractor has fully performed its service provision obligations as signed, the Investor is responsible for timely payment to the Contractor according to the Contract and relevant legal regulations.
2. Payment term in construction activities
According to Clause 10, Article 19 of Decree 37/2015/NĐ-CP on payment term for construction contracts. Accordingly, payment must ensure the following conditions:
• The payment term is agreed upon by the parties in the contract in accordance with the scale and nature of each contract. However, the payment term must not exceed 14 working days from the date the contractor receives complete and valid payment documents as agreed in the contract.
• Within seven (07) working days from the date of receipt of complete and valid payment request documents from the contractor, the contracting party must complete the procedures and forward the payment request to the bank or the State Treasury for payment.
• Within seven (07) working days from the date of receipt of the full valid payment documents from the contracting party, the bank or State Treasury serving the payment must transfer the full value of that payment to the contractor.
• The contracting party is strictly prohibited from failing to pay in full or on time according to the agreement to the contractor.
Consequently, the law has specifically stipulated that the contracting party is responsible to pay the amount no later than 14 working days from the date the contracting party receives the full valid payment documents according to the agreement in the contract.
Therefore, in case the contracting party is the investor and fails to pay the Contractor within 14 working days from the date of receipt of the full valid payment documents according to the agreement in the contract, it is a violation of the payment deadline as prescribed by law. Accordingly, depending on the Contract, the Contractor may carry out the following activities.
3. Measures that the Contractor can take when the Investor is late in payment
a) Suspension of construction contract performance
According to the provisions of Point b, Clause 2, Article 40 of Decree 37, the Contractor has the right to suspend the performance of the construction contract and extend the contract performance progress when the contracting party violates the payment agreements, specifically: Failure to pay the Contractor the whole value of the payment period that the parties have agreed upon exceeding 28 days from the payment deadline, unless otherwise agreed by the parties.
Therefore, if the parties do not have any other agreement regarding the payment period or conditions for suspension of contract performance other than those prescribed by law, and the Investor fails to fulfill its payment obligations to the Contractor within 28 days from the payment deadline, the Contractor has the right to suspend the performance of the contract to protect its rights and interests, as well as to demonstrate a firm move to force the Investor to properly fulfill its payment obligations committed in the Contract.
b) Termination of construction contract
According to the provisions of Point c, Clause 8, Article 41 of Decree 37, the Contractor has the right to terminate the construction contract when the contracting party fails to pay the Contractor after fifty-six (56) days from the date the contracting party receives complete and valid payment documents, unless otherwise agreed by the parties.
Accordingly, if the parties do not have any other agreement regarding the payment period or contract termination conditions other than those prescribed by law, and the Investor fails to fulfill its payment obligation to the Contractor after 56 days from the date the Investor receives a complete set of valid payment documents, the Contractor has the right to terminate the construction contract without having to bear any other responsibility (in case the parties do not have any other agreement).
c) Penalty for violation
According to the provisions of Article 42 of Decree 37, the Investor and the Contractor have the right to agree on the level of penalty for violation in the contract. For public investment projects and non-public investment projects, the penalty for the contract shall not exceed 12% of the value of the violated contract.
Therefore, if the parties have agreed on a penalty for breach of contract, in case the Investor fails to make payment, the Contractor has the right to request the Investor to pay a penalty for breach of contract corresponding to the agreement of the parties or up to 12% if the Project is a public investment project or a project with non-public state investment.
d) Compensation for damages
According to Clause 2, Article 43 of Decree 37, in case the contracting party fails to make payment on time and in full as agreed in the contract, it must compensate the contractor at the overdue interest rate announced by the commercial bank where the contractor opens a payment account corresponding to the periods of late payment. Late payment interest is calculated from the first day of late payment until the contracting party has fully paid the contractor, unless the parties have agreed otherwise.
Therefore, in case the Investor fails to make timely and incomplete payments according to the Contract to the Contractor, the Contractor has the right to request the Investor to compensate the Contractor at the overdue interest rate announced by the commercial bank where the Contractor opens a payment account corresponding to the periods of late payment. Late payment interest will be calculated from the first day the Investor is late in payment until the contractor has fully paid the Contractor, unless the parties have agreed otherwise in the Contract.
Above is an article by TNTP lawyer on the topic: ” What should the contractor do when the investor is late in payment?” Hopefully this article will bring value to the operations of businesses.
Sincerely,
