Comment on Precedent No. 09/2016/AL

In the practice of resolving commercial contract disputes, we often encounter cases that the buyer has paid or deposited money for the goods, but the seller violates the obligation to deliver the goods and must refund the money received. It is obvious that the seller is obliged to refund the amount received. But besides requesting a refund of the amount received, does the buyer have the right to require the seller to pay interest arising from this amount? And how is the interest rate calculated on this amount? Are penalties for breach of contractual obligations and compensation for damage at the same interest rate as the amount to be refund? These issues have been expressed by the Court through Precedent No. 09/2016/AL, which is considered as a typical and unified example for how to calculate interest and explain the problem of paying interest on the amount of penalties for violations and compensation for damage.

A. SUMMARY OF PRECEDENT NO. 09/2016

CONTENT OF THE CASE

1. On October 3, 2006, Viet Y Steel Joint Stock Company (“Viet Y Steel Company”) signed with Hung Yen Metallurgy Joint Stock Company (“Hung Yen Metallurgy Company”) 04 Economic Contract are No. 03/2006-HDKT, 05/2006-HDKT, No. 06/2006 and No. 01/2007.
2. On July 07, 2007, Viet Y Steel Company filed a lawsuit asking Hung Yen Metallurgy Company to be responsible for payment and compensation for all damages due to breach of delivery obligations in Contracts No. 03/2006, 05/2006, 06/2006, 01/2007 at the time of lawsuit is 12,874,298,683 VND, of which the goods cost is equivalent to 1,777,020 kg of steel billet = 11,181,662,503 VND, the fine for violation is 1,316,490,480 VND, overdue interest 376,145,700 VND
3. In the first-instance business and commercial Judgment No. 01/2007/KDTM-ST dated November 14, 2007 (“BAST 01”), the People’s Court of Bac Ninh Province (“People’s Court of Bac Ninh”) decided: “Force Hung Yen Metallurgy Joint Stock Company to pay Viet Y Steel Joint Stock Company the total amount of 04 contracts No. 03 dated October 3, 2006; No. 05 dated November 20, 2006; number 06 dated December 20, 2006 and number 01 dated February 1, 2007 are: 24,674,428,500 VND”.
4. On November 27, 2007, Hung Yen Metallurgical Joint Stock Company filed an appeal.
5. In the Appellate Business and Commercial Judgment No. 120/2008/KDTM-PT dated June 18, 2008 (“BAPT 120”), the Court of Appeal of the Supreme People’s Court in Hanoi (“Hanoi Supreme People’s Court”) decided: “Cancel the first-instance business and commercial judgment No. 01/2007/KDTM-ST dated November 14, 2007 of the People’s Court of Bac Ninh. Transfer the case file to the People’s Court of Bac Ninh to re-settle the case in accordance with the law”.
6. At the first instance business and commercial Judgment No. 09/2008/KDTM-ST dated October 23, 2008 (“BAST 09”), the People’s Court of Bac Ninh decided: “Forcing Hung Yen Metallurgy Joint Stock Company to have responsibility to pay Viet Y Steel Joint Stock Company the amount of 04 contracts No. 03 dated October 3, 2006; No. 05 dated December 20, 2006; number 06 on December 20, 2006 and number 01 on February 1, 2007 are: 31,902,035,179.56 VND”.
7. On November 5, 2008, Hung Yen Metallurgical Joint Stock Company filed an appeal.
8. In the Appellate Business and Commercial Judgment No. 32/2009/KDTM-PT dated February 19, 2009 (“BAPT 32”), the Hanoi People’s Court decided: “1. Canceling the first-instance business and commercial judgment No. 09/2008/KDTM-ST dated October 23, 2008 of the People’s Court of Bac Ninh on the “dispute on the sale and purchase contract” between the Metallurgical Joint Stock Company and Viet Y Steel Joint Stock Company 2. Transfer the case file to the first-instance Court to re-settle the case”.
9. In the first-instance business and commercial judgment No. 18/2009/KDTM-ST dated September 3, 2009 (“BAST 18”), the People’s Court of Bac Ninh decided: “1. Force Hung Yen Metallurgy Joint Stock Company to be responsible for paying Viet Y Steel Joint Stock Company the amount of 04 economic contracts: Contract No. 03/2006 dated October 3, 2006; Contract No. 05/2006 dated December 20, 2006; Contract No. 06/2006 dated December 20, 2006 and Contract No. 01/2007 dated February 1, 2007 with a total amount of VND 28,145,956,647 and must issue a value-added invoice to pay to Vietnam Italy Steel of 2 contract includes Contract No. 06/2006 corresponding to the amount of goods is 21,544,992,000 VND and Contract No. 01/2007 corresponding to the amount of goods is 30,469,842,000 VND”.
10. On September 23, 2009, Hung Yen Metallurgical Joint Stock Company filed an appeal.
11. In the Appellate Commercial and Business Judgment No. 63/KDTM-PT dated April 5, 2010 (“BAPT 63”), the Hanoi People’s Court decided: “Cancel the first-instance business and commercial judgment No. 18/ 2009/KDTM-ST dated September 3, 2009 of the People’s Court of Bac Ninh. Transfer the case file to the People’s Court of Bac Ninh for re-settlement in accordance with law”.
12. On July 25, 2010, the People’s Court of Bac Ninh issued Official Letter No. 110/2010/CV-TA requesting the Chief Justice of the Supreme People’s Court (“Chief Justice”) to review the appellate judgment according to cassation procedures.
13. At the Appeal Decision No. 17/2012/KDTM-KN dated June 25, 2012, the Chief Justice proposed that the Judicial Council of the Supreme People’s Court conduct a trial according to cassation procedures in the direction of canceling BAPT 63 of the Hanoi People’s Court; hand over the case file to the Hanoi People’s Court for appellate trial again in accordance with law.
14. Judges Council of the Supreme People’s Court:

• In this case, the Court needs to take the average overdue interest rate of at least three local banks to recalculate the interest due to late payment in accordance with the law, instead of interest rate announced by the State Bank at the time of first-instance trial at the request of the plaintiff.
• Regarding penalty for breach of contract: If Hung Yen Metallurgy Company does not deliver enough goods to Viet Y Steel Company, it must be fined 2% of the value of the breached contractual obligation as agreed upon by both parties and according to the provisions of Article 300 and Article 301 of the Commercial Law 2005. The first-instance court accepted the request for penalty for breach of contract of the Viet Y Steel Company as grounded, however, it charged interest on the fine amount for breach of contract is not correct.
• About the amount of compensation: The first-instance court also calculated the interest on the amount of compensation, which is not in accordance with the provisions of Article 302 of the Commercial Law 2005.

B. PRECEDENT NO. 09/2016 COMMENTS

Based on the summary of the Precedent, TNTP has a few comments as follows:

1. Determine the correct amount of late payment interest

• According to Article 306 of the Commercial Law 2005, “in case the breaching party is late in paying for goods or late in paying service fees and other reasonable expenses, the breached party has the right to demand payment interest on such amount of late payment shall be at the average overdue debt interest rate on the market at the time of payment corresponding to the late payment period, unless otherwise agreed or otherwise provided by law”. This regulation has the scope of adjusting the subjects entitled to late payment interest such as “delayed payment of goods or late payment of service fees and other reasonable expenses”.
• In the content of Case Law No. 09/2016/AL: “For the amount of advance without receiving goods of 4 economic contracts, the first-instance court correctly determined the amount and forced Hung Yen Company to must be returned to Vietnam Y Company is correct. However, when calculating interest for late payment of the above-mentioned amount, the first instance court, although applying Article 306 of the 2005 Commercial Law, did not take the average overdue interest rate on the market at the time of payment (first-instance trial) to calculate, but apply the basic interest rate announced by the State Bank at the time of first-instance trial at the request of the plaintiff to apply the overdue interest rate (which is 10.5 %/year) is incorrect. In this case, the Court needs to take the average overdue interest rate of at least three local banks (Bank for Agriculture and Rural Development of Vietnam, Joint Stock Commercial Bank for Foreign Trade of Vietnam, Bank for joint-stock commercial goods of Vietnam Industry and Trade…) to recalculate the interest due to late payment in accordance with the provisions of law”.

This shows that late payment interest is applied to both the seller’s refund of the goods due to the buyer’s failure to receive the goods as agreed, and the calculation of interest is applied on the basis of Article 306 of the Commercial Law.

2. The penalty for breach of contract and compensation for damage does not generate interest on late payment

As stipulated in Article 306 of the 2005 Commercial Law, this provision does not regulate the fines for breach of contract and compensation for damage that are subject to late payment interest. The content of Precedent No. 09/2016/AL also shows that the request for penalty for breach of contract and the calculation of interest on compensation for damage is incorrect.

3. Determine how to calculate late payment interest

• At the time of the case, because there was no specific guidance document, the Court applied many ways to determine the average overdue debt interest rate. However, thanks to the birth of Precedent 09/2016/AL, it is the unification for the calculation of overdue debt interest and is the premise for the Council of Judges of the Supreme People’s Court to issue Resolution 01/2019/NQ-HDTP guides the application of a number of legal provisions on interest, interest, and penalties for violations.
• For the settlement of this Precedent, the Court established the formula for calculating the overdue debt interest rate as follows:

Overdue interest rate due to late payment = average overdue interest rate of at least three local banks (Bank for Agriculture and Rural Development of Vietnam, Joint Stock Commercial Bank for Foreign Trade of Vietnam, Joint Stock Commercial Bank for Industry and Trade of Vietnam…)

This formula will not apply to the calculation of interest on the number of fines and damages.

TNTP considers that the final settlement of this precedent is reasonable, because this is a solution in accordance with the provisions of Article 306 of the Commercial Law 2005 and the provisions of the Civil Code 2015. In addition, related to the method of determining the interest rate of overdue debt, this solution contributes to ensuring that the legal document system follows the principle that a Law can only be interpreted in a single way.

Above is a comment on Precedent No. 09/2016/AL of TNTP. Hopefully, this article will help enterprises understand clearly how to determine the interest rate on overdue debt and the payment of interest on the fine for violation, compensation for damage when resolving Contract disputes.

Sincerely,