Legal framework businesses should understand for construction debt recovery

In the construction industry, outstanding receivables do not arise solely because a debtor fails to make payment on time.

They are often closely linked to the performance of the construction contract, work acceptance procedures, confirmation of completed work quantities, payment documentation, variation works, and numerous other legal issues.

Accordingly, construction debt recovery is not simply a matter of demanding payment. Rather, it is a legal process of establishing, substantiating, and protecting a business’s entitlement to payment based on applicable laws and the contractual arrangements between the parties.

In practice, many businesses have legitimate grounds to seek payment but still encounter significant challenges in recovering outstanding debts due to incomplete documentation, an incorrect assessment of the legal basis for their claims, or the adoption of inappropriate recovery strategies.

In many cases, inadequate legal preparation prolongs the recovery process, increases dispute resolution costs, and adversely affects a company’s cash flow.

This article by TNTP provides an overview of the legal framework governing construction debt recovery that businesses should understand. It explains the legal grounds for payment claims, clarifies the rights and obligations of the parties, and outlines practical approaches to resolving construction debt disputes in different circumstances.

1. Why must construction debt recovery be based on a valid legal foundation?

Construction debt recovery is the process of requiring a party to fulfil payment obligations arising under a construction contract or other transactions relating to construction activities.

Unlike receivables arising from ordinary commercial transactions, construction-related debts are typically subject to specific payment conditions, such as work acceptance, confirmation of completed work quantities, project handover, or the completion of payment documentation in accordance with the parties’ agreement.

For this reason, construction debt recovery should be carried out in compliance with applicable laws and through a structured legal approach.

If a business focuses solely on pressuring the debtor to make payment without strengthening its documentary record and adopting an appropriate legal strategy, the recovery process may not only prove ineffective but may also expose the business itself to legal risks.

In practice, businesses often encounter difficulties in recovering outstanding debts because they lack sufficient evidence to establish the debtor’s payment obligation or rely on inappropriate recovery measures.

Furthermore, debt collection methods that fail to comply with the law may give rise to additional disputes, disrupt business operations, and increase legal exposure.

Accordingly, construction debt recovery should be viewed as a strategic legal process in which a business simultaneously manages the legal basis for payment, organises supporting evidence, determines appropriate methods of engaging with the debtor, and follows the proper dispute resolution procedures.

This approach provides a solid legal foundation for conducting debt recovery in a lawful and effective manner, minimising legal risks, and protecting the business’s lawful rights and interests.

2. Legal framework governing construction debt recovery

Construction debt recovery in Vietnam is governed by a number of legal instruments.

Depending on the nature of the contract, the parties involved, and the applicable dispute resolution mechanism, businesses should pay particular attention to the following legislation:

• The Civil Code 2015, which governs the principles of contract formation and performance, payment obligations, liability for breach of obligations, default interest, compensation for damages, and the rules governing the applicable law for civil relationships involving foreign elements.
• The Commercial Law, which applies to commercial transactions between traders, including provisions on contractual penalties, damages, payment obligations, and default interest in commercial transactions.
• The Law on Construction, which regulates construction activities, construction contracts, the rights and obligations of contracting parties, work acceptance, project handover, and payment obligations in the construction sector.
• The Civil Procedure Code, which governs court proceedings before Vietnamese courts, as well as the recognition and enforcement of judgments and civil decisions rendered by foreign courts and foreign arbitral awards.
• The Law on Commercial Arbitration, which governs the resolution of disputes through arbitration where the parties have entered into a valid arbitration agreement.
• The Law on Enforcement of Civil Judgments, which regulates the enforcement of legally effective judgments, court decisions, and arbitral awards.

In addition to statutory legislation, construction debt disputes may also be governed by supplementary sources recognised under Vietnamese law, including:

• Customary practices, where the parties have made no agreement, no statutory provision applies, and the relevant custom is not contrary to the fundamental principles of Vietnamese law.
• Judicial precedents issued by the Council of Judges of the Supreme People’s Court, which serve as important references when resolving cases involving similar legal issues and factual circumstances.
• Analogical application of the law, where neither the parties’ agreement, statutory law, nor customary practices provide a basis for resolving the dispute. In such circumstances, the matter may be determined by reference to the fundamental principles of civil law, judicial precedents, and principles of equity.
• Soft law, including technical standards, guidelines, international principles, industry rules, and recognised trade practices, which may serve as persuasive references when determining technical requirements, construction quality, the parties’ rights and obligations, and other related matters.

Identifying the applicable legal framework at the outset is essential to the construction debt recovery process.

It enables a business to establish the appropriate legal basis for its payment claim, select the proper dispute resolution mechanism, and minimise legal risks throughout the debt recovery process.

3. Legal basis for payment claims under construction contracts

In construction debt recovery, the debtor’s payment obligation is primarily determined by the construction contract and its appendices.

The contract serves as the principal legal basis for defining the scope of work, contract value, unit prices, payment schedule, acceptance conditions, payment documentation, and dispute resolution mechanism.

In addition to the contract, the business must demonstrate that the relevant work has been completed through evidence such as records of completed work quantities, acceptance certificates, handover records, confirmations of completed quantities, construction site diaries, payment applications, or other documents showing that the debtor was aware of, received, or used the completed work.

These documents constitute the core evidence for establishing that the payment obligation has arisen and has become due.

Apart from claiming payment of the outstanding principal, the aggrieved party may also consider exercising the remedies provided under Article 292 of the 2005 Commercial Law, including contractual penalties, damages, specific performance, suspension of contract performance, termination of contract performance, contract cancellation, or any other remedies agreed upon by the parties, provided that such remedies are not contrary to the fundamental principles of Vietnamese law, international treaties to which the Socialist Republic of Vietnam is a party, or international commercial practices.

Payment provisions and dispute resolution clauses play a critical role in the debt recovery process.

Payment provisions determine when the payment obligation becomes due, while dispute resolution clauses identify the appropriate mechanism for resolving disputes in accordance with the parties’ agreement.

Failure to carefully review these provisions may result in errors when asserting payment claims or selecting the competent authority to resolve the dispute.

4. What requirements must lawful construction debt recovery satisfy?

To ensure that construction debt recovery is both effective and legally protected, a business should satisfy the following fundamental requirements:

4.1. First, valid legal basis and sufficient evidence supporting the payment claim.

The business should establish a comprehensive documentary record demonstrating the existence of the contractual relationship, the scope of work performed, the value of the completed work, and that the debtor’s payment obligation has become due.

Any evidence relied upon in the debt recovery process must satisfy the legal requirements of admissibility, relevance, and evidential value.

Electronic data, such as emails, text messages, and other communications exchanged during contract performance, may also be relied upon as evidence, provided that their origin, content, and connection to the disputed transaction can be established.

4.2. Second, carried out through lawful means.

Depending on the circumstances, the business may pursue negotiation, mediation, formal payment demand letters, court proceedings, or commercial arbitration.

Regardless of the method chosen, all debt recovery activities must be conducted in compliance with applicable laws.

A business must not resort to threats, coercion, or conduct that infringes upon the debtor’s reputation, property, or other lawful rights and interests.

Efforts to secure payment should instead be based on clear legal grounds and appropriate legal measures.

4.3. Third, the procedures must comply with the law.

Throughout the debt recovery process, the business should carefully review issues relating to the statute of limitations, jurisdiction, arbitration agreements, preconditions for commencing legal proceedings, supporting evidence, and enforcement procedures.

Incorrectly identifying the competent dispute resolution authority or failing to satisfy procedural requirements may significantly delay the resolution process, reduce the likelihood of successful debt recovery, and adversely affect the business’s lawful rights and interests.

5. Rights and obligations of businesses when recovering construction debts

A business has the right to require the obligor to fully perform its payment obligations in accordance with the construction contract and any related agreements.

Where the debtor fails to make payment on time or otherwise breaches its contractual obligations, the business may claim the outstanding principal, default interest, contractual penalties, and damages, provided that the relevant contractual and statutory requirements are satisfied.

Where the dispute cannot be resolved through negotiation, the business is entitled to initiate legal proceedings before a competent court or refer the dispute to commercial arbitration in accordance with the parties’ agreement.

Where necessary and where the statutory requirements are met, the business may also apply for temporary emergency measures to prevent the dissipation of assets, and safeguard the enforcement of any future judgment or arbitral award.

In addition to these rights, the business is obligated to provide adequate supporting evidence, comply with the applicable dispute resolution procedures, and refrain from using unlawful debt collection methods.

Ensuring that the debt recovery process is conducted in accordance with the law is essential to protecting the business’s lawful rights and interests.

6. Common legal issues encountered in construction debt recovery

In practice, construction debt disputes do not arise solely from the debtor’s failure to make payment.

They frequently involve disagreements over payment conditions, acceptance documentation, completed work quantities, or set-off claims arising during contract performance.

Some of the most common situations include the following:

6.1. The debtor delays payment

Although the payment obligation has become due, the debtor repeatedly delays payment, requests multiple extensions, or fails to respond to the business’s payment demands.

After the debt becomes due, the business may have issued formal demand letters or made repeated attempts to contact the debtor, yet receives no response or encounters deliberate delays in resolving the matter.

6.2. The debtor has committed to making payment but fails to do so

In many cases, the parties have agreed on a payment schedule or executed a written acknowledgment specifying the repayment deadline.

Nevertheless, the debtor fails to honour its commitment or makes only partial payment.

In such circumstances, the business should carefully review the terms of the commitment to determine the most appropriate course of action, including requiring the debtor to perform its obligations as agreed or commencing legal proceedings in accordance with applicable law.

6.3. The debtor shows signs of insolvency

If the business becomes aware that the debtor is scaling down its operations, transferring assets, undergoing dissolution or bankruptcy, or engaging in transactions that may adversely affect its ability to satisfy its payment obligations, the business should promptly assess the available documentation and consider taking appropriate legal measures to safeguard its rights and interests.

6.4. A judgment, decision, or arbitral award has been issued, but the debtor refuses to comply voluntarily.

In some cases, the business has already obtained a legally effective court judgment, court decision, or arbitral award, yet the debtor still fails to make payment voluntarily.

In such circumstances, closely monitoring the enforcement process, verifying the debtor’s enforceable assets, and requesting compulsory enforcement measures in accordance with the law are crucial to improving the likelihood of successful debt recovery.

7. When should a business seek legal advice on construction debt recovery?

A business should consider seeking legal advice as soon as issues arise concerning its documentation, evidence, or legal basis for claiming payment.

Common situations include the absence of acceptance certificates, missing confirmations of completed work quantities, failure to reconcile outstanding balances, or circumstances where most communications have been conducted solely through emails, text messages, or other electronic means.

Conducting a thorough legal review of the available documentation at an early stage enables the business to accurately assess the legal basis of its payment claim and minimise risks during the dispute resolution process.

A business should also seek legal advice where the debtor appears unwilling to cooperate, disputes its payment obligation, deliberately delays the acceptance process, asserts set-off claims, or raises disputes concerning completed work quantities, work quality, or other contractual obligations.

In these situations, obtaining an early legal assessment can assist the business in selecting the most appropriate dispute resolution mechanism and effectively protecting its lawful rights and interests.

Furthermore, where the debtor shows signs of insolvency, ceases operations, changes its business address, evades communications, or is suspected of dissipating assets, the business should promptly consider appropriate legal measures to preserve its rights and maximise the likelihood of recovering the outstanding debt.

8. Frequently asked questions

8.1. Is it mandatory to commence legal proceedings to recover construction debts?

No. A business may first seek to resolve the matter through negotiation, mediation, or by issuing a formal payment demand letter, thereby providing the parties with an opportunity to settle the dispute amicably and cost-effectively.

However, where the debtor fails to perform its payment obligation, denies the existence of the debt, or deliberately prolongs the matter, the business should consider initiating proceedings before a competent court or referring the dispute to commercial arbitration in order to protect its lawful rights and interests.

8.2. Under what circumstances may a business claim default interest, contractual penalties, and damages?

A business may claim these remedies provided that the relevant contractual and statutory requirements are satisfied.

To claim default interest, the payment obligation must have become due, and the debtor must have failed to make payment or failed to do so within the agreed time.

Contractual penalties may only be claimed where the contract contains a valid penalty clause and the imposition of the penalty complies with applicable law.

To recover damages, the business must establish that actual loss has occurred, that the debtor committed a breach, and that a causal relationship exists between the breach and the loss suffered.

8.3. When should negotiation, arbitration, or court proceedings be chosen?

The appropriate dispute resolution mechanism depends on the circumstances of each case.

Negotiation is generally suitable where the parties remain willing to cooperate and are acting in good faith to resolve the dispute.

Commercial arbitration is often preferred where the contract contains a valid arbitration agreement and the parties require a flexible and confidential dispute resolution process.

Court proceedings, on the other hand, are typically appropriate where no valid arbitration agreement exists or where the business intends to rely on procedural measures available through the courts to safeguard its ability to recover the outstanding debt.

8.4. Can a business claim payment if the parties have not executed a contract, or if the contract has not been fully executed, but the work has in fact been performed?

Yes. The absence of a signed contract or the failure to complete all contractual formalities does not automatically deprive a business of its right to claim payment for work that has actually been performed.

In such circumstances, the business must establish that a contractual relationship existed in practice and that the work was carried out at the request of, or with the acceptance of, the other party.

Documents such as emails, text messages, purchase orders, delivery records, acceptance certificates, invoices, payment records, meeting minutes, or any other documents evidencing the negotiation, formation, and performance of the transaction may be relied upon to substantiate the payment claim.

However, the likelihood of a successful claim depends not only on whether the work was actually performed, but also on the completeness, admissibility, and evidential value of the supporting documentation, as well as the assessment of the competent authority in light of the specific facts and circumstances of the case.

Construction debt recovery is not merely a matter of requiring the debtor to fulfil its payment obligation.

It is also a legal process of establishing and protecting a business’s entitlement to payment through appropriate legal grounds and supporting evidence.

To maximise the prospects of successful debt recovery, businesses should accurately identify the legal basis for their payment claims, prepare a comprehensive evidentiary record, and adopt the most appropriate strategy at each stage of the dispute.

We hope this article provides useful legal guidance on construction debt recovery within the construction sector.

As each case involves its own factual background and legal considerations, businesses should undertake a comprehensive assessment of all relevant legal issues before determining the most appropriate course of action.

Yours sincerely,