To ensure the effective completion of a project, the parties must conscientiously comply with the provisions of the construction contract. However, during the contract execution, one or both parties may engage in violations that cause damage to the other party. In such cases, the aggrieved party can apply penalties for the violation (if stipulated in the contract) and seek compensation for damages to remedy the consequences of the violation and compensate for economic losses or damages incurred. In the following article, TNTP will present these two measures for parties involved in construction contracts to refer to and apply.
1. Penalties for violation
Based on Article 146(2) of the Construction Law 2014, amended in 2020 (“Construction Law”), for construction projects using public investment funds, and non-public investment state funds, the penalty for a contract violation shall not exceed 12% of the value of the violated contract.
Therefore, for construction projects without public investment funds, and non-public investment state funds (referred to as “state funds”), the Construction Law does not specify the level of penalties for violations. Since the Construction Law does not provide regulations in this regard, there are different opinions on whether the provisions on penalties in the Civil Code 2015 (“Civil Code”) or the Commercial Law 2005 (“Commercial Law”) should be applied to determine the penalty level for construction projects without state funds between two enterprises.
Article 418(2) of the Civil Code allows parties to freely agree on the level of penalties without any limitation, except in cases where specialized laws provide otherwise. Meanwhile, Article 301 of the Commercial Law specifies that the penalty for a violation shall not exceed 8% of the value of the violated contract (except for penalties due to incorrect appraisal). Therefore, if the Civil Code is applied, there is no limitation on the penalty level, whereas if the Commercial Law is applied, the penalty is limited to 8% of the value of the violated contract.
According to the writer’s viewpoint, since a construction contract is a civil contract (Article 138(1) of the Construction Law), when the Construction Law does not provide regulations, the Civil Code should be applied to determine the penalty level for construction projects without state funds between two enterprises. Therefore, the parties can freely agree on the level of penalties without limitations. Businesses should take note of this to assess the risks associated with penalty enforcement.
2. Compensation for damages
2.1. General provisions
+ In addition to the agreed penalties, the violating party must compensate for damages suffered by the other party and third parties (if any), as regulated by the Construction Law and other relevant laws.
+ In cases where one party fails to fulfil contractual obligations or performs obligations that do not comply with the provisions, after fulfilling the obligations or implementing corrective measures, the party is still responsible for compensating for damages if the other party suffers further losses. The compensation for damages must be equivalent to the losses incurred by the other party.
+ In cases where a contract violation infringes upon the person, rights, and assets of the other party, the injured party has the right to demand that the violating party bear responsibility for the contract violation, as agreed upon in the contract and stipulated by relevant laws.
+ In cases where one party violates the contract due to the actions of a third party, the violating party is held responsible for the contract violation with the other party. Disputes between the violating party and the third party are resolved according to the provisions of the law.
2.2. Cases where the Contractor must compensate the Principal for damages
+ The quality of the work does not meet the agreed-upon terms in the contract, or the completion deadline is extended due to the fault of the Contractor;
+ Damage to individuals and property within the warranty period due to the fault of the Contractor.
2.3. Cases where the Principal must compensate the Contractor
+ Interruptions, delays, risks, coordination of machinery, equipment, materials, and stockpile components for the Contractor caused by the fault of the Principal as specified in the contract;
+ The Principal provides documents and necessary conditions for the work that do not comply with the agreements in the contract, leading to the need for the Contractor to redo, suspend, or modify the work;
+ In construction contracts where the Principal is responsible for providing materials, equipment, and other requirements if the provision is not made within the stipulated time and requirements;
+ The Principal delays payment as agreed in the contract.
The above is the article “Penalties for Violation and Compensation for Damages in Construction Contracts” that TNTP provides to readers. If you have any issues for discussion, please contact TNTP for assistance.