Should the Civil Code or the Commercial law be applied in resolving construction contract disputes?
In Vietnam, construction contracts are governed by a wide range of legal instruments. When the Law on Construction 2014 (“Law on Construction”) – as the specialized legislation – does not provide specific rules, dispute settlement bodies often have to refer to the Civil Code 2015 (“Civil Code”), the Commercial Law 2005 (“Commercial Law”), as well as subordinate regulations such as Decree No. 37/2015/NĐ-CP detailing construction contracts (“Decree 37”). This multi-layered framework frequently leads to inconsistencies in the application of the law when disputes arise from construction contracts. This article will elaborate the differences between applying the Civil Code and the Commercial Law in the settlement of disputes arising from construction contracts, thereby answering a central question: When the Law on Construction is silent, which legal instrument should be given priority – the Civil Code or the Commercial Law?
1.Applicable law in the settlement of disputes from construction contracts
The guiding principle in determining applicable law for disputes arising from construction contracts is the priority of specialized legislation – in this case, the Law on Construction. Whenever the Law on Construction lacks specific provisions, juridicial bodies may refer to the Civil Code, the Commercial Law, and relevant guiding documents. At present, the Law on Construction does not provide detailed rules on three essential issues: (i) the statute of limitations for initiating a lawsuit; (ii) the permissible penalty level for contractual breaches; (iii) the interest rate applied to late payment.
a.Determining the statute of limitations for initiating a lawsuit
The Law on Construction does not directly regulate the statute of limitations. Instead, Clause 3 Article 45 of Decree 37 stipulates: “The statute of limitations for initiating arbitration proceedings or filing a lawsuit with the court shall follow relevant provisions of law.”. This means that dispute-settling authorities must refer to either the Civil Code or the Commercial Law.
The statute of limitations for contractual claims in the Civil Code is 3 years from the date the entitled party knew or should have known that its lawful rights or interests were infringed (Article 429); while this matter in the Commercial Law is 2 years from the time the rights or interests were infringed (Article 319).
b.Determining penalty for contractual breach
The Law on Construction only prescribes a penalty rate for construction works using state capital: penalties may not exceed 12% of the value of the breached obligation (Clause 2 Article 146). However, it provides no guidance on penalty levels for construction works not using state capital. Therefore, under the Civil Code, parties in construction not using state capital may freely agree on the penalty amount (Clause 2 Article 418). In contrast, under the Commercial Law, penalties are capped at 8% of the value of the breached obligation (Article 301).
c.Determining interest on late payment
The Law on Construction currently only provides that the employer (the party awarding the contract) must compensate the contractor in cases of late payment, without specifying the applicable interest rate for late payment (Point d, Clause 4, Article 146 of the Law on Construction). Decree No. 37 offers more detailed guidance for projects using state capital or public-private partnership projects, under which the late payment interest rate is determined “according to the overdue interest rate announced by the commercial bank where the contractor opens its payment account, corresponding to the periods of delayed payment” (Clause 2, Article 43 of Decree 37).
However, these provisions do not apply to construction works that are not funded by state capital. If the Civil Code is applied, the interest rate is subject to the parties’ agreement but must not exceed 20% per year of the overdue amount; if no agreement is made, an interest rate of 10% per year shall apply (Articles 357 and 468 of the Civil Code). If the Commercial Law is applied, the late payment interest rate is determined based on “the average overdue interest rate on the market at the time of payment, corresponding to the period of late payment” pursuant to Article 306 of the Commercial Law.
Thus, it is evident that the Civil Code and the Commercial Law differ significantly on issues such as the statute of limitations, contractual penalty limits, and late payment interest in construction contracts. These differences may directly affect the rights and interests of the parties during the resolution of disputes arising from construction contracts.
2.Evaluating which law should be applied to disputes from construction contracts
The difference in the legal consequences of applying the Civil Code and the Commercial Law give rise to an important question: When the Law on Construction does not regulate a particular matter, which law should be applied? There are currently two relevant viewpoints.
a.Viewpoint 1: Priority should be given to the Civil Code as a construction contract is a civil contract
This viewpoint is reflected in Draft Precedent No. 06/2024. The Supreme People’s Court’s Council of Justices states that “Disputes arising from construction contracts constitute civil relations; therefore, in the absence of provisions in the Law on Construction, the Civil Code shall apply”.
Although there is no detailed justification for this draft, the reasoning appears to derive from the statutory definition of a construction contract. Clause 1 Article 138 of the Law on Construction defines a construction contract as: “a civil contract in writing, agreed upon by the employer and the contractor to perform part or all of construction activities”. This definition labels construction contracts as civil contracts. Consequently, when the specialized legal framework (the Law on Construction and its guiding documents) is silent, the Civil Code – being the general law governing civil relations – should be applied. However, it should be noted that as of now, Draft Precedent No. 06/2024 has not been officially adopted. Therefore, this viewpoint does not yet carry binding precedent and should be seen only as a proposed direction.
b.Viewpoint 2: Priority should be given to the Commercial Law as construction contracts are naturally commercial
The second viewpoint holds that when the Law on Construction does not provide guidance, the Commercial Law should apply. This stems from the nature of typical construction contracts: they are entered into by businesses engaging in activities for profit. Such activities fall squarely within the definition of “commercial activities” set out in Clause 1 Article 3 of the Commercial Law: “commercial activities are activities conducted for profit, including the purchase and sale of goods, provision of services, investment, commercial promotion, and other profit-generating activities”.
This viewpoint has received indirect acknowledgment from the Ministry of Construction. In Official Letter No. 1123/BXD–KTXD dated 13 May 2019, the Ministry responded to concerns regarding reward and penalty clauses in construction contracts and noted: “For matters not regulated under Decree 37, parties shall base their arrangements on relevant laws (the Commercial Law, the Civil Code…)”. This implicitly recognizes the applicability of the Commercial Law where the Law on Construction is silent.
Judicial practice also supports this viewpoint. Several courts have applied the Commercial Law to disputes arising from construction contracts, for example, Judgment No. 660/2022/KDTM–PT dated 10 November 2022 by the Ho Chi Minh City People’s Court; Judgment No. 10/2020/KDTM–PT dated 10 June 2020 by the Da Nang People’s Court. These decisions acknowledge that construction contracts may be governed by the Commercial Law when they are commercial in nature.
TNTP believes that in cases where the Law on Construction does not provide specific regulations, the Commercial Law should be given priority in resolving disputes arising from construction contracts. First, a construction contract is also a type of commercial contract, as the parties enter into the agreement to conduct activities for profit-making purposes. Second, according to the principle of “prioritizing the application of specialized laws over general laws”, the Commercial Law functions as the specialized law, while the Civil Code serves as the general law. Therefore, where the Commercial Law contains applicable provisions, it should be applied first. The Civil Code is only applied when neither the Law on Construction nor the Commercial Law provides specific regulations. This principle is reflected in Clause 3, Article 4 of the Civil Code: “Where other relevant laws do not provide regulations or provide regulations contrary to Clause 2 of this Article, the provisions of this Code shall apply.”
However, to ensure consistency in the interpretation and application of the law when resolving disputes arising from construction contracts, it is necessary for the Council of Judges of the Supreme People’s Court to issue a resolution or adopt a precedent to provide guidance, thereby preventing inconsistent application among courts when adjudicating disputes involving construction contracts.
This article, “Should the Civil Code or the Commercial law be applied in resolving construction contract disputes?”, is presented by TNTP. Should you have any inquiries, please feel free to contact TNTP for further clarification.
Sincerely.
