Common strategies used by investors to delay debt payments and solutions
Over the past years, the issue of investors “Withhold payments” from contractors has become staggeringly common. In many cases, contractors’ payments have been delayed for months or even over a decade without any proper acceptance. This issue became so severe that, in 2022, the leadership of VACC (Vietnam Association of Construction Contractors) and VCCI (Vietnam Chamber of Commerce and Industry) organized a seminar to address the challenges faced by enterprises. However, many contractors still struggle to find a way out of the overdue cycle imposed by investors. In light of this situation, TNTP, as a professional legal consultancy, presents the article: “Common strategies used by investors to delay debt payments and solutions.”
1. Common strategies used by investors to delay debt payments
• Delay the Acceptance of Work
One of the most frequently used strategies by investors is to deliberately delay or refuse acceptance of work due to various reasons, such as requesting adjustments, modifications, providing additional documents for acceptance or implementing unreasonable quality inspections and requiring contractors to make corrections.
Although most of construction tasks are governed by specific standards, investors often cite the lack of “aesthetic” as a reason to demand further corrections and refinements from contractors. This not only prolongs the payment timeline but also incurs additional costs and workforce requirements for contractors before they can submit the acceptance documents and request payment.
• Claiming Financial Difficulties
During contract negotiations, investors often make attractive promises regarding payment conditions. However, when contractors request payment, investors delay it, citing reasons such as cash flow issues or depleted funds. With such excuses, investors postpone payments for extended periods, promising to resolve the cash flow situation.
For projects funded by multiple sources or third-party financing, unstable cash flow can further enable investors to extend payment timeline, claiming delays in receiving funding or sponsorship, thereby complicating contractors’ ability to continue performing the work.
• Exploiting Ambiguous Contract Terms
Some contracts include vague or unclear provisions, making it difficult to determine specific timelines or conditions for investor payment obligations. This ambiguity gives investors the upper hand to justify short-term or long-term delays, or even to refuse payments for tasks that cannot be agreed upon.
Moreover, investors may demand documents or records not stipulated in the contract, creating additional obstacles for contractors in submitting payment requests and making the process more complex and prolonged.
• Failing to Provide Payment Guarantee
Payment guarantee is an effective mechanism used by contractors to minimize delays in payments. However, in most agreements, investors often hold the stronger negotiating position, forcing contractors to comply with the terms in their favor. In some cases, contractors are required to provide guarantees themselves to secure the contract.
On the other hand, while investors may agree to payment guarantees, they often propose guarantees at amounts significantly lower than the minimum required for project implementation. This ensures contractors remain engaged in the project but leaves a significant portion of funds at the investors’ disposal for other activities. In such situations, contractors may receive partial payments but face extended delays for the remaining amounts.
• Delaying Through Dispute Resolution
When all the above strategies have been used, investors may resort to prolonging payments by initiating dispute resolution through competent authorities.
In practice, the dispute resolution process in court can take several years from the initiation of a lawsuit to establishing a effective judgment. Even after a judgment is issued, if investors do not voluntarily comply, contractors must submit enforcement requests to competent enforcement agencies to recover the debt. Consequently, payments may be delayed for many years, causing significant losses to contractors.
2. Consequences of Payment Delays
• Affecting Contractors’ Cash Flow
Not all contractors have large financial resources like investors. Maintaining consistent cash flow is crucial for contractors to continue other projects. Interruptions in cash flow can result in wage arrears for workers, shortages of materials, delayed insurance payments, and loan defaults, directly affecting contractors’ business operations.
• Reduced Quality and Project Delays
Payment delays also impact projects directly, as contractors may lack the sufficient workforce or materials to meet deadlines. For instance, some phases like foundation pouring or applying protective coating, if not being performed continuously, will not only delay the progress but also compromise the structural integrity and aesthetic quality of the project. This creates challenges for contractors during both construction and acceptance stages.
• Increased Costs and Legal Risks
Most contractors in Vietnam are small and medium enterprises. To recover outstanding debts, contractors often resort to borrowing funds to maintain operations or finance other projects. Additionally, contractors may incur significant legal expenses to hire lawyers or advisors to recover the debt in disputes with investors.
• Damage to Reputation and Business Relationships
Disputes over unpaid debts often strain relationships between investors and contractors, making future cooperation difficult. Furthermore, such disputes create opportunities for competitors to exploit the situation and slander the contractor. In fact, these issues have tarnished the reputation of contractors in particular and the construction industry in general.
3. Measures to Mitigate Risks
• Drafting Clear and Comprehensive Contracts
Contractors should carefully review and request modifications to ensure contracts are clear and comprehensive, particularly regarding provisions on product standards, construction timelines, advances, guarantees, acceptance, and dispute resolution. For a better protection, contractors may seek assistance from legal advisors or consultants. Where contractors feel uncertain about potential risks, Lawyers and Law Firms can be one of the best choice for contractors to rely on.
• Implementing Payment Guarantees
Contractors can require investors to provide payment guarantees from banks or financial institutions to secure funds. It is crucial to establish clear terms and conditions for invoking the guarantee, ensuring contractors’ rights are protected and risks minimized.
• Adopting Progress-Based Payment Methods
Progress-based payments or task-based payments are among the most effective methods. This ensures contractors maintain stable cash flow, while investors can manage funds for multiple works, benefiting both parties.
• Monitoring and Recording Project Progress
In addition to oversight by third-party supervisors, contractors should actively monitor and document project progress. This facilitates acceptance procedures and provides evidence in disputes to demonstrate timely and quality completion of work.
Payment issues in business cooperation is always a challenge, especially in debt settlements. To protect their rights and interests, contractors must implement as many preventive measures as possible. In the second part of this topic, TNTP will delve deeper into the underlying causes of investors’ payment delays and propose solutions to help contractors navigate these challenges effectively.