In the business environment, particularly in construction, the potential for incurring debts is significant. However, debt recovery in the construction industry has some unique points compared to other sectors. In this article, lawyer from TNTP will provide readers with insights on the key issues to consider when recovering debts in the construction sector.
1. Debt Recovery Parties in Construction
In the construction sector, debts typically arise among the following entities:
• Project Investors
• Main Contractors
• Subcontractors
Specifically:
(i) Project Investors
According to point a of Clause 1, Article 4 of the Bidding Law 2023, a project investor is defined as: An agency or organization that owns borrowed capital or is directly assigned to manage and use capital during the project execution; budget-using units; direct budgetary expenditure units; centralized procurement units.
Consequently, a project investor is an entity that directly invests capital and manages the use of capital during the construction project.
(ii) Main Contractor
According to Clause 26, Article 4 of the Bidding Law 2023, a main contractor is: An organization or individual, or a combination of organizations or individuals, who enter into a bidding joint venture based on a joint-venture agreement to participate in bidding and directly sign the contract if selected. The joint-venture agreement must clearly define the responsibilities of the lead member and the common and individual responsibilities of each member within the joint venture for the entire scope of the contract package.
Therefore, the main contractor is the contractor named in the bid and directly signs the procurement contract with the project investor, responsible to the investor during the contract execution.
(iii) Subcontractors
According to Clause 27, Article 4 of the Bidding Law 2023, a subcontractor is: An organization or individual who signs a contract with the main contractor to participate in performing construction, consulting, non-consulting, and related services of the goods supply or mixed contract package.
As per the regulations, a subcontractor is a contractor that signs contracts with the main contractor and carries out related works in construction, consulting, non-consulting, and related services as per the signed contract.
Accordingly, for a construction project, the project investor will directly contract with the main contractor. During the construction process, the main contractor may sign contracts with subcontractors to perform tasks within the project scope. Therefore, debts in a construction project typically arise between the project investor and the main contractor; and between the main contractor and subcontractors.
2. Construction Debt Collection
a) Debt Between Project Investor and Main Contractor
The project investor, as the party awarding the contract to the main contractor, is responsible for making payments according to the contract to the main contractor. However, if the project investor neglects the capital plan and delays payments for completed projects awaiting final settlement, or for the purpose of misappropriate capital, they did not pay as committed to the main contractor, leading to bad debts.
b) Debt Between Main Contractor and Subcontractors
Subcontractors perform part or all of the project components under a subcontract with the main contractor. Debts typically relate to the payment fees for construction components, raw materials, and maintenance costs, among others.
3. Key Considerations for Effective Debt Collection in Construction
Due to the prolonged construction period typical of the construction, numerous fluctuations can arise due to changes in legal policies, prices, and funding sources. To effectively recover debts, businesses should consider the following issues:
a) Request Periodic Debt Reconciliation
One of the conditions for effective debt collection is to accurately evaluate the amount to be collected. To reconcile debts, the parties can create a Debt Reconciliation Minute, which is a document recording the debt value arising from the contract between the parties. This document will be signed and stamped by the parties as a testament to their status. In consequence, it serves as proof of the debtor’s payment obligations should the business require the debtor to make payments. If the parties cannot negotiate and must initiate litigation to resolve the issue at the competent authority, the Debt Reconciliation Document will be an important document to prove the debtor’s payment obligations and the value of the debt that the debtor must pay to the business.
b) Check the Financial Status of the Debtor
To check whether the debtor can make payments, the business must know the debtor’s financial capacity. Checking the debtor’s financial status helps the business identify which debtors are capable of paying so it can focus its resources and finances on recovering the debt from them. This avoids wasting resources and finances on trying to recover from debtors who are no longer able to pay.
However, checking the financial status of a debtor is not straightforward since information about a company’s assets and profits is not publicly disclosed (except for listed companies). Therefore, a business may engage with other partners in its sector to learn about the activities and projects the debtor is involved in, in order to assess the debtor’s financial capabilities.
c) Compliance with Legal Regulations
Businesses need to be aware of legal regulations to carry out debt collection activities legally. There have been cases where businesses have used debt recovery services in the form of “gangster,” which are prohibited under the Investment Law 2020, leading to criminal proceedings.
Although businesses have the right to demand payment from debtors, this request must be made within the legal regulations. Accordingly, businesses can recover debts by negotiating or initiating litigation if the negotiation process is unsuccessful. When initiating litigation, businesses must study the legal regulations to make reasonable demands and choose the appropriate competent authority to resolve the dispute so that their litigation request is accepted.
If a business has never initiated litigation at the competent dispute resolution authority, they can use the services of law firms to enhance its ability to recover debts and conduct litigation procedures most effectively.
This article by TNTP’s lawyer addresses the topic: “What are the issues to keep in mind when collecting debts in the field of construction?” We hope this article provides value to our readers.
Sincerely,
