Pham Hoai Huan, LL.D., Ho Chi Minh
City Law University
The maximum amount of penalty for breach of construction contracts currently varies between relevant laws governing construction contracts, including the 2015 Civil Code (Civil Code), 2005 Commercial Law (Commercial Law) and 2014 Construction Law (Construction Law). In relation to this issue, the Ministry of Construction (MOC) recently issued the Official Letter 48/BXD-KTXD dated September 3, 2019 (OL 48) to respond to an inquiry of an enterprise about the maximum amount of penalty for breach of construction contracts in case of private construction works. In the context that there are different regulations of the Civil Code, the Commercial Law and the Construction Law regarding the maximum amount of penalty for breach of construction contract, this article will discuss about two legal issues: (i) principles for resolution of the conflict of laws that regulate construction contracts between the Civil Code, the Commercial Law and the Construction Law and (ii) the maximum amount of penalty for breach of construction contracts (including both state-funded construction works and private construction works).
Nature of construction contracts
and legal framework regulating construction contracts
Broadly
speaking, construction contract is a special type of contract in the field of
construction investment regulated by the Construction Law, civil contract
regulated by the Civil Code, and/or commercial contract regulated by the
Commercial Law.
First
of all, construction contract is a particular type of contract in the
specialized field of construction investment and provided in the Construction
Law. Hence, construction contracts is regulated by the Construction Law. The
Construction Law also defines construction contract as a type of civil contract.[1]
Therefore, construction contracts can fall within the scope of regulation of
the Civil Code. Even though there is no specific mention in the Construction
Law, construction contract is also a type of commercial contract which is
governed by Commercial Law from a theoretical perspective. In principle, commercial contract is also a
type of civil contract. However, unlike
other types of civil contracts, a commercial contract has specific conditions
on the contracting parties (i.e., the contracting parties shall be both traders
or one of the contracting parties shall be a trader) and the purpose of the
contract (i.e., profit-making purpose). Therefore, if a construction contract
satisfies the conditions on the contracting parties and the purpose of the commercial
contract as noted above, it can be considered
as a commercial contract regulated by the Commercial Law as well.
In
fact, most of construction contracts satisfy the conditions applied for commercial
contracts as noted above. In such case,
such construction contracts are subject to both the Civil Code, the Commercial
Law and the Construction Law. The Civil
Code, the Commercial Law and the Construction Law all prescribe the maximum amount
of penalty for breach of contract. However, there is difference between these
regulations which might lead to a conflict of laws when determining the maximum
amount of penalty to be imposed for breach of construction contracts,
particularly those for private construction works. In particular, the Civil
Code allows contracting parties to reach an agreement on the amount of penalty (without
any limits), unless otherwise prescribed by a relevant law[2]. Under
the Commercial Law, a penalty for breach of contract must not exceed 8 percent
of the value of the contractual obligation which is breached. Meanwhile, the
Construction Law stipulates the penalty for breach of contract shall not exceed
12 percent of the value of the contractual obligation which is breached with
respect to state-funded construction works.[3]
The Construction Law does not provide for the limit of the amount of penalty for
breach of construction contract with respect to private construction works.
Regarding
this matter, an enterprise has sought for the MOC’s opinions on a specific case
involving a private construction work in which contracting parties had agreed
on the amount of penalty equivalent to 20 percent of the contract value. In the
OL 48, the MOC opines that contracting parties have the right to apply the
agreed amount of penalty for breach of the contract for such private construction
works. According to such response of the MOC, it could be understood that for private
construction works, the maximum amount of penalty of 8 percent under the
Commercial Law is not applicable and contracting parties are free to make an
agreement on the amount of penalty for breach of contract in accordance with
the Civil Code.
Since
the Civil Code, the Commercial Law and the Construction Law prescribe the different
maximum amount of penalty for breach of contract, the first and foremost question
is which law shall prevail to be applicable to construction contracts on the
basis of principles of resolution of conflict of laws.
Principles of resolution of
conflict of laws related to construction contracts between the Civil Code, the Commercial
Law and the Construction Law
Since
the Civil Code, the Commercial Law and the Construction Law have equal legal
effect, there are two principles of resolution of conflict of laws that can be
considered for the application, including (i) lex posterior derogat legi priori and (ii) lex generalis - lex specialis. The first principle states that given
that the regulations are issued by the same authorities, the later issued
regulations shall prevail over the previously issued ones. Under the second
principle, a specialized law (governing a specific matter) shall prevail over a
general law.
Given
the relationships between the Civil Code, the Commercial Law and the Construction
Law, the separate application of those two principles seems contradictory. Accordingly,
if only the first principle is applied, the prevailing order would be the Civil
Code, the Construction Law and the Commercial Law. If only the second principle
is applied, the prevailing order would be the Construction Law, the Commercial
Law and the Civil Code. This contradicition did not arise at the time of adoption
of the Civil Code 2005 because the Commercial Law and the Construction Law were
adopted after the Civil Code 2005. Therefore,
these principles should be applied simultaneously in order to have an
appropriate basis for resolving the conflict of laws regarding this matter.
Principle of lex posterior derogat
legi priori
Article
156.3 of the 2015 Law on Promulgation of Legal Documents prescribes the principle
of lex posterior derogat legi priori which is applied to resolve
conflict of legal documents issued by the same authority as follows: “In case legal documents issued by the same authority provide for different regulations on the same matter,
the later issued document shall
prevail.”
Basically,
this principle applies to legal documents issued by the same authority (e.g., laws
adopted by the National Assembly). If no other principles are applied (e.g.,
specialized laws shall prevail over the Civil Code in accordance with the principle
of lex generalis - lex specialis),
the Civil Code shall prevail over the laws which are adopted prior to the Civil
Code and does not prevail over the laws which are adopted after the Civil Code
in case of conflicts of laws. In this case, the Civil Code shall prevail over
the Construction Law and the Construction Law shall prevail over the Commercial
Law.
Principle
of lex generalis - lex specialis
This
principle is not prescribed in the Law on Promulgation of Legal Documents 2015 but
often provided in specific legal documents. The Civil Code itself prescribes
this principle to resolve the conflict between the Civil Code and specialized
laws. According to this principle, Civil Code shall be considered as the “general
laws” and specialized laws shall be considered as the “private laws”. In the relationship between the “general
laws” and the “private laws”, the specialized laws as the “private laws” shall
prevail over the “general laws” provided that such laws do not contravene the fundamental
principles of civil law prescribed in the Civil Code[4];
otherwise, the Civil Code shall prevail over the specilized laws. Besides, if a
specialized law is silent on a matter which is provided in the Civil Code, the
relevant regulations of the Civil Code shall apply.[5] While the Commercial Law also prescribes this
principle[6], this principle is not provided in the
Construction Law.
Based
on the above-mentioned principles, the following four conclusions can be made
to resolve the conflict of laws in the context of construction contracts:
· If
the provisions of the Commercial Law and the Construction Law contravene the
fundamental principles of civil law prescribed in the Civil Code, the provisions
of the Civil Code shall prevail over the provisions of the Commercial Law and
the Construction Law;
· If
the provisions of the Commercial Law and Construction Law do not contravene the
fundamental principles of civil law prescribed in the Civil Code, the
provisions of the Commercial Law and the Construction Law shall prevail over
the provisions of the Civil Code;
· If
the Commercial Law and Construction Law are both silent about a matter which is
regulated by the Civil Code, the Civil Code shall apply to such matter; and
· If
the Construction Law has specific provisions on a matter, such provisions shall
apply. If the Construction Law is silent on such matter and the Commercial Law has
specific provisions on such matter, the provisions of the latter shall apply.
If both the Construction Law and Commercial Law are silent about such matter,
the provisions of the Civil Code (if any) shall apply.
The maximum amount of penalty
applicable to construction contracts
Both
the Construction Law and Commercial Law prescribe the maximum amounts of penalty
for breach of construction contracts which do not contravene the fundamental
principles of civil law prescribed in the Civil Code. Therefore, in this case, their
provisions on the maximum amount of penalty for breach of construction
contracts shall prevail over those of the Civil Code.
The
regulations of the Construction Law implicitly refers to construction contracts
with respect to state-funded constuction works and private construction
works. If the above four conclusions are
applied to determine the maximum amount of penalty for breach of construction
contracts, following conclusions can be made:
· With
respect to construction contracts for state-funded construction works, since
the Construction Law (as the specialized law regulating construction contracts)
specifically provides the maximum amount of penalty for breach of contract
(i.e., equivalent to 12 percent of the value of the contractual obligation
which is breached), the provisions of the Construction Law shall prevail over
the Commercial Law and Civil Code; and
· With
respect to the private construction contracts, since the Construction Law is
silent on the maximum amount of penalty for breach of contract, the Commercial
Law (as a specialized law regulating this matter which do not contravene the
fundamental principles of civil law prescribed in the Civil Code) shall prevail
over the Construction Law and the Civil Code.
Under the Commercial Law, the maximum amount of penalty of 8 percent of
the value of the contract obligation which is breached shall be applicable to construction
contracts satisfying requirements to be commercial laws (including construction
contract for private construction works as well). Under this analysis, the clarification of the
MOC under OL 48 appears to be inconsistent with principles of resolution of
conflict of laws provided under the Law on Promulgation of Legal Documents 2015,
the Civil Code and the Commercial Law.
Conclusion
The
interpretation by the MOC in the OL 48 once again raises the importance of
defining and applying the principles of the resolution of conflict of laws, in
particular, between the Civil Code, the Commercial Law, and the Construction
Law. It is undeniable that a specific legal matter may be subject to
many/various legal documents at the same time and conflict of laws incurred
between legal documents on the same issue is inevitable. However, the unification of methods of
determining and applying conflict resolution principles will play an important
role in the proper and appropriate determination of provisions of the law to be
prevailing/predominant for the application in each specific case. In practice,
conflict of laws in many cases is extremely sophisticated and onerous to handle
even when the principles of conflict resolution have already been applied.
The
opinions presented in this article attempt to generalize conflict resolution
principles in the context of the relationship under a construction contract.
However, since the Civil Code is effective within a limited period, and there
is no or limitation in case law in practice, these opinions are mainly a
theory-based analysis of relevant provisions of the law and in need of further
development and codification when the case law after the effective date of the
Civil Code becomes more available.
[1] Article 138.1 of the Construction Law stipulates: “Construction contracts are civil contracts established in
writing between principals and contractors to perform in part or wholly the
work in construction investment activities.”.
[4] Under Article 3 of the
Civil Code, five fundamental principles of civil law include: (i) no
discrimination, (ii) freedom of agreement, (iii) goodwill and honesty, (iv) no
infringement upon public interests, and (v) self-liability.
[5] Clauses 2 and 3, Article 4
of the Civil Code stipulates:
“2. Other relevant laws that regulate civil relations
in specific fields must not contravene the fundamental principles of civil law
prescribed in Article 3 of this Code.
3. In case another relevant law makes no provisions or
makes provisions which, however, violate Clause 2 of this Article, the
provisions of this Code shall apply.”
[6] Article 4 of the Commercial Law: “1.
Commercial activities must comply with the Commercial Law and relevant laws.
2.
Particular commercial activities provided for in other laws shall comply with
the provisions of such laws.
3.
Commercial activities which are not provided for in the Commercial Law and
other laws shall comply with the provisions of the Civil Code.”
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