Key consideration on penalty for violations for consortium contractors

Compared to the Bidding Law 2013, the Bidding Law 2023 expands its subjects of application to include bidding packages of enterprises with 100% of charter capital held by state enterprises. This change has garnered significant attention from investors, especially as the number of bidding packages by subsidiaries of state enterprises continues to grow. These packages often impose strict requirements on the investor’s capabilities. Most small and medium-sized enterprises cannot meet these strict requirements, leading to the widespread practice of consortium bidding. However, many consortium investors remain unclear about the penalty regulations for breaches in bidding activities. Against this backdrop, this article aims to analyze critical aspects of contractual penalty clauses in bidding activities. 

1. Regarding penalty level 

Firstly, bidding activities are considered commercial activities and are governed by commercial law, as the parties involved in bidding typically aim for profit. Since bidding law does not provide specific provisions regarding penalty rates for contractual breaches, this issue is governed by commercial law. 

Accordingly, for contracts between consortium investors and the employer or consortium agreements, the penalty rate for breaches must not exceed 8% of the value of the breached contractual obligation. 

2. Regarding cases subject to penalty for breaches 

Under Article 300 of the Commercial Law 2005, penalty for breaches may only be applied when the parties are explicitly agreed upon and clearly stipulated in the contract between the employer and consortium investors. If the contract does not regulate provisions on this matter, the parties cannot impose penalty for breaches but may apply other remedies, such as compensation for damages. 

3. Regarding parties subject to penalty for breaches 

Under Article 131.22(a) of Decree 24/2024/ND-CP, in cases where one consortium member or several consortium members breach the contract, penalty for breaches will be imposed on all consortium members. This means that even members who do not breach the contract will still face consequences alongside the breaching member(s). 

This provision stems from the unique nature of consortium bidding, where members bear joint and several liability for the collective obligations committed to the employer. The purpose of this provision is to ensure responsibility and to encourage close coordination among members during the contract execution. 

To mitigate risks, consortium members should clearly define responsibilities, rights, and internal mechanisms for addressing potential breaches. They should also actively monitor one another to ensure compliance with contractual commitments. For instance, if a consortium member breaches the contract leads to penalties for the others, the breaching member will be required to pay a penalty equivalent to the amount borne by the non-breaching members. 

4. Regarding method of penalty payment 

Current laws do not specifically regulate whether penalties for breaches should be imposed collectively based on the consortium ratio or individually in cases where one or several consortium investors breach the contract. Therefore, the payment of penalties depends on the agreement between consortium investors and the employer. As a result, consortium investors should explicitly outline this issue in their consortium agreement and the contract with the employer. 

See more:

1/ Notable points of penalty regulations relating to spreading epidemic

2/ Simultaneous Application Of Penalty For Violations And Late Payment Interest For Violation Of The Time Limit Of Payment Obligations In Commercial Contracts

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