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

In order to increase deterrence and minimize the risk of contract breaching, the parties to a commercial contract may agree that one party, when there is a delay in fulfilling payment obligations, will have to pay the other party an amount of penalty for violations and late payment interest corresponding to the late payment period. The question is, when a dispute arises and is resolved in court or arbitration, will this agreement be accepted, or does the aggrieved party only have the right to claim one of the above two amounts?

1. Overview of penalty for violations and late payment of interest in commercial contracts 

Penalty for violations is a type of commercial sanction in which the aggrieved party requires the breaching party to pay a fine for breach of contract on the condition specified in the contract. The penalty will be agreed upon by the parties in the contract, but must not exceed 8% of the value of the breached contractual obligation, except for violations in the field of price appraisal.

Meanwhile, late payment interest is an amount of money that the aggrieved party has the right to demand when the other party pays for goods, service remuneration and/or other expenses not on time as specified in the contract, regardless of whether the parties have agreed in the contract on this amount or not. Late payment interest is calculated on the late payment amount corresponding to the late payment period. The amount of late payment interest may be agreed upon by the parties in the contract. In case the contract does not stipulate, the above interest rate will be determined according to the average overdue debt interest rate in the market at the time of payment. 

2. The possibility of simultaneously applying penalty for violations and late payment interest for violations of the time limit for performance of payment obligations in commercial contracts

The Commercial Law 2005 and the Civil Code 2015 do not clearly stipulate the relationship between penalty for violations and late payment interest, as well as whether the simultaneous application of both regulations to the same act of delay in fulfilling payment obligations is allowed or not. This has led to two conflicting opinions on how to handle when related disputes arise. 

Some argue that the principle of “a violation is punishable only once” should be applied to determine that the aggrieved party has the right to demand the breaching party to pay either the violation penalty or late payment interest. This principle is often applied to violations in the field of administrative and criminal law. Recently, in Resolution 01/2019/NQ-HDTP, the above principle has been included in civil law within the scope of loan contracts in Article 12.1. Accordingly, “A property loan contract has both agreements on penalty for violations and agreements on interest on overdue principal or other forms applicable to the act of failing to pay the debt on time“, “the Court shall consider and decide on the principle of only dealing with one time for each act of failure to pay the debt on time“. Thus, if the principle of “a violation is punishable only once” applies to commercial contracts, the aggrieved party is only entitled to demand that the breaching party pay: (i) a penalty for the violation or (ii) a late payment interest. 

On the contrary, others claim that the aggrieved party is fully entitled to demand the application of both sanctions for violations and late payment interest for the other party’s violation of the payment term in commercial contracts. Because these are two independent and non-exclusive institutions, there is no law restricting the simultaneous application of these two amounts. Therefore, in principle, the parties are free to agree and must comply with the contents of the executed contract. 

Since the law does not have clear and specific provisions on the above issue, how to handle arising disputes will depend on the views of the dispute settlement council. According to the author’s research, jurisdictions (both arbitrators and courts) are now inclined to accept the simultaneous application of both amounts for breaches of commercial contracts due to late performance of payment obligations. Therefore, there is a high probability that a party’s claim that the other party who did not pay on time must simultaneously pay a penalty for violation and late payment interest on the late payment amount will be accepted.  

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