Disputes related to construction contracts and key attentions

In recent years, disputes related to construction contracts have become increasingly common and complex, especially those arising during the course of contract implementation such as delays in fulfilling payment obligations, contract penalties, and compensation for damage. Such disputes not only affect the progress of construction projects but also have an impact on the business activities of the contractors or the livelihoods of employees. Hence, questions concerning how to minimise disputes related to construction contracts and key attentions when dealing with such disputes have become topics of significant interest.

Definition of construction contracts and disputes related to construction contracts

According to Article 138.1 of the Law on Construction 2014, a construction contract is a civil contract that is agreed upon in writing between the contractor and its client to perform part or all of the work in construction investment activities. Depending on the nature, scope of work and contract price, construction contracts can be divided into many different categories.[1] For instance, based on the scope of the work, construction contracts may include: construction consultancy contract, work construction contract, contract on supply of equipment for installation in construction work, etc. According to the form of applied contract price, construction contracts include: package contract, fixed unit price-based contract, adjustable unit price-based contract, and etc.

With the above in mind, disputes related to construction contracts refer to the conflicts and disagreements between the parties involved in the construction contract relationship.

Causes of disputes related to construction contract

There are many reasons that may lead to construction contract disputes. However, below are some typical causes of disputes:

• Disputes arising due to failure of fulfilling construction progress and project quality: Affected by many different subjective and objective factors such as the weather, financial constraints, or human resources, which leads to failing to meet the time limit or quality requirements of the project and arises in disputes.
• Disputes arising due to failure of compliance with payment schedule according to the contract: The investor does not make full payment or creates obstacles/delay for payment that causes economic losses to the contractor.
• Disputes arising due to unilateral termination of the contract before its expiration: This may cause losses for the other party, leading to disputes over compensation for damage, penalties, and etc.

Principles for resolving disputes related to construction contracts according to applicable laws

The principles of dispute resolution is always a matter of concern for all parties. Regardless of the chosen dispute resolution method, it must comply with the general principles of law in relevant field. Regarding disputes related to construction contracts, the following principles should be adhered to:⁵

• Respecting the contractual agreements and commitments during the contract implementation, ensuring equality and cooperation.
• The parties are responsible for negotiating to resolve disputes. In case the contracting parties fail to amicably negotiate, such dispute will be resolved through conciliation, commercial arbitration or court according to the provisions of law.

Hence, when disputes related to construction contracts occur, the parties have the right to choose one of the following methods to resolve the dispute:

Negotiation

Negotiation is the first method applied in the dispute resolution process. The advantage of negotiation is that the two parties can conduct by meeting in person or through other means such as phone, email, online meeting, etc. Therefore, this method is flexible, simple, quick, and cost-effective. However, as it relies on freedom of mutual agreement and goodwill of the parties, no mechanism requires both parties to be binding on the agreements successfully reached by them. If failure in negotiations, the parties may apply other methods for dispute resolution.

Mediation

Mediation is a method with the participation of an independent third party. In general, mediation has the same advantages and disadvantages as negotiation, but there are some differences such as the participation of an independent third party serves as an intermediary between the parties in dispute; mediation costs are generally higher than those for negotiation and these costs will be shared equally between the parties or as agreed upon by the parties.

Dispute Resolution at the Court

It can be said that dispute resolution at the court is often considered as the last choice for parties after other methods have proven ineffective. With this method, dispute resolution will be carried out through a third party, i.e the court, and the parties must comply with procedural laws to resolve the dispute. Dispute resolution at the court may be carried out with two levels of trial: first instance court and appeal court. Kindly note that legally effective judgments can also be reviewed according to cassation and retrial procedures. The court will conduct public trials with strict legal procedures, and ensure the rights and obligations of all parties.

Regarding the jurisdiction in resolving disputes related to construction contracts, it is essential to determine the parties in dispute. In this case, the dispute involves individuals or organizations with business registration and all of which are for profit-making purposes. Therefore, this is a case of a dispute arising from business or commercial activities among individuals or organizations with business registration and all of which are for profit-making purposes according to Article 30 of the Civil Procceding Code 2015. In such instances, based on Article 35.1(b) of the Civil Procceding Code 2015, the jurisdiction will belong to the district level people’s court. However, if it is not the case as mentioned above or the dispute involves a party or property abroad or require a judicial authorisation to the representative state authoity of the Socialist Republic of Vietnam abroad, then jurisdiction falls under the provincial-level people’s court.

In addition, the parties to the contract must pay attention to the statute of limitations for initiating a lawsuit to resolve disputes related to construction contracts. Article 45.3 of Decree 37/2015/NĐ-CP specifies that“the statute of limitations for initiating a lawsuit according to Arbitration procedures or the Court to resolve construction contract disputes shall comply with relevant provisions of law”. In comparison to Article 429 of the Civil Code 2015, the statute of limitations for filing a lawsuit in this case is 03 years from the date on which the person having the right to make the request knew or should have known that his/her lawful rights and interests were infringed.

Dispute Resolution through Arbitration

In order to choose this method, the parties must have an agreement to resolve disputes by arbitration under the form of either a contractual clause within the construction contract or a separate and independently effective arbitration agreement. The parties may choose ad-hoc arbitration or a specific Arbitration Center and dispute resolution will be conducted in accordance with the Law on Commercial Arbitration 2010. The arbitration award is not subject to appeal and is enforceable with the parties. Arbitration awards can be submitted to an enforcement authority for compulsory execution and may also be recognized and enforced in countries and territories that are signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, arbitration awards can be subject to review and potentially annulled by a court.

In the current context of international economic integration, domestic or foreign enterprises operating in Vietnam tend to choose the form of dispute resolution by Commercial Arbitration, since it meets the fundamental requirements of a market economy such as: quickly, convenient, cost-effective, non-impeding or non-restrictive to the business operations of the parties, particularly ensuring the business secrets and reputation of the parties, etc.

What should parties pay attention to when entering into and implementing construction contracts to avoid disputes?

 4.1 Establishing the template of contract

To avoid disputes, from the beginning, both parties need to establish the template of contract with clear, specific terms, avoiding the use of vague or ambiguous terminology. Both parties must (i) clearly define the responsibilities, scope of work of both parties, (ii) ensuring any arising issues or requests must be expressed in writing, and (iii) amending the contract clearly following to the contractual procedures. Since it will be very difficult to determine responsibility based on verbal agreements or intentions but not expressed in writing or in incorrect written form.

In addition, both parties also should establish a construction contract template in accordance with legal regulations. In the case of applying Vietnamese law, the main contents of a construction contract are specified in the Law on Construction and other guiding documents (refer to Circular 02/2023/TT-BXD of the Ministry of Construction dated 03 March 2023 guiding on some contents of construction contracts). In case the contract has foreign elements, the parties can refer to the FIDIC contract template. This type of contract is compiled by the International Federation of Consulting Engineers. This is the most commonly used standard form of international construction and engineering contracts and is widely accepted in the world. They are often used in international projects where parties speak different languages, have different nationalities, and come from different legal jurisdictions.

For contracts governed by Vietnamese law, the primary provisions for construction contracts are specified in construction laws and their related implementing documents. You can refer to the Ministry of Construction’s Circular No. 02/2023/TT-BXD, dated March 3, 2023, which provides guidance on some aspects of construction contracts. In the case of contracts involving foreign elements, parties can also consider using internationally accepted contract forms such as FIDIC, developed by the International Federation of Consulting Engineers. These are widely recognized in the construction industry for both large and small international investment projects, especially when dealing with parties from different countries, languages, and legal jurisdictions.

4.2 Establishing a Dispute Resolution Board to specifically support the resolution of disputes that may arise during project implementation, avoiding disputes from being escalated to arbitration or court proceedings.

4.3 Creating software for records management, record incoming and outgoing documents or dispatches, ensuring all documents are adequately addressed and responded to. Although document management is rarely mentioned, it is in fact extremely important to protect the interests of each party.

4.4 Fulfilling all obligations specified in the contract. In case a conflict arises, the parties should negotiate on the basis of respecting the legitimate rights and interests of each party.

 

[1] Article 140.1 Law on Construction 2014