2022 Construction Contract Violation Penalties

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Penalties Imposed for Breaching Construction Contracts

1. What is a construction contract? What are the penalties for violating a construction contract?

2. Penalties for violating construction contracts

3. Compensation for damages incurred when breaching a contract

The current penalties for construction contract violations are causing significant interest due to unclear legal regulations, posing challenges in implementation. Please read on for detailed information.

Typically, construction contracts explicitly stipulate rewards and penalties for any violations. However, for clearer understanding of construction contract violation penalties, readers can refer to the following article by Mytour.

Penalties Imposed for Breaching Construction Contracts

Article Contents:
1. What is a construction contract? What are the penalties for violating a construction contract?
2. Penalties for violating a construction contract.
3. Compensation for damages incurred when breaching a contract.

1. What is a construction contract? What are the penalties for violating a construction contract?

- Article 1, Article 138 of the 2014 Construction Law affirms that a construction contract is a civil contract. This is an agreement between the contractor and the subcontractor regarding the execution of part or all of the work in construction investment activities. The construction contract must be agreed upon in writing.

- Based on the nature and content of the work performed, there are the following types of construction contracts:

+ Construction consulting contract;
+ Construction project execution contract;
+ Contract for supplying equipment for installation into construction works;
+ Design - procurement - construction execution contract, turnkey contract;
+ Other construction contracts.

- Penalty for violating a construction contract is when the parties agree or as stipulated by law, one of the two parties in the construction contract must pay a fine for breaching the obligations under the contract.

In addition, you can also refer to violations of labor contracts when resigning here to avoid any issues.

Reference: What constitutes a breach of a labor contract when resigning?

2. Penalties for violating construction contracts

2.1 For construction contracts using State funds

Article 1, Article 2 of the 2014 Construction Law stipulates:

- Penalties for construction contracts must be agreed upon by the parties and recorded in the contract;
- For construction contracts using State funds, the penalty for the contract shall not exceed 12% of the value of the contract portion violated.

=> Penalties for breaching construction contracts using State funds will be determined by the parties themselves.

The maximum penalty is 12% of the value of the violated contract portion.

Example

Company A signed a construction consulting contract with Company B, with 03 appendices to be fulfilled. Appendix 1 is valued at 350 billion VND, Appendix 2 is valued at 500 billion VND, and Appendix 3 is valued at 450 billion VND.

The two parties agreed that if Company B (the consulting company) breaches the consultancy completion deadline as agreed, it will be penalized. However, they did not agree on the specific penalty percentage. When Company B violates the consultancy completion deadline for the construction part in Appendix 3, how is the penalty calculated?

=> In this case, since the two parties have not agreed specifically on the penalty for breaching the contract, the highest penalty that can be applied is 12% of the value of the violated contract portion (not the entire contract value).

According to the provided information, the violated contract portion is the part in Appendix 3, so the penalty for the breach is 12% of the value of Appendix 3 = 12% x 450 billion VND.

2.2 For construction contracts not using State funds

- For this type of contract, the penalty for breaching the contract must be agreed upon by the parties and recorded in the contract.

- However, the 2014 Construction Law and Decree 37/2015/NĐ-CP do not specify the maximum penalty that can be applied.

- And Article 7, Clause 6 of Decree 37 states: Matters not regulated in this Decree, the parties must comply with the provisions of related laws to implement.

=> It can be seen that this is a limitation, a drawback in the legal regulations, causing difficulties in implementation. On this issue, our standpoint is as follows:

- Because the Construction Law, Decree 37 do not have specific provisions, it is necessary to apply relevant legal provisions regarding construction contracts for implementation. Therefore, consideration should be given to which related laws regulate construction contracts?

+ Construction contracts are subject to the regulation of the Construction Law.
+ According to Article 1, Article 138 of the 2014 Construction Law, construction contracts are civil contracts => Therefore, they are subject to the Civil Code.
+ However, although there are no specific provisions, the nature of construction contracts can also be commercial contracts, subject to the Commercial Law: Because most construction contracts are established between one or both parties being traders, the purpose of the contract is profit.

=> According to the definition above, in this case, construction contracts are subject to the Civil Code, the Construction Law, and the Commercial Law. Among them, the Construction Law and the Commercial Law are specialized documents.

If specialized documents do not have specific provisions on a particular issue, the Civil Code applies.

- Article 301 of the 2005 Commercial Law stipulates that the maximum penalty for a violation is not more than 8% of the value of the contractual obligation violated.

Therefore, the content regarding penalties for construction contract violations not using State funds will follow the provisions of the Commercial Law.

=> Thus, in our opinion, the penalty for breaching construction contracts not using state funds is agreed upon by the parties.

+ The maximum penalty is 8% of the value of the violated contract portion.
+ This content needs to be specifically regulated by competent authorities for easier practical application.

3. Compensation for damages incurred when breaching a contract

- According to Section 146 of the 2014 Construction Law, apart from penalties for contract violations, the violating party is also obliged to compensate damages to the other party, or third party (if applicable) as stipulated. Accordingly:

- The contractor must compensate damages to the contracting party in the following cases:

When the quality of work is not ensured as agreed upon or when the completion period is extended due to faults of the contracting party;

Due to reasons attributable to the contracting party resulting in damages to persons and property during the warranty period.

- The contracting party must compensate the contractor in the following cases:

+ Due to reasons attributable to the contracting party leading to disruptions, delayed progress, encountering risks, coordinating machinery, equipment, materials, and maintaining inventory for the contractor;
+ The contracting party provides documents, necessary conditions for work not in accordance with agreements, causing the contractor to rework, suspend, or modify the work;
+ The contracting party supplies raw materials, equipment, other requirements not within the agreed timeframe and requirements as per the contract;
+ The contracting party delays payments as per the agreement in the contract.

Here is all the information about penalties for construction contract violations that we provide.

The content is developed by the Mytour team with the aim of customer care and solely to inspire travel experiences. We do not take responsibility for or provide advice for other purposes.

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Frequently Asked Questions

What are the penalties for violating a construction contract?

Penalties for violating a construction contract can vary based on the agreement between the parties involved. Typically, for state-funded contracts, the penalty may not exceed 12% of the violated contract value, while for non-state contracts, it is determined by the parties, but can be up to 8%.

How are penalties for construction contracts determined under state regulations?

Under the 2014 Construction Law, penalties for construction contracts using state funds must be mutually agreed upon and documented in the contract. The maximum penalty allowed is 12% of the value of the portion violated.

What constitutes a breach of a construction contract?

A breach of a construction contract occurs when one party fails to fulfill their obligations as specified in the contract. This can include delays, poor quality of work, or failure to provide necessary documentation, which can lead to penalties and compensation claims.

Are there differences in penalties for state and non-state construction contracts?

Yes, there are significant differences. State contracts have a capped penalty of 12%, while non-state contracts do not have a specified maximum, though parties generally agree to penalties, which can be up to 8%.

What compensation is required when breaching a construction contract?

When breaching a construction contract, the violating party must compensate for damages caused to the other party or any third party affected. This includes costs related to delays, poor quality work, and other contract-related failures.