General rule of late payment interest in Vietnam
In Vietnam, overdue payment often comes along with late payment interest (LPI). As a rule of thumb, under Articles 357 and 468 of the Civil Code 2015, an obligor failing to pay timely is subject to paying LPI as agreed between the contractual parties; unless otherwise provided by other relevant laws, this LPI is capped at 20% per annum or 1.667% per month.
Caps on LPI
The words “unless otherwise provided by other relevant laws” under the general rule of the Civil Code 2015 opens ways to many roads. Bank lending is subject to the Law on Credit Institutions 2010 and its implementation provisions (LCI 2010). Commercial contracts in general follow the provisions of the Law on Commerce 2005 (LoC 2005). Some commercial contracts in specific sectors, such as construction contract in certain cases, follow their own regulations.
Regarding loans extended by credit institutions
Article 91.2 of LCI 2010 reads, “credit institution and its customer may agree on the interest rate and other applicable fees for the credit extension within the former’s banking operations in accordance with the law.”
The phrase “in accordance with the law” is interpreted (and somewhat narrowed down) by the Council of Judges of the People’s Supreme Court (Supreme COJ). Under Resolution01/2019/NQ-HDTP (Resolution 01), the Supreme COJ guide, “With regard to disputes on credit agreements, to determine the interests and interest rates, the courts shall rely on the LCI 2010 and its implementing regulations to resolve, without applying the provisions on caps for interest rates under both the Civil Code 2005 and the Civil Code 2015.”
The Supreme COJ’s guide means loans extended by credit institutions are not subject to the LPI caps under the Civil Code 2015. Specifically, the LPI cap of 20% under the Civil Code 2015 does not apply to the LPI on overdue payments in loan agreements extended by banks. Instead, LPI caps under loans are governed by Circular 39/2016/TT-NHNN (Circular 39). Particularly,
a) Per Article 13.4(c), Circular 39: failure to make payments for the loan principle shall subject the borrower to LPI. This LPI can be as agreed between the parties but may not exceed 150% of the interest on the loan principle.
b) Per Article 13.4(b), Circular 39: failure to make payments for the loan interest may give rise to an LPI which is capped at 10% per annum.
Regarding construction contracts
According to Article 43.2 of Decree 37/2015 (Decree 37), the rate for LPI shall be the rates applied to overdue payment as published by the bank where the contractor opened its account. Of note, this only applies to construction contracts in projects that involve public investment and non-public State investment. For construction contracts on PPP projects, Decree 37 mandates that the client's late payment will be subject to LPI at the rate used by the credit institution where the contractor has opened its account. This appears to establish a mandatory LPI rate based on contractor’s bank regulations rather than allowing the parties to negotiate a mutually agreed-upon rate. Consequently, any cap on the LPI rate will also be subject to the regulations of the contractor's bank.
Regarding other commercial contracts and civil contracts involving payment obligations
In general, commercial contracts, which involve profit-making activities between individuals or organizations, are subject to the provisions of LoC 2005, except for those in specialized industries such as construction and banking.
Article 306 of the LoC 2005 provides, “Where a contract-breaching party delays making payment for goods or payment of service charges and other reasonable fees, the aggrieved party may claim an interest on such delayed payment at the average interest rate applicable to overdue debts in the market at the time of payment for the delayed period, unless otherwise agreed or provided for by law”.
This provision seems to suggest that the parties may agree on a different rate or the Vietnamese laws may provide an alternative rate that overrides the default rule on LPI. The question now arises as to whether LPI in contracts governed by LoC 2005 should also be subject to the 20% cap provided under the Civil Code 2015?
In this regard, Article 4.3 of the Civil Code 2015 provides a helpful mechanism, stating that the provisions of the Civil Code 2015 should apply in the absence of relevant laws or where such laws contradict the principles of the recognition and respect for, protection, and guarantee of civil rights enshrined in the Civil Code 2015.
As the LoC 2005 does not provide for a capped LPI rate in commercial contracts, similar to other civil transactions, the provisions of Articles 357 and 468 of the Civil Code 2015 should apply.
As the result, LPI rate may be agreed by the parties but may not exceed the maximum interest rate provided under Article 468.1 of the 2015 Civil Code, i.e., 20% per annum, or approximately 1.667% per month. It is noteworthy that not all contracts governed by the Civil Code 2015 are subject to this same limit. In particular, there is a distinct cap that applies to loan agreements between non-credit institution entities, as detailed below.
Non-bank lending with interests
Parties not being credit institutions may also enter into loan agreements that incur interests on the loan principle. In this case, the calculation will differ somewhat, with the cap interest rate of 20% per annum no longer applies directly.
Similar to lending from credit institutions, borrowing between non-bank entities which incurs interests comprises of repayment obligations on loan principle and interest on loan principle.
Under Article 466.5 of the Civil Code2015, failure to fulfill any of the abovementioned obligations shall give rise to LPI. Different mechanisms and caps, however, will apply to these LPIs. Accordingly,
a) With regard to the loan principle, the LPI rate shall be 150% of the borrowing interest rate, but in no case shall exceed 150% of the cap interest rates tipulated by Article 468.1 of the Civil Code 2015 and Article 5.2(c) of Resolution 01. As a result, the LPI on overdue payment of loan principle currently may be up to 30% per annum.
b) For the interests on the loan principle, if the borrower fails to repay interests on the loan principle, the LPI rate shall be 50% of the cap interest rate stipulated under Article 468.1 of the Civil Code, i.e., 10% per annum.
Payments other than loan interests: a way to manage LPI caps?
For lending transactions where borrowers do not meet the bank’s lending standards, the non-performing risks are generally higher on the lenders and this should justify for the needs to heighten loan interests. Given the caps of LPI, it is necessary to help manage with legal compliance to help achieve the business justification.
Lending business involves many works, including attracting and arranging borrowers, assessing borrower’s creditability, processing the lending transaction, managing the performance of the loan transaction, and debt management. These works can be places for payments other than loan interest, and are payable by borrowers. But, in some aspect, these works could be seen as interrelated and for the purpose of the lending transaction; thus, those payments other than loan interest should be properly structured and crafted, to manage the risks of them being deemed as a circumvention of LPI caps.
* Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.