CASE LAW NO. 09/2016/AL on Dispute arising from a contract for the sale of goods

CASE LAW NO. 09/2016/AL

The Cassation Decision No. 07/2013/KDTM-GĐT dated March 15^th, 2013, of the Judicial Council of the Supreme People’s Court concerning the business and commercial case “Dispute arising from a contract for the sale of goods” in Bắc Ninh Province

Approved by the Judicial Council of the Supreme People’s Court on  October 17^th, 2016, and published under Decision No. 698/QĐ-CA on October 17^th, 2016, by the Chief Justice of the Supreme People’s Court.

Source of the Case Law:

The Cassation Decision No. 07/2013/KDTM-GĐT dated March 15^th, 2013, of the Judicial Council of the Supreme People’s Court concerning the business and commercial case “Dispute over a contract for the sale of goods” in Bắc Ninh Province between the plaintiff, Việt Ý Steel Joint Stock Company, and the defendant, Hưng Yên Metallurgy Joint Stock Company; with interested parties being Ms. Lê Thị Ngọc Lan and Mr. Lê Văn Dũng.

Location of the Case Law’s content:

Paragraphs 4, 5, and 6, Section 2 of the “Court’s Opinion” section.

Summary of the Case Law:

– Case Background 1:

The contract for the sale of goods was breached because the seller either did not deliver or did not deliver enough goods to the buyer, resulting in the seller’s obligation to return the advance payment along with interest for late payment.

– Legal Resolution 1:

In this scenario, the interest payable for the delayed payment is determined by the average overdue debt interest rate prevalent in the market. This rate is equivalent to the average rate offered by at least three local banks during the first-instance trial unless the parties have agreed otherwise or the law stipulates a different calculation method.

– Case Background 2:

A contract for the sale of goods includes provisions for penalties in case of breach and compensation for damages resulting from such a breach.

– Legal Resolution 2:

In this scenario, the party liable for paying the contractual penalties and damages is not obligated to pay additional interest on those amounts.

Relevant Legal Provisions:

– Articles 34, 37, Clause 3 of Article 297, and Articles 300, 301, 302, 306, and 307 of the Commercial Law 2005;

– Articles 307, 422, 474, and 476 of the Civil Code 2005.

Keywords:

“Contract for the sale of goods”; “Breach of contract”; “Return of advance payment”; “Interest for late payment”; “Overdue debt interest rate”; “Average market overdue debt interest rate”; “Penalty for breach”; “Compensation for damages.”

CASE DETAILS

According to the lawsuit filed on July 7^th, 2007, the application to amend the lawsuit on October 10^th, 2007, the documents in the case file, and the presentation of the plaintiff’s representative:

On October 3^rd, 2006, Việt Ý Steel Joint Stock Company (hereinafter referred to as Việt Ý Steel Company) signed Economic Contract No. 03/2006-HĐKT with Hưng Yên Metallurgy Joint Stock Company (hereinafter referred to as Hưng Yên Metallurgy Company); represented by Mr. Nguyễn Văn Tỉnh, Deputy General Director, authorized by the General Director’s Power of Attorney No. 621 dated September 10^th, 2005. Under this contract, Việt Ý Steel Company (Party A) agreed to purchase continuous cast steel billets CTS-5SP/PS in bulk, according to GOST 380-94 standards from Hưng Yên Metallurgy Company (Party B) with a quantity of 3,000 tons +/- 5%, at a unit price of 6,750,000 VND per ton; delivery time from October 25^th to October 31^st, 2006; total contract value of 20,250,000,000 VND +/- 5%.

On October 4^th, 2006, Việt Ý Steel Company transferred the full amount of 20,250,000,000 VND to Hưng Yên Metallurgy Company through a bank transfer via the Vietcombank – Hải Dương Branch. Hưng Yên Metallurgy Company delivered a total of 2,992.820 tons of steel billets to Việt Ý Steel Company, leaving a shortfall of 7.180 tons, equivalent to 48,465,000 VND.

On December 20^th, 2006, the two parties signed another contract, No. 05/2006-HĐKT. The representative for Hưng Yên Metallurgy Company in this contract was Mr. Lê Văn Mạnh, Deputy General Director (authorized by Power of Attorney No. 1296/UQ/HYM of the General Director).

According to this contract, Việt Ý Steel Company agreed to purchase 5,000 tons of steel billets (same standards and quality as in Contract No. 03), at a unit price of 7,290,000 VND per ton (including VAT and transportation costs). The total contract value was 36,450,000,000 VND +/- 5%; delivery time from January 18^th, 2007, to January 30^th, 2007; Việt Ý Steel Company would advance 500,000,000 VND to Hưng Yên Metallurgy Company immediately after signing the contract; the remaining amount would be paid in two installments after Việt Ý Steel Company received the goods. The contract also stipulated that Hưng Yên Metallurgy Company would be penalized 2% of the contract value if the goods delivered were not up to the specified standards or were not delivered at all.

According to the representative of Việt Ý Steel Company, on December 21^st, 2006, Việt Ý Steel Company transferred 500,000,000 VND as an advance payment to Hưng Yên Metallurgy Company, but this contract was not fulfilled by Hưng Yên Metallurgy Company without justification or explanation.

On the same day, December 20^th, 2006, Việt Ý Steel Company also signed Contract No. 06/2006 with Hưng Yên Metallurgy Company (represented by Mr. Lê Văn Mạnh, Deputy General Director) to purchase 3,000 tons of steel billets from Hưng Yên Metallurgy Company at a unit price of 7,200,000 VND per ton. The total contract value was 21,600,000,000 VND; delivery time from January 5^th, 2007, to January 15^th, 2007.

On December 22^nd, 2006, Việt Ý Steel Company transferred the full amount of 21,600,000,000 VND to Hưng Yên Metallurgy Company via Techcombank – Hưng Yên Branch, but Hưng Yên Metallurgy Company only delivered 2,989.890 tons of steel billets to Việt Ý Steel Company, leaving a shortfall of 7.640 tons, equivalent to 55,008,000 VND.

On February 1^st, 2007, Việt Ý Steel Company signed Contract No. 01/2007 with Hưng Yên Metallurgy Company (represented by Mr. Lê Văn Mạnh, Deputy General Director) to purchase 5,000 tons of steel billets from Hưng Yên Metallurgy Company at a unit price of 7,800,000 VND per ton. The total contract value was 39,000,000,000 VND +/- 5%. During the contract performance, Việt Ý Steel Company transferred 37,710,000,000 VND to Hưng Yên Metallurgy Company, and Hưng Yên Metallurgy Company delivered 3,906.390 tons of steel billets, worth 30,469,842,000 VND. The remaining amount of steel billets that Hưng Yên Metallurgy Company owed to Việt Ý Steel Company was 928.25538 tons, equivalent to 7,240,158,000 VND.

Việt Ý Steel Company sent multiple official letters requesting Hưng Yên Metallurgy Company to perform the contract, but Hưng Yên Metallurgy Company did not comply, forcing Việt Ý Steel Company to purchase steel billets from other manufacturers to ensure its production and business operations.

Due to Hưng Yên Metallurgy Company’s breach of the contracts signed between the two parties, Việt Ý Steel Corporation initiated a lawsuit demanding that Hưng Yên Metallurgy Company be held accountable for payment and compensation for all damages arising from the breach of delivery obligations under Contracts No. 03/2006, 05/2006, 06/2006, and 01/2007, amounting to VND 12,874,298,683 at the time of filing. This total includes VND 11,181,662,503 for the goods corresponding to 1,777,020 kg of steel billets, VND 1,316,490,480 for penalty fines, and VND 376,145,700 for overdue interest.

At the first-instance trial on September 3^rd, 2009, the plaintiff’s representative requested that Hưng Yên Metallurgy Company pay Việt Ý Steel Corporation a total of VND 28,145,956,647 as of the first-instance trial date, September 3^rd, 2009, and be required to issue VAT invoices for the quantities of goods delivered under Contract No. 06/2006 amounting to VND 21,544,992,000 and Contract No. 01/2007 amounting to VND 30,469,842,000.

In the testimonies, reconciliation records, and trial minutes, the defendant’s representative stated:

At the time when Hưng Yên Metallurgy Company signed the above contracts with Việt Ý Steel Corporation, Mrs. Lê Thị Ngọc Lan was still the General Director, and her husband, Mr. Lê Văn Dũng, was a business advisor. On March 22^nd, 2007, Mrs. Lê Thị Ngọc Lan transferred all her shares in Hưng Yên Metallurgy Company to Mrs. Nguyễn Thị Toàn, who assumed the position of Acting General Director from April 2^nd, 2007.

According to the marital property division agreement between Mr. Lê Văn Dũng and Mrs. Lê Thị Ngọc Lan, and a written agreement assuming responsibility for company debts, Mr. Lê Văn Dũng agreed to be responsible for all debts of Hưng Yên Metallurgy Company established before April 1^st, 2007. Thus, Hưng Yên Metallurgy Company disputed liability for the debts related to Contracts No. 03/2006, 05/2006, 06/2006, and 01/2007, asserting that the responsibility belonged to Mr. Dũng, Mrs. Lan, and the former management of Hưng Yên Metallurgy Company. Hưng Yên Metallurgy Company is working with Mr. Dũng to either have him directly pay Việt Ý Steel Corporation or reimburse Hưng Yên Metallurgy Company to settle the debt with Việt Ý Steel Corporation.

Hưng Yên Metallurgy Company requested the Court to review and evaluate the legal validity of Contracts No. 03/2006, 05/2006, 06/2006, and 01/2007 signed by Mr. Tỉnh and Mr. Mạnh on behalf of Hưng Yên Metallurgy Company with Việt Ý Steel Corporation in this case, and to consider the responsibility of Mr. Dũng, Mr. Mạnh, Mr. Tỉnh, and Mrs. Lan for the debts claimed by Việt Ý Steel Corporation.

At the 1^st first-instance trial session, Hưng Yên Metallurgy Company generally agreed with the contract performance figures provided by Việt Ý Steel Corporation, but disputed the financial figures as the debts had not been reconciled; the interest on the contracts needed recalculating, and they disagreed with the claim under Contract No. 05 because the parties had agreed to cancel it and transfer the VND 500,000,000 prepayment to Contract No. 01/2007, meaning there was no violation of Contract No. 05 by Hưng Yên Metallurgy Company.

Mrs. Lê Thị Ngọc Lan, a interested party, stated that in early 2004, she and her husband purchased shares from Mr. Nguyễn Lương Tuấn and Mr. Nguyễn Văn Thành in Hưng Yên Metallurgy Company, which was still under construction. Consequently, Mrs. Lan became the General Director and Chairman of the Board, while her husband, Mr. Dũng, acted as a business advisor.

Due to marital conflicts, on September 5^th, 2005, Mrs. Lan and Mr. Dũng agreed to a marital property division at Hồng Hà Law Office (Hà Nội Bar Association). Under this agreement, Mrs. Lan retained ownership of the house at 250 Bà Triệu Street, while Mr. Dũng received the VND 48 billion worth of shares in Hưng Yên Metallurgy Company, along with the responsibility to settle all debts incurred during the construction of the Hưng Tài Steel Plant (a part of Hưng Yên Metallurgy Company).

Despite transferring the shares to Mr. Dũng, Mrs. Lan continued as General Director but authorized Mr. Tỉnh and later Mr. Mạnh to manage the company. Although not holding shares, Mrs. Lan remained nominally in charge, while actual operations were conducted by Mr. Dũng, Mr. Tỉnh, and Mr. Mạnh. In July 2007, she handed over outstanding loans and the General Director role to Mrs. Toàn. Mrs. Lan confirmed that contracts with Việt Ý Steel Corporation signed by Mr. Mạnh and Mr. Tỉnh were under her regular authorization. However, after handing over to Mrs. Toàn, the responsibility for the debt to Việt Ý Steel Corporation did not lie with her.

Mr. Lê Văn Dũng, another interested party, stated that although he was allocated shares in Hưng Yên Metallurgy Company through the marital property division, his role was limited to being a business advisor without authority to sign contracts or manage finances. Therefore, he had no responsibility for the debts. He disagreed with Hưng Yên Metallurgy Company’s claim that he should be liable, asserting that the company and Mrs. Toàn should be responsible.

He confirmed signing an agreement with Mrs. Nguyễn Thị Toàn on April 1^st, 2007, which outlined debt reconciliation for internal purposes only, without formal share transfer contracts between him and Mrs. Toàn. He was unaware of any share transfer between Mrs. Lan and Mrs. Toàn. Legally, Hưng Yên Metallurgy Company, as a legal entity, should bear the liability for contractual obligations to Việt Ý Steel Corporation. Mr. Dũng requested to be excused from attending all court sessions.

In the Business and Commercial Judgment No. 01/2007/KDTM-ST dated November 14^th, 2007, the People’s Court of Bắc Ninh Province ruled: “Order Hưng Yên Metallurgy Joint Stock Company to pay to Việt Ý Steel Joint Stock Company the total amount of the four contracts: No. 03 dated October 3^rd, 2006; No. 05 dated December 20^th, 2006; No. 06 dated December 20^th, 2006; and No. 01 dated February 1^st, 2007, which is: VND 24,674,428,500.” Additionally, the court of first-instance made decisions regarding court fees and the right to appeal for the litigants.

On November 27^th, 2007, Hưng Yên Metallurgy Joint Stock Company filed an appeal.

In the Appellate Business and Commercial Judgment No. 120/2008/KDTM-PT dated June 18^th, 2008, the Appellate Court of the Supreme People’s Court in Hà Nội decided: “To vacate the First-instance Business and Commercial Judgment No. 01/2007/KDTM-ST dated November 14^th, 2007 of the People’s Court of Bắc Ninh Province. Remand the case file to the People’s Court of Bắc Ninh Province to re-examine the case according to legal provisions.”

The reason was that the court of first-instance did not take statements from Ms. Lan, Mr. Dũng, Mrs. Toàn, Mr. Tỉnh, Mr. Mạnh, and did not determine the participants in the lawsuit to clarify who is responsible for the debt to Việt Ý Steel Joint Stock Company; furthermore, documents such as, written commitments to assume the company debts, receipts by Mr. Dũng, management authorization papers for company operations… are photocopies without notarization, legal verification, or comparison with the original copy of the court of first-instance.

In the First-instance Business and Commercial Judgment No. 09/2008/KDTM-ST dated October 23^rd, 2008, the People’s Court of Bắc Ninh Province ruled: “Order Hưng Yên Metallurgy Joint Stock Company to be responsible for paying Việt Ý Steel Joint Stock Company the amount of the 04 economic contracts: Contract No. 03/2006 dated October 3^rd, 2006; Contract No. 05/2006 dated December 20^th, 2006; Contract No. 06/2006 dated December 20^th, 2006; and Contract No. 01/2007 dated February 1^st, 2007, totaling VND 31,902,035,179.56.”

On November 5^th, 2008, Hưng Yên Metallurgy Joint Stock Company filed an appeal.

In the Appellate Business and Commercial Judgment No. 32/2009/KDTM-PT dated February 19^th, 2009, the Appellate Court of the Supreme People’s Court in Hà Nội ruled: “1. Vacate the First-instance Business and Commercial Judgment No. 09/2008/KDTM-ST dated October 23^rd, 2008 of the People’s Court of Bắc Ninh Province regarding the “Dispute arising from a contract for the sale of goods” between Hưng Yên Metallurgy Joint Stock Company and Việt Ý Steel Joint Stock Company. 2. Remand the case file to the court of first-instance for re-examination.”

The reason was that General Director Đinh Văn Vì only filed a claim against Hưng Yên Metallurgy Joint Stock Company for VND 12,874,298,683, but the authorized representative continuously changed and supplemented claims beyond the scope of the lawsuit, violating Article 2, Clause 164 of the Civil Procedure Code and Resolution No. 02/2006/NQ-HDTP dated May 12, 2006 of the Council of Judges of the Supreme People’s Court. All these amended claims were not in compliance with the law; therefore, the Appellate Court accepted all the claims made by the representative, constituting serious procedural violations, and thus, the Appellate Court did not review the appeal on the merits of Hưng Yên Metallurgy Joint Stock Company.

In the First-instance Business and Commercial Judgment No. 18/2009/KDTM-ST dated September 3^rd, 2009, the People’s Court of Bắc Ninh Province ruled: “1. Order Hưng Yên Metallurgy Joint Stock Company to be responsible for paying Việt Ý Steel Joint Stock Company the amount of the 04 economic contracts: Contract No. 03/2006 dated October 3^rd, 2006; Contract No. 05/2006 dated December 20^th, 2006; Contract No. 06/2006 dated December 20^th, 2006; and Contract No. 01/2007 dated February 1^st, 2007, totaling VND 28,145,956,647 and to issue value-added tax invoices for Việt Ý Steel Joint Stock Company for 2 contracts: Contract No. 06/2006 corresponding to the amount of goods of VND 21,544,992,000 and Contract No. 01/2007 corresponding to the amount of goods of VND 30,469,842,000.”

Additionally, the court of first-instance made decisions regarding court fees, execution of judgments, and the right to appeal for the litigants according to legal provisions.

On September 23^rd, 2009, Hưng Yên Metallurgy Joint Stock Company filed an appeal.

In the Appellate Business and Commercial Judgment No. 63/KDTM-PT dated April 5^th, 2010, the Appellate Court of the Supreme People’s Court in Hà Nội ruled: “Vacate the First-instance Business and Commercial Judgment No. 18/2009/KDTM-ST dated September 3^rd, 2009 of the People’s Court of Bắc Ninh Province. Remand the case file to the People’s Court of Bắc Ninh Province to re-examine according to legal provisions.”

On July 25^th, 2010, the People’s Court of Bắc Ninh Province issued Document No. 110/2010/CV-TA requesting the Chief Justice of the Supreme People’s Court to review the appellate judgment under the cassation procedure.

In the Appeal Decision No. 17/2012/KDTM-KN dated June 25^th, 2012, the Chief Justice of the Supreme People’s Court requested the Judicial Council of the Supreme People’s Court to review the case under the cassation procedure in order to vacate the Appellate Business and Commercial Judgment No. 63/KDTM-PT dated April 5^th, 2010 of the Appellate Court of the Supreme People’s Court in Hà Nội; remand the case file to the Appellate Court of the Supreme People’s Court in Hà Nội for re-trial in accordance with legal provisions.

During the cassation trial, the representative of the Supreme People’s Procuracy agreed with the appeal of the Chief Justice of the Supreme People’s Court.

COURT’S OPINION:

1. From October 2006 to February 2007, Việt ÝSteel Joint Stock Company and Hưng Yên MetallurgyJoint Stock Company signed 04 economic contracts (Contract No. 03/2006 dated October 3^rd, 2006; Contract No. 05/2006, Contract No. 06/2006 dated December 20^th, 2006, and Contract No. 01/2007 dated February 1^st, 2007).

At the time of signing the contracts, Mrs. Lê Thị Ngọc Lan was the legal representative on behalf of Hưng Yên Metallurgy Joint Stock Company (based on the Certificate of Business Registration, 5^th Amendment, dated August 12^th, 2005 and 6^th Amendment dated July 6^th, 2007 of Hưng Yên Metallurgy Joint Stock Company and Decision on Amendment of Business Registration Content No. 140/QD-HCDC dated July 2^nd, 2007 of Hưng Yên Metallurgy Joint Stock Company).

According to the Power of Attorney No. 621/UQ-KKHY dated September 10^th, 2005, Mrs. Lan had “1. Authorize the management and administration of Hưng Yên Metallurgy Joint Stock Company to Mr. Nguyễn Văn Tỉnh. 2. Mr. Nguyễn Văn Tỉnh is responsible for: a/ Representing the Company in relations with banks, organizations, individuals, and relevant agencies to ensure the normal operation of the company; b/ Acting on behalf of the Company to perform civil, economic, and commercial transactions within the scope of the Company’s business operation…” On November 20^th, 2006, Mrs. Lan issued Power of Attorney No. 1296/UQ/HYM authorizing the management and administration of the Company to Mr. Lê Văn Mạnh (the content of the authorization is similar to the authorization for Mr. Tỉnh).

The fact that Ms. Lan issued the above power of attorney to Mr. Nguyễn Văn Tỉnh and Mr. Lê Văn Mạnh (who were Deputy General Directors of the Company) to sign economic contracts is entirely legal. Mr. Tỉnh and Mr. Mạnh signed the contracts on behalf of the legal entity, not as individuals, therefore they are not the interested parties this case. Thus, it cannot be determined that Mr. Tỉnh and Mr. Mạnh are interested parties in this case, as requested by the defendant and as stated by the Appellate Court.

The Appellate Court based its decision on the Agreement on the Division of Marital Property of Mrs. Lê Thị Ngọc Lan and Mr. Lê Văn Dũng, and the written Commitment to assume the Company debts between Mr. Lê Văn Dũng and Ms. Nguyễn Thị Toàn, to conclude that Mr. Dũng, Ms. Lan, and Ms. Toàn are interested parties in this case, which is also incorrect. That is because, the division of marital property between Mr. Lê Văn Dũng and Ms. Lê Thị Ngọc Lan, and the agreement between Ms. Nguyễn Thị Toàn and Mr. Lê Văn Dũng regarding the responsibility for paying the company debts are internal matters of Hưng Yên Metallurgy Joint Stock Company.

The commitment to assume the company debts between Mr. Dũng and Mrs. Toàn has not been agreed upon by Việt Ý Steel Company, which is the obligee. According to Article 315, Clause 1 of the 2005 Civil Code: “The obligor may transfer the civil obligation to another person if agreed by the obligee.” During the litigation process, Mr. Dũng and Ms. Lan clearly testified regarding the agreement on the division of marital property and the signing of contracts with Việt Ý Steel Company, as well as the responsibility of Hưng Yên Metallurgy Joint Stock Company in fulfilling contractual obligations. Mr. Dũng also requested not to participate in the court session.

Therefore, summoning Mr. Dũng and Ms. Lan for testimony and cross-examination as stated by the Appellate Court was unnecessary. Consequently, the Appellate Court’s decision to vacate the First-instance Business and Commercial Judgment No. 18/2009/KDTM-ST dated September 3^rd, 2009 of the People’s Court of Bắc Ninh Province, and remand the case file back to the People’s Court of Bắc Ninh Province for retrial was incorrect.

2. Regarding the merits: During the contract performance process, Việt ÝSteel Company transferred money via payment order to Hưng Yên MetallurgyJoint Stock Company; Hưng Yên Metallurgy Joint Stock Company also delivered goods to Việt Ý Steel Company (as evidenced by delivery notes bearing the seal of Hưng Yên Metallurgy Joint Stock Company). According to Article 93, Paragraph 1 of the Civil Code 2005: “A legal entity shall bear civil liability for the exercise of civil rights and obligations established and performed in its name.” Therefore, in this case, Hưng Yên Metallurgy Joint Stock Company is responsible for paying the debts to Việt Ý Steel Company.

Hưng Yên Metallurgy Joint Stock Company did not fulfill its commitment as stated in the contract (did not deliver sufficient goods to Việt Ý Steel Company), so Việt Ý Steel Company filed a lawsuit demanding that the court compel Hưng Yên Metallurgy Joint Stock Company to reimburse the amount of undelivered goods, interest due to late payment, contractual penalties, and compensation for damages (due to purchasing from another supplier at a higher cost than agreed with Hưng Yên Metallurgy Joint Stock Company), which is legally justified under Article 34, Clause 3 of Article 297, Articles 300, 301, 302, 306, and 307 of the Commercial Law 2005.

However, when deciding on the amounts that Hưng Yên Metallurgy Joint Stock Company must pay to Việt Ý Steel Company, the court of first-instance made inaccurate calculations, specifically as follows:

Regarding the advance payment without receiving goods under the 04 economic contracts, the court of first-instance accurately determined the amount that Hưng Yên Metallurgy Joint Stock Company must reimburse to Việt Ý Steel Company. However, when calculating the interest due to late payment on the aforementioned amount, although the court of first-instance applied Article 306 of the Commercial Law 2005, it did not use the average overdue interest rate in the market at the time of payment (as in the first-instance trial) for calculation, but instead applied the basic interest rate announced by the State Bank of Vietnam at the time of the first-instance trial at the request of the plaintiff to apply the overdue interest rate (which is 10.5% per annum), which is incorrect.

In this case, the court should use the average overdue interest rate of at least three local banks (Vietnam Bank for Agriculture and Rural Development, Joint Stock Commercial Bank for Foreign Trade of Vietnam, and Joint Stock Commercial Bank for Industry and Trade of Vietnam…) to recalculate the late payment interest according to the provisions of the law.

Regarding the penalty for breach of contract: the two parties agreed that Party B must bear a penalty of 2% of the confirmed order value when Party B violates one of the following cases: delivered goods not up to specified standards, or non-delivery of goods. Therefore, Hưng Yên Metallurgy Joint Stock Company, which did not deliver sufficient goods to Việt Ý Steel Company, must be penalized for breach of contract at 2% of the value of the contractual obligation violated, according to Articles 300 and 301 of the Commercial Law 2005. The court of first-instance accepted Việt Ý Steel Company’s request for a penalty for breach of contract, which is justified; however, calculating interest on the penalty amount was incorrect.

Regarding the compensation for damages: According to the presentation by the representative of Việt Ý Steel Company, this was because Hưng Yên Metallurgy Joint Stock Company breached the contract by not delivering sufficient goods. Therefore, Việt Ý Steel Company had to purchase steel billets from another manufacturer at a higher price to ensure its production and business operations. The court of first-instance only relied on the purchase contracts of steel billets that Việt Ý Steel Company signed with another manufacturer to compel Hưng Yên Metallurgy Joint Stock Company to reimburse Việt Ý Steel Company for the price difference due to purchasing at a higher cost.

However, it did not investigate whether this purchase from another manufacturer was indeed to compensate for the shortage caused by Hưng Yên Metallurgy Joint Stock Company’s failure to deliver enough goods to ensure production and business operations according to the established plan. In this matter, the court should request Việt Ý Steel Company to provide documents and evidence (such as orders from the third party, production and business plans…) to demonstrate the actual damages incurred, only then can it have grounds to compel Hưng Yên Metallurgy Joint Stock Company to pay compensation for damages accordingly.

Additionally, the court of first-instance also calculated interest on the compensation for damages, which is not in accordance with Article 302 of the Commercial Law 2005.

In light of the foregoing, pursuant to Clause 3, Article 291, Clause 3, Article 297, and Article 299 of the Civil Procedure Code (as amended and supplemented in 2011),

DECISION:

Vacate the Appellate Business and Commercial Judgment No. 63/KDTM-PT dated April 5^th, 2010 of the Supreme People’s Court’s Appellate Court in Hà Nội and First-instance Business and Commercial Judgment No. 18/2009/KDTM-ST dated September 3^rd, 2009 of the People’s Court of Bắc Ninh Province; and remand the case file to the People’s Court of Bắc Ninh Province for retrial in accordance with the law.

CONTENT OF THE CASE LAW:

“Regarding the advance payment made without receiving goods under the four economic contracts, the court of first instance accurately determined the amount that Hưng Yên Metallurgy Joint Stock Company must reimburse to Việt Ý Steel Company. However, when calculating the interest due to late payment on the aforementioned amount, the court of first instance applied Article 306 of the Commercial Law 2005 incorrectly.

Instead of using the average overdue interest rate in the market at the time of payment (as in the first instance trial), the court applied the basic interest rate announced by the State Bank of Vietnam at the time of the trial, at the plaintiff’s request, which was 10.5% per annum. This approach is incorrect. The court should have used the average overdue interest rate of at least three local banks (Vietnam Bank for Agriculture and Rural Development, Joint Stock Commercial Bank for Foreign Trade of Vietnam, and Joint Stock Commercial Bank for Industry and Trade of Vietnam…) to recalculate the late payment interest, in accordance with legal provisions.”

“The court of first instance accepted Việt Ý Steel Company’s request for a penalty for breach of contract, which is justified. However, the calculation of interest on the penalty amount was incorrect.”

“Additionally, the court of first instance calculated interest on the compensation for damages, which does not comply with Article 302 of the Commercial Law 2005.”

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