Contractor Kumho wins $1.5 million in debt trial

The Hanoi court decided in favour of Kumho, awarding compensation for the construction of Project 1A Lang Ha

Contractor hands in claim for stalling project

According to the petition filed by Kumho Industrial Co., Ltd. (South Korea), on December 17, 2011, the company signed a contract for the construction of a building located at 1A Lang Ha Street, Thanh Cong Ward, Ba Dinh District, Hanoi. The main investor of the project was Lang Ha JSC and Kumho Industrial Co., Ltd. was the main contractor.

Prior to this, the area had been used to develop the $100-million Kinh Bac Tower, which was invested by Kinh Bac City Development Holding Corporation (KBC). The former investor also signed a contract with Kumho Industrial Co., Ltd. in November 2010.

At the time KBC was deep in debts, having taken up huge loans to fund a lot of the corporation’s real estate development projects. However, experts found that many projects had been left idle a short time after being kicked off. They also expressed suspicions that the investor only tried to register projects and then transferred them to others for profit.

Regarding Project 1A Lang Ha, after signing the preliminary agreement with Kumho on December 17, 2011, the bank issued a letter of guarantee on December 28, committing to pay out Lang Ha JSC. The value of the guarantee was $14.3 million and the term of validity was 17 months.

Before 2012, it was widely believed that the defendant bank had close connections with the chairman of KBC, the well-known stock millionaire Dang Thanh Tam, who owned another commercial bank and several real estate agencies.

Three out of five board members of this bank were key leaders of KBC. According to its first quarter financial report in 2012, KBC held 26.55 million shares or an 8.85 per cent stake, which had a par value of VND265 billion (or $12.8 million), in the bank. The real estate market’s downturn in 2012 had pushed Kinh Bac into continuous losses, sparking speculations that Tam would divest some of his assets. In early September 2012, KBC announced that it no longer held stocks of the bank.

As mentioned above, by 2012—only six months after the implementation of the project—the real estate market fell into a quiet phase and the investor was mired down in a host of financial difficulties. The project was suspended and has been stalling so far.

According to the contractor Kumho, the firm had asked the owner to pay for the completed work. However, Lang Ha JSC was unable to meet its financial obligations under the contract. Kumho had no other choice but to take the case to court, requesting the bank to perform the payment obligations stipulated in the letter of guarantee.

At the time, Kumho's debt claim encountered several difficulties because the defendant was in the process of merging with another financial institution as part of the Vietnamese central bank's scheme to restructure lenders saddled with mountains of bad debts.

In 2013, the merger was successfully finalised. The new bank took over all assets and liabilities of the former one. Shareholders of both sides, meanwhile, would also be transferred to the merged bank, with all rights and responsibilities reserved.

In 2015, the case was brought to trial which was subsequently cancelled because the parties failed to agree on their statistical records of debts and late-payment penalties.

Before the second trial on August 16, 2017, Kumho and Lang Ha JSC confirmed the original loan of $1.4 million. According to calculations by Kumho, the investor had delayed its payment (from 2012 to 2017) for 1,539 days. Given the basic interest rate announced by the State Bank of Vietnam of 9 per cent per annum, Kumho requested a late payment penalty of $552,000. The total amount claimed by Kumho against the bank was $2.09 million.

Original contract lost during merger

Before Kumho's court filing, the new bank established after the merger had been repeatedly refusing to fulfil the obligations stipulated by the payment guarantee. The bank's rationale was that during the merging process it had not been handed any guarantee contract or related documents by the former bank. Also, data extraction from the information system did not find the original guarantee contract.

With regards to the documents issued by Kumho, the bank confirmed that the letter of guarantee had violated the Law on Credit Institutions. Lang Ha JSC is a subsidiary of the bank, yet the contract was not secured by collateral property nor ratified by the Board of Directors.

Kumho did not accept the above explanation as the bank’s record keeping and its personnel rearrangements were out of the company’s control. According to Kumho, the contract of guarantee was an independent transaction and Kumho only looked to the legal representative who had signed the letter of guarantee to request payment.

It is known that currently the new bank holds a 94 per cent stake in Lang Ha JSC. Thus, it is not only the guarantor, but also the main investor of the project. To some extent, it appears to be rational for the project owner to pay the contractor.

Conflict over late-payment penalty arrangements

The construction contract between Kumho and the main investor did not specify whether the late payment penalty would be payable in VND or USD. In its petition against the project owner, Kumho cited Article 305 of the Civil Code 2005 and Decision No.2868/QD-NHNN to require a late payment interest of 9 per cent per year in VND.

Lang Ha JSC did not agree with Kumho’s calculations. The investor said that the difference between VND and USD interest rates was significant. The contract value was termed in USD, so the interest rate must be calculated based on the average USD mobilisation interest rates over the years. Accordingly, the interest rate should be 3 per cent per year.

The calculation method of Lang Ha JSC was approved by the Justice Council of the Hanoi People's Court. Consequently, the total amount payable to Kumho includes a principal sum of $1.4 million and a late-payment penalty of $184,224, which is equivalent to over VND37 billion.