Cassation judgment No. 26/2013/KDTM-GDT dated august 13, 2013 regarding dispute over service contract

THE SUPREME PEOPLE’S COURT

CASSATION JUDGMENT NO. 26/2013/KDTM-GDT DATED AUGUST 13, 2013 REGARDING DISPUTE OVER SERVICE CONTRACT 

On August 13, 2013, the cassation trial was conducted at the office of the Supreme People’s Court to adjudicate the dispute over service contract between:

Petitioner:  Orange Engineering Co., Ltd;

Address: 5^th FL.Kins Tower, 25-1, Jeongja-dong, Bundang-gu, Seongnam- city, Kyungki-province, Korea; legal representative: Mr. Kang Sang Mun - CEO and authorized representative: Mr. Nguyen Van Kien; address: 79 Dao Duy Anh, ward 9, Phu Nhuan district, Ho Chi Minh City (according to the Letter of Authorization dated November 19, 2010 of CEO).

Respondent:  Phu My Development Joint Stock Company;

Address: Phu My commune, Thu Dau Mot town, Binh Duong province; legal representative: Mr. Hong Bong Chui - Director General and authorized representative: Mr. Dang Luong Giao (according to the Letter of Authorization dated February 16, 2011 of Director General).

FINDING THAT

Representation of the petitioner via the representative in the lawsuit petition dated November 19, 2010 and during the legal proceedings:                                            

On June 15, 2007, Orange Engineering Co., Ltd (hereinafter referred to as Orange Company) and Phu My Development Joint Stock Company (hereinafter referred to as Phu My Company) concluded a service contract as follows (summary of content in dispute):

Phu My Company appointed Orange Company as a provider of design service for construction project named “National Club and the Double Pigeon Golf Club” in Phu My commune, Thu Dau Mot town, Binh Duong province (the project in which Phu My Company acts as the investor); scope of work: according to the “Scope of Work” enclosed with the Contract, including: basic design (including plan design and basic design) and construction design (including civil works, CD golf courses and ancillary equipment); service duration: 3 months after the contract date; service charge: KRW 400,000,000 (Korean won) exclusive of VAT and any tax payable in Vietnam; payment in installments: 1) first installment: KRW 120,000,000 within 7 days after contract date, 2) second installment: KRW 120,000,000 based on the acceptance of the work plan, 3) third installment: KRW 160,000,000 based on the acceptance of CD and detail drawing (Article 4); inspection result: 1) the service shall only be accepted when the customer approves it, 2) the customer shall complete the inspection within 10 days from the day on which the design product is received from the designer and give the inspection result thereafter. If there is no further notice, the inspection shall be considered as approving the service, 3) In order to perform the work in an honest way, the designer shall regularly report its work performance to the customer. Upon any request for modification, the designer shall promptly abide by that request; if such modification leads to an extension of the contract, the customer and designer may amend it by mutual agreement (Article 12); handover and receipt of design product: 1) If the designer has completed the work and has notified the customer of the handover, the customer shall, in case of no particular reason, complete the inspection, 2) If the inspection result is “failed”, the designer shall immediately revise it and request the double check (Article 13); termination of contract by customer: the customer may terminate or cancel any or all of the contract if any of following circumstances occurs: a) the designer fails to perform the work after conclusion of the contract without justifiable reasons, 2) the designer admits that it is completely incapable of completing the work within the given time frame, which is not related to the customer’s responsibility or the designer has not completed the work when the time for completion is due, 3) the designer admits that the purpose of contract cannot be achieved because the designer violated conditions of the contract (Article 14); termination or cancellation of contract due to change in scope of work: 1) upon occurrence of lawful reasons, the customer may terminate or cancel the contract, 2) within 7 days from the ending of the contract pursuant to Clause 1 Article 16 of the contract, the customer has to pay an amount equivalent to the portion of work (Article 16)…

After concluding the contract, Orange Company promptly initiated performance of works under the contract and Phu My Company paid the first and second installments, totaling KRW 240,000,000 as committed.

On September 30, 2007, Orange Company completed and handed CD and the set of detail drawing of the project over to Phu My Company in conformity with the volume and progress as stated in the contract. In accordance with the contract, Phu My Company is obliged to inspect and give an inspection result within 10 days since the handover date; however, Orange Company did not receive any response from Phu My Company in connection with CD and the set of detail drawing. It means that Phu My Company accepted the service provided by Orange Company without any claim. Orange Company completed the work under the contract and Phu My Company used the set of detail drawing of the project provided by Orange Company to apply for a construction permit and has initiated the construction in fact.

Phu My Company failed to pay the third installment of KRW 160,000,000 (equivalent to USD 141,969) as committed, thus, Orange Company filed a lawsuit requesting termination of contract and forcing Phu My Company to repay the amount of USD 141,969 and interest on delayed payment calculated from September 30, 2007 to December 31, 2010: USD 141,969 x 39 months x 12%/12 months = USD 55,367.

Representation of the respondent through the representative: On June 15, 2007, Orange Company and Phu My Company concluded a design service contract as presented by the petitioner’s representative. In September 2007, Orange Company presented the first sketch. However, since the sketch was still rough, in the online meeting in October 2007, Phu My Company notified Orange Company of delay in construction of golf courses because of the incomplete drawings. The representative of Orange Company, Mr. Kwon Dong Young - the architect agreed to present all complete drawings by November 2007 and the contracting parties agreed the construction from December 2007. In November 2007, Orange Company presented the second sketch but it was still incomplete. Thus, in early December 2007, Mr. Han Suk Jung - project manager of Phu My Company and the contractor’s representative came to Korea to request Orange Company to complete the drawings. In this business trip, the President of Orange Company Mr. Kang Sang Moon personally opposed the underground drainage system designed by the chief architect of Orange Company and in January 2008, Phu My Company received a plan for underground drainage system but it was still incomplete and not detailed.

Phu My Company asserts that it has not received a complete product and detailed perspective drawing of trees, including modified arrangement of stream bank and other details requiring addition from Orange Company. The drawing file on computer was even not modified; drawings presented by Orange Company totally disregard natural factors and climate of Vietnam but have typical particulars of Korea. Although Phu My Company has given many feedbacks to Orange Company, Orange Company has still not reflected it in its drawings.

As Orange Company failed to hand over design drawings as required, Phu My Company suffers loss due to delayed construction, employment of another designer and damages paid to the contractor due to delayed construction, etc. The damage is estimated up to USD 1,800,000, not to mention the company faced delay in commencement and putting the project into business. Thus, Orange Company violated Article 13 of the concluded contract. Pursuant to Article 14, Article 10 of the contract, Phu My Company is entitled to terminate the contract and Orange Company is obliged to pay the damages to Phu My Company. Alternatively, Orange Company is incapable of performing the work as required and has no practice design certificate as prescribed by Vietnam’s law, so, Phu My Company requests the court not to accept the lawsuit request of Orange Company.

In the First Instance Commerce Judgment No. 08/2011/KDTM-ST dated April 7, 2011, the People’s Court of Binh Duong province judged:

“1. Accept partial lawsuit request of Orange Engineering Co., Ltd.

- Terminate the service contract between Orange Engineering Co., Ltd and Phu My Development Joint Stock Company dated June 5, 2007.

- Compel Phu My Development Joint Stock Company to pay Orange Engineering Co., Ltd  VND 3,720,448,347.

From the date on which Orange Engineering Co., Ltd files a request for judgment enforcement, if Phu My Development Joint Stock Company fails to pay the aforementioned amount, in addition to the amount to be paid, Phu My Development Joint Stock Company is also obliged to incur an amount of interest according to the basic rate quoted by the State Bank at the judgment enforcement time equivalent to the amount and time of delayed judgment enforcement.

2. Regarding court fee:

- Phu My Development Joint Stock Company has to pay VND 106,408,966.

- Orange Engineering Co., Ltd has to pay VND 18,348,611.

On April 19, 2011, Phu My Company filed an appeal against the entire First Instance Judgment and requesting rejection of the lawsuit petition of the petitioner.

In the Appellate Instance Commerce Judgment No. 127/2011/KDTM-PT dated August 12, 2011, the Appellate Court of People’s Court of Ho Chi Minh City decided to uphold the First Instance Judgment.

After appellate trial, Phu My Company filed a claim for review of the said Appellate Judgment under cassation procedure.

In the Decision No. 07/VKSNDTC-V12 dated February 24, 2012, Chief Justice of the Supreme People’s Court appealed the Appellate Commerce Judgment No. 127/2011/KDTM-PT dated August 12, 2011 of the Appellate Court of the Supreme People’s Court in Ho Chi Minh City, requesting the Council of Judges of the Supreme People’s Court to hear the case under cassation procedure, quashing the above Appellate Judgment and quashing the First Instance Judgment No. 08/2011/KDTM-ST dated April 7, 2011 of People’s Court of Binh Duong province; referring the case file to the People’s Court of Binh Duong province for first instance re-trial as per the law.

At the cassation court hearing, the representative of the Supreme People’s Procuracy requests the Council of Judges of the Supreme People’s Court to accept the Appeal of the Chief Procurator of the Supreme People’s Court.

CONSIDERING THAT

Orange Company (an enterprise incorporated in 2005 under law of Korea, headquartered in Korea and not under a managing authority, having branch or representative office in Vietnam) was appointed by Phu My Company (an enterprise incorporated under law of Vietnam, headquartered in Vietnam) to provide design service for construction project “National Club and Double Pigeon Golf Course” in Phu My commune, Thu Dau Mot town, Binh Duong province under the service contract concluded on June 15, 2007. During the dispute settlement between two companies concerning such service contract, the Court of First Instance and the Court of Appeal have committed errors below:

-With reference to the legal relationship in dispute:

Pursuant to Clause 1 Article 3 of the Law on Construction 2003, amended in 2009 (“1. Construction activities include the elaboration of construction plannings, formulation of projects on investment in work construction, construction surveys, construction work designing, execution of work construction, supervision of work construction, management of projects on investment in work construction, selection of contractors in construction activities and other activities related to work construction); regulations in Part 1 of Circular No. 02/2005/TT-BXD of the Ministry of Construction on guidelines for contracts in construction activities: Contract in construction activities (hereinafter referred to as construction contract) is a written agreement between an employer and contractor to perform all or any or certain works in construction activities. Construction contract is a document legally bound to contracting parties in terms of rights and obligations to be performed, is a basis for payment and settlement upon occurrence of any dispute (if any) in the contract relation; 2. Scope and regulated entities:… Regulated entities: This Circular applies to employers and contractors being local and foreign organizations and individuals having qualified professional competence when entering into a contract to perform construction activities in Vietnam… 3. Types of contracts: Depending on scope and nature of construction works, work, relations between contracting parties, the construction contract may have various kinds with different contents, in specific: 1. Consulting contract: to be concluded between an employer and a contractor to provide consulting such as: elaboration of construction plannings, formulation of projects on investment in work construction; construction surveys; construction work designing; selection of preferred bidders; license for construction supervision practice; management of construction projects; design assessment, total estimate, estimate and other consulting activities related to work construction…) and arrangements in the “service contract”; there are valid grounds for determining that the legal relationship in dispute in the case is a service contract in construction, so it is advisable to apply the Law on Construction and its guiding documents to resolve the case.

The Court of First Instance and the Court of Appeal determined the legal relationship in dispute in this case as a service contract and applied regulations of the Civil Code and the Law on Commerce to resolve the case. They were wrong application.

-With reference to legality of the service contract dated June 15, 2007:

Pursuant to Clause 1 Article 56 of the Law on Construction 2003, amended in 2009, the design of construction works must fulfill the following conditions: “a. having registered for design of construction works; b. having been qualified for design of construction works…”. Orange Company presented the business registration certificate No. 129-81-86201 issued on December 9, 2008 for addition of business line to justify that Orange Company may provide engineering and design services, but the Court of First Instance and the Court of Appeal made an error when not requiring the litigants to provide the business registration certificate of Orange Company issued before December 9, 2008. Thus, there are insufficient grounds for determining that if Orange Company was capable of providing design of construction works at the time of concluding the service contract (on June 15, 2007).

With respect to Phu My Company, according to the representation of the company’s representative and the seal in documents sent to the court, Phu My Company is a company in a joint venture with a foreign party, headquartered in Thu Dau Mot town, Binh Duong province. However, when resolving the case, the Court of Appeal and the Court of Appeal failed to collect the business registration certificate or investment license of Phu My Company. This failure was considered as a flaw.

On the other hand, as prescribed in Regulation on management of employees of foreign contractors in construction sector in Vietnam (issued together with Decision No. 87/2004/QD-TTg dated May 19, 2004 of the Prime Minister): “Article 2. Interpretation of terms…1. “Foreign contractor” means foreign organizations and individuals having legal personality; and individuals having legal capacity to enter into and execute a contract. Legal personality and legal capacity of a foreign contractor shall be determined under the law of the country which the contractor takes nationality…8. “investment consulting and construction” means professional works in investment and construction, including consulting of elaboration of construction projects, construction surveys, architecture design, technical design, management of construction projects, construction supervision practice and other technical services associated with construction projects… 10. Contractor permit means a permit which is granted a foreign contractor by a competent authority of Vietnam for each contract after the contractor wins the bid and is selected as per the Vietnamese law.

Article 3. Rules for management of operation of foreign contractor: 1. A foreign contractor is only allowed to operate in Vietnam after being issued with a contractor permit by the competent authority of Vietnam; 2. Operation of the foreign contractor in Vietnam must comply with regulations of Vietnamese law and relevant international treaties which Vietnam signs or accedes”.

However, available documents in the case file indicate that Orange Company concluded and executed the service contract without a “contractor permit” issued by a competent authority of Vietnam as prescribed.  In this circumstance, the court should have clarified if, upon concluding and executing the service contract, Orange Company and Phu My Company completed paperwork to enable a “contractor permit” to be issued as prescribed. If they completed paperwork, why they were not granted a contractor permit by the competent authority of Vietnam.

The Court of First Instance and the Court of Appeal has not gathered adequate documents and has not clarified above matters but determined that the service contract dated June 15, 2007 is a lawful contract (to accept partial lawsuit request of Orange Company to terminate the service contract dated June 15, 2007; force Phu My Company to pay VND 3,720,448,347 to Orange Company). These are their inadequacies.

-Pursuant to Article 4 of the service contract, Phu My Company is obliged to pay Orange Company KRW 160,000,000 based on acceptance of CD and detail drawings supplied by Orange Company. Pursuant to Article 12 of the service contract, Phu My Company is obliged to complete the inspection within 10 days from the day on which it receives the design product from the designer and notify the inspection result thereafter. If there is no further notice, the inspection shall be considered as approving the service.

During the case settlement, the litigants reach a consensus that Orange Company handed over CD and the set of detail drawing of the project to Phu My Company but the handover was not recorded in writing. However, the Court of First Instance and the Court of Appeal did not specify when Orange Company handed over the design product; details of the design product and whether Orange Company completed workload as mutually agreed by both parties. Within 10 days after receiving the handover, if Phu My Company gave any feedback about the design product (in which manner the feedback was given, if there was no feedback, if both parties had any other agreement after handover of the product). Whether Orange Company continued handing over drawings after modification as required by Phu My Company in November 2007 and in January 2008 as presented by Phu My Company, the basis of mutual agreement on which such handover prevails. If Phu My Company used either a part or the whole of design product of Orange Company and how Phu My Company hired another company to complete the design…

So, when retrying the case, in order to resolve it properly and lawfully, the court (whether the service contract is null and void or lawful) must require the litigants to provide evidence to justify and adopt measures to take other items of evidence to clarify abovementioned matters. If the service contract is deemed null and void, it is necessary to force Phu My Company to pay Orange Company the value corresponding to the workload performed by Orange Company as agreed under the contract. If the service contract is deemed lawful, it is necessary to force Phu My Company to pay Orange Company the value corresponding to the workload performed by Orange Company as agreed under the contract and the interest on delayed payment as per the law.

According to facts and matters, pursuant to Clause 3 Article 291, Clause 3 Article 297, Clause 1 and Clause 2 Article 299 of the Civil Procedure Code;

HEREBY DECIDES

Quash the Appellate Commerce Judgment No. 127/2011/KDTM-PT dated August 12, 2011 of the Court of Appeal of the Supreme People’s Court in Ho Chi Minh City and the First Instance Commerce Judgment No. 08/2011/KDTM-ST dated April 7, 2011 of People’s Court of Binh Duong Province; refer the case file to People’s Court of Bac Ninh Province to retry as per the law.

CONTENTS PROPOSED TO BE RECOGNIZED AS PRECEDENT

The Cassation Decision indicates the question of law which is a valid guide for subsequent similar cases:

In resolving a dispute over a service contract, if the service contract is considered null and void, it is necessary to force the employer to pay the provider the value corresponding to the workload performed by the provider under the contract. If the service contract is considered lawful, it is necessary to force the employer to pay the provider the value corresponding to the workload performed by the provider under the contract and the interest on delayed payment as per the law.

In particular, the Council of Judges of the Supreme People’s Court judged:

“…If the service contract is deemed null and void, it is necessary to force Phu My Company to pay Orange Company the value corresponding to the workload performed by Orange Company as agreed under the contract. If the service contract is deemed lawful, it is necessary to force Phu My Company to pay Orange Company the value corresponding to the workload performed by Orange Company as agreed under the contract and the interest on delayed payment as per the law.