Failure to make timely payment to contractors and the resulting legal consequences

I. Common legal risks arising from late payment to contractors

NPLaw observes that late payment in the construction sector remains a persistent and serious issue, causing substantial disruptions for projects and stakeholders alike. Below are the most common legal risks that arise when project owners/clients make late payment to contractors: 

• Obligation to pay interest on late payment: It is a direct financial consequence that almost certainly arises under the law.
• Contractual sanctions: If the contract contains a penalty clause, the breaching party must pay an additional penalty amount.
• Suspension of construction activities: The contractor is legally entitled to suspend construction, resulting in delays across the entire project.
• Unilateral termination of contract: In cases of material breach, the contractor has the right to unilaterally terminate the contract.
• Exposure to litigation: The contractor has sufficient legal grounds to initiate claims before courts or commercial arbitration to recover debts and seek compensation for damages.
• Reputational damage: Late payment significantly undermines the project owner's reputation, making future cooperation with other partners more difficult.

II. Understanding late payment to contractors

To properly address the issue, it is first necessary to understand its nature. NPLaw will assist you in examining the fundamental aspects and the practical circumstances surrounding late payment to contractors.

1. What consequences can late payment cause to a construction project?

From a practical perspective, failure to make timely payment is one of the leading causes of project disruption. Its consequences extend beyond the contracting parties and may affect the entire project:

• Project delays: Without adequate financial resources, contractors cannot pay workers, procure materials, or settle accounts with subcontractors. Suspension of construction becomes inevitable, undermining the project timeline.
• Cost overrun: Delays lead to increased management expenses, opportunity costs, and maintenance costs of unfinished works. Material prices may also escalate, resulting in increased overall investment.
• Reduced construction quality: Disrupted cash flow may force contractors to use lower-grade materials or cut essential safety and technical measures, directly affecting the structural integrity of the work.

2. When is a client deemed to have failed to make timely payment?

A client (project owner/employer) is considered in default when the payment deadline clearly agreed upon in the construction contract has passed and the client either fails to pay or pays incompletely.

The legal basis derives primarily from the contractual terms as provided under Article 398 of the Civil Code 2015, which governs contractual contents such as subject matter, quality, quantity, duration, place, and method of payment. Article 440 of the Civil Code 2015 further provides that the buyer must pay in accordance with the agreed time, place, and amount.

Additionally, payment deadlines and payment obligations constitute fundamental terms of construction contracts pursuant to Article 144 of the Civil Code 2015.

Therefore, any delay beyond the agreed deadline constitutes a breach of contract.

3. What are common causes of late payment to contractors?

From NPLaw’s experience in advisory and dispute resolution, late payment generally arises from two principal groups of causes:

Subjective causes from the client:

• Financial difficulties: The project owner fails to secure the expected funding.
• Poor management: Ineffective cash flow and project management.
• Intentional capital appropriation: Some project owners deliberately delay payment for other financial purposes.

Objective causes and disputes:

• Incomplete payment documentation: The contractor has not provided sufficient documents, records, or acceptance minutes as required under the contract.
• Disputes over work volume or quality: The parties have not reached an agreement on the completed work volume, or there are disagreements regarding construction quality.
• Legal or administrative issues affecting the project: Inspections, audits, or regulatory obstacles may halt disbursement.

III. Legal provisions governing late payment to contractors

The law provides strict mechanisms to protect the rights of the parties. In this section, NPLaw examines the main sanctions and legal remedies applicable to late payment.

1. How is the extent of damages determined in cases of late payment?

Damages are assessed based on two categories: Direct damages and other provable losses.

• Interest on late payment: It is the most direct and easily quantifiable loss. Under Article 357 of the Civil Code 2015, the contractors may claim interest on the overdue amount for the entire late period. The rate is determined by contract but may not exceed 20% per annum; if not agreed, it is 50% of the statutory interest ceiling (i.e., 10% per annum).
• Contractual penalties: If provided under the contract, the contractor may claim contractual sanctions. The penalty amount is subject to the parties’ agreement; however, for construction contracts funded by State capital, the penalty may not exceed 12% of the value of the breached portion of the contract under Article 146 of the Law on Construction 2014, as amended in 2020.
• Compensation for other damages: Under Article 360 of the Civil Code 2015, the contractor may also claim compensation for other actual losses arising from the late payment, such as: payments owed to subcontractors, project management costs due to delays, equipment rental costs during idle periods, etc. However, the contractor bears the burden of proving that such losses are real and are the direct consequence of the late payment.

2. What rights may the contractor exercise when the client fails to pay on time?

When facing late payment, contractors may exercise several legal remedies:

• Demand full payment of principal and interest: It is the contractor’s most fundamental right.
• Suspend construction: Article 145 of the Law on Construction 2014 (as amended in 2020) expressly provides that if the employer fails to make full and timely payment, the contractor has the right to suspend construction and is entitled to compensation for damages pursuant to Article 146 of the same law.
• Unilaterally terminate the contract: If the delay constitutes a material breach preventing contractual performance, the contractor may terminate under Article 428 of the Civil Code 2015.
• Initiate legal proceedings before the competent authority: The contractor may file a claim with the Court or with an Arbitral Tribunal (if so agreed by the parties) to seek dispute resolution.

To safeguard its rights and interests, the contractor should seek legal advice for tailored guidance and appropriate courses of action. This ensures that the contractor exercises its rights effectively and in compliance with the law.

3. What sanctions may be imposed on a client who fails to pay on time?

A client in breach of payment obligations may face the following:

• Contractual sanctions and remedies: The client must pay interest on late payment, contractual sanctions, and other amounts as stipulated in the contract, as previously analyzed.
• Compulsory performance under an arbitral award or court judgment: If the dispute is brought before a Court or an Arbitral Tribunal, the client may be compelled to pay the principal debt, interest, sanctions, and any other compensatory damages under a legally effective judgment or award.
• Enforcement measures for non-compliance: If the client fails to voluntarily comply with the judgment or award, the civil judgment enforcement authorities may impose coercive measures such as freezing bank accounts, seizing and liquidating assets to secure payment to the contractor.

Therefore, clients should be fully aware of the serious legal consequences that may arise from failing to meet their contractual payment obligations.

IV. Questions on late payment to contractors

Practical experience shows that late payment disputes lead to numerous questions. NPLaw summarizes and addresses the most common inquiries below.

1. In case of failure to pay the contractor on time, can the parties request arbitration or court to resolve?

The parties are fully entitled to request resolution by an Arbitral Tribunal or a Court in cases where payment to the contractor is not made on time, specifically:

• The choice of dispute resolution forum depends on the dispute resolution clause agreed upon in the contract pursuant to Article 398 of the Civil Code 2015 on the contents of a contract. If the contract stipulates arbitration, the parties must comply and may not initiate proceedings before a Court (except in certain statutory exceptions).
• If the contract does not contain an arbitration agreement, the dispute shall be resolved by a competent People’s Court in accordance with the Civil Procedure Code 2015, as amended in 2025.

2. May the contractor request contract adjustment due to late payment?

The contractor may not request an adjustment of the contract in the event of late payment. This is because late payment constitutes a breach of contract, not a “fundamental change of circumstances” that would justify contract adjustment under Article 420 of the Civil Code 2015.

Instead of requesting an adjustment, the contractor’s lawful rights include requiring the breaching party to cease the violation, properly perform its contractual obligations, and compensate for any damages incurred.

3. What is the maximum waiting period before the contractor may take legal action?

The law does not prescribe any minimum or maximum waiting period. Once the payment becomes due and the client fails to make payment, the contractor is legally entitled to take action immediately.

However, the contractor must pay close attention to the statute of limitations for initiating legal proceedings. Pursuant to Article 429 of the Civil Code 2015, the statute of limitations for initiating a lawsuit relating to a contractual dispute is three (03) years from the date on which the aggrieved party knew or should have known that its lawful rights and interests had been infringed.

Failure to file a claim within this period will result in the contractor losing the right to initiate legal action.

4. What methods may be used to handle outstanding payments?

There are multiple methods of debt recovery, ranging from flexible to more coercive measures:

• Negotiation and mediation: The parties may negotiate to reach a suitable payment arrangement (e.g., extension of the payment deadline, installment payments).
• Legal demand letter: The contractor, through legal counsel, may issue a formal demand letter requesting payment, citing the legal basis and outlining the consequences of continued non-compliance.
• Litigation or arbitration: The matter may be submitted to a Court or Arbitral Tribunal to obtain a binding judgment or award.
• Enforcement: The contractor may request the competent enforcement authorities to enforce a legally effective judgment or award.

The choice of debt recovery method depends on the severity of the breach, the client’s willingness to cooperate, and the contractor’s objectives, with negotiation and mediation generally preferred before pursuing more formal legal remedies.

5. What is the dispute resolution process for late-payment cases?

 A typical litigation process includes:

• Preparing the claim dossier: Collecting contracts, acceptance records, reconciliation statements, correspondence, and notices.
• Filing the lawsuit: Submitting the dossier to the competent People’s Court.
• Accepting the case: The court accepts the case after the claimant pays the advance court fee.
• Mediation and preparation for trial: The court conducts mediation sessions and evidence collection.
• First-instance trial: The case is heard and adjudicated.
• Appeal (if any): Either party may appeal the first-instance judgment.
• Enforcement: Requesting enforcement of the legally effective judgment or decision.

Such a process requires thorough preparation and compliance with procedural law to ensure optimal protection of the contractor’s rights.

V. Looking for a reputable law firm to handle late-payment issues?

Failure to make timely payment to contractors is among the most complex disputes in the construction sector, requiring deep understanding of the Law on Construction, the Civil Code, and practical litigation experience. Handling such disputes without proper legal support may be time-consuming, costly, and ineffective.

If you are a contractor facing capital appropriation or late payment, or a project owner experiencing payment-related obstacles and seeking appropriate legal solutions, contact NPLaw today. With an experienced team of lawyers, we are ready to advise, negotiate, and protect your legitimate rights and interests effectively.