Notes on the time-bar, negotiation, and interest from a dispute

Summary of the facts

An American company ("Claimant”) leased shipping containers to a Vietnamese company (the "Respondent") under contracts signed in 2007 and 2011 ("Contract").  The Contract was performed for a long time without a considerable problem. However, the Respondent still owed the Claimant an amount of container lease.  Therefore, on August  11, 2015, the parties signed an Agreement confirming that Respondent would pay the Claimant (“Agreement”) the container lease within 20 months without interest if the Respondent complied with the commitment. Due to Respondent’s non-payment, on August 14, 2017 the Claimant made the Request for Arbitration but the Respondent said that the time-bar of 02 years (counting from August 11, 2015) had expired according to Article 319 of the Law on Commerce of 2005, so the Claimant had no right to lodge a Request for Arbitration.

According to the Agreement, as of July 31, 2015, the Respondent owed the Claimant: (i) the amount of container lease (principal) of USD 99,667.72; (ii) interest incurred due to late payment of USD 64,277.82. The two parties agreed to pay the principal (USD 99,667.72) within 20 months, each month minimum of USD 5,000, starting from August 2015 with the detailed payment schedule specified in the Appendix 01 (each month payment of USD 5,000 on the 15^th day of every month from August 15, 2015 to February 15, 2017, and payment of the remaining debt amount of USD 4,667.72 from February 15, 2017 to March 15, 2017). If the Respondent made the 20 payments on time, the Claimant would waive all interests. In case the Respondent failed to comply with the debt payment schedule for any single payment due, all remaining payments should be deemed due and the Claimant should restore the right of interest as agreed in the Contract.

Lessons learned through the analysis of the Arbitral Tribunal  

1. In the Statement of Defense dated October 5, 2017, the Respondent opposed the Claimant’s view   and said that the time-bar had expired, so the Claimant had no right to make the Request for Arbitration. The Arbitral Tribunal found that the Respondent acknowledged the debt and pledged to pay the Claimant, specifically, in the Agreement the two parties confirmed as of July 31, 2015 the Respondent owed the Claimant the container lease (principal) of USD 99,667.72 and Respondent"agreed to pay the principal of USD 99,667.72 within 20 months [...] starting from August 2015" according to the debt payment schedule agreed at Appendix 01. On the other hand, at the hearing on November 28, 2017, the Respondent continued to acknowledge the principal of USD 99,667.72, and requested that the Claimant recalculated the interest. In the document dated December 5, 2017, the Respondent disagreed on the request for interest calculation but had no objection about the principal. Therefore, the Arbitral Tribunal decided that the time-bar of two years (according to Article 319 of the Law on Commerce of 2005) was re-started as stipulated by Sub-clause a, Clause 1, Article 157 of the Civil Code of 2015 as follows: "The obligor has acknowledged part or all of its obligation to the petitioner." Therefore, the Respondent's opinion that the time-bar had expired was not accepted by the Arbitral Tribunal.

2. The Claimant requested USD 64,277.82 of interest due to late payment ("interest"), (which should have been an in-service charges, not interest) for a period of 42.961 months (rounded to 43 months) , but applied the calculation method of in-service charges specified in the contracts of 2007 and 2011. The Arbitral Tribunal found: (i) The Claimant requested interest, not the in-service charges, so the Claimant was not allow to apply the in-service charges to the calculation of interest; (ii) The Claimant referred to the definition of "in-service charges"  which stated"... including without limitation, fines, penalties and interest thereon" to claim that the Claimant could charge in-service charges including the right to calculate the interest. The term “interest” in this definition was not separated from the word “thereon” behind it and had to be construed as interest for the penalty included in the meaning of “in-service charges”, not related to interest due to late payment. Therefore, the Arbitral Tribunal found no basis to accept this request of the Claimant. However, the calculation of the interest of USD 64,277.82 as of July 31, 2015 under method of the in-service charges was accepted by the Respondent in the Agreement. So, the Arbitral Tribunal, considering that this agreement was not contrary to the provisions of laws and regulations, found basis to accept it.

3. For interest request of USD 35,880.38 (from August 1, 2015 to August 1, 2017), as the parties had no agreement, the Arbitral Tribunal based on Article 306 of the Law on Commerce of 2005 to resolve it.  With regard to the time of late payment, on the basis of the Agreement, the time to calculate interest was from August 1, 2015 to the time requested by the Claimant was August 1, 2017. Regarding interest rates, the Arbitral Tribunal based on the announcement of the State Bank of Vietnam on the operation of banks in December 2017, whereby the USD lending interest rate for medium-term  (12 months to 60 months) was approximately from 4.6%/year to 6%/year. The Arbitral Tribunal decided to accept the average level of 5.3%/year. Thus, the average overdue interest rate was 7.95%/year (150% of the average of the USD lending interest rate for medium-term). The interest due to late payment was USD 99,667.72 x 7.95% : 12 months x 24 months = USD 15,847.17. On the basis of the above analysis, the Arbitral Tribunal accepted a part of the Claimant’s request for interest, forcing the Respondent to pay late payment interest to the Claimant from August 1, 2015 to August 1, 2017 of 15,847.17 USD. Therefore, the Respondent had to pay the Claimant the total amount of USD 80,124.99 as late payment interest.

By Ngo Khac Le | Arbitrator of VIAC