Legal Perspectives On “Abandoning” Rice Reserve Contracts

July 04, 2021

As one of the staple commodities consumed domestically as well as exported to the global market, the rice industry has recently faced a series of market fluctuations under the influence of COVID-19. Adversity reached a peak when the rice industry encountered two unexpected moves, namely hardships during the customs clearance process for rice exportation and the contract cancellation event in bidding for domestic rice reserves.

Right after the rice exportation incident, the rice industry was struck by the cancellation of the signing of rice sale contracts to the General Department of State Reserves (GDSR) of a series of companies.

This action of enterprises significantly impacted the total rice reserves, forcing the GDSR to plan for another bidding round.

There are opinions that the fact that enterprises had won the bidding for supplying national reserve rice but chose to cancel and registered to export rice instead showcased that they clearly prioritised profit over food security. These enterprises should be restricted from exporting as a severe penalty for breaches of the bidding agreement.

Is this statement legally appropriate?

Violations and penalties

Is refusal to sign a contract an offense? According to Article 65 of the Law on Bidding 2013, the unit with need of procurement and the selected contractor "must sign a contract for implementation of the bidding package". Thus, it is an obligation under the bidding law.

Circular No. 05/2015/TT-BKHDT dated 16 June 2015 of the Ministry of Planning and Investment providing specific provisions on preparing the invitation for bid on procurement of goods (referred to as "Circular 05/2015") issued a fairly detailed model contract that the bid solicitors must include in the public bidding documents for all bidders.

All citizens are obligated to comply with the law and any violations shall be punished. Also according to the press, rice enterprises that refuse to sign the contracts will only lose their bid guarantee, which is about 1% to 3% of the bid price according to Article 19 of Decree No. 63/2014/NĐ-CP dated 26 June 2014 of the Government detailing the implementation of several provisions of the Law on Bidding regarding the selection of contractors ("Decree 63/2014").

As a matter of law, there is more than that. Clause 1, Article 21 of Decree No. 50/2016 dated 1 June 2016 of the Government on penalties for administrative violations against regulations on planning and investment ("Decree 50/2016") stipulates that "A fine of from VND 10,000,000 to VND 15,000,000 shall be imposed for failure to carry out a contract negotiation in contractor selection or preliminary contract negotiation in investor selection”.

The intention of the lawmakers behind Decree 63/2014 is clear: not signing a contract is a violation of the law, but the imposed penalty is only 1% to 3% of the bid price along with an administrative fine of VND 10 to 15 million.

The question is whether current law allows subjecting the contractor to a greater legal/financial liability.

In principle, it is plausible to take refusal to sign contracts out of the scope of Article 19 of Decree 63/2014 in order to consider its true nature as a "violation of the bidding law" under Article 90 of the Law on Bidding 2013 (on handling of violations).

In case Article 90 of the Law on Bidding 2013 is applied and if criminal prosecution is not possible or the prohibition from participation in the bidding is not necessarily applicable to refusal to sign a contract, at least the violating party should be held liable for damages.

How to pay damages in detail is still debatable (this is a potential dispute as discussed below), but the violating party's obligation to compensate for damage is also an opportunity to partially re-establish the balance of benefits and interests for both parties.

Besides, we should consider reinforcing the provisions on obligations in Article 65 of the Law on Bidding 2013. Pursuant to current regulations, as mentioned above, it is compulsory to specify the main contents and attach the model contract in the bidding documents (according to Circular 05/2015).

However, in the provisions on bidding dossiers of the bidder, in particular the confirmation of participation (as required by the bidding documents), there is no regulation on Contract and contract signing. Given the recent practice of the rice industry, the above mentioned provisions should be added to Circular 05/2015.

Accordingly, this will be a commitment of the parties to the signing of the contract; hence, the reasoning in case of violation due to not signing the contract might also be more solid.

Dispute resolution

In case of dispute, the subject of dispute cannot be the obligation to sign the contract or the loss of the bid guarantee. In other words, if the situation is merely governed by Decree 63/2014 and Article 19 of this Decree, no potential dispute regarding the non-signing of the Contract will arise.

Disputes may arise only if Article 90 of the Law on Bidding 2013 is applied, particularly with regard to liability for damages (in this case, tort claims for damages). Specifically, GDSR, which is the bid solicitor and also the party with the highest risks, will file a lawsuit requesting the rice enterprises that are selected contractors to compensate for damage resulting from failure to sign the contract.

As for the competence to settle disputes, Article 93 of the Law on Bidding 2013 stipulates that "The settlement of disputes in court shall comply with provisions on civil procedures". Clause 6, Article 26 of Civil Procedure Code 2015 provides that disputes related to non-contractual damages fall into the jurisdiction of the court.

On the other hand, Article 2 of the Law on Commercial Arbitration 2010 regulates "disputes among parties at least one of whom conducts commercial activities" is under the  jurisdiction of arbitration. In this case, we have a state administrative agency on one side (GDSR) and rice enterprises that are engaged in commercial activities on the other.

The aforementioned legislations prove that both the court and arbitration have jurisdiction over such disputes.

(*) Senior Advisor in Global Vietnam Lawyers

Arbitrator of Vietnam International Arbitration Center (VIAC)

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