Basic Legal Principles of Contract in Loan Contract Relationship

The consequences of the economic, financial and monetary system in this period negatively impacted lending relations, as shown in the following points: Personal loans were limited (originating from the unrecognized private capitalist economy), mainly for the purpose of repairing houses or lending to members to develop the household economy, with low interest rates; 40 The term "consumer lending" was left open, almost not mentioned in banking law; 41 Lending transactions in this period were still rudimentary... When lending relations changed in the direction of the market economy, a two-tier banking system was formed, banking activities were proactive, professional, and developed more strongly, in harmony with the world financial system.

The development of lending transactions associated with the development of the commodity economy has affirmed the important and central role of this transaction in the field of banking credit, specifically in the following points: First , the demand for loan capital is easy-to-use currency, easy to supply to businesses and investors in production and business activities to achieve the set goals and plans, strongly impacting and influencing the diverse, complex and increasingly high capital needs of economic life; Second , economic components with capital needs and meeting certain conditions can participate in lending relationships, and are autonomous in signing and implementing contracts according to their needs and capabilities; Third , lending transactions still account for the main proportion, determining the effectiveness and success of banking activities. Other credit transactions (guarantees, factoring, etc.) account for a very low transaction rate (this rate can be clearly seen in the annual consolidated financial reports of commercial banks); Fourth , the requirements on conditions, safety when lending, and handling of consequences arising from weaknesses in banking operations are all aimed at ensuring healthy development of lending transactions and strengthening contractual relationships.

With the characteristics that form the central role of the loan contract regime in the banking legal system as analyzed, the law on loan contracts on the general development trend must be amended and supplemented promptly to meet the above goals and needs. That is also the orientation and development strategy of the banking industry set by the State, associated with the development of the commodity economy in the current practical conditions of Vietnam.

In short, lending is an objective economic phenomenon, appearing in a situation where there is excess capital in some places and a shortage of capital in others when the socio-economic development reaches a certain stage (due to separation from the original natural asset lending relationships). This activity forms a lending transaction mechanism with its own characteristics, requiring strict management by the state instead of letting the parties transact and resolve conflicts themselves.

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40 See: Decision No. 223 - QD/017 dated May 18, 1962 on promulgating temporary measures for lending to repair houses managed by people

41 For example : Circular No. 11-TTG-TN dated January 29, 1965 on lending money to build houses for workers, retired officials or those who have lost their jobs due to disability allows a loan repayment period of 9 years, with an interest rate of 0.6%/year. If compared with the provisions of current law, it is difficult to find any loan with a long term and a preferential fixed interest rate as above. Because in terms of business, a long-term loan with a fixed interest rate will create many risks for the lender. Meanwhile, the lending goal of quickly recovering capital to continue lending will not be achieved.

conflict with customs and business ethics. In this mechanism, banks act as the focal point, playing the role of intermediary in regulating capital sources with the function of profitable business, while at the same time performing social functions for the community through credit access rights, which are of interest to lawmakers and are increasingly consolidated and perfected.

b) The concept of loan contract in legal science and in law

- In terms of legal science :

The concept of HDCV is a collection of viewpoints, reflecting the most general attributes, expressing the nature of this relationship. With that idea, textbooks (of Hanoi Law University, Ho Chi Minh City Law University) have mentioned the concept of loan contract, which is: "a written agreement between a credit institution and a customer who is an organization or individual, according to which the credit institution agrees to advance a sum of money for the customer to use for a certain period of time, with the condition of repayment of both principal and interest, based on trust " 42 .

From another point of view, the concept of a loan contract is based on the structure of a contractual relationship, in the sense that: “… a written agreement between a credit institution (lender) and an organization or individual (borrower) to establish certain rights and obligations of the parties in the process of borrowing, using and repaying the loan ” 43 .

In general, the two concepts above have clarified the most basic characteristics of the nature of the loan contract. However, in each concept, researchers have shown different approaches: i) In the first concept, the authors' viewpoints are based on the specific features of the lending relationship. Accordingly, by committing to give the borrower a sum of money to use for a purpose, within a certain period of time, the borrower must comply with the principle of repaying the principal and interest on the loan when due; ii) In the second concept , the authors rely on the legal grounds that give rise to changes or termination of the loan contract through the process of signing and implementing the loan contract. The lending process according to this concept starts from the stage of preparing documents, reviewing the loan until the debt is fully recovered, with the aim of bringing about loan efficiency.

Although both concepts have fully stated the basic characteristics, they have not yet gone into depth to mention and classify the subjects of loan contracts and the purpose of borrowing capital of a specific type of contract (in each purpose of borrowing, the contract terms have fundamental differences in terms of operations and law); from there, it is the basis for determining the scope of civil, or business, commercial relations (based on legalized criteria, according to the provisions of procedural law), establishing a legal mechanism to regulate appropriately each characteristic of the subject and purpose of this contract.

- In terms of law:

Lending relationships exist in the legal form of a loan agreement. Accordingly, Vietnamese positive law defines a loan agreement in terms of form and content to ensure that loan transactions are legally operated. Clause 1, Article 23 of Circular No. 39/2016/TT-NHNN defines

42 Hanoi Law University (2014), Vietnamese Banking Law Textbook , People's Police Publishing House, p. 153

43 See: Ho Chi Minh City University of Law (2015 ), op. cit. (34), pp. 317-318

The relatively complete definition of HĐCV is as follows: “ The loan agreement must be made in writing, which must include at least the following contents:… b) Loan amount;… c) Purpose of using the loan; d) Loan currency, debt repayment currency; e) Lending method;… ”.

Meanwhile, the positive laws of countries around the world refer to the term HĐCV only relatively. For example, New Zealand law: This country's law does not indicate the basic principles of loan contracts. The New Zealand Credit Contracts and Consumer Finance Act (2003) is based on the concept of contract mentioned in the common law system (commitments, promises that if violated will be punished 44 ), from which this law defines HĐCV simply, in the sense: " a credit contract is a contract under which credit is or may be provided " (Article 7 Part 1). 45

In China, the law of this country defines more fully the form and main contents of the loan contract, according to which " When making a loan, the commercial bank must sign a written contract with the borrower. The contract must clearly state the type of loan, purpose of use, amount, interest rate, date and form of repayment, obligations in case of default and other issues that both parties deem necessary ". 46

Thus, the laws of each country as cited have different approaches to the content of the credit contract (under the name of "loan agreement", "credit contract"). In general, the definitions in the laws of the above countries have outlined the legal nature of the credit relationship, which is "the amount of money provided to the borrower". Due to the similarity in socio-economic conditions, Vietnamese law defines the credit contract quite fully (as analyzed), similar to this definition in Chinese banking law.

In short, borrowers come to credit institutions from many economic sectors for different borrowing purposes. Each entity has unequal interests, legal understanding, understanding of rights, and contractual equality. In particular, individuals who borrow for consumption purposes, which are the majority, are the "weaker" party in the credit relationship. Therefore, the consumer credit relationship has its own characteristics of objects and purposes, which need to be clearly expressed in the concepts of credit contracts (in legal science) to be comprehensive, while ensuring the meaning and goals that lawmakers aim for (equal contractual rights), properly protecting the rights of consumer borrowers in the strongly developing commodity economy in Vietnam.

2.1.1.2. Basic legal principles of contracts in loan contract relationships

The provisions on Contractual Relations are inseparable from the basic legal principles of contractual relations. These are the right to freely and equally enter into and perform contracts with

44 John D. Calamari and Joseph M. Perillo (1987), ibid (9), pp. 1-2

45 Source: http://www.legislation.govt.nz/act/public/2003/0052/latest/DLM211512.html , accessed at 06:15 on 27/11/2016

46 Article 37 of the Law of the People's Republic of China on Commercial Banks, 1995. See: Law of the People's Republic of China on Commercial Banks, http://www.npc.gov.cn/englishnpc/Law/2007-12/12/content_1383716.htm

limitations to ensure the common interests of society when the parties fully exercise these rights.

- Freedom to enter into and perform labor contracts:

This principle is reflected quite commonly in philosophical and religious doctrines and in ancient laws. 47 The right to freedom of contract is a principle that is legally recognized, both in general law and specialized law under Vietnamese law (For example: Article 3 of the 2015 Vietnamese Civil Code; Clauses 1 and 2, Article 7 of the 2010 Law on Credit Institutions; Article 7 of the 2014 Law on Enterprises).

According to banking law, these rights are expressed in the fact that credit institutions (as lenders) have the right to: choose, search for partners (customers) to sign, change contracts, refuse to lend if they (borrowers) do not meet the loan requirements prescribed by law; the right to proactively organize loan inspection and supervision activities; internal inspection and supervision; debt collection. For borrowers, it is the right to choose credit institutions to borrow capital, agree on interest rates, loan methods, loan terms, and propose loan security measures suitable to their actual circumstances and financial capacity.

Freedom of contract does not mean that the parties (lender and borrower) are allowed to do whatever they want. State intervention in the loan contract through regulations on conditions or performance limitations… forces the parties to strictly implement.

- Agreement of unanimity of will:

The parties are free to enter into contracts in many forms but must be of one mind, that is, they must reach consensus on both the form and content of the contract as per the common understanding of contracts, as stated by authors Catherine Elliott and Frances Quinn in their classic work “Contract Law”: “ For a contract to exist, one party must usually make an offer to enter into a contract, and the other party must accept it. Once accepted, the contract will usually be binding on both parties” 48 . Therefore, any act of intimidation, deception, or mistake can render the loan contract invalid, and the parties must terminate the contract and remedy the consequences.

Agreements in a legal credit contract will give rise to the rights and obligations of the parties. To reach this agreement, the parties must go through a long process of meeting, negotiating and signing a contract. In the banking sector, the agreement to sign a credit contract is always limited to the interest rate margin and the limit on the use of borrowed money. The parties can freely change the content of the credit contract. These amendments and supplements must also be made in writing, which is an inseparable part of the contract, reflecting the true nature of economic and civil relations: The parties are free to change their will when signing the contract based on actual credit needs and circumstances.

- Ensure balance of rights and interests of the parties (equality):

47 See: Corinne Renault – Brahinsky, Essentiel du droit des contrats (Outline of contract law) , Translated by Tran Duc Son, Vietnamese – French Legal House

48 Catherine Elliott and Frances Quinn (2009), ibid (10), UK p. 47

Most of the service contracts are drafted by credit institutions proactively to apply in their entire system (bank). This creates a number of framework agreements, which are predetermined by credit institutions, recorded in the service contracts, and do not change during the negotiation and signing process with customers. Borrowers still have to accept disadvantages because it is difficult to intervene and influence each of these terms (contents) of the contract.

In consumer lending relationships, consumer borrowers are the majority and have limited contractual rights. Therefore, these subjects (consumer borrowers) need to be concerned by lawmakers to establish and supplement regulations to ensure equal rights and protect legitimate and legal rights as the weaker party.

It is extremely necessary to legalize basic rights, mainly to ensure the balance of contractual rights, especially for consumer borrowers. This work is carried out to prevent credit institutions from abusing the sense of contractual agreements to the disadvantage of borrowers (due to the lack of regulations or unclear regulations in the law), when disputes arise.

- The Labor Contract must be guaranteed to be implemented:

To ensure the performance of the obligation to repay principal, interest, and credit fees, credit institutions often apply loan security measures, which are bound by strict contract terms. This is a precautionary measure to recover debt in case the borrower fails to perform the contract. This measure is guaranteed through the mechanism of supervision and enforcement of law. It is a system of judicial and judicial support agencies (courts, enforcement agencies, notaries, lawyers, etc.) with the function of resolving disputes and enforcing judgments at the request of the parties, contributing to raising awareness of responsibility and compliance with contractual obligations.

The choice of dispute resolution method, the choice of court and arbitration agencies must be consulted and considered by the parties right from the beginning of the contract signing. This is to facilitate the resolution of future disputes, ensure the stability of the contract, and deter organizations and individuals from suffering more serious damage if they deliberately violate the contract.

2.1.2. Nature of the loan contract

2.1.2.1. Legal nature of loan contract

a) A loan contract is a special form of asset loan contract.

As presented, the bank lending relationship is formed from the initial asset borrowing relationship, with separate transaction mechanisms, subjects, and scope of regulation. Although they are both sources of capital supply for the economy, the nature and level of capital regulation of banks are higher through the role and function of a professional intermediary institution (CI) that is increasingly expanding.

Author Nguyen Van Van referred to the argument of Russian scholars, current Vietnamese positive law affirms that HDCV is a special form of asset loan contract originating from the most common characteristic of these two types of contracts: " obligation"

The obligation to repay loans (property, money) by the borrower to the lender " 49 has full scientific and practical theoretical bases. However, the obligation to repay loans in the banking sector has clear differences, bound by stricter and more complicated enforcement conditions as follows:

- The credit institution is obliged to disburse according to the progress of the loan agreement. In case of violation, it must be fined and compensate the borrower for damages:

According to scientific arguments, the HDCV is a form of "consent contract", effective immediately upon signing (if the parties do not have another agreement) arising from the needs and capital use plans (of the borrower) agreed upon by the lender. This means that the lender must have the obligation to disburse according to the progress and conditions of the contract (on the borrower's side, if the contract has been signed but the borrower does not borrow, he must also bear the capital withdrawal commitment fee).

The borrower's right to request disbursement is, in essence, the right to request continued performance of the loan agreement. Legal liability in this case is the liability for failure to perform the contract as committed by the lender, even though the borrower has seriously performed the disbursement conditions.

In fact, it is difficult to find any court judgment ordering a bank to pay compensation or a fine for breach of disbursement obligations, 50 as a basis to prove the effective date of the loan agreement. Therefore, there is an opinion that Vietnamese law does not consider the loan agreement as a real contract, but this opinion leaves open the issue of compensation if the credit institution does not continue to lend: “ Vietnamese law does not consider the asset loan contract as a real contract. However, in reality, what happens if the credit institution has entered into a contract but in the end does not lend? ” 51 .

Regarding this argument, according to the author of the thesis, before the parties sign the loan agreement, the customer's loan application must be approved by the credit institution's leadership. The result is that the credit institution has a written notice of approval or refusal to lend. Banking law in the past and present does not specifically stipulate the obligations of the credit institution if it does not disburse. However, legal responsibility must still be imposed on the lender, arising from the binding commitments according to the conditions stated in the loan contract. In case the lender violates, the borrower has the right to complain or sue to request a penalty for the violation, compensation for damages for the losses the borrower has incurred, to remedy the consequences. The obligation to compensate for damages in this case is the legal basis to ensure the borrower's right to access credit, and at the same time to avoid the situation of

49 Nguyen Van Van (2000), Tlđd (21), p. 30

50 Jurisdictional history has a court ruling ordering the bank to compensate the borrower for over 109 billion VND in damages due to breach of disbursement obligations. This ruling was later rejected by the Court of Appeal on the grounds that the bank was not at fault. See: Le Hoi, Tay Do Limited Liability Company must pay Vietnam Development Bank - Thanh Hoa Branch 109,199 billion VND , http://baothanhhoa.vn/vn/phap-luat/n115678/Cong-ty-LTD-Tay-Do-phai-tra-cho-Ngan-hang-Phat-trien-Viet-Nam---Chi-nhanh-Thanh-Hoa-109,199-ty-dong , accessed at 6:19, November 27, 2016

51 Nguyen Ngoc Dien (2005), Commentary on common contracts in Vietnamese civil law , Tre Publishing House, p. 465

A situation where a bank commits to granting credit but then arbitrarily refuses to grant it, with unconvincing reasons.

- The borrower's obligation to repay the loan and interest according to the commitments stated in the loan agreement until the borrower has paid off the debt:

In terms of theoretical basis, credit institutions, as credit intermediaries, must have the obligation to repay deposits and interest to customers (depositors) on time. Credit institutions cannot cite any reason to delay the obligation to pay deposits when due. The principle of repaying loans and interest is set by lawmakers, in order to balance the rights and contractual responsibilities of the parties. To implement this regulation, credit institutions are required to build a strict and effective credit process, make efforts to monitor loan flows, have measures to secure loans, and carefully select customers with real financial and economic capacity to lend to. Credit institutions are only allowed to waive or reduce loan principal and interest when customers fully meet the requirements prescribed by law (when customers encounter temporary difficulties, or waive or reduce interest according to the policies of the State and credit institutions).

Thus, HDCV shows basic characteristics compared to asset loan contracts. In particular, the responsibility of the loan contract (bank) is emphasized, not only for the lender right from the time of signing the contract, but also for the borrower when performing the obligation to repay the loan. From this characteristic, lawmakers have established a legal mechanism throughout the lending process, with strict inspection and supervision to ensure that: The borrower's obligations to repay the loan and interest are carried out on schedule as committed.

b) Loan contracts contain specific legal characteristics. First, the borrower must have the trust of the lender.

When participating in a credit relationship, the borrower must be trusted (trust factor), then the lender will proceed to lend. Trust is often present in business and commercial relationships, but in credit relationships, this factor is constituted in many forms: long-term, stable credit relationships; borrowers repay debts in full, healthy finances, etc. In internal regulations, banks also often set criteria for assessing their own level of trust in accordance with their control capacity. For example, the 6C 52 assessment model is quite popularly applied by commercial banks, suitable for the lending environment in our country. In which, the financial capacity indicator (effective use of loan money, income) of customers mentioned by this model is always a key factor, closely linked to the reputation and capacity of the borrower.

In theory, customers can have credit relationships with many credit institutions at the same time to diversify loan sources, reduce risks due to not being able to borrow from a credit institution, and meet loan requirements for businesses with a group size and multiple industries. Therefore, the work of building an internal rating system

52 This model includes: Borrower's character (Character), Borrower's capacity (Capacity), Borrower's income (Cashflow), Collateral, Environmental conditions (Conditions), Control (Control)

Credit institutions need to rely on information sources from many credit institutions where customers have credit relationships, with the meaning of limiting errors in assessing customers' reputation and credit risk.

Thus, the credit factor can be quantified by specific criteria, which serve as a basis for assessing the borrower's reputation, ability to comply with and perform contractual obligations well. From that basis, credit institutions decide whether to lend or not, and if so, to what extent and extent. This is a difficult task for credit institutions because credit assessment is often predictive, with many risks and uncertainties that can occur, including risks due to the limited data analysis skills (customer credit records) of credit officers.

Second, the transaction object of the HĐCV is monetary capital.

Monetary capital, including cash (Vietnamese currency and foreign currency; for loans in foreign currency - foreign currency, the law stipulates lending conditions to meet legitimate foreign currency needs when making payments abroad) and currency (account balance or money in the form of book entries). Money issued by the state, easy to use, is a payment instrument in the economy, affecting and related to many subjects in society. 53 The subject of a civil contract is different from a commercial contract whose subject is goods, labor products, traded, exchanged, bought and sold to satisfy human needs (for example: real estate, personal property, tangible property, intangible property, property rights, etc.). Therefore, the provisions of law must be consistent with the characteristics of the subject of this relationship. For example, commercial law allows the application of sanctions for violations (Clause 2, Article 292 of the 2005 Commercial Law) due to late delivery of goods. However, in banking, when the debt is transferred to an overdue debt, the borrower has to bear interest on the principal debt. Legal agencies cannot continue to apply a penalty for violations at a certain rate, even if the parties have agreed on the contract as the court has rejected in practice. 54

In principle, the subject of the loan contract must always be a specific loan amount clearly stated in the loan contract. 55 The borrower is only responsible for the loan amount received even if the amount depreciates compared to market fluctuations at the time of repayment. This provision is similar to the provisions in the laws of other countries (For example: Article 1894 of the Civil Code of the French Republic (Chapter II 56 ). When using the loan, the borrower must comply with the purpose of use approved by the lender. For consumer loans in the form of overdrafts, due to the small loan value, the borrower can use the loan for any purpose he wants, as long as it is within the permitted credit limit. These loan cases are not bound by the requirements for using the loan for the right purpose.

53 Ho Chi Minh City University of Law (2015), op. cit. (34), p. 209

54 See more: Final judgment No. 08/2017/KDTM-GDT dated May 19, 2017 of the Supreme People's Court

55 Hanoi Law University (2014), op. cit. (42) , p. 158

56 Vietnamese-French Jurist (1998), Civil Code of the French Republic , National Political Publishing House, p. 486