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Lotte and POSCO Caught in Dispute Over Vietnamese Highway Project

Despite Lotte Construction and POSCO E&C’s involvement in highway construction, Vietnam hasn’t paid approximately $166.7 million, yet demands $83.3 million in damages.

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Shocking revelations have come to light about Lotte Construction and POSCO E&C’s uncollected construction fees for a highway project in Vietnam, totaling about $166.7 million.

Despite an international arbitration institution ruling in favor of the Korean companies, the Vietnamese government has reportedly not complied. Conversely, a Vietnamese court has claimed that the Korean companies owe over $83.3 million in damages due to substandard construction.

According to the construction industry on the 13th, Lotte and POSCO participated in the construction of a highway connecting Danang and Quang Ngai in Vietnam, which opened in September 2018. However, they have not received part of the construction payment even after five years and six months since the opening.

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The unpaid construction fees are estimated to be around $7.2 million for Lotte Construction and $8.3 million for POSCO E&C. If you add the interest cost for the non-payment period, the unpaid construction payments are expected to grow.

The Vietnam Expressway Corporation (VEC), which is in charge of the highway construction, has reportedly not paid the Korean construction companies, citing poor construction by other sections built by domestic construction companies.

In 2021, Lotte Construction sought arbitration at the International Chamber of Commerce in Singapore against VEC. The Chamber ruled in favor of Lotte, ordering VEC to pay the overdue fees. Similarly, POSCO E&C filed for recovery of unpaid dues for the highway project in 2021. The Chamber also ruled favor of POSCO E&C, ordering VEC to pay the overdue fees.

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POSCO E&C sued for unpaid construction payments and retained money for the highway construction project connecting Danang and Quang Ngai in Vietnam at the International Chamber of Commerce in 2021. The International Chamber of Commerce ruled in favor of POSCO E&C, just as it did in the Lotte Construction lawsuit, ordering the payment of unpaid construction payments.

Despite the arbitration ruling by the International Chamber of Commerce, the situation shows no improvement. Both Lotte Construction and POSCO E&C applied for consular certification of the arbitration judgment at the Vietnamese Embassy in Singapore, but the Vietnamese Embassy refused.

Without the consular authentication, the arbitration ruling effectively becomes invalid, almost nullified. The Korean Embassy in Vietnam requested cooperation from the Vietnamese government, but no response has been received.

In 2013, the contract amount for the construction was around $68.3 million for Lotte Construction and $53.6 million for POSCO E&C. They had hoped for success in overseas construction orders. Still, the failure to receive construction payments even after ten years is expected to impact their overseas expansion efforts.

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The shock is intensifying as it has been revealed that they are in a crisis of paying $8.4 million to VEC following the non-payment of construction payments. The Hanoi People’s Court in Vietnam held a trial last October related to allegations of substandard construction on the highway connecting Danang and Quang Ngai, and it was ruled that Korean companies should pay tens of millions of dollars in damages to VEC.

According to local media, the Hanoi People’s Court ruled that five construction companies, including Lotte Construction and POSCO E&C, should pay VEC a total of $21.2 million in damages for the poor construction of the Danang-Quang Ngai highway. The amount was determined in proportion to the scale of the companies’ bid packages that failed to meet quality standards.

The Hanoi Court ordered Lotte Construction to pay $5.9 million and POSCO E&C to pay $3.3 million in damages. It was added that the construction companies have the right to demand compensation through separate civil lawsuits against former VEC officials charged with involvement in the poor construction. However, these individuals are known to be currently imprisoned.

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The highway project connecting Danang and Quang Ngai in Vietnam, led by VEC, is a large-scale project with a length of approximately 86.4 miles and a total investment capital of over $1.57 billion. Construction began in May 2013, the 40.3-mile section was completed in 2017, and all construction was completed in 2018.

Right after the highway opened, local communications reported cracks and potholes throughout the highway. The Vietnamese authorities concluded that the poor construction resulted from non-compliance with construction regulations during the process.

The highway constructors demanded compensation for failing to meet quality standards, but VEC argued that the foreign contractors’ fault led to this situation.

Lotte Construction and POSCO E&C protested against the test standards, methods, and site conditions, but the Vietnamese court sided with VEC, a domestic company. Both Lotte Construction and POSCO E&C are known to have appealed.

Furthermore, it is known that the section where the poor construction occurred was not a foreign company but a local Vietnamese company’s construction section, so attention is focused on the appeal judgment.

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Meanwhile, news of overseas orders from domestic construction companies is coming from all over. These companies are leading the charge in earning foreign currency and are being met with cheers, but the repeated occurrence of foreign clients delaying payments or finding fault with the work to withhold payment is increasing the anxiety over overseas orders.

Various risks are associated with overseas orders. To address these issues, the government has created a task force known as “One Team Korea.” However, the prevailing opinion is that it still constitutes an ineffective group. Critics say it focuses too much on overseas expansion and securing business orders, with insufficient post-project support.

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