1. Why arbitration makes sense
This article shows foreign businesses the necessity of dispute resolution clauses quite plainly and provides assistance in choosing appropriate alternatives to the Vietnamese civil courts.
Disadvantages of Vietnamese courts
Most contracts in North America and Europe specify in detail all of the parties’ obligations and will be closely watched for the effectiveness of its clauses. The contract’s legal enforceability, however, is widely regarded as a given.
On the other hand, contracts between foreign investors and Vietnamese entities or with a reference to Vietnam that establishes Vietnamese jurisdiction should always specify the question “what institution will decide any disputes and in which language and what national law is to be applied?”
In this circumstance, without a dispute resolution clause, Vietnamese courts will have jurisdiction over a possible dispute. However, interested parties must consider the particularities of Vietnamese courts in comparison to Western rule-of-law courts. According to Transparency International, the risk of corrupted decisions remains, and almost one-fifth of surveyed Vietnamese people (aged 18 – 65) believe that judges are involved in corruption (Global Corruption Barometer 2017). Many businesses therefore avoid Vietnamese courts, as the existence of bribes deters them (USAID’s Vietnam Provincial Competitiveness Index 2021). Besides the unfortunately persistent risk of corruption, the Vietnamese judiciary, despite improvement efforts, continues to struggle with additional problems: Many Vietnamese judges lack adequate legal training and are appointed through personal contacts with party leaders or based on their political views, as a 2012 study by the United States Dept. of State revealed. Extremely low judicial salaries and short office terms of five years that must be renewed through a new appointment amplify the judiciary’s dependence on the Communist Party’s sympathy and on bribes. Furthermore, there is the systemic problem that rule-of-law and a single-party-system are mutually exclusive, due to the practical lack of separation of powers (Andersson 2012). The term rule-of-law in its Vietnamese translation means rules of the state, therefore rules of the Communist Party running the single-party state. Considering these factors, putting potential disputes into the hands of the Vietnamese judiciary is not advisable, because the possibility of corrupted decisions and political pressure or incompetent judges must still be taken into account. It is also important to note that, similar to other countries with an independent court system and a strong emphasis on the rule-of-law, companies may prefer to see delicate affairs arbitrated, rather than see their commercial disputes become a matter of public record.
Advantages of arbitration
The right arbitration center provides independent decisions and professional competence. It is usually possible to select a pool of arbitrators trusted by both parties in the clause, which might lead to a wider acceptance of a possible arbitrational decision. It is important to consider arbitrator candidates based on their expertise in the relevant business field. Most arbitration centers provide renowned experts for certain fields of work.
2. Which arbitration court is right?
Selecting an appropriate arbitration venue is a key component in designing any dispute resolution clause A company may decide upon a Vietnamese arbitrational court, for instance the Vietnamese International Arbitration Centre (VIAC), or an offshore arbitrational court, such as the Singapore International Arbitration Centre (SIAC). To decide which venue is the best fit, the following factors must be carefully considered:
Project size
For major projects with an investment sum of more than roughly US$ 5 million, choosing an international arbitration court is generally recommended. At this level, the problem of cost pressure (see infra) is likely to be neglected. An international tribunal’s decision is also more likely to be accepted by the parties, as a lack of competence on the arbitrator’s part and any (remote) possibility of political pressure on the arbitrators is therefore eliminated.
Location of seizable assets – enforcement risks of foreign arbitrational awards
Another major factor is the location of the contractual partner’s assets that may be seized when enforcing a possible arbitrational award. If the assets are mainly located in Vietnam, a foreign arbitrational court’s decision must be enforced there – a tougher task than enforcing a domestic award. Indeed, Vietnam became a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (NYC) in 1995, and therefore foreign arbitrational awards of the 149 member states can generally be enforced. However, there is a risk of a substantial delay in completing enforcement, as an application to the Ministry of Justice and further explanations and a court
date leading to an appealable decision are necessary for enforcement. Furthermore, the competent Vietnamese enforcement court may reject the arbitrational award. According to Article V of the NYC, this is possible in the case of an arbitrational award’s violation of domestic laws or public orders. The Vietnamese Civil Code refers to this as the “principles of Vietnamese laws”, and the Vietnamese judiciary has made broad use of it (Tam Shu Ching et al. 2012). With more than 50% of domestic verdicts being set aside, it shows that the courts in Vietnam have somehow not been friendly with and not positively supported the arbitration tribunal. In one case, for example, rejecting the arbitrational award of a foreign company was based on a missing construction permit (Tyco Services Singapore Pte Ltd v Leighton Contractors Vietnam).
Pressure of cost
One should take into consideration that the costs of on- and offshore arbitration differ widely. For a value in dispute of approximately US$4 million, for instance, the cost of arbitration at the VIAC is roughly $62,000 if one arbitrator is assigned to the case, as opposed to about U$117,000 at the SIAC. Not only are the costs for an offshore arbitration substantially higher, but that option can create additional costs for parties, such as travel expenses for parties, witnesses and lawyers. Furthermore, the hourly rates of local lawyers at the international arbitration court are usually higher than the rates of Vietnamese lawyers, (Shouzhi et al. 2009). The same applies to expert’s opinions and other experts. The risk of expensive litigation can put less liquid companies under pressure to accept even unfavorable settlements. Therefore, the cheaper onshore arbitration can often be more beneficial to companies with fewer financial resources.
Complexity and specialty of the subject matter of the contract and potential issue
Vietnamese arbitration courts, such as VIAC, have a high legal competence. But domestic arbitrational courts cannot yet provide internationally recognized experts on the same level as foreign tribunals. The main reason for this is the comparatively low fee of an arbitrator in Vietnam. Decisions regarding business transactions of high complexity or contracts focusing on highly specialized fields are more likely to be mutually accepted if the parties choose a more expensive foreign arbitrator with special expertise.
(Hidden) state-owned enterprises
When state-owned enterprises are involved, an offshore arbitration clause should be used. This ensures that the arbitrator handling the case is free of any authoritarian exertion of influence by the state-owned party. In theory, the follow-up problem of the enforcement of judgment in Vietnam remains, but the current development shows that the positive award strengthens a company’s negotiating position with the business partner. The same applies to hidden state-owned enterprises – companies that are de facto influenced by the government, for instance those that share ownership through state-owned enterprises’ subsidiaries. The contractual partner’s status as “state-owned” should always be considered very carefully.
Special case: Intellectual property
In special cases, where intellectual property is concerned, the contracts must ensure that no official interim measures are cut off by the arbitration clause. Arbitration courts are also able to issue interim measures. But as the case arises, an opening clause should be considered where Vietnamese courts or authorities such as the Market Management Bureau normally provide more effective interim relief.
Choice of jurisdiction
3. How it is done
Vietnamese law allows dispute resolution clauses in commercial contracts explicitly through the Law 54/2010/QH12 on Commercial Arbitration, (“LCA”). An effective dispute resolution clause withdraws Vietnamese courts’ jurisdiction of the particular case and establishes the appointed arbitral tribunal’s jurisdiction. The LCA follows the UNCITRAL model law as an international standard for procedural rules, and the lawmakers’ intention is indeed arbitration-friendly. Once the decision is made regarding whether and where an arbitration tribunal should be used for disputes arising from the contract, the following points should be cleared:
• Applicable law: The applicable law can be chosen freely in cases with a foreign element according to Article 14 Nr. 2 LCA. The chosen applicable law should also influence the selection of arbitrators, as they should have a legal background in the particular national law.
• Court’s language: This can be freely selected according to Article 10 Nr. 2 LCA.
• Number of arbitrators: Several arbitrators might give a more balanced-out decision as a collegial formation. Arbitration costs will however rise accordingly.
• Appointing a particular arbitrator: This is important in cases that require experts:
The dispute resolution clause becomes effective if the requirements of Articles 16, 18 and 19 LCA are met, e.g. through a written agreement.
Making use of the dispute settlement mechanism under the EU – Vietnam Investment Protection Agreement (“EVIPA”) and the Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”)
For any investment-related dispute (i.e. expropriation without compensation, investment discrimination), an investor of a party is allowed to bring such dispute against the Government of the other party to the Investment Court for settlement. In case either of the disputing parties disagrees with the decision of the Tribunal, it can appeal it to the Appeal Tribunal. While this is different from the common arbitration proceeding, it is quite similar to the 2-level dispute settlement mechanism in the WTO (Panel and Appellate Body). We believe that this mechanism could save time and cost for the whole proceedings. The final arbitration award is binding and enforceable without the local courts’ review of its validity. The Government of Vietnam has to fully implement this commitment within five years from the entry into force of the EVIPA. For your information, as of February 2023, there have been 11 out of 27 EU members having ratified the EVIPA. It means we need to wait until the remaining 16 EU members have ratified the agreement for it to take effect and trigger the deadline for direct enforcement of arbitral award by the Government of Vietnam.
While the CPTPP allows the same mechanism for an investor of a party to challenge the Government of the other party, it does not include the 5-year transitional period as in the EVIPA. In other words, the enforcement of arbitral award under the CPTPP would follow the NYC rules. However, we believe that the Government of Vietnam will soon revise the current local arbitration regulations to ensure its commitment under the EVIPA. Investors under the CPTPP could then take advantage of such improvement.
We believe that the investor-to-state dispute settlement (“ISDS”) under both the EVIPA and the CPTPP brings the highest level of enforceability and bankability when they are well designed in commercial contracts in Vietnam.
Conclusion
The question of whether or not to have a dispute resolution clause in contracts in Vietnam can be answered with a clear yes. However, deciding on the right place for dispute resolution can involve much complexity, as a number of factors must be thoroughly taken into account.
In addition, investors do not need to wait until the entry into force of the EVIPA or the amendment of local arbitration laws to benefit from the ISDS mechanism. We can assist you to include the ISDS clause in your commercial contracts now so that your contracts have the highest level of enforceability and bankability. Please contact us for more details on how we can include it per the contact details right below.
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Dr. Oliver Massmann is a partner in the Hanoi office of U.S.-based international law firm Duane Morris LLP. He practices in the area of corporate international taxation and on power/water projects, matters related to oil and gas companies and telecoms, privatization and equitization, mergers and acquisitions, and general commercial matters for multinational clients in relation to investment and doing business in Vietnam. Dr. Massmann is registered Arbitrator of the Vietnam International Arbitration Centre.
Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC. He can be reached at omassmann@duanemorris.com.