All posts by Giles T. Cooper

New Rooftop Solar Guidance – MOIT Official Letter 7088  

Further to the recent publication of Circular 18, the Ministry of Industry of Trade (“MOIT”) has issued Official Letter 7088 dated 22 September 2020 to provide further guidance on development of rooftop solar power projects.

The following important points are worth considering for developers and prospective investors alike:

  1. Combining multiple projects into a single PPA

Where a group of rooftop solar projects (e.g. a portfolio of 5 rooftop solar installations in separate locations) exceeds a total combined capacity of 1MW, it is not permitted for the producer to combine several distinct PPAs into a single PPA for the entire portfolio.

Rather, separate PPAs must be executed with offtakers for each individual rooftop solar power project.  If not, the project will not qualify as a “rooftop solar system” and will be considered something else, presumably a solar project subject to additional licensing requirements including power masterplan approval and need to obtain relevant electricity operation license(s).  Though whether a system actually mounted on a roof can be treated as a ‘ground-mounted’ system for procedural purposes remains a matter open to debate.

While this is logical and previously largely presumed, it does potentially expose investors to additional contractual risk and contract management issues.  Ideally investors would secure guarantees from a single source for a string of rooftop PPAs.

  1. Genuine rooftop purpose

In order to be characterized as a valid rooftop solar project for the purposes of attracting FiT 2 under Decision 13, a rooftop solar project must only be installed on a rooftop which has a genuine construction purpose beyond that of merely existing to hold solar equipment.

In other words, rooftops which have no other function than to hold solar installations will not be characterized as a valid rooftop, and thus ineligible to receive FiT.

The Official Letter specifically references agricultural land on this point, suggesting that solar systems would need to be installed on a rooftop which has a genuine pre-existing agricultural or farming function.

This was something that was foreshadowed by previous unofficial comments from various authorities.  With the FiT 2 regime due to expire at end of December 2020, it remains open whether and how private rooftop PPA arrangements can proceed on structures that don’t otherwise meet FiT criteria.

  1. Eligibility under FiT 2

Rooftop solar projects of a voltage level of more than 35kV are not eligible to receive FiT 2 under Decision 13.

Further, rooftop solar installations on agricultural farm land with a capacity of more than 1MW or 1.25 MWp are now also ineligible to receive FiT 2. 

  1. Recent info on fire prevention requirements for rooftop solar project

Separate from the above Official Letter, we have also seen recently some regulations on providing additional information in regards to fire prevention obligations for ground-mounted and rooftop solar power developments.

Specifically, projects listed in Appendix IV of Decree 79/2014/ND-CP must have a design for fire prevention approved prior to the construction phase.

Appendix IV includes residential areas, apartment buildings, industrial zones, hospitals, educational facilities, and shopping malls, amongst several other specific development sites.

Relative to the current uncertainty over application of construction permit regulations for rooftop solar project around the country, this at least seems a reasonably clear and consistent requirement.

***

Should you have any further queries on rooftop solar power regulations or investment opportunities in Vietnam, please do not hesitate to contact us.

For more information, please contact Giles Cooper at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an Australian qualified lawyer and associate in Duane Morris’ HCMC office.

New Draft Decree – Regulations Implementing the PPP Law 2020

Vietnam’s first uniform Public-Private Partnership Law (the “PPP Law”) was recently passed by the National Assembly, effective from 1 January 2021.

Whilst the new law provides a much needed legislative framework for the facilitation of PPP investment, it is not without criticism and several drafting uncertainties present potential concerns for developers and lenders alike.

A recently published draft decree serves to clarify such uncertainty, providing further guidance in several key regulatory areas.[1]

Eligible Project Sectors and Investment Size

The PPP Law introduced several general eligible sectors for PPP investment (e.g. Transport, Power, Water, Waste, Healthcare, Education and Training, IT) but did not provide further guidance on the specific sub-sectors or investment amounts pertaining to each.[2] The draft decree confirms the following:[3]

  • Transport: Transportation projects require a total minimum investment amount of VND 1,500 billion for projects in road, rail, inland waterway, maritime, and aviation;

 

  • Power: Power plant and grid projects require a total minimum investment amount of VND 2,300 billion;

 

  • Water: Clean water supply projects require a total minimum investment amount of VND 1,500 billion (urban areas) / VND 200 billion (rural areas) / VND 100 billion (difficult or especially difficult socio-economic areas);

 

  • Waste: Wastewater drainage and treatment projects require a total minimum investment amount of VND 1,500 billion (urban areas) / VND 200 billion (rural areas) / VND 100 billion (difficult or especially difficult socio-economic areas);

 

  • Health, Education, and Training: Minimum total investment amount of VND 100 billion; and

 

  • IT: Minimum total investment amount of VND 800 billion for concentrated IT park developments and VND 200 billion for technical IT projects (i.e. national information systems, government e-platforms and databases, information security, technical infrastructure, amongst others).

The Introduction and Role of Project Evaluation Councils

For each proposed PPP project, a State Evaluation Council (National Assembly-level investment) or Inter-Branch Evaluation Council (Prime Ministerial-level investment) or Grassroots Evaluation Council (People’s Council-level investment) will be established. [4]

Such councils are tasked with arranging an evaluation and official opinion on the submitted pre-feasibility and feasibility study reports. Councils will comprise of official representatives from the Ministry of Planning and Investment and other relevant agencies as decided by the Prime Minister.

The draft decree introduces the potential for domestic or foreign organizations to be formally hired as consultants to assist with such evaluation, as approved by the Prime Minister or relevant People’s Council. [5]

The Ability of Investors to Self-Propose Projects

Importantly, the draft decree seems to confirm that investors will be able to self-propose PPP projects. [6] Specifically, investors are required to submit formal proposals to the Department of Planning and Investment (“DPI”). The proposal must satisfy several criteria as detailed under Article 27.1 of the PPP Law. Following this, investors will be required to prepare a pre-feasibility report for submission.

Where two or more investors submit proposals for the same project, the DPI will select the most feasible project based on several factors including investor capacity and expertise, financial considerations, and potential socio-economic impacts, amongst others.[7]

Project Conversion: Public to Private

Projects currently funded by way of public capital may seek to formally convert to a PPP form as under the new law.[8] Conversion will require the current authorized agency to withdraw their public capital portion, with the investor undertaking the relevant re-capitalization.

It is unclear at this point if any limitations will apply to potential conversions. For example, a restriction on the conversion of projects which are already at a particular development phase (e.g. construction phase).

Whilst the opportunity to invest in underperforming pre-existing public projects is attractive and potentially lucrative, corporate restructuring under Vietnamese law is highly complex and requires careful further legal consideration.

 

 

 

Project Contract – Takeover Rights

The new draft decree provides that where an investor commits a serious breach of their contractual responsibilities and is unable to remedy such breach within a reasonable time, the procuring agency is granted a statutory right to temporarily takeover the management and operation of the project facility.[9] Such rights apply broadly, arising when the project is in the pre-construction, construction, and operational phases. [10]

Termination Rights – Procuring Agency

The draft decree details broad circumstances leading to the rights of a procuring agency to terminate for serious contractual breach by the project enterprise: [11]

  • Pre-construction: Failure to procure essential financing options, failure to execute the PPP project contract or to incorporate a project enterprise prior to the specific contractual deadline, failure to obtain the necessary licenses or approvals, failure to commence basic construction works or lodge formal project design documentation;

 

  • Construction: Failure to comply with building regulations or design criteria, failure to complete works within the agreed schedule; failure to comply with labor regulations and other public laws; and

 

  • Operation: Failure to supply services pursuant to quality standards prescribed by law and under contract, failure to comply with price controls, temporary interruption to the supply of services without consent, failure to maintain the facility in accordance with agreed quality standards, failure to comply with any imposed administrative sanctions or penalties.

 

Such termination rights are broad and potentially uncertain, greatly favoring the procuring agency, and will thus likely present as an unwanted contractual risk for prospective investors.

Termination Rights – Project Enterprise

Conversely, a project enterprise is provided with very limited grounds for termination should the procuring agency commit a serious contractual breach: [12]

  • Acts of corruption or bribery;

 

  • Failure to make the required payments to the project enterprise;

 

  • Failure to obtain the necessary licenses to operate the facility where such failure is not the fault of the project enterprise; and

 

  • Failure by the procuring agency to provide necessary support for the performance of the project contract.

Compensation for Contractual Termination

The draft decree confirms that compensation for termination should be included in the project’s contractual agreement as specifically negotiated between the procuring agency and the project enterprise. The draft decree also contemplates that a compensation clause should include reference to the fair value of work already performed up to the point of termination, as well as any further expense or loss, including loss of profit. [13]

Conclusion

The passing of Vietnam’s first Public-Private Partnership Law provides an exciting development in the evolution of the Vietnamese PPP market. Whilst the new law serves to protect investors via the codification of key legal rights, the drafting of the law is not without concern and numerous uncertainties exist as to statutory application.

It is anticipated that several guiding circulars and decrees will be issued to assist in the implementation of the new law. The first such decree, albeit currently in draft form, provides important further clarification on eligible PPP sectors, investment size, the role of project evaluation councils, contractual termination rights, and compensation terms.

Please do not hesitate to contact us should you have any further queries or wish to discuss how the incoming PPP Law may provide investment opportunities for you.

***

For more information, please contact Giles Cooper at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an Australian qualified lawyer and associate in Duane Morris’ HCMC office.

[1] Draft Decree, Detailed Regulations for Implementation of Law 64 on Public-Private Partnership Investment Form, 27 August 2020, (“Draft Decree”).

[2] Article 4.1, PPP Law 2020.

[3] Article 3, Draft Decree.

[4] Articles 7-16, Draft Decree.

[5] Article 17, Draft Decree.

[6] Article 31, Draft Decree.

[7] Article 32, Draft Decree.

[8] Articles 34-35, Draft Decree.

[9] Article 38, Draft Decree.

[10] Article 40, Draft Decree.

[11] Article 40, Draft Decree.

[12] Article 41, Draft Decree.

[13] Article 42, Draft Decree.

Legal Update – Vietnam’s New Law on Enterprises 2020

The National Assembly of Vietnam recently approved a new Law on Enterprises 2020 (59/2020/QH14), superseding the Law on Enterprises 2014 (68/2014/QH13). As with previous versions, the Enterprise Law continues to regulate the establishment, operation, and governance of corporate entities, and exists as the primary legislative instrument in the area of Vietnamese corporate law. The new law will come into effect on 1 January 2021. Directors, shareholders, and prospective investors are encouraged to consider the key amendments discussed below.  Critically, companies should also ensure that their charters and internal processes are amended and adapted as necessary to ensure consistency and compliance with the terms of the new law as of 1 January 2021.  If not, they run the risk of taking unlawful corporate actions which could jeopardise validity of transactions and/or give rise to potential disputes and liabilities.

One Member Limited Liability Company – Corporate Owner

Where a one-member limited liability company is owned by a corporate member, there is now no longer a requirement to appoint official controllers (sometimes called inspectors). Rather, the incoming law provides for the following possible two organisational structures: i) Chairman and Director/General Director; or ii) Council of Members and Director/General Director.[1] Importantly, the company must appoint at least one legal representative who must also simultaneously hold the position of Company Chairman, Chairman of the Members’ Council, or Director/General Director.[2]

 Capital Transfers by Foreign Investors

The Enterprise Law 2014 provided an express blanket obligation that all foreign capital contributions (as well as dividend repatriations, and the purchase, sale, and transfer of shares) must be routed via an authorised capital account with a Vietnamese bank, except where such transfers were made in the form of assets.[3]

The phrasing under the 2020 law remains unchanged, merely re-stating that all foreign capital transfers must be routed via a capital account, except for transfers in the form of non-cash assets.[4]

In potential conflict with the above position, State Bank of Vietnam regulations under Circular 06/2019/TT-NHNN provides that transfers between two non-resident investors need not be routed via a capital account, irrespective of whether or not the transfer was in the form of cash or non-cash assets. [5]

Issues around Vietnamese foreign exchange control laws and the use capital accounts remain highly complex and uncertain, and we intend to produce further publications on such matters in due course. Whilst the 2020 law does touch on the issue, it is still silent as to when foreign investments are categorically deemed to be direct or indirect for the purposes of routing contributions via a formal capital account. It is strongly recommended to seek further legal advice prior to the making of any foreign capital contributions, as non-compliance may result in material transaction delays and prohibitions on the repatriation of future profits.

Bond Offerings

It has been widely reported that the Vietnamese domestic bond market has recently experienced significant overheating, largely as an indirect consequence of the State Bank of Vietnam imposing credit restrictions, particularly on real estate ventures.

The new law plays a part to address such concerns via the introduction of additional statutory obligations on corporate bond issuers and investors. The new law continues to allow for the issuance of bonds by private joint stock companies, however placement requires satisfaction of numerous complex transparency obligations, including in relation to audit procedures, shareholder approval, stock exchange notification, prudential and debt ratios, amongst others.[6] Such requirements on issuance also overlap with existing stipulations under the Securities Law 2019 and various guiding decrees, and it is therefore strongly advised to seek legal counsel on such matters prior to considering a private placement. Under the 2014 regime, the placement of private bonds only required the board of management to report on the issuance to shareholders in the next general meeting, including details of bond value, timing, class, and an explanation of the board’s resolution.[7]

The new law also allows for multiple member limited liability companies to issue bonds, [8] which was previously restricted to that of only joint stock companies under the 2014 law.

Additional Protections for Minority Shareholders

The new law allows a group of shareholders (5% or more) of a joint stock company to access important corporate information, including financial statements, resolutions, minutes, and inspection committee reports, amongst others. [9] This is a lowering of the threshold from 10% under the 2014 law.[10]

The group may also seek to convene a shareholders’ meeting in specific circumstances (i.e. serious breach of shareholder rights by the board of management). [11] Ordinary shareholders are now no longer required to hold their shares for a minimum ownership period (i.e. 6 months as under the 2014 law [12]) before being able to exercise general shareholder rights.[13]

Additionally, a group of shareholders (10% or more) now need not wait for 6 months post-investment before being able to exercise their right to nominate a specific director to the board of management. [14] This amendment is crucial, as in practice it had been commonplace for such delay to restrain incoming investors from nominating a preferred director at the time of investment completion.

Of note, the amendment comes on the back of a 2018 controversy, whereby incoming majority shareholder, ThaiBev, was denied the ability to nominate members to the board of management of Sabeco, Vietnam’s largest domestic brewer. This occurred due to the fact that ThaiBev had not held their shares for at least 6 months prior to the holding of Sabeco’s extraordinary general meeting, which was principally held for the purposes of nominating board of management members post-investment completion.

Rights of Preference Shareholders

Preference shares are a form of non-voting shares under current Vietnamese law. Significantly, the new law allows for shareholders holding preferred dividends and redeemable preferred shares to have limited participation rights. Such shareholders will be allowed to attend and vote in shareholder meetings where proposed resolutions adversely impact their rights and obligations.[15]  In such cases, a resolution will only pass where it is approved by at least 75% of shareholders who hold that specific class of shares.[16] It is important to note that the incoming provision does not provide an express definition of “adverse” should a shareholder dispute scenario arise.

This is a crucial amendment, providing much needed statutory protection to the rights of preference shareholders. In principle, Vietnamese law currently allows ordinary shareholders to alter the substantive terms of a class of preference shares via the passing of a general shareholders’ resolution. The above incoming 75% threshold seemingly serves to restrain such adverse action. Of course, the minority 25% shareholding group will nevertheless still be potentially subject to adverse alteration, and it is strongly recommended that appropriate consent rights are negotiated and drafted into the shareholders’ agreement at the time of investment.

 Pre-emptive Rights

Where a private joint stock company seeks to issue new shares by way of private placement, the amended law provides that existing shareholders are to be given pre-emptive rights over the subscription of such shares, except in a situation of merger or consolidation. [17]

Accordingly, in practice, a private joint stock company should obtain a formal waiver of pre-emptive rights from existing shareholders prior to undertaking a private placement of new shares. It may also be necessary for a general resolution to pass where such shares are offered on more favourable terms than those currently in existence. [18]

While this amendment will be welcome to some, it will serve as a potential constraint and unwelcome development for others. This sort of change in the 2020 law also highlights a significant point that has not been addressed: the role and scope of shareholder agreements in which shareholders may reach agreement on points that run contrary to otherwise mandatory terms of the Enterprise Law (e.g. – agreement to be issued new shares in priority to other shareholders). Despite the common use of shareholder agreements in Vietnam, there remains significant question marks over their validity and enforcement in practice. Nothing in the 2020 law suggests a change to this status quo.

Legal Representative Liability

A joint stock company or limited liability company may now appoint multiple official legal representatives. The specific rights and duties of each appointed representative must be recorded in the charter of the company. [19]

Should the charter be silent as to such allocation of duties, each individual legal representative stands to represent the company before third parties.[20] Under the new law, legal representatives are also now jointly liable for any loss or damage related to the company.[21] There continues to be no express indication that companies can agree to insure or indemnify legal representatives against such liabilities.

 Shareholder Confidentiality Obligations

Shareholders of joint stock companies are now under an obligation to keep corporate information confidential and refrain from distribution to third parties (presumably most relevant to substantive financial reports, strategic planning etc). [22]

The provision does not precisely identify the forms of relevant information nor circumstances where distribution would otherwise be permitted. It is also unclear whether such obligations would materially prevent a shareholder from providing corporate information to a prospective purchaser of shares.

 State Owned Enterprises – Lower Threshold

The new law amends the 2014 position, providing that State-owned enterprises (SOEs) are now to be defined as enterprises comprising of a State shareholding of more than 50% charter capital or voting rights. [23] The 2014 law previously defined SOEs as those enterprises with 100% State owned charter capital. [24]

This will have the effect of increasing the number of SOEs significantly. While this may serve a policy position of enhancing State control over use of State capital, it may have an adverse impact, especially when considering the drive to speed up the equitization process in general. SOEs are, in general, subject to stringent rules on audit, fund raising, and procurement, and such rules may serve to dampen the interest of potential strategic minority investors.

Digital Signatures

Enterprises are now free to utilise both physical seals and digital signatures when executing company documentation. Consistent with the current Law on Electronic Transactions,[25] digital signatures will be given the same legal weight with that of traditional physical seals. This is particularly relevant due to the current Covid-19 situation, introducing timely flexibility and practicality into corporate administrative practice. [26]

Board of Management – Rights and Obligations

The rights, duties, and liabilities of members of the board of management of joint stock companies remain largely unchanged under the new law, albeit with the following technical amendments.

Firstly, a shareholder holding as little as 1% has standing to commence legal proceedings against a director or member of a board of management who is in breach of their duties, regardless of how long the shareholder has held their shares (previously minimum 6 month holding requirement under the 2014 law).[27]

Secondly, where the board of management passes a resolution contrary to law or the charter of the company, a single shareholder now has the right to commence legal proceedings and request that the resolution be suspended or rescinded,[28] again with no minimum holding requirement (previously 1 year under the 2014 law). [29] This will importantly empower incoming shareholders who would otherwise have limited formal legal recourse against unlawful board action.

Thirdly, a board appointed independent director can now only serve for two consecutive terms. [30] There was previously no limit under the 2014 law. [31] This amendment will ensure that appointed independent directors are better able to meet their corporate governance objectives, bringing greater transparency and impartial oversight to the management of joint stock companies in Vietnam.

Finally, a board member of a joint stock company which is also a State-owned enterprise (i.e. State shareholding / charter capital of more than 50%), must not have a family relationship with a manger of the company, or with a manager of the parent company.[32] Again, such amendment brings greater transparency and governance standards, better protecting shareholders against improper corporate conduct.

Transitional Requirements

It is highly recommended that all enterprises undertake a thorough review of their existing company charters and proactively identify and amend any clauses which are inconsistent with the incoming law prior to 1 January 2021.

Where a company charter is inconsistent with the new law, board actions based on such outdated clauses (e.g. prohibiting a new shareholder from nominating a specific director until at least 6 months of shareholding has passed) may be legally challenged and potentially deemed invalid at law.

 Conclusion

In conclusion, Vietnamese corporate law continues to positively evolve with the approval of the amended Enterprise Law 2020.

Significantly, the new law enhances protections for minority and preference shareholders, whilst consolidating pre-emptive rights. Importantly, the law also simplifies organisational structures for one-member limited liability companies, and allows for the use of digital signatures in the execution of corporate documentation.

Finally, the new law seeks to address recent concerns around overheating and transparency in the Vietnamese domestic bond market, introducing greater statutory obligations on private issuers and investors alike.

***

For more information, please contact Giles at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an associate in Duane Morris’ HCMC office.

[1] Art 79(1), LoE 2020.

[2] Art 79(3), LoE 2020.

[3] Art 36(3), LoE 2014.

[4] Art 35(5), LoE 2020.

[5] Art 10(1), Circular 06/2019/TT-NHNN.

[6] Art 128(3), LoE 2020.

[7] Art 127(4), LoE 2014.

[8] Art 46(4), LoE 2020.

[9] Art 115(2)(a), LoE 2020.

[10] Art 114(2), LoE 2014.

[11] Art 115(3), LoE 2020.

[12] Art 114(2), LoE 2014.

[13] Art 115(2)(a), LoE 2020.

[14] Art 115(5), LoE 2020.

[15] Art 148(6), LoE 2020.

[16] Art 148(6), LoE 2020.

[17] Art 125(2)(b), LoE 2020.

[18] Art 125(2)(c), LoE 2020.

[19] Art 12(2), LoE 2020.

[20] Art 12(2), LoE 2020.

[21] Art 12(2), LoE 2020.

[22] Art 119(5), LoE 2020.

[23] Art 88(1), LoE 2020.

[24] Art 4(8), LoE 2014.

[25] Law on Electronic Transactions 51/2005/QH11.

[26] Art 43(1), LoE 2020.

[27] Art 166(1), LoE 2020; Art 161(1), LoE 2014.

[28] Art 153(4), LoE 2020.

[29] Art 149(4), LoE 2014.

[30] Art 154(2), LoE 2020.

[31] Art 150(2), LoE 2014.

[32] Art 155(1)(d), LoE 2020.

The Good, The Bad, and The Ugly – Vietnam’s New Public-Private Partnership Law 2020

Vietnam’s first Public-Private Partnership Law 2020 (the “PPP Law”) was passed by the National Assembly of Vietnam on 18 June 2020 and will come into effect from 1 January 2021. It is anticipated that further guiding decrees and circulars will soon be introduced to assist in the implementation of the PPP Law.  Here we take a look at the good, the bad, and the ugly.

The Good

The current Vietnamese PPP legal framework consists of numerous outdated circulars, decrees, and decisions. The incoming PPP Law serves to unify the current patchwork of laws into a stand-alone legislative instrument, thereby attempting to govern the full life cycle of inbound PPP activity, providing greater legal clarity and comfort to prospective foreign investors. The availability for the first time of codified minimum revenue guarantee and viability gap mechanisms will pique the interest of international investors and financiers. Likewise, the ability to select third country international arbitration provides increased comfort should a dispute scenario arise. Finally, the inclusion of competitive bidding processes enhances transparency and is welcomed.

The Bad

Concerns exist with respect to rigid project development timelines, restrictions on the assignment of rights, limitations in the scope of eligible investment sectors, and high minimum investment thresholds. Mandatory contract performance security and potentially mandatory use of template project documents are also areas of potential concern for investors and financiers alike.

The Ugly

From a project finance perspective, broad rights in favor of the procuring entity to terminate “in the interests of the nation”, rigidity with regards to the timing of financial close, and limitations in the choice of contractual governing law are all notable concerns, resulting in unfavorable risk allocation for investors. Further, the lack of express change in law provisions, step-in rights for lenders, and the inability of international financiers to take direct security over land in Vietnam will likely further negatively impact forthcoming project bankability assessments.

The table below provides an analysis of the key features of the new law, with comparative commentary from the perspective of primary PPP participants – namely, the government, developers, and lenders:

Key Legislative Features The PPP Law 2020 Government  View Investor View – Developers / Lenders
Permitted PPP Investment Sectors –  Reduces the list of eligible PPP investment sectors to the following only: Transport; Power Grids and Plants; Irrigation, Water, and Waste; Healthcare and Education; IT Infrastructure.

 

– Current Vietnamese law under Decree 63 recognizes a broader list of PPP investment sectors, which in addition to the above, also includes public lighting systems, agricultural developments, social housing, commercial infrastructure for economic and industrial zones, water drainage systems, waste treatment systems, amongst others.

 

– The reduced list clearly articulates and reinforces Hanoi’s current policy priorities regarding target PPP investment sectors.

 

 

– Limited scope, seemingly excludes important sectors (agriculture, public housing, public lighting systems etc).

 

– Potentially excludes sub-projects connected to the primary project (i.e. terminals, pipelines, transmission lines, storage facilities etc).

 

– Ambiguities surround the statutory scope of “power plant.” Potentially excludes some forms of renewables (i.e. rooftop solar systems).

 

Competitive Bidding – All proposed PPP projects must undergo competitive bidding, except for projects related to security, defence, high technology, and “other special cases as decided by the Prime Minister”.

 

 

 

 

 

– Global best practice.

 

– Attracts top international expertise.

 

– Demonstrates policy commitment to ensure development of quality and transparent public infrastructure works.

 

– Transparent process that encourages the participation of tier-one international expertise. However, implementation in practice must be transparent and efficient to be valuable.

 

– Some investors may however prefer to self-propose projects with the option of direct appointment.

Bid Security / Contract Performance Security – Investors must provide bid security of between 0.5%-1.5% of the total investment value of the project (to be later released).

 

– PPP project companies must provide contract performance security of between 1%-3% of the total investment value of the project (to be later released).

 

 

– Ensures only investors who are genuinely committed to completing the tender process are selected.

 

– Provides the government with some form of compensation should a non-completion scenario arise.

 

– Such requirements are problematic as financing may not yet be complete at this early stage of the PPP investment cycle.

 

– A lower security threshold or more flexible timing may be more appropriate.

 

Minimum Total Investment Threshold

 

– Minimum investment threshold of USD 8.7 million (for projects in the specific permitted investment sectors) reinforces current government policy focus on large-scale PPP ventures.

 

– NB: Minimum investment threshold lowered to USD 4.3 million for projects located in geographical areas with difficult or extremely difficult socio-economic conditions.

 

– Minimum investment threshold does not apply to O&M contracts.

 

– Reinforces Hanoi’s policy preference for large-scale high-impact PPP investments.

 

 

– Small-scale projects of significant social value may still require private sector investment and expertise, and thereby be unnecessarily excluded.

 

– Particularly relevant for smaller projects in health, education, science and technology, and environmental protection.

 

Statutory Definition of “Project Enterprise”

 

 

– The new law narrowly defines “project enterprise” to that of an entity executing and implementing a single PPP project contract. – Unclear policy objective but may be linked with desire to clearly ring fence projects for ease of administration (e.g. – assessing revenues and applying tax incentives). – This would seemingly prevent the enterprise from executing ancillary sub-projects connected to the primary project (e.g. construction of regasification assets connected to proposed gas turbine power plant development).

 

Assignment of Rights

 

 

– Restricts equity investors from assigning their shares/capital contribution/rights in a PPP project company until after the completion of the construction phase.

 

– Ensures only qualified investors are selected and thus genuinely capable of implementing the proposed project agreement.

 

 

 

– Rigidly prohibits assignment. Share ownership group structures should be flexible and allow for supplemental participation, including new and affiliate membership.

 

– The participation of new members can potentially add significant value and expertise to a project.

 

Contractual Governing Law

 

 

– The PPP project agreement must be governed by Vietnamese law.

 

In contrast to the incoming provision, the Vietnamese Civil Code permits parties to a PPP contract to select foreign law where the contract includes a “foreign element.”

– Projects are located in Vietnam and it is standard global PPP practice for the agreement’s governing law to be the same with that of the host government or procuring entity. – Important concepts of commonly used contract laws (e.g. English law) are not recognized under Vietnamese law.  For example, Vietnamese law does not recognize agreement on liquidated damages.

 

– The unpredictability of Vietnamese law will likely discourage foreign lending syndicates from providing debt funding and therefore significantly impact the project’s bankability assessment.

 

Dispute Resolution

 

– Where contractually agreed, parties to a project agreement may opt for international arbitration as a dispute resolution mechanism.

 

– The new law also references international treaties as a means to resolve disputes where applicable, leading to a possible application of formal Investor State Dispute Resolution.

 

– The potential to resolve disputes via international arbitration in a third country (i.e. Singapore International Arbitration Centre) is attractive and provides additional comfort to prospective foreign investors should a dispute scenario arise.

 

 

– Potential application of Investor State Dispute Resolution under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership / EU-Vietnam Free Trade Agreement is welcomed.

 

 

Viability Gap Funding

 

 

– Allocation of public funding designated for the construction phase, site clearance and compensation, and resettlement capped at 50% of the total investment amount. – Provides a tangible incentive for private investors to participate in projects which may otherwise not be economically viable or financially attractive.

 

–  Use of viability gap funding mechanism to attract investment is consistent with other comparative regional PPP markets (e.g. Indonesia, the Philippines, and India) and is welcomed.

 

Minimum Revenue Guarantee – Subject to satisfaction of certain conditions, where revenue reaches less than 75% of the revenue in the project’s financial plan, the government shall share with the investor and the PPP project company 50% of the difference between 75% of the revenue in the financial plan and the actual revenue realized. – Important financial risk allocation mechanism, providing additional encouragement to international financiers to join PPP infrastructure developments. – Availability subject to satisfaction of complex terms and conditions, heavily weighted against the private investor.

 

– Restricts revenue risk sharing to that of a change in plan, policy, or law scenario.

 

– Fixed threshold creates financial feasibility concerns.

 

– Threshold should be flexible and adjusted on a case-by-case basis, dependent upon the specific investment sector.

 

Financial Closing Timeline – Equity and debt financing into the project vehicle must be completed within 12 months (or 18 months for projects whose decisions on investment policy fall within the approval of the National Assembly or the Prime Minister) from the execution of the project contract.

 

– Deadlines ensure funding is provided in a timely manner, injecting the requisite equity and debt amounts into the project vehicle. – Too restrictive and unnecessarily prescriptive and threatens financial feasibility.

 

– Financial closing should be more flexible and account for the different forms of potential funding (i.e. bond solutions may take more time to prepare than bank solutions).

 

Step-in Rights: Lenders – Where a project contract is terminated early, the procuring entity, lender, investor, and project company have the ability to agree to coordinate with the government entity in the selection of an alternative investor.

 

–  This is more restrictive compared to the current position under Decree 63, whereby lenders have the right to step in on their own or to appoint another competent organization to take over all or part of the rights and obligations of investors and project companies if investors or project companies fail to discharge the obligations prescribed in the relevant project contracts or loan agreements.

 

 

 

 

– Allows participants to agree on the selection of an alternate investor should a termination scenario arise.  – Too restrictive and inconsistent with global PPP best practice. In practice, lenders will not lend without pre-agreed step-in rights recorded in Direct Agreements and we do not expect this to change.

 

 

Termination – Government may terminate in the “interests of the nation.” – Provides protection and contractual flexibility should proposed investments become unviable or inconsistent with the public interest. – Reference to national interests creates a very broad termination basis in favor of the government entity and is inconsistent with international best practice.

 

– Parties should be free to directly negotiate and define specific termination events in the project agreement.

 

Foreign Lender Security – The requirement to mortgage in accordance with the Law on Land remains, meaning that security over land use rights and real property is only available to domestic lenders. – The incoming law remains consistent with key Vietnamese concepts in relation to foreign legal interests over real property. – Foreign lenders’ inability to directly take security over land and assets attached to land is a serious impediment to attracting international project finance funding.

– The use of local security agents to hold land-related security remains fraught with uncertainty and practical constraints.

 

Change in Law – No specific stand-alone change in law provision. Government will however allow for amendment of project contract terms where changes in law result in actual project revenue to be 75% less than the anticipated revenue projected in the initial financial plan.

 

– Apparent policy decision to allocate change in law risk to investors though, more likely, in knowledge that terms will be subject to case-to-case negotiation and agreement.

 

 

– The PPP Law or government-issued contractual template should provide specific clauses protecting investors regarding change in law scenarios, as consistent with global PPP best practice.

 

– Particularly important given Vietnam’s evolving legislative landscape.

 

 

For more information, please contact Giles at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an associate in Duane Morris’ HCMC office.

Circular 18: New Template PPA and Revised Regulations on Solar Power Developments

Circular No. 18/2020/TT-BCT (“Circular 18”) [1] was recently issued by Vietnam’s Ministry of Industry and Trade, and provides regulations on the development of solar power projects to guide the Prime Minister’s Decision 13 issued in April 2020. Circular 18 is effective from 31 August 2020 and supersedes Circular 16 on the same subject matter.[2]

Circular 18 introduces updated template power purchase agreements (“PPAs”) as well as revised regulations for the development of i) grid-connected solar farms; and ii) rooftop solar power systems.

Despite rapid growth and significant investment potential, the Vietnamese renewable energy market and associated regulatory regime remains highly complex and constantly evolving.

Developers, lenders, and prospective investors are encouraged to consider the key amendments discussed below:

Background – The Second Solar Feed-in-Tariff

As introduced under Decision 13 (extending Decision 11), the second feed-in-tariff regime (“FiT 2”) provides for a preferential feed-in-tariff mechanism for a 20 year contractual term as under an executed PPA with Vietnam Electricity (“EVN”).[3]

This applies to solar power projects (i.e. grid-connected, floating, and rooftop) which achieve a commercial operation date (“COD”) prior to 31 December 2020.[4]

Within this context, developers are racing to complete projects prior to the 2020 deadline in order to enjoy FiT 2.

When Does Circular 18 Apply?

Circular 18 specifically applies to the following solar power projects:

  • 1 July 2019 – 31 August 2020: Where a solar power project (grid-connected or rooftop) achieved COD from 1 July 2019 – 31 August 2020 (i.e. the effective date of Circular 18), the seller and the purchaser must amend any pre-existing executed PPA to ensure that the terms of such agreement are consistent with the terms of the template PPA issued with Circular 18. [5]  This is significant because it means that projects that were financed, built, and commissioned on the basis of a specific executed PPA now face changes to the fundamental underlying contract terms. See further below for some headline comments on the new template PPA.
  • Prior to 1 July 2019: Where a solar power project (grid-connected or rooftop) achieved COD prior to 1 July 2019, such executed PPA shall continue to be valid and need not be amended to reflect the revised template PPA issued with Circular 18. [6]

 New Project Development Regulations

1) Grid-Connected Solar Farms

Circular 18 provides that the total area for construction of a grid-connected solar project (land or water surface area) must not exceed 1.2 hectares per MWp.[7] While this base number is unchanged from the previous regulations, Circular 18 clarifies that this area excludes power transmission lines or road access, but does include the actual power plant and transformer station. [8]

Further, the basic design dossier of the project must include details of the project’s location, solar radiation potential, impact on the electricity systems in the local area, load dispatch information, and design for connection to the SCADA system.[9]

Importantly, from a commercial perspective, Circular 18 overturns the previous minimum 20% equity ownership threshold under Circular 16, [10] thereby enabling developers to secure the bulk of project financing by way of debt funding.

2) Rooftop Solar Systems

Circular 18 provides that where a proposed grid-connected rooftop solar system has a capacity of no more than 1 MW, it is not necessary to obtain a formal power generation license.[11] This is consistent with current regulations, and reaffirms the position under Circular 36 from the Ministry of Industry and Trade.[12]

Rooftop solar developments with a 1 MW capacity or less (AC capacity) or a 1.25 MWp capacity or less (DC capacity) must still nevertheless register their proposed connection with EVN, including details of location for installation, output scale, and proposed connection point.[13]

Additionally, after receiving EVN’s opinion on the project’s transmission capabilities, the developer must then enter into an interconnection agreement (with EVN or the relevant grid owner), obtain approval on the proposed sale of electricity, install metering equipment, and carry out technical testing, amongst other requirements.[14]

The above requirements are all subject to very strict deadlines (often less than 5 working days) and it is highly recommended to seek the formal support of legal counsel to ensure such agreements are negotiated and executed in a timely manner, thereby preventing material transaction delays.

Significantly, the template PPA for rooftop solar projects issued with Circular 18 does not need to be used in cases where the developer sells power to a party other than EVN.  In those cases, the parties are free to agree terms and prices consistent with general Vietnamese contract law.

 New Template PPA

 1) Grid-Connected Solar Farms

  • Mandatory use of template PPA: The use of the template PPA for grid-connected solar farms is mandatory.[15] Parties may negotiate to include additional supplemental clauses which serve to clarify the rights and obligations of the parties, although in practice EVN may be reluctant to do so.[16] Any supplemental terms must remain consistent with the terms of the template PPA, and parties are prohibited from making substantive alterations. [17]

 

  • Force majeure: The previous template PPA excused a defaulting party from broadly performing their obligations should a force majeure event arise. Whilst the new template PPA provides for the same, it specifically limits the ability of a defaulting party to avoid payment of monies owed up to the date of the force majeure event. Such clarification is welcomed and presumably more significant in the context of Covid-19.[18]

 

  •  Change in law: The new template PPA does not provide for a specific change in law clause. This is inconsistent with global best practice, and potentially leaves developers and lenders in a vulnerable position should an adverse change in law circumstance arise. Given Vietnam’s constantly evolving legislative landscape, particularly in relation to renewable energy, the potential protection provided by a change in law clause is significant, and thus would be very attractive to prospective foreign investors.

 

  • Offtake obligation: The new template PPA no longer obliges EVN to contractually agree to purchase the entire yield generated from the solar farm. Legally, this seems inconsistent with the previous obligation on EVN to purchase the entire output generated by the solar farm under Decision 13.[19] Commercially, this creates significant concerns for developers and lenders alike, and may negatively impact forthcoming bankability assessments with regards to anticipated project revenue.

 

  • Curtailment: The new template PPA provides EVN with broad curtailment rights. Specifically, where the solar farm does not conform with relevant power regulations; during times of installation or repair; when EVN is carrying out inspection on portions of the grid which are connected to the farm; when EVN’s gird systems are broken; or when EVN’s power grid requires support to recover following a breakdown. [20] Such broad curtailment rights in favor of the purchaser will again negatively impact on bankability assessments, creating considerable uncertainty for financiers.

 

  • Termination payments: Of particular concern is that where the seller opts to terminate the agreement due to the purchaser’s default, the new template PPA provides that the termination damages amount will be calculated up to the time of termination, rather than based on the remainder of the 20 year contractual term. [21] The previous template PPA under Circular 16 provided no such restriction. The incoming clause will therefore create significant concern for those projects already operating under pre-existing PPAs which now need to conform with the terms of the new template. Furthermore, under Circular 18, the non-defaulting party assumes the burden of proof in establishing loss as a result of the defaulting party’s actions. [22] Such risk allocation greatly favors the purchaser and will again negatively impact forthcoming bankability assessments.

2) Rooftop Solar Systems

The template PPA for rooftop solar system projects is largely the same as the template provided under Circular 5,[23] albeit with the following noteworthy amendments:

  • Mandatory use of template PPA: The use of the template PPA for grid-connected rooftop solar systems is mandatory.[24] Parties may negotiate to include additional supplemental clauses which serve to clarify the rights and obligations of the parties.[25] Any supplemental terms must however remain consistent with the terms of the template PPA. [26] As noted above, the template is not mandatory where the power buyer is not EVN.

 

  • Continued silence: The template PPA still does not provide for specific change in law, termination compensation, grid unavailability, or tariff indexation provisions, thereby continuing to place an unfavorable risk allocation against the developer.

 

  • Dispute resolution: Concerns continue to exist with regards to the transparency and flexibility of the provided dispute resolution process under the template PPA. Where parties are still unable to resolve their differences post-mediation, it appears that the final body responsible for resolving the dispute will be EVN or its parent entity (as the relevant “higher level power unit of the power purchaser”), thereby potentially greatly favoring the purchaser.[27]

 

  • Late payment interest: The new template PPA introduces greater flexibility with regards to late payments. Parties are now free to include a late payment interest clause in an amount as agreed between the parties, in accordance with the Commercial Law 2005.[28] The previous template PPA under Circular 5 limited the calculation of late payment interest to an amount based on the State Bank of Vietnam’s monthly interbank interest rate.

 

  • Metering system malfunction: Where the power metering system malfunctions (e.g. fire, damage), there is now an obligation on the seller to promptly notify the purchaser of such malfunction. The seller and the purchaser must then agree on the output of power during this time of malfunction, measured according to output based on the previous week, month, or year.[29]

Conclusion

Vietnam’s solar power market and associated regulatory regime continues to constantly evolve. The latest piece of regulation, Circular 18, is effective from 31 August 2020 and introduces updated project development requirements as well as a revised mandatory template PPA.

Significantly, those solar power projects which achieve a commercial operation date of between 1 July 2019 – 31 August 2020 will need to revise their pre-existing PPAs to ensure conformity with the updated regulations under Circular 18.

Please do not hesitate to contact us should you have any further queries or wish to discuss how the incoming Circular 18 may impact your current or proposed solar power development.

***

For more information, please contact Giles at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com.  Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an Australian qualified lawyer and associate in Duane Morris’ HCMC office.

 

Giles Cooper, Partner
+84 24 3946 2210
gtcooper@duanemorris.com
Daniel Haberfield
Daniel Haberfield, Associate
+84 28 3824 0240
dhaberfield@duanemorris.com

[1] Circular No. 18/2020/TT-BCT, dated 17 July 2020, Ministry of Industry and Trade (“Circular 18”).

[2] Circular No. 16/2017/TT-BCT, dated 12 September 2017, Ministry of Industry and Trade (“Circular 16”).

[3] Decision No. 13/2020/QD-TTg, dated 6 April 2020, Prime Minister of Vietnam (“Decision 13”).

[4] Ibid.

[5] Articles 6(1)-(3) and 9(2), Circular 18.

[6] Article 9(1), Circular 18.

[7] Article 4(3), Circular 18.

[8] Article 3(2), Circular 18.

[9] Article 4(2), Circular 18.

[10] Article 10(3), Circular No. 16/2017/TT-BCT, dated 12 September 2017, Ministry of Industry and Trade.

[11] Article 5(4), Circular 18.

[12] Article 3(2), Circular No. 36/2018/TT-BCT, dated 16 October 2018, Ministry of Industry and Trade (“Circular 36”).

[13] Article 5(2), Circular 18.

[14] Article 5(2), Circular 18.

[15] Article 1, Circular 18.

[16] Article 6(3), Circular 18.

[17] Article 6(1)-(3), Circular 18.

[18] Article 5(3), Model Grid Connected Solar Farm PPA, Circular 18.

[19] Article 4(1), Decision No. 13/2020/QD-TTg, dated 6 April 2020, Prime Minister of Vietnam.

[20] Article 7, Model Grid Connected Solar Farm PPA, Circular 18.

[21] Article 7(5), Model Grid Connected Solar Farm PPA, Circular 18.

[22] Article 7(4)(b), Model Grid Connected Solar Farm PPA, Circular 18.

[23] Circular No. 5/2019/TT-BCT, dated 11 March 2019, Ministry of Industry and Trade (“Circular 5”).

[24] Article 1, Circular 18.

[25] Article 6(3), Circular 18.

[26] Article 6(1)-(3), Circular 18.

[27] Article 6(2), Model Rooftop Solar System PPA, Circular 18.

[28] Article 4(3)(b), Model Rooftop Solar System PPA, Circular 18.

[29] Article 3(2)(c), Model Rooftop Solar System PPA, Circular 18.

Vietnam’s NEW Labor Code – 15 notable changes coming your way effective January 2021

The New Labor Code 2019 will soon come into effect on 1 January 2021 and entirely replace the current labor regime (‘Labor Code 2012’). The below fundamental amendments should be taken into account with a view to best protecting an employers’ legitimate rights and entitlements under Vietnamese labor law.

1.         The definition of ‘employment relationship’ has been broadened

Pursuant to the Labor Code 2019, a legally valid employment relationship is deemed to exist even where two parties agree to a document by a different name rather than ‘a labor contract’, as long as the document includes a description of the job, salary, management, and supervision conditions. In other words, a contractual document with a different name is still considered to be a labor contract assuming the above general terms are included.

The new Labor Code 2019 creates the possibility that where a contract with an “independent contractor”, “service provider”, “freelancer”, or other informal agreement between two or more parties contains employment-like terms may specifically be recognized as a formal Vietnam-law labor contract.

From a practical perspective, this serves to prevent employers from misusing service contracts as an alternative mechanism for hiring individuals (as opposed to traditional labor contracts). The use of service contracts typically enables employers to more easily undertake termination without statutory restrictions, as well as avoid mandatory social insurance contributions, as would otherwise ordinarily be required under a formal employment contract.

It is thus necessary for an employer who genuinely wishes to engage an individual contractor for a specific service to prepare a specific service contract in order to avoid the potential risk that the relationship be characterized as one of employment and not of service.

  1. E-contracts are formally recognized

    Labor contracts made by electronic means in data message form are now formally accepted and recognized under the Labor Code 2019. Specifically, labor contracts concluded via electronic devices in data message form have the same validity as those concluded in written form.

Additionally, a verbal labor contract can be concluded if the contractual term is for less than one (1) month.

  1. Seasonal labor contracts have been removed

    From 1 January 2021, labor contracts can take either one of the following forms: (i) indefinite-term labor contracts, and (ii) definite-term labor contracts of maximum 36 months.

    That is to say, compared to the current regulations of the Labor Code 2012, seasonal or work-specific labor contracts will no longer exist.

 

  1. Labor contract extension is no longer allowable

 Under the Labor Code 2012, an annex to a labor contract serves to elaborate on specific provisions or to amend or supplement the primary labor contract. Specifically, the duration of a labor contract shall be amended only once by annex and type of the signed contract shall not be changed as the result.

Under current law, in practice, the employer is entitled to conduct one extension for each definite-term labor contract via an annex as an integral part of such labor contract. On this basis, by way of two definite-term labor contracts plus two extensions, an employer is potentially eligible to extend three times before the labor contract term is deemed indefinite by law.

Conversely, the employer can no longer do that under the Labor Code 2019. The reason is that, an annex to a labor contract fundamentally serves to elaborate, amend or supplement specific provisions of the labor contract, but must not change the duration of the labor contract.

  1. Multiple definite-term labor contracts are now allowed in certain cases

In principle, in case the two parties enter into a new labor contract with a definite-term, only one additional definite-term labor contract may be executed. After that, if the employee continues working, an indefinite-term contract shall be constituted.

Nevertheless, the Labor Code 2019 has addressed exceptions for this aforesaid principle whereby parties may sign multiple definite-term labor contracts under special circumstances, comprising: (i) elderly employees (i.e. employee working after reaching his/her retirement age); (ii) expat employees; (iii) members of executive boards of organizations representing the labor collective (including trade unions); and (iv) directors of state-owned enterprises.

  1. New regime for probationary periods

 Probationary periods can last up to 180 days for managerial positions (as defined under the Law on Enterprises or Law on Management and use of State Investment in Enterprises, which greatly favor an employer from a recruitment perspective, effectively enabling an extended trial period, though only for a narrow list of personnel that meet the managerial positions definition.

It is also worth noting that probation is not allowed if the employee works under a labor contract with a duration of less than one (1) month.

  1. Unilateral termination by employer 

Since 1 Jan 2021, an employer shall have additional legal grounds to unilaterally terminate a labor contract, once:

 (i)         An employee has reached his/her retirement age, noting that under the Labor Code 2012 an employer CANNOT unilaterally terminate an employee who has not yet contributed to the social insurance regime in full for the purposes of pension entitlement, even though he/she has reached his/her retirement age;

(ii)        An employee is absent from work without a legitimate reason for five (5) consecutive working days or more; or

(iii)       The employee has provided false information that affects the recruitment of the employee.

Additionally, the Labor Code 2019 has granted extra protection for an employer to unilaterally terminate a labor contract without prior notice once:

(i)         An employee fails to return to work after 15 days from the expiry of the suspension period of a labor contract; or

(ii)        An employee is absent from work without a legitimate reason for five (5) consecutive working days or more.

  1. Unilateral termination by employee

 From an employee perspective, under the Labor Code 2019, an employee has the right to unilaterally terminate a labor contract without any reason as long as they provide proper notice in advance (i.e. at least 45 days in case of indefinite-term labor contract; at least 30 days in case of definite-term labor contract of 12 to 36 months or at least 3 working days in case of definite-term labor contract of less than 12 months).

In addition to the above, an employee also has the right to unilaterally terminate the labor contract without prior notice should he/she:

  • be not assigned to the contractual position or workplace;
  • be not provided with the agreed working conditions;
  • be not paid, in full or on time, the salary due as agreed in the labor contract;
  • be mistreated or humiliated by the employer;
  • be sexually harassed in the workplace;
  • be pregnant and the continued employment would adversely affect the fetus;
  • reach retirement age; or
  • be provided with false information by the employer that affects the performance of the labor contract.
  1. New regulations on salary payment

 Employers are now no longer required to register a salary table, salary scale, or salary norms with the labor authorities.

In case of salary paid via bank transfer, employers shall pay the cost of account opening and money transfer. An employer may also pay the salary to the employee’s authorized person.

When taking annual leave, an employee may request the employer to pay advance payments equal to the salary for the entitled days of leave of such month. Should the employer agree, it can deduct the advance payments at the time of salary payment for the employee in question.

  1. Changes applicable to expat employees

 The maximum term of a work permit for a foreign employee is two (2) years and may only be extended once for an additional maximum term of two (2) years. That is to say, new application in full for a new work permit should be prepared every four (4) years for those working in Vietnam for a long way. Under the current law, the maximum duration of a work permit is also two (2) years and can be renewed on an unlimited basis.

Employers and foreign employees may enter into multiple definite-term labor contracts. This regulation is to guarantee that the term of the expat employee’s labor contract shall be consistent with that of his/her obtained work permit and should close a long-standing conflict in the law concerning the mandatory use of indefinite-term contracts after two consecutive definite-term contracts.

In addition, expats married to Vietnamese citizens and living in Vietnam shall be exempt from work permit obligations (noting that work permit exemption certificate is still required though).  This is a major new additional ground for work permit exemption.  It remains to be seen whether there will be any limits to the types or positions that such spouses may hold without work permits.

  1. Labor discipline

 The internal labor regulations may be registered at the district-level labor authority.  We are of the  presumption and view that the provincial labor authority may authorize a district-level labor authority to process an application for the registration of internal labor regulations.

Importantly, employers may impose disciplinary measures for violations stipulated not only in the internal labor regulations but also in the labor contract or labor laws. This is the case for an employer with less than 10 employees where internal labor regulation preparation and registration is not mandatory.

As a separate note, similar to current law, the procedure to impose labor discipline would strictly require the involvement of a representative organization of employees at grass-root level. However, it is also worth noting that, under new Labor Code 2019, representative organization of employees could be other internal employee organizations within the employer, in addition to the current regime of internal trade union which is purely under the sole management of Vietnam Labor Federation.

  1. Retirement ages have been increased

 The age of retirement for employees working in normal conditions will follow a roadmap until the age of 62 years for men and 60 years for women. Specifically, the retirement age will be gradually increased to 62 years by 2028 for men, and 60 years by 2035 for women.

From 2021, the retirement ages of employees in normal working conditions shall be 60 years and 3 months for men, and 55 years and 4 months for women, and shall increase by 3 months for men and 4 months for women for each consecutive year.

  1. The number of public holidays has been increased by one day

National Day public holiday will now consist of two (2) days, namely (i) the second day of September; and (ii) the previous or next day (presumably at employer’s discretion to identify the specific one).

  1. Overtime policy

 The monthly overtime cap has been increased from 30 hours to 40 hours.

Additionally, the Labor Code 2019 has supplemented the circumstances where organizing overtime work of up to 300 hours in a year is permissible, comprising the manufacturing and processing of textiles, garments, footwear as well as electric and electronic products; and the processing of agricultural, forestry, aquaculture, and salt products.

  1. Concept of ‘sexual harassment’ has been introduced for the first time

‘Sexual harassment’ at the work place is expressly defined in the Labor Code 2019.

Procedures and policies on the prevention and handling of sexual harassment at the workplace must be included in the internal labor regulations, whereby ‘sexual harassment’ is now defined as a legal ground for dismissal.

***

For more information, please contact Giles at GTCooper@duanemorris.com or Le Nhan at NTLe@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

COVID-19 and eligibility to enter Vietnam

Border Control

As of the date of this post, the Government of Vietnam still maintains suspension of entry for expats, including people with a Vietnamese visa exemption certificate.  A potential date to allow foreigners to enter Vietnam again has not been formally announced by the Government yet, though further information is expected imminently.

The current entry restriction, which came into effect on 22 March 2020, has limited exemptions for diplomatic, official duty, as well as special circumstances, including experts, business managers, high-skilled technicians (pursuant to Government’s Decree 11/2016/ND-CP, it can be interpreted that experts, business managers, high-skilled technicians are those who have been issued with work permits to legally work in Vietnam), and other essential categories as determined by the Government of Vietnam.  That is to say, statutorily speaking, there exists a possibility where such subjects are entitled to enter Vietnam, subject to approval of provincial People’s Committee and Department of Immigration, after the  consultation with the Ministry of Public Security, Ministry of National Defense, Ministry of Foreign Affairs, Ministry of Health, and other relevant agencies.

Despite this, to the best of our knowledge, though feasible in theory, practice appears to be different and it seems no formal approval has been granted yet, partly due to absence of any guidance from the Government to each province in detail.

Should an enterprise wish to send an expat (with a valid work permit) to Vietnam to manage operations in Vietnam at the moment, they should seek approval for entry on a case-by-case basis from the provincial People’s Committee and Department of Immigration as first priority.

Quarantine Requirements in Vietnam

Since 8 March 2020, all people who have arrived from outside the country must (i) complete a medical declaration form, which can be done by completing a paper form on arrival or a digital form online before the trip via this link https://tokhaiyte.vn/ and (ii) undertake COVID-19 testing. On this basis, regardless of whether the COVID-19 testing result is positive or not, everyone entering Vietnam, including Vietnamese nationals, have been subjected to mandatory, centralized quarantine for 14 days. It is worth noting that this quarantine period, under some circumstances, might be prolonged to more than 14 days, at the broad discretion of the authorities.

Hệ thống thông tin quản lý Khai báo Y tế

tokhaiyte.vn

Hệ thống thông tin quản lý khai báo y tế

So-called “centralized” quarantine sites in Vietnam may be basic facilities. Therefore, Ministry of Health released Decision No. 1246/QD-BYT on 20 March 2020 (“Decision 1246”) to grant more flexibilities for the mandatory quarantine. Specifically, a person subject to quarantine is entitled to request to be quarantined at a permitted hotel to enjoy better facilities and would need to bear all accommodation expenses during the quarantine period.

By law, this requires the individual to simply (i) fill in a Request Form under Annex 2 of Decision 1246; and (ii) submit same to immigration authority. However, we note that the procedure for this step is neither transparent nor well-organized and unlikely to be workable in practice on an ad-hoc basis.  It is thus necessary to ensure that arrangements are confirmed directly with the relevant provincial authorities of the port of entry.

For more information, please contact Giles at GTCooper@duanemorris.com or Le Nhan at NTLe@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

COVID-19 GUIDANCE FOR BUSINESSES IN VIETNAM: FORCE MAJEURE EVENTS AND E-SIGNATURES

The COVID-19 pandemic has given rise to many questions regarding force majeure and e-signatures. In particular, parties to commercial contracts are keen to know (i) whether they can be released from liabilities by relying on a force majeure clause and (ii) whether they can execute contracts by electronic signatures instead of the traditional “wet ink” signatures which have become almost impossible in the context of the COVID-19 pandemic.

  1. Force majeure

 A force majeure event under Vietnamese law

Vietnamese law defines force majeure in Article 156.1 of the Civil Code as “an event which occurs in an objective manner which is not foreseeable and which is not able to be remedied by all possible necessary and admissible measures being taken”.

For contracts that have been entered into prior to the COVID-19 pandemic, affected parties will have to prove that the pandemic satisfies all three components of a force majeure event in order to rely on this statutory right. The first two can be easily met – the corona virus is an objective event that cannot be foreseen. However, the trickiest part for parties would be the last component – whether the party has taken all reasonable measures to prevent the effect of the pandemic on their performance of the contract. This is a subjective test, and will need to be analyzed on a case-by-case basis taking actual facts into account.

  1. The effect of a force majeure event

The effect of a force majeure event is that the affected party who fails to perform its obligation under a contract will be released from liabilities. The relevant provisions are Article 351.2 of the Civil Code 2015 and Article 294.1 of the Commercial Law 2005 as quoted below:

Article 351.2 of the Civil Code 2015:

Where an obligor fails to perform correctly an obligation due to a force majeure event, it shall not have civil liability unless otherwise agreed or otherwise provided by law.

Article 294.1 of the Commercial Law 2005:

A defaulting party will be exempt from liability upon occurrence of a force majeure event.

The wording of Article 294.1 of the Commercial Law 2005 does not explicitly require a causal link between a force majeure event and the default of the affected party. However, logically speaking, to be released from liabilities, the fault should be caused by a force majeure event. It is also worth noting that according to the Commercial Law 2005, in order to be released from liabilities, the affected party is required to (i) immediately notify the other party in writing of the force majeure event and the potential consequences of such event; and (ii) promptly notify the other party when the force majeure event ceases to exist.

Regarding the possibility to terminate a contract, neither the Civil Code 2015 nor the Commercial Law 2005 allows parties to terminate a contract due to a force majeure event. However, the Commercial Law 2005 allows an extension of the deadline for the performance of a contract, and a refusal to perform a contract in the event of a prolonged event. The affected party who refuses to perform the contract due to a prolonged force majeure event must notify the other party of its refusal to perform the contract within ten days from the expiry date of the extended deadline for performance of the affected party’s obligations and before the other party commences to perform its contractual obligations.

  1. Alternative approaches for affected party due to COVID-19

Besides a force majeure event, an alternative approach for parties to consider in the context of the COVID-19 pandemic is fundamental changes clauses provided by Article 420 of the Civil Code 2015. Article 420 the performance of a contract under a fundamental change of conditions, which is quite similar to hardship clauses in other civil jurisdictions. Specifically, a circumstance is deemed fundamentally changed when the following elements are met:

  • The change occurs due to objective reasons after the execution of the contract. The COVID-19 pandemic would seem, prima facie, to satisfy this element;
  • At the time of contract execution, the parties could not foresee any change in circumstances. Contracts executed prior to the COVID-19 pandemic would also seem to satisfy this element;
  • There is such a fundamental change in circumstances that if the parties had known in advance, they would not have executed the contract, or might have executed it but with completely different content. This element is likely to be satisfied as well;
  • The continued performance of the contract without an amendment would cause serious damage to one party. The satisfaction of this element would depend on specific facts of each case; and
  • The affected party has taken all necessary measures in its capability in accordance with the nature of the contract but it still cannot prevent, mitigate the impact on its interest. The satisfaction of this element would also depend on specific facts of each case.

A key difference between a force majeure event and a fundamental change, which is also what might make proving the COVID-19 pandemic to be a fundamental change easier than a force majeure event, is that, with respect to the former, affected parties need to prove that the contractual performance is impossible while, for the latter, affected parties only need to prove that the performance of the contract is possible but with substantial disadvantages to the affected party.

In the event of a fundamental change regulated by Article 420, affected parties may request the other party to re-negotiate the contract within a reasonable period of time. Where the parties to the contract cannot agree on amendment to the contract as such, either party may request a court to:

  • terminate the contract at a specified time; or
  • amend the contract to balance the rights and benefits of the parties;

Of note, the court is only permitted to decide on the amendment to the contract where the termination of such contract would cause loss and damages greater than the costs for the performance of the contract when amended.

  1. Rewriting force majeure clauses

Proving any pandemic, the COVID-19 as analyzed above for an example, is onerous and requires a lot of efforts from affected parties while the outcome is unpredictable as ever. That is why we have seen plenty of new drafting around force majeure terms expressly referencing to pandemic in general and the COVID-19 in particular, as below for an example, which is highly recommended to be incorporated into contracts to be entered into.

Force Majeure Event means an event that wholly or partly prevents or delays the performance of obligations and/or the adherence to deadlines or time periods arising under this Agreement and shall include, without limitation, an act of God, explosion, accident, fire, lighting, earthquake, storms, flood or similar cataclysmic occurrence; an act of war , blockade, insurrection, lockouts, or other labor difficulties; restrictions or restraints imposed by law or by rule, regulations or order of any deferral, state or local government, governmental agency or quasi-governmental agency; a pandemic; COVID-19 (Coronavirus)-related events, including, by way of example but not limitation, quarantines, third party vendor shut downs, business shut downs, and travel restrictions; action or failure to act of any federal, state or local government, governmental agency or quasi-governmental agency; and interruption or other loss of utilities due to causes beyond the reasonable control of the Purchaser.”

  1. E-signatures

Under the Law on Electronic Transactions 2005, an e-signature is defined as being created in the form of words, script, numerals, symbols, sounds or in other forms by electronic means, logically attached or associated with a data massage, and being capable of identifying the person who has signed the data message, and being capable of identifying the consent of that signatory to the contents of the signed data message.

The law also provides that parties to a transaction have the right to agree to use or not to use an e-signature to execute data messages (e.g. a soft copy of a contract exchanged via emails) unless otherwise regulated by the law. In the context of the COVID-19 pandemic, it is advisable that parties explicitly agree on the e-signatures having the same validity of “wet ink” signatures. Internationally we have seen new drafting around e-signatures as below, for an example:

The words “execution,” “signed,” “signature,” and words of like import in this Agreement shall be deemed to include electronic signatures which shall be of the same legal effect, validity or enforceability as a manually executed signature, to the extent and as provided for in all applicable law.”

Notwithstanding the agreement of the parties on the validity of e-signatures, according to Article 24.1 of the Law on Electronic Transactions, e-signatures must satisfy the following conditions in order to have same legal effect with a “wet ink” signatures:

  • The method of creating the e-signatures permit the identification of the signatory and to verify his/her approval of the contents of the data message; and
  • Such method is sufficiently reliable and appropriate for the purposes for which the data message was originated and exchanged.

In addition, Article 21.2 of Law on Electronic Transactions also generally requires e-signatures to satisfy the following “safety” conditions:

  • The data used to create an e-signature is owned only by the signatory;
  • The data used to create an e-signature is under the control of only the signatory at the time of signing;
  • All changes to an e-signature after the time of signing is detectable; and
  • All changes to the contents of the data message after the time of signing is detectable

As all these conditions are vague and may give rise to uncertainty, a practical solution is to resort to third-party certification service providers. Enterprises/individuals can register their e-signatures with such service providers and will receive a certificate of validity of the respective e-signatures.

All analysis aside however, Vietnam remains an ‘old school’ jurisdiction for the time being and, where possible to obtain wet signatures on contracts and contract related documents such as formal notices it remains advisable to do so.

For more information, please contact Giles at GTCooper@duanemorris.com or Dang Ngoc Huyen at HDang@@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam’s renewable energy industry amid COVID-19: facts, force majeure and (patchy) Government support

Vietnam’s renewable energy development over the past three or so years can variously be described as frenetic, chaotic and heartening. Look past all the noise about non-bankable agreements, insufficient transmission infrastructure and bureaucratic black holes, and it’s clear the market has spoken. Vietnam currently has the largest installed solar capacity in Southeast Asia and is taking strides on wind too. Between May and July 2019, an incredible 82 ground mounted solar plants were connected to the national grid (total of 4,464 MW), more than 400% the target that had been set for 2020. The Ministry of Industry and Trade recently announced that the country is aiming to boost power output produced by renewable energy to about 23% by 2030.

The sector as a whole is also poised on the brink of a new phase. Feed in tariffs are coming to an end, low hanging fruit projects have been developed and local banks’ capacity to continue to finance development is stressed. Meanwhile, energy demand rises steadily and right-minded global citizens are clamoring for an end to coal and a rapid transition to renewable energy sources.

Into this heady mix arrived a novel corona virus and the disease known as COVID-19.

For all the momentum, the clean-energy sectors – solar, wind, energy storage, and companies transforming the power grid – will not escape the COVID-19 impact. They face serious questions across the board: from supply chain issues to workforce shortages, to more macro questions about the economy, energy demand and availability of finance.

New FiT announcement for solar does little to calm waters

Which is why the Prime Minister’s Decision 13 on 6 April 2020 announcing the new solar power feed in tariffs was both a blessing and a curse. On the one hand, the market finally has long-awaited certainty over revenue stream. On the other hand, the COD deadline to qualify for the new tariffs – 31 December 2020 – is like a bad joke. See more about this here: https://blogs.duanemorris.com/vietnam/2020/04/07/solar-fit-2-finally-announced-in-vietnam-but-strict-timeline-remains/

In fairness, the 31 December 2020 deadline had been flagged for some time, but the long delay in making it formal, only to finally issue the Decision in a period of unprecedented global chaos and lockdown, with a deadline just 8 months away, almost seems cruel.

Module production facilities in Vietnam usually carry one or two months of supplementary materials inventory on-site. If production interruptions lasts longer than one month, factories in Vietnam will start to see supply shortages that will reduce their production output. Developers waiting for module delivery from mainland China in the second quarter of 2020 will very likely not see the orders delivered on time. Late module delivery will affect project construction schedules around the world, and projects with Q3 and Q4 2020 targets are likely to be hit particularly hard.

In other words, if you are a ground-mounted solar developer in Vietnam today and had been waiting for certainty of revenue stream before pulling the trigger on procurement (let alone land clearance costs), good luck.

Wind makes out better

Similar to the solar industry, COVID-19 has already interrupted the supply chain for wind power plants, which will lead to commissioning delays. Leading turbines suppliers have already announced delays in delivery dates for turbines and other essential equipment citing force majeure clauses in supply contracts.

Looking past supply, the longer strict public health measures stay in place, the more likely it is that equipment prices will be impacted as well.

At least for wind power projects, Vietnam’s Government seems to be listening. As a result of the COVID-19 situation and pleas from investors, on 9 April 2020, the Ministry of Industry and Trade proposed to the Prime Minister a FiT extension for wind projects until 31 December 2023 (a substantial 2+ years extension on the current deadline of 1 November 2021). The MOIT proposes in Official Letter 2491 that a new FiT should apply from1 November 2021 to 31 December 2023 and thereafter wind power tariffs should be subject to auction.

It remains to be seen if the MOIT proposal will be accepted and if prompt action is not taken, foreign clean energy development companies may withdraw from the wind and solar power market because of the possible negative impacts of COVID-19 on their global operations. Vietnam may lose investment disproportionately because it is considered a high-risk market. The virus could also make it harder to keep wind and solar farms up and running, due to travel bans and maintenance delays.

COVID-19 re-writes force majeure clauses

Where coronavirus causes business disruption, from fulfillment of deliveries to cancellation of events, a common question is whether commercial parties can rely on force majeure clauses in their contracts.

Vietnamese law defines force majeure in Article 56 of the Civil Code: “An event of force majeure is an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and admissible measures being taken”.

For contracts that have been entered into prior to the COVID-19 pandemic, project developers will have to prove that the pandemic satisfies all three components of a force majeure event in order to rely on this statutory right. The first two can be easily met – the corona virus is an objective event that cannot be foreseen. However the trickiest part for developers would be the last component – whether the developer has taken all reasonable measures to prevent the effect of the pandemic on their project. This is a subjective test, and will need to be analyzed on a case-to-case basis taking actual facts into account.

Internationally, we see plenty of new drafting around force majeure terms expressly referencing COVID-19. An example is:

“Force Majeure Event means an event that wholly or partly prevents or delays the performance of obligations and/or the adherence to deadlines or time periods arising under this Agreement and shall include, without limitation, an act of God, explosion, accident, fire, lighting, earthquake, storms, flood or similar cataclysmic occurrence; an act of war, blockade, insurrection, riot, civil disturbance, sabotage, strikes, lockouts, or other labor difficulties; restrictions or restraints imposed by law or by rule, regulation or order of any federal, state or local government, governmental agency or quasi-governmental agency; a pandemic; COVID-19 (Coronavirus)-related events, including, by way of example but not limitation, quarantines, third party vendor shut downs, business shut downs, and travel restrictions; action or failure to act of any federal, state or local government, governmental agency or quasi-governmental agency; and interruption or other loss of utilities due to causes beyond the reasonable control of the Purchaser.”

Even though the force majeure clauses in standard wind and solar PPA do cover epidemic, they do not refer to epidemic-related events caused by third parties or those within the control of the government (government FM events). Since the power purchaser in Vietnam (EVN) is a State-owned enterprise, this raises the concern of EVN relying on government FM events to exempt itself from obligation. The lack of distinction emphasized between natural FM events and government FM events in the standard clauses, and the lack of expansion on the general reference to “epidemic”, puts power developers in a fragile spot amid this novel virus situation. As a result, it is advised that developers should always try to negotiate their PPAs to reflect international standards. This is of course easier said than done, but doesn’t mean efforts should be ignored.

On the developer’s side, it remains to be seen whether the standard PPA terms on force majeure might operate to allow extensions to COD deadlines, especially considering the deadlines are mandated in legislation. This is a topic that would bear much more scrutiny on a case-to-case basis.

For more information about Vietnam’s energy sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC, branch director of Duane Morris’ HCMC office and Asia lead for Duane Morris’ Energy Industry Group.

COVID-19 GUIDANCE FOR BUSINESSES IN VIETNAM: DEFERRAL OF TAX AND LAND RENTAL PAYMENT

The Government on 8 April 2020 issued Decree 41/2020/ND-CP on extension of deadlines for taxes and land rental payment (“Decree 41”) with immediate effect to support businesses, among other subjects, affected by COVID-19 pandemic.

The relief available under Decree 41

Primarily, the decree extends deadline for payment of value added tax (VAT) excluding VAT for imports, corporate income tax (CIT), personal income tax (PIT) and land rental payment.  Specifically, eligible enterprises and organizations can defer their VAT amount payable for the assessment periods of March, April, May, June of 2020 (for monthly tax declaration cases) or the first two quarters of 2020 (for quarterly tax declaration cases) for five months.  They can also defer their final CIT payment of 2019 and their CIT provisional payments for the first two quarters of 2020 for a period of five months.

With respect to household businesses and individuals, the deferral of deadlines for VAT and PIT payments can be extended until 31 December 2020.

Regarding the land rental payment, enterprises, organizations, households, and individuals with direct land lease contracts with the State can defer the first installment of their annual land rental payment which are due on 31 May 2020 for five months.

The beneficiaries provided by Decree 41

It is worth noting that the relief provided by Decree 41 is only available to certain enterprises, organizations, households, and individuals.  The beneficiaries under Decree 41 includes:

  • Enterprises, organizations, households, and individuals operating in agricultural, forestry and fishery manufacturing; food processing and manufacturing; garment and textile manufacturing; wooden, metal, paper, plastic and rubber products manufacturing; metallurgy, mechanical engineering; electronic products, computers and optical products manufacturing; automobile manufacturing; and construction;
  • Enterprises, organizations, households, and individuals operating in transportation and storage services; accommodation and catering services; training and education; medical and social assistance activities; real estate businesses; labor and employment services; travel agents, tour businesses and supporting services relating to tour promotion; artists, recreational activities, sport activities, museums and cinemas; and
  • Enterprises, organizations, households, and individuals producing auxiliary and key mechanical products; micro and small-sized enterprises; credit organizations, and branches of foreign banks which support their customers affected by COVID-19 pandemic.

The required procedures to obtain the relief

Taxpayers must submit a pro forma request to the local tax authorities before 30 July 2020 to be considered for the extension of deadlines for relevant taxes and land rental payment.

For more information, please contact Giles at GTCooper@duanemorris.com or Dang Ngoc Huyen at HDang@@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.