Duane Morris Vietnam

Regarding the issuance of the long-awaited Power Development Plan VIII (PDP8), on 25 April 2023, the Ministry of Industry and Trade of Vietnam (MOIT) delivered a Brief Report on the review of the PDP8 with some proposal to the Permanent Government (Report). The notable points of the Report are as follows:

Renewable energy sources
Firstly, the Report presents the maximization of hydropower, the cheapest source of electricity, to a capacity of about 40,000 MW on the basis of environmental protection. On a separate note, according to the Report, the storage power resource will be developed with the goal of having storage hydroelectric power plants with a capacity of roughly 2,400 MW and having storage batteries be distributed with a capacity of 300MW, when the cost is affordable, all by 2030. Forwarding to 2050, the storage power capacity will reach between 30,650 and 51,850 MW.
Solar and wind energy sources, as a global trend, are prioritized to be developed for on-site use, without connecting to the national grid. Also, regarding the solar power development orientations, the aim is to connect the solar power with the storage batteries when the cost is lower. Rooftop solar are also prioritized to be developed for self-consumption with the capacity of around 10,355 MW by 2030, producing roughly 15.5 billion kWh. Since the development of this kind of power source which has (i) no capacity restrictions; (ii) affordable costs; (iii) the instant use for current power system without needing to be upgraded; and (iv) the requirement for the issuance of ground-breaking policies, solar power is given special emphasis in the Report. The Direct Power Purchase Agreement mechanism is also mentioned in the Report as a mean to test out about 1,000 MW of solar power. Regarding the current 27 solar power projects with a combined capacity of 4,136.25 MW that were included in Power Development Plan VII (PDP7) without being assigned to investors, it is advised in the Report that they will not be implemented until 2030.
When it comes to wind energy, the MOIT focuses on substantial development of offshore wind power for export, without connecting to the national grid system, to fully utilize the potential of offshore wind power (approximately 600,000 MW within 200 km from coast) to provide electricity and new forms of energy. According to the Report, the capacity will be between 3,000 and 4,000 MW by 2030.

Thermal power resources
It is the aim of the MOIT to build and develop thermal power facilities to provide an ongoing source of electricity and putting in place a conversion to achieve net zero emissions by 2050. For that reason, only the projects listed in the revised PDP7 that are currently being built will be continued until 2030, with an emphasis on switching to biomass/ammonia fuel for projects that have been in operation for 20 years when the prices are affordable. The operations for projects that have been in operation for more than 40 years will also be terminated. Orientation to 2050, entirely transition to biomass/ammonia for the generation of electricity is expected instead of using coal. As for LNG, the MOIT prioritizes domestic gas usage for power generation and then the import of natural gas/LNG when there is a shortfall, alongside creating LNG power projects with synchronous LNG import infrastructure and switching to fuel use. Hydrogen technology is also on the wish list when it becomes commercialized, and the price is right.

Import/export of electricity
About 5,000 MW of electricity will be imported in 2030, with a goal toward 11,042 MW in 2050. The process of importing power may be scaled up and sped up if the conditions are good and the price is fair.

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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Recent developments and the importance of the power and energy sectors in Vietnam

Vietnam’s GDP grew by 8.02% in 2022 as opposed to merely 2.58% due to COVID-19 in 2021, which is the fastest yearly growth rate since 1997. Vietnam’s GDP growth for 2021-2030 is forecasted to reach an average of 6.6%/year and an average of 5.7% for 2031-2045. Considering the unpredictability and instability of the global situation, this is a remarkable result and anticipation. And, to cement the steady growth of Vietnam, it is important to speed up the energy transition to match the global trend.

The rapid economic expansion, urbanization, and industrialization of Vietnam are all related to the energy transformation. The strong desire of the leaders of Vietnam has been recognized in terms of the acceleration of the energy transition while also achieving the needs of economic growth and the target of becoming a high-income nation by 2045. In order to increase support for renewable energy, the energy transition is increasingly viewed as a possible engine of employment. Regarding this mater, currently, fossil energy sources remain the primary sources of energy but they are slowly replaced by green energy sources. And, when it comes to green energy, Vietnam is one of the first nations to renew its nationally determined contribution to the UNFCCC in 2020, pledging to cut greenhouse gas emissions. Vietnam requires energy security that is cheap for the general populace and sustainable for its social and economic development, with a goal of going carbon-free by 2050.

Moreover, according to the World Economic Forum’s Energy Transition Index in 2021, Vietnam ranked 65th out of 115 nations in terms of its preparation for the energy transition, with a score of 54, which is at the worldwide average. This demonstrates the chances for Vietnam’s energy transformation that should be taken. Energy security as well as the socioeconomic development objectives of the master plans across industries and sectors will need to be guaranteed by the roadmap for the nation’s transition process towards green and sustainable development. It is believed that more developed countries are of help by providing both financial and technical help.

To accelerate the transition, Vietnam has established the four goals focused on the reduction of coal-fired power and the increment of renewable energy for the energy transition by the year 2030, and the Power and Energy Working Group is prepared to cooperate with the Government to support this effort. Vietnam’s ambitious climate ambitions and a significant increase in renewable energies by 2030 are supported by the signature of the Just Energy Transition Partnership (JETP) between International Partners Group and Vietnam in December 2022, building on the promises made at COP26. This further underlined the consensus among governments, multilaterals, the private sector, banks, and all other significant institutions with an interest in the energy sector that the short-term economic benefits of energy production are far outweighed by its detrimental effects on the environment, and that there are sufficient, more sustainable alternatives to pursue. These JETP targets can be found in the draft Power Development Plan VIII (PDP VIII), a recent draft of which was released in December 2022 and estimates an investment cost of US$142 billion for the years 2021– 2030 (US$126 billion for power generation/sources and US$16 billion for the power transmission grid), the vast majority of which must come from the private sector. With the reform of the Law on Electricity, a framework for enticing greater private investment to aid in the transition will be established.

Until now, the finalization of PDP VIII remains slow-going, especially when it comes to the handling of newly emerging and difficult issues in the energy transition process. According to the leaders of the Ministry of Industry and Trade (MOIT), the MOIT will finalize the PDP VIII to be in line with the socio-economic development of Vietnam and to address the transition of renewable energy properly. Also, it is anticipated that the finalized PDP VIII will not be issued until the MOIT can settle the price dispute with the current investors on the Feed-In Tariffs (FIT) for solar and wind energy.
Renewable under the EVFTA, the EVIPA and the CPTPP

Both the Comprehensive and Progressive Trans Pacific Partnership Agreement (CPTPP) (Chapter 20) and the European Union—Vietnam Free Trade Agreement (EVFTA) (Chapter 13), whereby Vietnam is a member, impose obligations on its members to reduce any environmental harm caused by their business activities. Accordingly, under the CTPPP and the EVFTA, Vietnam must replace its existing coal-fired power stations with cleaner or renewable energy sources because it and the other signatories to the EVFTA and CPTPP are also signatories to the 2015 Paris Climate Agreement. Renewable energy is clearly alluded to as the preferable option in the EVFTA and CPTPP, and all parties undertake to encourage trade in that direction. Furthermore, the European Union—Vietnam Investment Protection Agreement (EVIPA) grants specific safeguards for investors regarding the free transfer of capital based on foreign exchange convertibility as well as dispute resolution governed by international arbitration rules. Vietnam also agrees to promote, develop, and increase the generation of energy from renewable and sustainable sources, including via facilitating trade and investment, under Chapter 7 on Non-tariff barriers to trade and investment in renewable energy generation of the EVFTA. According to Chapter 7, Vietnam committed to a) refrain from adopting measures providing for local content requirements or any other offset affecting the other Party’s products, service suppliers, investors or enterprises; (b) refrain from adopting measures requiring to form a partnership with local companies, unless those partnerships are deemed necessary for technical reasons and that Vietnam can demonstrate those reasons upon request of the other Party; (c) ensure that any measures concerning the authorization, certification and licensing procedures that are applied, in particular, to equipment, plants and associated transmission network infrastructures, are objective, transparent, non-arbitrary and do not discriminate among applicants from the Parties; (d) ensure that administrative fees and charges are transparent and non-discriminating. Moreover, at least 20% of managers, executives, and experts for all service and non-service energy lines must be Vietnamese nationals, unless Vietnamese nationals cannot fill those jobs. However, each enterprise is only permitted to employ a maximum of three non-Vietnamese managers, executives, and specialists.

The bankability of power and energy projects in Vietnam

While the corporate sector generally supports the mentioned initiatives on the increment of renewable energy, more might be done to attract the money required to shift away from coal. In other words, to facilitate the shift to renewable energy, Vietnam will require financially sound and commercially viable energy projects. However, at the same time, Vietnam must also secure a baseload adequate to replace coal in order to sustain grid strength and development. This indicates that in order to transition to renewable energy, hydrogen, wind, and solar with storage, there will need to be a flexible gas/LNG and eventually a large amount of hydrogen as a baseload, scalable behind-the-meter renewables solutions, and significant energy efficiency initiatives. Additionally, it is reasonable to expect Vietnamese government’s consideration of a bankable legal framework, as committed in the EVFTA and the CPTPP, for high-quality energy projects to get finance from the global financial market advance.

Evidence has demonstrated how regulations, such as the subsidized FIT, might boost investment in renewables. However, a number of GWs of these projects that miss the requirements for the Commercial Operation Date are awaiting a price structure that, given the existing legal landscape, makes sense for both investors and purchasers. It still takes time for EVN and investors to reach an agreement on a specific rate for each power plant, even though the MOIT just released the maximum prices for these transitional projects. The sector has been dealing with delays and extension of rooftop solar system and wind and solar power plant development due to the worldwide pandemic and its effects. As a result, investors may have little influence over delays in commercial operations and commissioning. In light of the current situation, a prompt resolution is more important than ever to take care of this problem as we wait for new tariff regulations for renewable energy projects.

It will be necessary to change present laws in order to address the finance issues mentioned by EVN. There is still green financing available that provides private investors with advantageous rates to decrease CO2, but it is crucial to enhance the legislative environment around green financing operations to provide more clarity on the requirements for issuing green finance. In the context where off-grid power projects are expanding, particularly rooftop solar systems with onsite corporate PPAs and private sector self-investment. These should be examined to enable EVN to work out price for accessing the national grid because off-grid models have demonstrated that producers and consumers are capable of creating long-term, sustainable arrangements.

In the context of the JETP which provides important finance to operationalize Vietnam’s net-zero targets, the early approval of the pilot program for the offsite corporate direct PPA (DPPA) would be much welcomed. Such a pilot program is an important mechanism to attract investors and private investments, not only in the energy sector but also in other sectors where companies are looking for clarity in the ability to source affordable green energy when making investment decisions. The clock is ticking for a lot of critical commitments in the space of renewable energy that our members have made. In order to ultimately establish and operate the offsite corporate DPPA pilot program in the first quarter of 2023, we expect to have the government’s cooperation.

Recently, investors have expressed that offshore wind has a high potential in Vietnam and in the future contributing as a baseload for the national grid. Recently, many foreign investors are interested in developing large offshore wind farms in Vietnam. However, to develop a large offshore infrastructure project such as offshore wind farms, Vietnam must address the current legal uncertainties. One of the significant issues to be addressed is the new draft Decree amending Decree No. 11/2021/ND-CP on assignment of certain sea areas to organizations and individuals for exploitation and use marine resources (Decree 11) and the Sea Law. Since the project developer might not be able to mortgage the sea area (as part of the security package) to the project lenders if there is no property right over the designated sea area, the amendment of Decree 11 should resolve this issue. If the conditions are right, Vietnam can draw in billions of dollars in funding for projects and the supply chain, generate thousands of employment, and establish offshore wind as a reliable engine of economic growth. Additionally, there is potential for locally produced iron/saltwater batteries and competitively priced, environmentally safe rare earths for batteries and energy generation, both of which is believed to be advantageous for Vietnam over the long term.

Another crucial component of the long-term fix is hydrogen. Although it is now too expensive for use in power plants, it is cost-effective for industrial and agricultural application. Development, research, and international funding should eventually lower prices. Vietnam should make sure that initiatives like offshore wind and LNG to power are developed with hydrogen in mind. From the economic perspective of developing the Vietnamese private sector, the Government must ensure that new power projects are helping to drive up Vietnamese private sector capacity. Such large-scale foreign investments have enormous potential for expanding the tax base and supplying the vitality required for economic growth, as well as for preparing entire Vietnamese generations of future Vietnamese businesses with the requisite technical and management leaders.

Summary

With the signings of the EVFTA, the EVIPA and the CPTPP, investors from more developed countries now can bring their technology and know-how, especially those from countries with high level of development in renewable sectors to Vietnam with less market access barriers and being more secured. This can bring a great deal of help for Vietnam to facilitate the transition to renewable energy from 2023 to 2030, given that Vietnam itself adopts the initiatives of the mentioned international instruments into its legal system. Moreover, under the CPTPP and the EVFTA, it is possible for foreign investors to sue Vietnam’s Government for its investment related decisions according to the dispute settlement by arbitration rules. The final arbitral award is binding and enforceable without any question from the local courts regarding its validity. This is an advantage for investors considering the fact that the percentage of annulled foreign arbitral awards in Vietnam remains relatively high for different reasons.

The regulatory environment has traditionally been one of the major hindrances to private investors in infrastructure development. Although there is always a certain amount of uncertainty in any project of this nature, both the public and private sectors would serve their communities greatly by coming to a reasoned solution that suits both. There has been notable progress by Vietnam on this regulatory-front, such as the draft PDP VIII and the revised FIT and DPPA. However, works are expected to be done from 2023 regarding the finalization of the PDP VIII, the settlement of the FIT with the investors and new regulations for Vietnam to achieve its goal in energy and power sector. The CPTPP and EVFTA agreements have been (and will be) a major factor in Vietnam’s infrastructure development goals. Utilizing those agreements and advice and input from the private sector, Vietnam’s power and energy situation will be poised to efficiently and effectively capitalize on its enormous potential—especially with renewables.

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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyer listed in our office list if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Frontier market vs. Emerging market – How is it defined?

As a term invented in 1981 by then World Bank economist Antoine van Agtmael, an emerging market is an economy that is thriving, a promising market with risks and rewards in the eyes of foreign investors (1). The term “frontier market” was coined 11 years later by Farida Khambata as a term used for smaller, riskier and less accessible markets than emerging markets (2).

According to the classification of Morgan Stanley Capital International (MSCI), in order to be classified as an emerging market, one country has to satisfy a majority of indexes as “no major issues, improvements possible” out of its eighteen different indexes for five market accessibility criteria (3). However, as of June 2022, despite its effort in concluding different international trade instruments for the past years, Vietnam has not yet been recognized as an emerging market by the MSCI and is still classified as a frontier market. This puts Vietnam at risks in meeting its self-established 2025 deadline to be an emerging market (4).

Where does Vietnam stand now?

Currently, according to the MSCI, Vietnam has only established itself as a country with no issue on a certain areas of market infrastructure and openness to foreign ownership while other indexes has shown that improvements are highly needed for Vietnam to be upgraded to emerging market status, including foreign ownership limit (FOL) level, equal rights to foreign investors, information flow, foreign exchange market liberalization level, investment instruments(5).

It is important to note that, there are four countries in the South East Asia (SEA) region that are established as emerging markets by the MSCI, namely the Philippines, Thailand, Malaysia, and Indonesia since its start date of collecting data back from 1987 (6). Looking at the liberalization level of market access under the WTO, Vietnam is on par with Singapore – the most developed country in SEA region. With the participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and European Union–Vietnam Free Trade Agreement (EVFTA) of Vietnam, Vietnam is way ahead of the four SEA emerging markets in terms of international integration. Vietnam is the second country after Singapore that has concluded an FTA with the European Union. Taking telecommunication services for example, Vietnam is the most open country in terms of market access under the WTO since Vietnam allows the joint venture of up to 70% foreign ownership while the Philippines, Thailand, Malaysia, and Indonesia only allow joint ventures with an FOL of 30 percent. Under the EVFTA and CTPPP, foreign investors are allowed to take control or even wholly own a telecommunication company in Vietnam. Vietnam’s better market access commitments could be found in other service sectors such as construction and education compared to that of the Philippines, Malaysia, and Indonesia.

Although experts might believe that Vietnam is more developed than the four emerging markets in SEA region in a wide array of indexes and that Vietnam is doing the best among the frontier markets, from the MSCI’s point of view, it seems that they pay more attention to banking services and the indexes for treatment for foreign investors as well as investment instruments. Currently, for banking services, Vietnam only allows maximum 30 percent foreign ownership. Moreover, the foreign currency market, information flow of the market, and investment instruments in Vietnam, according to the MSCI, are still under development while they are already established as strong traits of the mentioned four countries. Looking at the investment instruments index, while the MSCI does not make any assessment on Vietnam, all of the four horsemen has been rated highest in the ranking of MSCI in this regard. This reflects the frequently use of non-voting depositary receipt (NVDR) in the Philippines, Thailand, Malaysia, and Indonesia. Meanwhile, it is still a debatable topic in Vietnam on whether NVDR or lower restrictions on conditional business lines is the silver bullet for Vietnam and the definite answer has not yet been concluded (7). With the introduction of the new law on investment, law on securities and law on investment in the recent years without the concept of NVDR, it seems that the State will focus more on easing restrictions on foreign investment in certain specific sectors, and, the best is yet to come.

To put the MSCI aside, reforms in Vietnam are not anticipated to happen anytime soon due to the mass dot lo (“blazing furnace”) campaign of Mr. Nguyen Phu Trong, the General Secretary of the Vietnamese Communist Party (VCP) in his effort to purge the VCP from corruption completely. From 2020 until now, a large number of high-ranking officials and financial giants have been arrested due to bribery, corruption, and fraud charges. It is undeniable that the recent infightings, with the hardest hit being the resignation of the President – Mr. Nguyen Xuan Phuc, have also affected the Government’s decision. The infightings and its aftereffects have significantly hindered relevant authorities from making any major decisions and it appears that the change of law would only commence after all of the in-charge authorities regain their confidence to reach a final resolution.

CTPPP, EVFTA and EVIPA

Despite the lack of investment instruments and the current FOL in Vietnam, it is crystal clear that Vietnam is worth their investment in the eye of foreign investors due to its activeness in the participation in international agreements. The EVFTA, CTPPP, and EVIPA (Investment Protection Agreement with the European Union) were signed by Vietnam in just a period of three years, from 2018 to 2020. The agreements with the world’s largest trading bloc – the EU – have cemented Vietnam’s position as a potential destination for corporate giants from all over the world. While Vietnam is the only SEA country having successfully concluded an FTA with the EU, Malaysia and Vietnam are the two SEA representatives in the CTPPP. Thus, from an international trading and investment perspective, Vietnam is unmatched when it comes to partnership and openness of market access. From a domestic perspective, Vietnam has made its move by ways of replacing the Law on Securities to ease the last FOL in public listed companies at 49 percent and allow the 100 percent FOL for non-critical business sectors.

On another note, the Investor State Dispute Settlement (ISDS) provision under the CTPPP and EVIPA also plays an important role in Vietnam’s investment attractiveness since it provides the investors with high standards of legal certainty and enforceability and protection (8). Under that provision, for investment related disputes, the investors have the right to bring claims to the host country by means of international arbitration. The arbitration proceedings shall be made public as a matter of transparency in conflict cases. The final arbitration award is binding and enforceable without the local courts’ review of its validity. The Government of Vietnam has to fully implement this commitment within five years from the entry into force of the EVIPA.

Summary and action plan

During COVID-19, Vietnam’s economy saw a steady and positive growth of GDP – a rare sight for a frontier market during an once-in-a-lifetime pandemic. However, as MSCI’s concerns have not yet been addressed and some of the commitments in the CTPPP, EVFTA, and EVIPA have not yet been localized, legal reforms are required for opener investment instruments and lower FOL for certain high-profile sectors. In other words, regardless of the infighting settlement, the government will have to work harder and do their homework under the current signed agreements to realize the emerging market status and ensure investors that they will be rewarded generously once they decide to come to Vietnam. As the self-established deadline is 2025, urgent actions are required since the procedures for amendments of the laws can take years before it becomes effective. To accelerate the process, competent authorities are recommended to engage and work closely with international commercial experts. It is believed that Vietnam is on the right track but the authorities are not on it right now due to the infightings which are holding back the reforms. It is advisable that, the state officials, with the support of external and international entities, make decision for the long-awaited reforms to amend the law and therefore change the view of international analysts and investors now or it would be too late. Duane Morris Vietnam LLC, led by Dr. Oliver Massmann with almost 25-year working experience in Vietnam, could support the Government in this process.

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Please do not hesitate to contact Dr. Oliver Massmann at omassmann@duanemorris.com if you have any questions. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

1-https://www.economist.com/special-report/2017/10/05/defining-emerging-markets
2-https://www.investopedia.com/terms/f/frontier-market.asp#:~:text=Key%20Takeaways-,A%20frontier%20market%20is%20a%20country%20that%20is%20more%20established,frontier%20markets%20are%20still%20investable.
3-https://www.msci.com/documents/1296102/8ae816b1-fa03-bae3-0bb4-1a3b2bf387bf?t=1656972645260
4-https://www.cnbc.com/2023/01/19/vietnams-market-risks-missing-upgrade-to-emerging-economy-status-2025.html
5-https://www.msci.com/documents/1296102/2cfed30d-daff-2155-91cc-3476882b057c?t=1656973074509
6-Looking at the past market reclassification of the MSCI
7- https://vietnamnet.vn/en/foreign-funds-want-law-changes-to-further-invest-in-vietnam-E211545.html
8-Chapter 9, CTPPP and Chapter 3, EVIPA

1. Why arbitration makes sense

This article shows foreign businesses the necessity of dispute resolution clauses quite plainly and provides assistance in choosing appropriate alternatives to the Vietnamese civil courts.

Disadvantages of Vietnamese courts

Most contracts in North America and Europe specify in detail all of the parties’ obligations and will be closely watched for the effectiveness of its clauses. The contract’s legal enforceability, however, is widely regarded as a given.

On the other hand, contracts between foreign investors and Vietnamese entities or with a reference to Vietnam that establishes Vietnamese jurisdiction should always specify the question “what institution will decide any disputes and in which language and what national law is to be applied?”

In this circumstance, without a dispute resolution clause, Vietnamese courts will have jurisdiction over a possible dispute. However, interested parties must consider the particularities of Vietnamese courts in comparison to Western rule-of-law courts. According to Transparency International, the risk of corrupted decisions remains, and almost one-fifth of surveyed Vietnamese people (aged 18 – 65) believe that judges are involved in corruption (Global Corruption Barometer 2017). Many businesses therefore avoid Vietnamese courts, as the existence of bribes deters them (USAID’s Vietnam Provincial Competitiveness Index 2021). Besides the unfortunately persistent risk of corruption, the Vietnamese judiciary, despite improvement efforts, continues to struggle with additional problems: Many Vietnamese judges lack adequate legal training and are appointed through personal contacts with party leaders or based on their political views, as a 2012 study by the United States Dept. of State revealed. Extremely low judicial salaries and short office terms of five years that must be renewed through a new appointment amplify the judiciary’s dependence on the Communist Party’s sympathy and on bribes. Furthermore, there is the systemic problem that rule-of-law and a single-party-system are mutually exclusive, due to the practical lack of separation of powers (Andersson 2012). The term rule-of-law in its Vietnamese translation means rules of the state, therefore rules of the Communist Party running the single-party state. Considering these factors, putting potential disputes into the hands of the Vietnamese judiciary is not advisable, because the possibility of corrupted decisions and political pressure or incompetent judges must still be taken into account. It is also important to note that, similar to other countries with an independent court system and a strong emphasis on the rule-of-law, companies may prefer to see delicate affairs arbitrated, rather than see their commercial disputes become a matter of public record.

Advantages of arbitration

The right arbitration center provides independent decisions and professional competence. It is usually possible to select a pool of arbitrators trusted by both parties in the clause, which might lead to a wider acceptance of a possible arbitrational decision. It is important to consider arbitrator candidates based on their expertise in the relevant business field. Most arbitration centers provide renowned experts for certain fields of work.

2. Which arbitration court is right?

Selecting an appropriate arbitration venue is a key component in designing any dispute resolution clause A company may decide upon a Vietnamese arbitrational court, for instance the Vietnamese International Arbitration Centre (VIAC), or an offshore arbitrational court, such as the Singapore International Arbitration Centre (SIAC). To decide which venue is the best fit, the following factors must be carefully considered:

Project size

For major projects with an investment sum of more than roughly US$ 5 million, choosing an international arbitration court is generally recommended. At this level, the problem of cost pressure (see infra) is likely to be neglected. An international tribunal’s decision is also more likely to be accepted by the parties, as a lack of competence on the arbitrator’s part and any (remote) possibility of political pressure on the arbitrators is therefore eliminated.

Location of seizable assets – enforcement risks of foreign arbitrational awards

Another major factor is the location of the contractual partner’s assets that may be seized when enforcing a possible arbitrational award. If the assets are mainly located in Vietnam, a foreign arbitrational court’s decision must be enforced there – a tougher task than enforcing a domestic award. Indeed, Vietnam became a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (NYC) in 1995, and therefore foreign arbitrational awards of the 149 member states can generally be enforced. However, there is a risk of a substantial delay in completing enforcement, as an application to the Ministry of Justice and further explanations and a court
date leading to an appealable decision are necessary for enforcement. Furthermore, the competent Vietnamese enforcement court may reject the arbitrational award. According to Article V of the NYC, this is possible in the case of an arbitrational award’s violation of domestic laws or public orders. The Vietnamese Civil Code refers to this as the “principles of Vietnamese laws”, and the Vietnamese judiciary has made broad use of it (Tam Shu Ching et al. 2012). With more than 50% of domestic verdicts being set aside, it shows that the courts in Vietnam have somehow not been friendly with and not positively supported the arbitration tribunal. In one case, for example, rejecting the arbitrational award of a foreign company was based on a missing construction permit (Tyco Services Singapore Pte Ltd v Leighton Contractors Vietnam).

Pressure of cost

One should take into consideration that the costs of on- and offshore arbitration differ widely. For a value in dispute of approximately US$4 million, for instance, the cost of arbitration at the VIAC is roughly $62,000 if one arbitrator is assigned to the case, as opposed to about U$117,000 at the SIAC. Not only are the costs for an offshore arbitration substantially higher, but that option can create additional costs for parties, such as travel expenses for parties, witnesses and lawyers. Furthermore, the hourly rates of local lawyers at the international arbitration court are usually higher than the rates of Vietnamese lawyers, (Shouzhi et al. 2009). The same applies to expert’s opinions and other experts. The risk of expensive litigation can put less liquid companies under pressure to accept even unfavorable settlements. Therefore, the cheaper onshore arbitration can often be more beneficial to companies with fewer financial resources.

Complexity and specialty of the subject matter of the contract and potential issue
Vietnamese arbitration courts, such as VIAC, have a high legal competence. But domestic arbitrational courts cannot yet provide internationally recognized experts on the same level as foreign tribunals. The main reason for this is the comparatively low fee of an arbitrator in Vietnam. Decisions regarding business transactions of high complexity or contracts focusing on highly specialized fields are more likely to be mutually accepted if the parties choose a more expensive foreign arbitrator with special expertise.

(Hidden) state-owned enterprises

When state-owned enterprises are involved, an offshore arbitration clause should be used. This ensures that the arbitrator handling the case is free of any authoritarian exertion of influence by the state-owned party. In theory, the follow-up problem of the enforcement of judgment in Vietnam remains, but the current development shows that the positive award strengthens a company’s negotiating position with the business partner. The same applies to hidden state-owned enterprises – companies that are de facto influenced by the government, for instance those that share ownership through state-owned enterprises’ subsidiaries. The contractual partner’s status as “state-owned” should always be considered very carefully.

Special case: Intellectual property

In special cases, where intellectual property is concerned, the contracts must ensure that no official interim measures are cut off by the arbitration clause. Arbitration courts are also able to issue interim measures. But as the case arises, an opening clause should be considered where Vietnamese courts or authorities such as the Market Management Bureau normally provide more effective interim relief.

Choice of jurisdiction

Choice of jurisdiction

3. How it is done

Vietnamese law allows dispute resolution clauses in commercial contracts explicitly through the Law 54/2010/QH12 on Commercial Arbitration, (“LCA”). An effective dispute resolution clause withdraws Vietnamese courts’ jurisdiction of the particular case and establishes the appointed arbitral tribunal’s jurisdiction. The LCA follows the UNCITRAL model law as an international standard for procedural rules, and the lawmakers’ intention is indeed arbitration-friendly. Once the decision is made regarding whether and where an arbitration tribunal should be used for disputes arising from the contract, the following points should be cleared:

• Applicable law: The applicable law can be chosen freely in cases with a foreign element according to Article 14 Nr. 2 LCA. The chosen applicable law should also influence the selection of arbitrators, as they should have a legal background in the particular national law.
• Court’s language: This can be freely selected according to Article 10 Nr. 2 LCA.
• Number of arbitrators: Several arbitrators might give a more balanced-out decision as a collegial formation. Arbitration costs will however rise accordingly.
• Appointing a particular arbitrator: This is important in cases that require experts:
The dispute resolution clause becomes effective if the requirements of Articles 16, 18 and 19 LCA are met, e.g. through a written agreement.

Making use of the dispute settlement mechanism under the EU – Vietnam Investment Protection Agreement (“EVIPA”) and the Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”)
For any investment-related dispute (i.e. expropriation without compensation, investment discrimination), an investor of a party is allowed to bring such dispute against the Government of the other party to the Investment Court for settlement. In case either of the disputing parties disagrees with the decision of the Tribunal, it can appeal it to the Appeal Tribunal. While this is different from the common arbitration proceeding, it is quite similar to the 2-level dispute settlement mechanism in the WTO (Panel and Appellate Body). We believe that this mechanism could save time and cost for the whole proceedings. The final arbitration award is binding and enforceable without the local courts’ review of its validity. The Government of Vietnam has to fully implement this commitment within five years from the entry into force of the EVIPA. For your information, as of February 2023, there have been 11 out of 27 EU members having ratified the EVIPA. It means we need to wait until the remaining 16 EU members have ratified the agreement for it to take effect and trigger the deadline for direct enforcement of arbitral award by the Government of Vietnam.

While the CPTPP allows the same mechanism for an investor of a party to challenge the Government of the other party, it does not include the 5-year transitional period as in the EVIPA. In other words, the enforcement of arbitral award under the CPTPP would follow the NYC rules. However, we believe that the Government of Vietnam will soon revise the current local arbitration regulations to ensure its commitment under the EVIPA. Investors under the CPTPP could then take advantage of such improvement.
We believe that the investor-to-state dispute settlement (“ISDS”) under both the EVIPA and the CPTPP brings the highest level of enforceability and bankability when they are well designed in commercial contracts in Vietnam.

Conclusion

The question of whether or not to have a dispute resolution clause in contracts in Vietnam can be answered with a clear yes. However, deciding on the right place for dispute resolution can involve much complexity, as a number of factors must be thoroughly taken into account.

In addition, investors do not need to wait until the entry into force of the EVIPA or the amendment of local arbitration laws to benefit from the ISDS mechanism. We can assist you to include the ISDS clause in your commercial contracts now so that your contracts have the highest level of enforceability and bankability. Please contact us for more details on how we can include it per the contact details right below.

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Dr. Oliver Massmann is a partner in the Hanoi office of U.S.-based international law firm Duane Morris LLP. He practices in the area of corporate international taxation and on power/water projects, matters related to oil and gas companies and telecoms, privatization and equitization, mergers and acquisitions, and general commercial matters for multinational clients in relation to investment and doing business in Vietnam. Dr. Massmann is registered Arbitrator of the Vietnam International Arbitration Centre.

Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC. He can be reached at omassmann@duanemorris.com.