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Vietnam_ The most Important Clause in Any Commercial Contract in Vietnam - Get Your Dispute Resolution Clause Right!
The Most Important Clause In Any Commercial Contract In Vietnam
- Get Your Dispute Resolution Clause Right!
Author: Oliver Massmann
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
In this circumstance, without a dispute resolution clause, Vietnamese courts will have
jurisdiction over a possible dispute. But 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 households that have been to court declared that they had paid bribes at least once
(Global Corruption Barometer 2011). Many businesses therefore avoid Vietnamese courts, as the
existence of bribes deters them (Global Integrity 2011; USAID’s Vietnam Provincial
Competitiveness Index 2011). 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:
For major projects with an investment sum of more than roughly $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 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). 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 $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 $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
Vietnamese jurisdiction Onshore Arbitration at
Arbitration Center (VIAC)
generally advised against project size under $5M project size over $5M
Only in special cases regarding
intellectual property, an opening
clause can be considered to be
implemented into a dispute
resolution clause, e.g. making
authorities like the Market
seizable assets of the contractual
partner are located in Vietnam
seizable assets of the contractual
partner are located abroad
less complex legal questions more complex legal questions
contract affects more general
legal fields, e.g. purchase law
contract affects legal fields that
require a decision from highly
specialized legal professionals
contractual partner is not a
(hidden) state-owned enterprise
contractual partner is a (hidden)
own financial strength is smaller,
cost pressure can be a thread
own financial strength is higher,
cost pressure is not a thread
no dispute resolution clause
dispute resolution clause
dispute resolution clause
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
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.
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. One
hopes that 2010’s arbitration-friendly LCA keeps its promises as it is being implemented, and
that the Vietnamese judiciary will reliably enforce domestic and foreign arbitrational awards
alike. Doing so would send the right signal to foreign investors with reservations about
undertaking litigation in Vietnam.
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. Massmann is registered Arbitrator of the Vietnam
International Arbitration Centre. He can be reached at email@example.com.