Vietnam - Legal Overview - Contractual Disputes In Vietnam

The laws of Vietnam are complex and new legislation is constantly being introduced. What follows is no more than an introductory overview that we hope will assist investors to decide which areas of law they will need to research further.

This summary is, necessarily, selective and is no substitute for detailed legal advice.

1. Introduction
To seek to put into context the options that an investor may have, we begin with a sketch of the Court system in Vietnam.

1.1 At the lowest level, there are the District Courts. Above them are the City and Provincial Courts. Not all cities have City Courts. If the city is a major city and comes under Central authority, like Da Nang or HoChiMinh City, it will have a City Court equivalent in authority to a Provincial Court. Other cities will fall under the authority of a Provincial Court.

1.2 Above the City and Provincial Courts is the Supreme People's Court. This sits in Hanoi.

1.3 The Courts above District level have three divisions: civil, criminal and, now, economic. The Economic Courts are a recent creation.

1.4 In 1996 an Administrative Court may be established to supervise the acts of government bodies.

1.5 The judges at the higher courts are very often those promoted from the lower courts.

1.6 Until 1994, judges did not have to be legally qualified. They trained at the Courts. They now have to undergo legal training whilst they continue in office.

2. An Example

2.1 Where jurisdiction lies will very often be determined by individual items of legislation.

2.2 Determining what is the applicable legislation in any given case is not always easy. A recent, practical instance, arising in the context of leases of commercial property demonstrates the difficulty.

2.3 For example, a joint venture with foreign invested capital builds an office block and lets it to foreign representative offices and to other foreign invested enterprises in Vietnam.

2.4 As far as we can determine, there is no directly applicable legislation.

2.5 What jurisdictional provisions can you include in your lease? Our enquiries suggest that up to now disputes over leases have been treated as arising under civil contracts.

2.6 However, it seems clear that a lease entered into between two foreign invested joint ventures would be an economic contract. Disputes under such contracts probably have to be resolved by the Economic Courts. The applicable law will, pursuant to the legislation on Economic Contracts, have to be Vietnamese.

2.7 However, Article 101 of Decree 18 of 16 April, 1993, which sets out the detailed regulations for investing in Vietnam, is intended to cover disputes between foreign invested joint ventures. This Article provides for disputes to be resolved under Vietnamese law by Vietnamese bodies. It is left unclear whether this could include, for example, arbitration by the Vietnam International Arbitration Centre but it may well do so.

2.8 The parties may then have an option whether or not to go to the Economic Courts.

2.9 The Lessor will, thus, always need to be aware of limitations imposed on what it can provide in its documentation in terms of jurisdiction clauses.

3. Jurisdiction Clauses In Particular Agreements

3.1 Two basic questions need to be answered in relation to any contract:-
(a) what choice of law is permitted; and
(b) what choice of forum for resolution is permitted.

3.2 The laws of Vietnam appear to try to differentiate between (i) the resolution of disputes between the parties to foreign investment vehicles; and (ii) contracts with which non-investors doing business with Vietnam will be concerned; and (iii) contracts between Vietnamese entities (including foreign investment vehicles) and third parties and (iv) disputes with the State and State Bodies.

4. Joint Ventures

4.1 Article 25 of the Foreign Investment Law ("FIL") in its amended form as at 23 December 1992, provides that disputes between the parties to foreign invested enterprises or between a foreign invested enterprise and any Vietnamese economic organisation or other enterprise with foreign owned capital must first be attempted to be resolved by conciliation and negotiation and if this is unsuccessful:-

"Then the dispute shall be referred to a Vietnamese economic arbitration body or other arbitration or judicial body as may be agreed".

4.2 Decree 18 provides in Article 21.6 that a joint venture agreement shall contain provisions relating to:

"...the resolution of disputes between joint venture partners; the arbitration procedures and law to be applied in case of a dispute."

4.3 Article 100 of Decree 18 provides that disputes shall be resolved primarily through conciliation and negotiation, but if these fail, the dispute will be resolved by:

EITHER

"a Vietnamese arbitration body, or an arbitration body of a third country, or an international arbitration body;

OR

- an arbitration council established pursuant to an agreement between the parties to the dispute. The distinction between the above two alternatives seems to be that the former requires that there be reference to an established arbitration body such as the International Chamber of Commerce in Paris and the latter to a typical arbitration clause where, for example, each party appoints its own arbitrator and the two so chosen elect the third and the parties further specify a venue for the arbitration.

4.4 The terms of Article 21.6 referred to above i.e. that the parties choose the law to be applied in the case of a dispute does not mean that the parties can freely choose the law relating to their contract. The reference is to the procedural law which is intended to apply to the arbitration.

The SCCI have, however, accepted that a provision may be included to provide that, to the extent any issue is not covered by Vietnamese law, the substantive law may be that of another jurisdiction.

5. Business Co-operation Contracts

5.1 Article 25 of the FIL applies here also. Article 10.6 of Decree 18 provides that the BCC shall provide for resolution of disputes between contracting parties. Article 100 of Decree 18 quoted above applies also.

6. Wholly Foreign Owned Enterprises ("WFOE")

6.1 Since these are Enterprises where there is only one party, there is, theoretically, no specific provision needed. However, if the WFOE is, broadly speaking, within an important area of the economy, as determined by the Government, there is a right of buy in for a Vietnamese party which converts the WFOE into a Joint Venture, and so it is important to take this into account when drafting certain WFOE.

7. Build Operate Transfer Contracts ("BOT")

7.1 The BOT legislation contemplates that the BOT Company will be formed under the legislation applicable to joint ventures and WFOF.

7.2 The BOT legislation which sets out the detail of the legislation is Decree 87-CP of 23 November 1993, and this provides in Article 15 that disputes between the State Body and the BOT Company shall be resolved through negotiation and conciliation and, if this fails, it may be referred to an ad hoc arbitration established by the parties for dispute resolution. The Article states that the parties shall agree upon the procedure and the laws to govern the dispute.

7.3 The Article goes on to say that the decision of the arbitrators shall be enforced in accordance with Vietnamese laws. Enquiries made of the Vietnam International Arbitration Centre ("VIAC") suggest that there may be no specific enforcement provisions in Vietnamese domestic law to permit the enforcement of a VIAC Award.

7.4 The Ordinance on Economic Arbitration, however, in Article 21.7 provided that in order to implement an order made, the arbitrator was empowered to freeze bank accounts and to require third parties who possessed property and/or who owed money to the party against whom the order is made temporarily to withhold that property or money.

7.5 The same powers now reside in the Economic Courts for the taking of interlocutory measures and Article 88 of the Ordinance establishing the Economic Courts provides that decisions of the Court shall be enforced in accordance with the Ordinance on the enforcement of Civil Judgements and Decisions dated April 1993.

7.6 Circular 333 of 28 February 1994, which expands on Decree 87-CP, states in Article 3.3 that any mortgage of its assets (which a BOT Company is expressly entitled to enter into) must be drawn in accordance with the laws of Vietnam and, in so far as the laws of Vietnam do not cover the issue, the laws of a foreign country may be applied but not in a way that contradicts Vietnamese Law.

8. Appealing Administrative Discretion

8.1 If, for example, the SCCI and/or the Ministry of Science, Technology and Environment ("MOSTE") will not agree to approve a contract unless a Vietnamese forlini is agreed, the parties should be aware that, at present, their remedies are limited. There appears to be no appeal from their decisions.

In this context, an investor needs to have regard also to Article 102 of Decree I 8. Disputes with State bodies (for example the Civil Aviation Authority or the Department General of Posts and Telecommunications) are to be resolved by what is described as "a competent State Body..."

8.3 A practical example of the importance of this provision. If you enter into a petroleum contract under the Petroleum Law, and if you are a foreign party, the dispute will be resolved in accordance with the Foreign Investment Law. If your dispute is with a State Body, it will, apparently, be resolved by the "competent State Body", which may be your contracting party.

9. Foreign Arbitration Awards And Judgements

9.1 There is, at present, no formal method for the enforcement of foreign arbitration awards in Vietnam, as Vietnam is not party to any Convention on the enforcement of arbitral awards. We understand that Vietnam is contemplating becoming party to the New York Convention, so as to permit the enforcement of awards.

9.2 The use of a foreign arbitration tribunal may well be of considerable value once Vietnam joins the New York Convention. However it will not cover those cases where jurisdiction has, by Vietnamese law, to be with a Vietnamese body.

10. Contracts Entered Into Between Vehicles Formed Under The Fil And Third Parties

10.1 Article 101 of Decree 18 provides that:-

"Disputes between enterprises with foreign owned capital, foreign parties to business co-operation contracts and Vietnamese economic organisations, shall be resolved in accordance with the law of Vietnam and by Vietnamese bodies".

Vietnamese economic organisations probably means State owned enterprises, co-operatives, domestic companies and private enterprises established under the Laws on Private Enterprises.

10.2 It would seem to follow that the most likely venue for such disputes to be heard is before the Economic Courts.

10.3 Article 14 of Decree 87-CP relating to 130T Contracts lists in subsection 2 the contracts which a BOT Company can enter into, such as for the right to use land, for construction, for capital finance and to grant mortgages and goes on to provide that the BOT Company may :-

"In respect of issues which are not regulated by the laws of Vietnam apply foreign laws provided that such application is approved by the SCCI".

It is not made clear what is the position if there is a later change in the law in Vietnam to cover issues that are subject to an existing, valid choice of law.

10.4 Article 15 of Decree 87-CP provides that in relation to what are known as "Ancillary Contracts" under a BOT structure, disputes go to (i) an arbitration body in Vietnam; or (ii) an ad hoc arbitrator established by the parties; or (iii) an arbitration body of a third country; or (iv) an international arbitration tribunal. Ancillary Contracts are basically those made with subcontractors on the project.

11. Disputes At Governmental Level

11.1 In relation to contracts with the Government, as such, for example, between a lender such as the World Bank or ADB, there are specific Decisions dealing with these on an individual basis. There appears to be no general law dealing with how this kind of dispute with the Government would otherwise be resolved nor how far the Government can go in waiving sovereign immunity.

12. Disputes Over The Use Of Lad

12.1 In relation to land, the Law on Land makes specific provision and it is left unstated what is intended to be the relationship between this law and the provisions referred to above. We understand that the Law on Land will prevail.

13. Intellectual Property Rights Under Contract

13.1 The definition of what is a contract of technology transfer is very wide and includes such contracts as management contracts and technical assistance contracts.

13.2 Article 6 of the Ordinance of the Transfer of Foreign Technology into Vietnam says that the contract must provide for :-

"The law and procedures to be applied in the resolution of any disputes which may arise from the performance of the technology transfer contracts."

Again the question which arises is whether what is permitted is a law to govern the procedure for dispute resolution or the adoption of a foreign system of law to govern the contract. In our own dealings with MOSTE, they have always insisted upon Vietnamese law applying.

NOTE: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

If you would like further advice please contact: David Ellis, Johnson Stokes & Master, 16th Floor, Princes Building, 10 Chater Road, Hong Kong; Tel 2843 4226; Fax no. : 2845 9121. Alternatively do a text search "Johnson Stokes and Master" and "Business Monitor".