Dr. Oliver Massmann is a registered International Arbitrator and
holding a German judge degree. He has worked as an arbitrator in
international arbitration and mediation centers in Asia and Europe
for over 25 years.
With more than two decades of practicing law as an International
Arbitrator, Dr. Oliver Massmann has advised for wide variety of
multinational businesses from all parts of the world, counseling
many leading foreign and local investors in Vietnam.
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
Vietnamese jurisdiction Onshore Arbitration at Offshore
Arbitration
Vietnam International Arbitration Center (VIAC)
generally advised against project size under US$5M project size
over US$5M
Only in special cases regarding seizable assets of the contractual
seizable assets of the contractual
intellectual property, an opening clause partner are located in
Vietnam partner are located abroad
can be considered to be implemented less complex legal questions
more complex legal questions
into a dispute resolution clause, e.g. making applicable interim
contract affects more general contract affects legal fields
measures/injunctions through authorities legal fields, e.g.
purchase law that require a decision from like the Market
Management Bureau highly specialized legal professionals
contractual partner is not a contractual partner is
(hidden) state-owned enterprise a (hidden) state-owned
enterprise
own financial strength is smaller, own financial strength
is
cost pressure can be a thread higher, cost pressure is
not a thread
no dispute resolution clause necessary dispute resolution clause
necessary! dispute resolution clause necessary!
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.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
