Enforcement of foreign arbitral awards in Vietnam
21 November 2013
What constitutes a “Basic principle of Vietnamese law”? The refusal of Vietnamese courts to recognize and enforce foreign arbitral awards deemed contradictory to “basic principles of Vietnamese law” has long created frustration and uncertainty for commercial parties seeking to enforce such awards in Vietnam.
Recent court decisions and draft guidelines issued by the Supreme Court shed light on what constitutes a “basic principle of Vietnamese law” in the eyes of a court examining a foreign arbitral award, and may help to bring a measure of certainty to the courts’ practice in this area.
Because Vietnam is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, domestic enforcement of foreign arbitral awards is possible. To enforce a foreign arbitral award in Vietnam, a petition must first be sent to the Ministry of Justice, which will then transfer the petition to a competent court for recognition and enforcement. Article 370 of the Civil Procedure Code sets out the grounds on which a court may refuse to recognize a foreign arbitral award, including if such award is contrary to “basic principles of Vietnamese law”. Unfortunately, for parties seeking to enforce foreign arbitral awards in Vietnam, a historical lack of guidance as to what constitutes a “basic principle of Vietnamese law” has left Vietnamese courts with broad discretion to interpret and apply this term in the context of recognizing a foreign arbitral award in Vietnam.
Differing views of the courts
Some judges have taken the position that a breach of any specific Vietnamese law could be construed as being against the basic principles of Vietnamese law, and have therefore refused to enforce foreign arbitral awards for even minor inconsistencies with sub-law provisions. For example, in Energo-Novus v. Vinatex (1998), the court found that the Russian arbitration tribunal’s refusal to admit a notarised document submitted by the Vietnamese defendant contradicted a Vietnamese government decree supporting the validity of notarised documents and refused to recognize the foreign tribunal’s award on that basis. In another case, Tyco Services Singapore v. Leighton Contractors Vietnam (2003), the court held that the failure of the Singaporean - awarded party to register for foreign contractor status as required by a Vietnamese ministerial circular constituted a violation of the basic principles of Vietnamese law and benefits of the State of Vietnam.
More recently, courts have increasingly cited specific provisions of primary Vietnamese legislation – most notably the Civil Code1 and the Commercial Law2 – when refusing to recognize a foreign arbitral award on the grounds that it is inconsistent with basic principles of Vietnamese law. However, the broad manner in which the Civil Code and Commercial Law are drafted leaves ample room for interpretation by the courts. For example, in Toepfer v. Sao Mai (2011), the Supreme Court held that the failure of the awarded party to mitigate its loss constituted a breach of the principle of goodwill set out in Article 6 of the Civil Code. The court also held that the UK arbitration tribunal’s award of liquidated damages was contrary to the Civil Code’s provisions regarding actual damages and consideration of fault for civil liability and, therefore, contrary to the “compliance with law” principle set out in Article 11 of the Civil Code. This ruling suggests that at least some Vietnamese courts may deem non-compliance with any ordinary provision of Vietnamese law to be a breach of the “compliance with law” principle as provided for in Article 11 of the Civil Code, and has raised concerns regarding the enforceability of indemnity or limitation of liability provisions under contracts governed by foreign law.
Courts may also look to secondary legislation, the relevance or “basic” nature of which may not always be readily apparent. In 2012 the People’s Court of Hanoi refused to enforce an arbitral award granted by the International Cotton Association (ICA) because the ICA arbitration tribunal had failed to duly notify the Vietnamese defendant of the proceeding. According to the court, the deficient notice constituted both a fault in the arbitration procedure (as provided in Article 370.1(c) of the Civil Procedure Code) and a breach of its principles regarding parties’ rights of self-protection (set out in Article 9), and on that basis refused to recognize and enforce the foreign award. The proposition that, in order to be recognized in Vietnam, a foreign arbitral proceeding operating in accordance with its own rules must also follow procedural principles applicable before Vietnamese courts is questionable at best, and suggests that Vietnamese courts may be willing to disregard foreign arbitral awards for any inconsistency with local law.
Draft guidelines of the Supreme Court
It is hoped that a guiding resolution to the Law on Commercial Arbitration currently being drafted by the People’s Supreme Court will improve the consistency and efficiency of Vietnamese courts’ handling of foreign arbitral awards. Article 16 of the draft resolution (which addresses the basis for setting aside an arbitral award) provides that an arbitral award contrary to basic principles of Vietnamese law is an award containing substantive matters in breach of the principles provided by Vietnamese legislation. This Article 16 (if it comes into effect) should encourage Vietnamese courts to rely on specific principles of Vietnamese law when refusing recognition and enforcement of foreign arbitral awards. Its language also suggests that procedural matters should not be taken into account in the court’s review, though they may still be grounds for a refusal to enforce under Article 370.1(c) of the Civil Procedure Code.
Actions to be taken
The broad discretion of Vietnamese courts to decide what constitutes a “basic principle of Vietnamese law” and to use such determination to refuse recognition of a foreign arbitral award leaves parties seeking to enforce such awards in Vietnam in an uncertain position. To mitigate this uncertainty, parties anticipating a potential need to enforce a foreign arbitral award in Vietnam should consider taking (where practicable) the following actions:
review all contracts, irrespective of governing law, to ensure consistency of contractual terms with basic principles of Vietnamese domestic legislation, particularly those principles set forth in the Civil Code, Commercial Law and Civil Procedure Code;
when serving an arbitration notice on a Vietnamese counterparty, care should be taken (to the extent possible) to comply with both contractual and Vietnamese law notice requirements as well as those of the foreign tribunal in order to minimize the risk that such notice will be challenged by a Vietnamese court reviewing the award; and
foreign - awarded parties should also consider alternate or contingency enforcement plans (such as possible bilateral investment treaty (BIT) claims) if the Vietnamese legal system ultimately proves unable to deliver adequate legal protection to foreign investors.
1 The Civil Code stipulates that all civil transactions must comply with the following basic principles: (i) a person must freely and wilfully make a commitment or enter into an agreement; (ii) all persons are equal in civil relations; (iii) a person must act with goodwill and honesty in civil relations; (iv) a person must take liability for his/her failure to perform a civil obligation; (v) good ethics and customs must be respected; (vi) civil rights of individuals and entities must be respected and protected by law; (vii) the interests of the State, public and other persons must be respected; (viii) the establishment or performance of a civil right or obligation must comply with the law; (ix) settlement between parties must be encouraged; and (x) civil rights and obligations must be established on a legal basis.
2 The Commercial Law sets out the following basic principles of commercial activities: (i) traders are equal under the law; (ii) commercial parties have freedom to enter into an agreement and freewill to undertake commercial activity; (iii) precedent practices are deemed applicable unless otherwise agreed; (iv) commercial customs may apply where the law, agreement or established practice is silent; (v) lawful customer interests must be protected; and (vi) the validity of electronic data must be recognised.