Is It Better To Arbitrate in Vietnam or Abroad?

Background   

Three types of dispute qualify for arbitration in Vietnam. Firstly, disputes involving "commercial activity" can be arbitrated. Commercial activity is any "activity with a profit-making purpose comprising the purchase and sale of goods, provision of services, investment, commercial enhancement, and other activities for profit-making purposes. [i]

Secondly, arbitration is allowed if one party to the contract is engaged in a commercial activity, say, a vendor in a dispute with a customer. Finally, the law requires that some disputes be settled by arbitration. Disputes that are specifically stipulated by law also qualify for arbitration. For example, contracts that relate to investments under the 2014 Law on Investment[ii], qualify for arbitration. Arbitration is not a general right. Use of arbitration is subject to agreement. That is, the parties have to agree to arbitrate. Agreement to arbitrate can be made in any written form. The agreement may be part of an underlying agreement that is itself in dispute or it may be a separate agreement to arbitrate. Any modification, extension, termination, or invalidity of the contract will not affect the arbitration clause. This follows the separability doctrine of the New York Convention.[iii]

Types of Arbitration

There are two types of arbitration, foreign and domestic. Foreign arbitration is an arbitration process that is governed by a foreign law, e.g., arbitration at the Singapore International Arbitration Center whose rules of arbitration are governed by Singaporean law. On the other hand, domestic arbitration is arbitration governed under Vietnam's Law on Commercial Arbitration, e.g., at the Vietnamese International Arbitrator Center (VIAC) whose rules of arbitration are governed by Vietnamese law. Accordingly, arbitral awards pronounced through a foreign arbitration mechanism are foreign awards and arbitral awards pronounced through a domestic mechanism are domestic awards. That is, the actual place where the arbitration is held is not relevant. Not oddly, is it relevant whether foreign or domestic law is chosen to resolve the dispute. However, before being enforced in Vietnam, a foreign arbitral award must be recognized by a Vietnamese court. 

Considerations to Keep in Mind 

The benefits of domestic arbitration as a mechanism to resolve disputes, should not be dismissed, even by persons inclined to present before an international arbitration forum. While foreign companies often opt for international arbitration, domestic arbitration forums provide significant benefits including: (i) higher probability of enforcement in Vietnam, (ii) decreased legal and administrative costs, and (iii) a wide range of options in the selection of a forum, skills and arbitrators, and governing law. Domestic arbitration generally provides great flexibility and the autonomy of the parties to contract for the type of tribunal they desire.

Domestic arbitration awards have higher enforcement rates in Vietnam.

One major concern of foreign arbitral awards is that they will not, without more, be recognized by a Vietnamese court. Foreign arbitral awards require a filing with the Ministry of Justice (MOJ). This is the first step toward recognition. Within several days the MOJ must send the foreign award to the appropriate People's Court which will determine whether it will be recognized. Decisions made by a People's Court regarding recognition are final and cannot be appealed. Recognition of foreign arbitral awards can be rejected by a court in Vietnam: (i) when they violate procedural requirements (format, representation, notification, and authorization), or (ii) when they violate "fundamental principles of Vietnamese law."[iv] Reviews in Vietnam of foreign arbitral awards are generally intended not to relate to the merits, but revolve around whether procedural and provisional requirements have been met. There is no timeframe within which the court must act.

A domestic arbitral award, on the other hand, comes into force when it is issued and without any need to be recognized. The Court may set aside a domestic arbitral award when there is a request by one of the parties and when the legal grounds, if proved, are sufficient to set aside a domestic award. However, the grounds to refuse recognition of a domestic award are limited to traditional issues such as there is no agreement to arbitrate or the arbitration agreement is invalid.[v] The courts have come to the view that they need to respect domestic arbitral awards and strictly evaluate any grounds suggested for them to refuse to enforce domestic awards.

This was evident in a case in which a Vietnamese court refused to set aside a domestic arbitral award against one of the largest state-owned enterprises in the country. A request was made by Vinalines to set aside a domestic award on four grounds: (i) The award was contrary to fundamental principles of Vietnamese law, (ii) forged evidence was used in the proceeding, (iii) not all related parties were allowed to participate, and (iv) issuance of another arbitral decision after the arbitral award. All four grounds which were argued by the Vietnamese company to the Vietnamese court were denied. Although the matter involved domestic arbitration, the court avoided any temptation to examine the award by referencing, for example, principles of Vietnamese law. 

The court in Vietnam clearly observed that when faced with a request to set aside a domestic arbitral award, the courts may not consider the merits of the dispute, but may only determine if there is a valid ground to set aside the domestic award as provided in the Law on Commercial Arbitration.[vi]

Recently, courts have elaborated on the concept of "fundamental principles of Vietnamese Law" and have considered what the concept includes. The elaboration presents a two-prong conjunctive test which requires:

(i) that the principle of Vietnamese law breached by the award violates "[a] basic principle on conduct, the effect of which is overriding in respect of the development and implementation of Vietnamese law" and (ii) that the award "violates the interests of the government, and the legitimate rights and interests of third parties." [vii] If both of these tests are met, a court must set aside the award whether domestic or foreign.

Contrary to the more positive record of enforcement of domestic awards, recognition of foreign awards can pose a significant hurdle. Regardless of the choice of law stated in a particular contract, "the legal capacity of a foreign legal entity must be determined by following the laws of Vietnam."[viii] This language, in reality, is narrow. It refers only to the "capability" of a foreign entity not the organic law applied to the dispute. However, determining recognition, and perhaps prompted by a misinterpretation of this language, courts will sometimes compare Vietnamese law with the foreign law used to resolve the dispute, to determine whether an award should be recognized. Foreign awards in which foreign law is applied and which favour foreign companies are more likely to be perceived as biased and in violation of "fundamental principles of Vietnamese law." While the Vietnamese government has urged courts to apply the rules selected by the party,[ix] recognition can still be problematic. In some circumstances, the merits of a case will be reviewed.[x] In other cases, courts may deny recognition because of concerns over whether the persons or entities who signed the arbitration agreement were authorized to do so.[xi]

The Supreme Court made a statistical review of requests to the courts for recognition of foreign arbitral award in cases decided between January 2005 and June 2014. Fifty-two requests were reviewed.[xii]12 Of these 52 requests, 23 awards were recognized. ln the city of Hanoi, as few as 18 percent of foreign arbitration awards were recognized while in Ho Chi Minh City almost 80 percent of awards were recognized. Because of the finality of these court decisions, it is especially problematic to enforce foreign awards in Vietnam. Another challenge to recognition of a foreign award, is the possibility of delay. The Code of Civil Procedure requires that courts issue a decision regarding recognition and enforcement of a foreign award within 20 days.[xiii]

There is a series of steps to reach decision and each step can result in delays. Delays can take as long as one or two years. While not every resolution of a petition takes this long, delay remains a possibility and should be a concern of companies when deciding between domestic and foreign arbitration.

In contrast, domestic arbitration awards governed by Vietnamese law are automatically recognized by courts, resulting in far less delay and expenditure of resources. Additionally, when the jurisdiction of a domestic tribunal is challenged, it seems that Vietnamese courts will rarely interfere. ln 2015, there were 13 requests to challenge awards made by the VIAC, and none succeeded.[xiv] In addition, without a long recognition and enforcement process, parties in domestic arbitration may maximize the chance to reach an amicable, negotiated resolution. [xv]

Lauren Sun, Russin & Vecchi