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!
Dr. 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 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
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
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
generally advised against project size under US$5M project size over US$5M
Only in special cases
property, an opening clause
seizable assets of the
contractual partner are
located in Vietnam
seizable assets of the
contractual partner are
can be considered to be
into a dispute resolution
clause, e.g. making applicable
through authorities like the
Market Management Bureau
less complex legal
more complex legal
contract affects more
general legal fields, e.g.
contract affects legal fields
that require a decision from
highly specialized legal
contractual partner is not a
contractual partner is a
own financial strength is
smaller, cost pressure can
be a thread
own financial strength is
higher, cost pressure is not
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 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
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.
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.
Dr. 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. Dr. Massmann is registered Arbitrator of the Vietnam International Arbitration Centre.
Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC. He can be reached