Vietnam has experienced significant economic growth in recent years, attracting foreign investment and leading to an increase in the number of foreign-owned companies operating within its borders. With the expansion of international business activities, the choice of governing law for contracts between these foreign-owned companies has become a topic of interest and importance.
Determining the applicable law
By default, Vietnamese law governs contracts between foreign-owned companies and other companies in Vietnam. However, there are arguments and mechanisms that allow parties to choose a foreign governing law, such as English law, for these contracts. This becomes important when foreign-owned companies plan to secure financing from foreign lenders based on the cash-flow generated from such contracts, like a power purchase agreement with Vietnam Electricity.
Under Vietnamese law, transactions without a “foreign element” do not allow parties to choose foreign governing law. Therefore, the applicable law for these domestic transactions would typically be Vietnamese law.
Civil Law:
Parties to an international contract have the ability to agree on the governing law of their contract, subject to certain limitations outlined in the Civil Code. If the parties do not make a choice, the law of the country that has the closest connection to the contract will prevail (Article 683.1 of the Civil Code). According to Article 683.2 of the Civil Code, the following laws may be considered to have the closest connection to specific types of contracts:
(a) For contracts involving the purchase and sale of goods, the law of the country in which the seller (individual or legal entity) resides or was established;
(b) For contracts for services, the law of the country in which the service provider (individual or legal entity) resides or was established;
(c) For contracts concerning the transfer of use rights or the assignment of intellectual property rights, the law of the country in which the transferee of rights (individual or legal entity) resides or was established;
(d) For labor contracts, the law of the country in which the employee regularly performs work. If an employee works in multiple countries or if it’s impossible to determine the regular work location, the law of the country where the employer (individual or legal entity) resides will apply.
(e) For consumer contracts, the law of the country in which the consumer resides.
However, Article 683.3 of the Civil Code mandates the application of the law of another country, not mentioned above, which demonstrates a closer connection to the contract, if it can proven.
The limits include the following:
+ Where the subject matter of a contract is immovable property, the law applicable to transfer of ownership rights and other rights with respect to property being immovable property, applicable to lease of immovable property or use of immovable property in order to secure the performance of obligations must be the law of the country in which the immovable property is located (Article 683.4 of the Civil Code).
+ Where the law chosen by the parties to a labor contract or a consumption contract adversely affects minimum benefits of the employee or consumer as provided in the law of Vietnam, the law of Vietnam applies (Article 683.5 of the Civil Code).
+ Article 683.6 of the Civil Code states that the parties may change the law applicable to the contract, as long as the change does not impact the lawful rights and benefits of a third person who entitled to them before the change, unless the third person agrees to the change.
With respect to formal requirements, the form of a contract must comply with the choice of law applicable to such contract. If the law applicable to such contract inconsistent with the contract form provided of a contract, but aligns with the contract form according to the law of the country in which the contract entered into or according to the law of Vietnam, Vietnam may recognize the form of such contract (Article 683.7 of the Civil Code).
Investment Law:
The 2020 Investment Law provides a mechanism that allows parties to choose foreign governing law for such domestic transactions. It states that in contracts involving at least one foreign-owned company as defined in Article 23.1 of the 2020 Investment Law, the parties can agree to the application of foreign law if it does not contradict Vietnamese law. However, one can argue that this mechanism only applies to contracts governed by the 2020 Investment Law, which limits it to contracts solely related to “business investment activities.”
To enable a foreign-owned company to choose foreign governing law for their contracts, another approach is to incorporate a “foreign element” into the agreements. The 2015 Civil Code and the 2005 Commercial Law allow parties in civil or commercial transactions with a foreign element to agree on foreign governing law, with some exceptions. A transaction is considered to have a foreign element if:
+ At least one of the involved parties is a foreign individual or legal entity.
The participating parties are Vietnamese citizens or legal entities, but the establishment, modification, implementation, or termination of the relationship occurred in a foreign country.
+ The participating parties are Vietnamese citizens or legal entities, but the subject matter of the civil relationship is located in a foreign country.
For instance, when entering into an agreement with a Vietnamese counterpart, the foreign-owned company could include the foreign investor as a sponsor or guarantor for the obligations of the foreign-owned company. This arrangement introduces a foreign element into the agreement, potentially allowing the choice of foreign governing law.
Governing law for contracts in Vietnam may pose certain challenges
It is worth noting that choosing a foreign governing law for contracts in Vietnam may pose certain challenges.
Firstly, there may be differences in legal systems, language, and cultural norms between Vietnam and the chosen foreign jurisdiction. This can result in potential difficulties in interpreting and applying the chosen governing law. Moreover, enforcement of contractual obligations in foreign jurisdictions may also present challenges, particularly if there are differences in legal procedures or if language barriers exist.
To address these challenges and ensure the smooth implementation of contracts, foreign-owned companies in Vietnam should seek legal advice from experienced professionals who are familiar with both Vietnamese law and the chosen foreign governing law. By drafting the contract to take into account the legal requirements of both jurisdictions, this will help minimize the risk of disputes and enhance the enforceability of the contract.
Additionally, it is important for foreign-owned companies to carefully consider the choice of governing law in light of the specific circumstances and the nature of the contract. When making this decision, you should take into account factors such as the location of the parties, the intended market for the goods or services, and the nature of the transaction. Seeking input from legal experts can provide valuable insights and guidance in the decision-making process.
Conclusion
In conclusion, the choice of foreign governing law for contracts between foreign-owned companies in Vietnam is a crucial consideration that can have far-reaching implications for the parties involved. While Vietnam’s default position is to apply Vietnamese law, foreign-owned companies have the option to choose a foreign governing law for their contracts, subject to certain conditions. To ensure the effective implementation and enforcement of contracts, it is vital for foreign-owned companies to seek legal assistance and carefully consider the specific circumstances before making their choice of governing law. By doing so, they can navigate the complexities of international contracts and operate with confidence in Vietnam’s thriving business environment.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn
