Enforcing contractual rights under Vietnamese laws

May 20, 2020

Nguyen Trung Nam, founder and senior partner of legal consultancy firm EPLegal, VIAC's arbitrator

The ongoing outbreak of COVID-19 with a frozen economy and lockdown orders in many countries have forced businesses large and small into unprecedented problems. As Global Research put it, the response to the pandemic is creating the largest human experiment in world history.

Due to the unprecedented restrictions on direct human contact, any remaining business communication and transactions have now turned towards online and other indirect means, with the booming use of the online assisting technology such as Zoom, Google Hangouts, and Dropbox. Even very old and conservative business people are now trying to master their IT capabilities and get themselves familiar with online communication technologies in order to adapt with social distancing.

For the people in general, we are not on a scale as terrible as a global war. However, for businesses, it truly is disastrous if the pandemic and government restrictions continue to prevail on a long-term basis.

What does this mean for businesses? From a risk management perspective, this would be a critical time for any company to revisit overall business strategies, which should be switched to survival mode. Many enterprises will face challenges in the next few months to a year and will struggle to stay in business if they cannot comply with contractual commitments or income streams dry up.

Barriers in Vietnam

Like in many other economic crises, the near future of the world’s economy and Vietnam will witness a large number of commercial disputes and bankruptcies. These will be even more complicated than any previous crisis, because right now most businesses are not even able to meet and discuss their disputes.

Disputes cannot be brought to court because the court system is also frozen. The alternative means, including arbitration and mediation, have been utilised to the maximum extent but they also face obstacles from both legal and practical perspectives.

There are some key challenges for businesses in entering into new contracts, performing their contracts, or enforcing their contractual rights under Vietnamese laws.

Firstly, as a result of the lockdown and market disruption, many businesses will be unable to perform their contractual obligations. Their situation may fall under the legal categories of “force majeure” (unforeseeable events which are beyond control of the contract party) or “hardship” as stipulated in the Civil Code 2015, which may help the party in breach opt out of contractual obligations or renegotiate contractual terms.

There are, however, several situations where this will not be helpful in practice. The first situation is where the breaching party is incurring the loss – force majeure will not help them recover such loss because that is the risk they have to assume.

The second situation is cross-party force majeure claims. For instance, a main contractor is in breach of the main contract due to a breach by his supplier (the subcontractor). Where the subcontractor claims that his breach was caused by a force majeure event, that does not automatically mean that the main contractor faces a force majeure event. He must still prove that the situation he faces is beyond his control though he has carried out all possible measures to remove the impediment.

For those who seeks to renegotiate their contracts due to a market disruption (such as plummeting oil prices), they should remind themselves that even if the situation meets the conditions enabling them to claim a “hardship” situation, their rights are limited to renegotiation while waiting for the court to order amending or terminating the contract. Importantly, during such renegotiation or court proceedings, the party facing the hardship still has to perform the contract.

Secondly, from a procedural perspective, many businesses will find hard times in courts these days, simply because most courts are not in proper operation during the lockdown period. To make the situation worse, any document transfers, notarisation, and legalisation for the purpose of court proceedings will also be delayed for an indefinite time.

It may be a matter of months or even a year to get courts and supporting agency activities back to normal. The alternative is alternative dispute resolution, including mediation and arbitration, with the key advantage of flexibility and availability of technology for online dispute resolution.

These tools however are also facing some other challenges. For example, under Rule 25 of the Vietnam International Arbitration Centre, the Arbitral Tribunal may only conduct the hearings by means of teleconference or video-conference if the parties have so agreed. This causes a problem in practice because if a party (most likely the respondent) is not co-operative, the parties will have to wait until the physical hearing could be conducted after the lockdown imposed on the parties participating in the hearings has been lifted.

Another problem frequently mentioned is that the cybersecurity (and thus the confidentiality) of the online dispute resolution systems are highly questionable, while hackers are increasing their activities in every area of the online realm.

Thirdly, those businesses entering into new contracts are facing the fact that they are very uncertain of the future capability to perform their contracts. In many cases it would be better for them just to wait until the pandemic is over, but nobody knows when that may be. It is notable that for these new contracts, the claims for force majeure or hardship events are very less likely successful. As everyone is now aware of the pandemic and its possible effect on the businesses’ ability to perform their contractual obligations, it cannot be stated that the event is unforeseeable.

Treading water

Another arising problem for the new cross-border contract entries is that hard-copy contract documents may be delayed in exchanges due to the lockdown in many cities.

On the other hand, electronic signatures are not certainly recognised by Vietnamese laws unless made by digital means (encrypted and opened with tokens). This digital signature service is currently provided by a handful of service providers licensed by the Vietnamese government (such as Viettel or VNPT). Not many enterprises are used to this digital signature means and they will still have to stick with the traditional hard-copy execution of contracts and other documents.

Finally but most seriously, the rising disputes arising out from the economic hibernation and later recession will push more businesses into bankruptcy in a domino line. Given the delayed proceedings in courts, these bankruptcy cases will take months and years to finish, and the creditors in each case will get big hits. This is echoed with a critical flaw in the commercial arbitration law, which provides that if a party goes bankrupt the arbitration proceedings will terminate.

Vietnam is not famous for reaching a surplus of cash flow and there is not much the government could assist the businesses from a macro-economic perspective, apart from its efforts to stop the pandemic. The businesses therefore are expected to help themselves to survive in this uncertain future, by directing their strategies toward a more contractionary style, or even a temporary hibernation with minimised costs until the whole economy activities are back to normal.

For those who are seeking to enforce their contracts, it is critical for them to move fast in three courses of action. First, they should try to secure their financial position by negotiating with the counter-parties to obtain some security or crystalised payments in the short term.

Second, where their counter-parties claim force majeure or hardship to avoid performing the contractual obligations, it is important to request them to continuously use (and prove) their best efforts to cure the impediment and mitigate loss, and in the case of hardship, to request them to continue to perform the contract.

Lastly, where the counter-parties face bankruptcy, it is important to find as many ways as possible to lock the available assets of the debtor before the bankruptcy proceedings commence.

By Nguyen Trung Nam

For original upload, click here.

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