THE APPLICATION OF BASIC PRINCIPLES OF LAW OF THE SOCIALIST REPUBLIC OF VIETNAM AS A GROUND FOR NON-RECOGNITION OF FOREIGN ARBITRAL AWARDS
Pham Van Hung
Phan Khanh Ha
ALSA National Chapter: Vietnam
To incorporate the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (hereinafter the “New York Convention”) in domestic law after ratifying it on September 12, 1995, the Vietnamese National Assembly issued the Ordinance on Recognition and Enforcement of Foreign Arbitral Awards 1995, which was subsequently replaced by the Civil Procedure Code (hereinafter CPC) 2004, and then by the CPC 2015. Article 459, previously Article 370 in CPC 2004, which sets out the grounds on which a court shall not recognize or enforce a foreign arbitral award is a transposition of Article V of New York Convention. However, instead of using “public policy”, this article refers to “basic principles of law of the Socialist Republic of Vietnam” as a ground for non-recognition and non-enforcement of foreign awards.
For a long time, because no further legislative guidance regarding the interpretation of this provision has been issued, the courts have complete discretion in determining the scope of this matter and this leads to a broad array of outcomes. Therefore, the phrase “violating basic principles of law of the Socialist Republic of Vietnam” has become “one of the bases Vietnam courts most commonly cite as the reason for declining to recognize a foreign arbitration award”. With regard to this, this article will dig deeper into some aspects of the term.
- Legal basis
Pursuant to Article V.2.b of New York Convention, an arbitral award may be refused to be recognized and enforced if “the recognition or enforcement of the award would be contrary to the public policy of that country”.
The relevant provision is stated in Article 459.2.b of the CPC 2015. This provision uses the term “basic principles of law of the Socialist Republic of Vietnam” instead of “public policy”. Before CPC 2015, Article 16.2.b of the 1995 Ordinance and Article 370.2.b of CPC 2004 also used this term.
Looking at the Vietnamese law system, the term “basic principles of law of the Socialist Republic of Vietnam” is also used consistently in many other current codes such as Civil Code 2015 (Article 670), Commercial Code 2005 (Article 5.2), Law on Investment 2014 (Article 4.4), Maritime Code 2015 (Article 5.3), Law on Commercial Arbitration (Article 14.3). As we can see, the phrase “basic principles of law of the Socialist Republic of Vietnam” represents a deviation from the international consensus in using the term “public policy”.
However, there is no further official guidance on applying this term in the context of the refusal to recognize a foreign arbitral award. Therefore, the term has been interpreted and applied arbitrarily by many Vietnamese courts. Accordingly, there are two main approaches of the courts as follows:
The first approach is that any breach of Vietnamese law, including primary legislation and delegated legislation, could be construed as being against the basic principles of Vietnamese law. In other words, even minor inconsistencies with regulatory provisions can be held as violations of the fundamental principles of Vietnamese law, leading to refusal of recognition and enforcement of foreign arbitral awards.
In Energo – Novus v. Vinatex (1998), the court found that the Russian arbitration tribunal’s refusal to admit a notarized document submitted by the Vietnamese defendant contradicted a Vietnamese government decree supporting the validity of notarized 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 request for recognition and enforcement of the award was refused due to the failure of the Singaporean party to register as a “foreign contractor” in Vietnam, which was required by a Vietnamese ministerial circular. Such failure was held to constitute a violation of the fundamental principles of Vietnamese law and the benefits of the State.
The second way of interpretation of the phrase is that only a breach of primary legislation – most notably the Civil Code and the Commercial Law, is inconsistent with basic principles of Vietnamese law.
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. In Ecom v. Dong Quang (2015), the Appellate Court in Ho Chi Minh City refused to enforce the arbitral award granted by International Cotton Association (ICA) because of two grounds: (i) the representative of Ecom has no capacity to sign the arbitration agreement in accordance with Article 370.1.a of CPC 2004; (ii) the ICA arbitration tribunal had failed to duly notify the Vietnamese defendant of the proceeding pursuant to Article 370.1.c of CPC 2004.
- The interpretation of the Supreme People’s Court
To take a more restrictive approach towards award enforcement, the Supreme People’s Court issued Resolution No 01/2014/NQ-HDTP providing guidelines for the Law on Commercial Arbitration. This resolution gives more details for judges to clarify the definition of the phrase.
Pursuant to Article 14.2 of Resolution No 01/2014/NQ-HDTP: “the arbitral award is contrary to the basic principles of the law of Vietnam” means that the award violates basic principles on conduct, whose effects are most overriding in respect of the development and implementation of Vietnamese law”.
Resolution No 01/2014/NQ-HDTP also adds two criteria: (i) the award has any content which is contrary to one or more basic principles of Vietnamese law that were not respected by the Tribunal in making the award; (ii) the award seriously violates the interests of the government and/or violates the legitimate rights and interests of third party or parties. Only when the arbitral award meets these two criteria, the court may vacate that award based on the violation of basic principles of Vietnamese laws.
- Two characters of the phrase “basic principles of law of the Socialist Republic of Vietnam”
From the definition given in the Resolution, “basic principles of law of the Socialist Republic of Vietnam” has two characters:
Firstly, these principles are fundamental and hold a critical position in Vietnamese law system.
However, there are no legal documents or guidance that lists the name of these principles. Actually, in each law of Vietnam, a number of “fundamental/ basic principles” are listed in a provision or in a chapter/ subchapter. For examples, Article 3 of Civil Code 2015 provides five (05) principles of civil law; Article 5 of Law on Commercial Arbitration 2010 sets up five (05) principles for dispute resolution by arbitration; or Chapter II of CPC 2015, Chapter II of Commercial Code 2005.
Resolution No 01/2014/NQ-HDTP gives two examples of applying this ground into specific situations. The first example refers the principles of freedom and free will to reach an agreement in commercial activities as provided in Article 11 of the Commercial Law and Article 3 of the Civil Code; the other applies a principle prescribed in Clause 2 Article 4 of Law on Commercial Arbitration. It seems that the opinion of the Supreme People’s Court is that “basic principles of law” is the collection of the principles prescribed in substantive law (such as civil law, commercial law) or procedural law (such as civil procedure law, law on commercial arbitration).
However, many scholars in Vietnam have the opposing view about this interpretation of Supreme Court: “Some codes such as the Civil Code, the Penal Code, the Commercial Law … have some general principles, but with the specific characters, they can only be applied exclusively to that Code. The “fundamental principles of Vietnamese law” cannot be found by adding the specific basic principles set out in each of code together.”
In our opinion, some principles are enshrined in most of the codes such as the principle of freedom and free will to reach an agreement (Article 11 of the Commercial Law, Article 3 of the Civil Code…), the principle of agreement that is not contrary to law and social ethics (Article 11 of the Commercial Law, Article 3 of the Civil Code, Article 5 of CPC), the principle of equality in rights and obligations between parties (Article 8 CPC, Article 4 Law on Commercial Arbitration). Therefore, these principles have an effect on the formulation of regulations in substantive law branch or procedural law branch. In contrast, it is noted that not all the principles listed in the chapter titled “The basic principles” is also considered as a basic principle, because some of them are not universal or general and only used to apply in a particular situation. For example, Article 585 of Civil Code 2015, which includes the principle of compensation for damage, is only applied for civil relations regulated under Vietnam Civil Code, so it is not a basic principle of law.
Secondly, the objects under the protection of Article 459.2.b are the interests of the government and/or the legitimate rights and interests of a third party or parties.
National interest is neither defined in any Vietnamese legal document nor legal opinions. In fact, this term, as a political terminology, is interpreted as a national goal which the nation pursues to ensure its survival and development, including maintaining national sovereignty; protecting unity and territorial integrity; stabilizing political regime; ensuring security and safety for the people; preserving national cultural identity; ensuring the conditions for national economic and social development.
The third person mentioned above is not the person with related rights and obligations set out in the CPC. In arbitration proceedings, there is no person involved in legal proceedings who has related rights and obligations. Only the subjects of the arbitration agreement are the litigant in the arbitration. Therefore, in the case where a person has a related right or obligation but he or she does not have an arbitration agreement, his / her rights and obligations shall not be settled by the arbitrator.
The third person can be: (i) the international organizations or social organizations such as organizations involving community health, environmental protection, consumer’s interests; (ii) a State (except Vietnam) which has rights and interests affected by the arbitral award, usually in the investment disputes resolved by ad hoc arbitration; (iii) natural person or legal person who does not involve in that dispute but has rights and interests violated by the arbitral award.
The approach of the Supreme People’s Court suggests a wider defense, more closely based on domestic rather than international standards. While “public policy” in many countries such as United States, Australia, Switzerland refers to State’s most basic notions of morality and justice, the phrase “the basic principles of law of the Socialist Republic of Vietnam” includes not only justice and social ethics but also many other principles. Besides, because of the purpose of the protection of the national interests, the term has a political aspect, which may seriously undermine the Convention’s utility.
- The cases that shall apply Article 459.2.b
The following are the cases which should be regarded as violating “basic principles of law of Socialist Republic of Vietnam”:
First, the arbitral award violates seriously the basic principles prescribed in both substantive law and procedural law. These principles include the principle of freedom and free will to reach an agreement, the principle of equality in rights and obligations between parties, the principle of fair trial, and the principle of independence, objectivity and impartiality of the arbitrators.
Second, either the clause of the contract or the foreign arbitral award that recognizes the settlement agreement between the parties infringes the rights and interests of an individual who neither participates in the dispute nor relates to the dispute.
Third, in contracts or agreements between parties, there are provisions violating either social ethics or prohibitive regulations.
Article 123 of the Civil Code 2015 gives a definition of social ethics: “Social ethics are common standards of conduct among people in social life, which are recognized and respected by the community.” This article also provides: “Prohibitory provisions of law mean the provisions of law which do not permit subjects to perform certain acts”. The prohibitory provisions can be expressed in the term “prohibit/ ban” or not to do or must do. However, it is noted that violating administrative formalities is not violating the prohibitory provisions.
For instance, the agreement between parties has a provision about sex trade or prostitution but the arbitrators still address the dispute with rights and obligations regulated in the agreement. In this situation, the agreement is null and void according to Civil Code (or Commercial Code) because of violating social ethics.
Another example is that the agreement is a drug dealing contract or the purpose of the agreement is for money laundering or for unfair competitive practices. Because these clauses violate the prohibitory provisions which are enshrined in Criminal Code 2015 or Law on Competition 2005, the courts shall refuse to recognize the arbitral award.
Fourth, the arbitral agreement between the two parties in the contract infringes independence and sovereignty territorial integrity of Vietnam but the tribunal issuing the award still recognizes that agreement. The way that Vietnamese court protects national sovereignty is similar to that of India, Brazil and Russia.
The principle of protecting national sovereignty, unity and territorial integrity is enshrined in Article 11 of the Constitution 2013 and has an important impact on the formulation of the Vietnamese law system. In addition, in this situation, the behavior of the parties and/or the arbitrators violates the interest of Vietnam. Therefore, the court shall apply Article 459.2.b to refuse for recognition of the foreign arbitral award.
For example, although the agreement or contract between parties could provide financial support for terrorist organizations or organizations against Vietnam, the arbitral decision still recognizes the agreement or contract.
Fifth, the implementation of the foreign arbitral award will either harm the relationships between Vietnam and other countries or violate international commitments of Vietnam.
Article 459.2.b was meant to reflect Article V.2(b) of the New York Convention, which allows refusal when the recognition or enforcement of an award is contrary to the public policy of the country. However, the ground for refusal based on “fundamental principles of Vietnamese law” proves to be a big hindrance for recognition and enforcement of foreign arbitral awards in Vietnam since there is no clear definition of “fundamental principles of Vietnamese law”, which lead to the inconsistency in applying the Article by different courts in Vietnam.
Even though the People’s Supreme Court has made some efforts to interpret the phrase by putting forward Resolution No.01/2014/NQ-HDTP, the definition is still too abstract and remains vague. Therefore, the authors propose that the Supreme People’s Court of Vietnam should promulgate the list of basic principles of law of Vietnam, concurrently publish precedents about this matter to improve the certainty and efficiency of the recognition and enforcement of foreign arbitral awards in Vietnam.
 Civil Procedure Code, No.24/2004/QH11 (June 15, 2004).
 Civil Procedure Code, No. 92/2015/QH13 (November 25, 2015).
 Fred Burke, The 2015 Report of the Investment and Trade Working Group (Vietnam Business Forum, 2015) p.1.
 Article 459 Case for non-recognition
- Foreign arbitral awards shall also not be recognized and permitted for enforcement in Vietnam if the Vietnamese courts deem that:
- The recognition and enforcement in Vietnam of foreign arbitrator’s award are contrary to basic principles of law of the Socialist Republic of Vietnam.
 Article 670 Non- application of foreign laws
- The foreign law, notwithstanding being referred to, shall not apply in any of the following cases:
- a) The consequences of its application are not inconsistent with the basic principles of the law of the Socialist Republic of Vietnam.
 Article 5 Application of treaties, foreign laws and international commercial practices
- Parties to commercial transactions involving foreign elements may agree to apply foreign laws or international commercial practices if such foreign laws or international commercial practices are not contrary to the basic principles of the Vietnamese law.
 Article 4 Application of the Law on Investment, relevant laws and treaties
- For a contract to which at least one party is a foreign investor or an economic organization prescribed in Clause 1, Article 23 of this Law, parties may agree in the contract on the application of foreign laws or international investment practices, provided such agreement is not contrary to Vietnam’s law.
 Article 5 Negotiating rights in contracts
- If stipulated by this Code or agreed upon by parties in contracts, foreign laws may be applied in Vietnam with respect to contractual relations pertaining to marine operations provided that such laws are not inconsistent with basic principles of Vietnamese laws.
 Article 14 Applicable laws for dispute settlement.
- When the Vietnamese law or law selected by the parties contains no specific provisions concerning the dispute, the arbitration council may apply international practices for settling the dispute, provided such application or consequence of such application does not contravene the basic principles of Vietnamese law.
 Energo – Novus Co (Russia) v Vietnam Textile Corporation (Vinatext) , Case No.58, Decision of the Appellate Court of the Supreme People’s Court of Vietnam in Hanoi.
 Typo Services Singapore Pte Ltd v. Leighton Contractors (Vietnam) Ltd , Decision No.02/PTDS, Decision of the Appellate Court of the Supreme People’s Court of Vietnam in Ho Chi Minh City.
 Toepfer v. Sao Mai , Decision of the Appellate Court of the Supreme People’s Court of Vietnam in Hanoi.
Ecom Agroindustrial Corp. Ltd v Dong Quang Spinning Corporation , Decision of the Appellate Court in Hochiminh City No.31/2014/QDPT-KDTM.
 Dang Hoang Oanh, ‘The outstanding issues in recognition and enforcement of foreign arbitral awards in Vietnam: From the view of TYCO case’ (Moj, 18 November 2008)
<http://www.moj.gov.vn/qt/tintuc/Pages/thong-tin-khac.aspx?ItemID=919> accessed 16 February 2018.
 Prof. PhD. Phung Huu Phu, Assoc. Prof. Sc.D. Nguyen Van Dang, Assoc. Prof. PhD. Nguyen Viet Thong, ‘The interpretation of terminology in the Document of 12th National Congress of the Communist Party of Vietnam’, (National Political Publishing House, 26 December 2016)
 Article 11.
- The Vietnamese Fatherland is sacred and inviolable.
- All acts against the independence, sovereignty, unity and territorial integrity against the course of building and defense of the Fatherland, must be strictly punished.