Pros of sandbox regulation for fintech

With the development of the Fourth Industrial Revolution, the application of digital technologies for providing financial services has become the key driver in promoting financial inclusion. However, the industry’s growth will not only depend on investments, new technologies, or smartphone penetration, but will also require a robust legal framework. Le Net and Hoang Nhu Quynh from law firm LNT & Partners, listed as innovative lawyers by the Financial Times in 2015, 2016, and 2019, analysed how Vietnam can accelerate the development of companies within the fintech regulatory sandbox.

Financial inclusion with the participation of fintech companies has been one of the key priorities for many developing countries. Fintech is believed to help customers, especially individuals and small- and medium-sized enterprises (SMEs), access banking and financial services at lower costs and with more accessible procedures compared to traditional banking services. Vietnam is one of the developing countries firmly committed to this development, with reliable infrastructure for digital finances (for instance Internet and smartphone) and a young and interested population.

While Vietnam has a high rate of smartphone users, less than half of the country’s population does not have a bank account, according to the State Bank of Vietnam (SBV), which leads to the rapid growth of Vietnamese fintech companies. Last year, the government took note of the rise of fintech and established a steering committee to improve the ecosystem for the sector. All these factors have given rise to a vibrant tech entrepreneurship scene for fintech solutions.

Vietnam currently has 77 fintech companies. Among the three different product segments – digital payment, personal/retail finance, and corporate finance – digital payment solutions lead the service market share at 89 per cent. As of last month, the SBV licensed 30 intermediary payment service providers, of which the majority offer e-wallets. The most popular names that provide e-wallet services in Vietnam are Momo, VnPay, BaoKim, NganLuong, and Zalo Pay. These activities were licensed under the mechanism of non-cash payments regulated in Decree No.101/2012/ND-CP issued by the government in 2012 on non-cash payments.

Another notable activity in Vietnam’s fintech landscape is peer-to-peer lending (P2P) which belongs to the personal/retail finance segment. There are 40 P2P companies providing a platform for money lending between users in the country, such as Mofin, HuyDong, and BaGang. The lending is believed to help customers, especially household businesses and SMEs access banking and finance services at low costs. The development of P2P lending will also create a new capital supply channel instead of the credit system of traditional banks.

In corporate finance, the introduction of new technologies such as blockchain, with its main applications in cryptocurrencies, draw much attention in Vietnam, especially in the context of the globally skyrocketing rise of bitcoin and ethereum. In 2017, the Vietnamese dong was used by 15 per cent of surveyed cryptocurrency payment companies worldwide. Blockchain has opened new doors for data collection and analyses, and risk management as well as treasury management in the country. However, there is only a limited number of startups working in this field, such as cash2vn, Bitcoin Vietnam, fiahub, and Verichains.

The activities of P2P lending and blockchain are currently not governed by any regulations in the Vietnamese legal system. In practice, fintech companies operating P2P lending or blockchain platforms are only obliged to obtain an enterprise registration certificate. On the one hand, when the companies wish to implement new projects, they may diligently submit official letters to competent authorities explaining its product and service plan to obtain approval.

However, due to the lack of a legal framework, the competent authorities are confused with assessing dossiers submitted and allowing new activities in the fintech market. Consequently, the dossiers are usually pending or rejected, which leads to projects not being deployed. On the other hand, the lack of regulations facilitates many companies liberally operating without satisfying any legal requirements. These operations outwith the control from authorities carry too many risks related to high-tech crimes and fraud or financial crimes, such as theft of personal information, tax evasion, money laundering, or unlawful capital mobilisation.

Sandbox application and approval process Source: Author’s synthesis

To serve the urgent demand for a legal framework for fintech, Vietnam can refer to the experience of developed countries in the formulation and development of such frameworks. One enacted pilot mechanism for operations of fintech firms is called the Fintech Regulatory Sandbox (sandbox).

The sandbox concept, which was developed in a time of rapid technological innovation in financial markets, is an attempt to address the frictions between different regulators’ desires to encourage and enable innovation. The first sandbox was launched in the UK in 2015, and many countries have followed suit. In Southeast Asia, four countries have formulated and implemented the sandbox, namely Singapore, Thailand, Malaysia, and Indonesia. A sandbox is a framework set up by a financial sector regulator, typically summarised in writing and published, to allow small scale, live testing of innovations by private firms in a controlled environment (operating under a special exemption, allowance, or other limited, time-bound exception) under the state authorities’ supervision. A sandbox typically works as depicted in the image above.

The process can be explained in four stages. During the initial application stage, the fintech company (sandbox entity) shall submit a sandbox package, including four types of dossiers, as stated in the image. Upon the receipt of the package, the authorised state agencies (ASA) shall review the dossiers and inform the sandbox entity about the potential suitability of its package. This information would help the sandbox entity adjust its business and resource planning.

In the following evaluation stage, the sandbox entity would have discussions with the ASA to set out specific milestones for their project, for example, the time for testing and operation or the time for the completion of the experimentation stage. Meanwhile, the ASA would set out a legal framework that requires the sandbox entity to comply with, then approve the entity to proceed. Depending on the service’s completeness and complexity, the package may be rejected by the ASA. However, the sandbox entity is allowed to re-apply. The rejection shall be written and must contain reasons to assist the entity in re-submitting their package.

Upon approval by the ASA, at experimentation stage, the entity shall operate its service only if it has notified its customers that the service is being tested in a sandbox, then disclose all key risks that customers may encounter while using its service. Simultaneously, the ASA would establish an expert committee, including financial, legal, and technical experts to monitor the operation of the service. After the experimentation stage has ended, the ASA shall make decisions regarding the project, meaning decides to either to extend the experimentation time, discontinue the project, or officially deploy the project.

Once the decision on deploying the project has been made, it lays out the framework for other fintech companies operating similar services. Specifically, those companies would still have to apply for a sandbox process. However, they may be exempted from going through evaluation and experimentation stage if they operate similar services to the sandbox entity that have been approved by the ASA.

Each decision shall be based on careful considerations of the ASA after reviewing the pros and cons of the service and feedback from customers.

Using a regulatory sandbox may affect digital financial inclusion in several ways including new, affordable products, or services that address the needs of the excluded customer segments; distribution channels that reach out to dispersed populations in remote and rural areas; operational efficiencies that allow financial service providers to serve low-margin clients profitably; ways to address compliance and risk management barriers to financial inclusion; and increasing competition that may prompt traditional service providers to focus more attention on unserved segments and improve the procedures to keep their revenues steady.

Although the SBV is preparing and will soon issue pilot regulations on the ­establishment and business ­operations of fintech companies, the Vietnamese law ­system is still lacking regulations which allow the operation of such pilot entities in ­Vietnam. Therefore, it is ­recommended that the government creates a legal framework for the sandbox as pilot regulations which are effectively ­implemented in countries around the globe.

By Dr Net Le – Partner and Ms. Hoang Nhu Quynh – Associate

This article is featured in the July issue of the Vietnam Investment Review.

Disclaimer: This article is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

Arbitration procedures and practice in Vietnam: overview

This article is our publication from Global Guide 2014/15 – ARBITRATION by Practice Law (A Thomson  Reuters Legal Solution). This section is written by Dr. Le Net –  Partner of LNT & Partners

A Q&A guide to arbitration law and practice in Vietnam

The country-specific Q&A guide provides a structured overview of the key practical issues concerning arbitration in this jurisdiction, including any mandatory provisions and default rules applicable under local law, confidentiality, local courts’ willingness to assist arbitration, enforcement of awards and the available remedies, both final and interim.

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Use of arbitration and recent trends

1. How is commercial arbitration used in your jurisdiction and what are the recent trends?

In recent years arbitration in Vietnam has gained momentum and is becoming an increasingly attractive method of resolving domestic and international disputes. Parties tend to prefer the private nature of the proceedings and the ability to decide on important issues, including the arbitrators, choice of law, venue and language. Relevant statistics for 2013 revealed that 4% of all disputes In Vietnam were resolved by arbitration.

An overwhelming majority of the cases involve the sale of goods (60%), relying on data from the largest and most commonly used local arbitration administrator in Vietnam, the Vietnam International Arbitration Centre (VIAC). However, a growing number of claims relate to other economic sectors such as banking and finance, construction, distribution, investments, outsourcing and services.

Recent trends

Foreign companies have used arbitration for quite some time, but recent statistics show that local companies are increasingly relying on arbitration as the preferred choice for dispute resolution. A leading indicator is the 55% increase year-on-year in cases settled by VIAC in 2013. The VIAC handled 99 cases in 2013 and 124 cases in 2014 (an increase of 25%). The majority of cases are settled in Ho Chi Minh City. Domestic arbitrations count for 58.9% while international arbitrations count for 41.1%. On average, an arbitration lasts for 167 days, with the shortest case taking 81 days and the longest case extending 251 days. Out of 124 cases, the following statistics demonstrate that the VIAC arbitration is now becoming increasingly recognised internationally:

  • Cases that apply applicable foreign laws: four.

  • Cases that apply foreign languages: 25.

  • Cases where arbitrators send dissenting or separate opinions: five.

  • Cases that have the involvement of lawyers: 66 out of 124.

  • Cases that request for courts to apply interim measures: 14.

  • Cases that request for the tribunal to apply interim measures: two.

Arbitration clauses are now becoming a necessity in virtually all contracts.

Another positive trend is the increased involvement of local Vietnamese attorneys acting as arbitrators. The valuable experience local attorneys gain from representing clients in arbitral disputes have translated into a larger pool of qualified local attorneys who can credibly act as arbitrators in both complex cross-border and domestic arbitration proceedings. This will help bolster and continue to elevate arbitration as the preferred dispute resolution mechanism in Vietnam.

Advantages/disadvantages

There are many advantages to using arbitration over court litigation. In addition to the near universal advantages experienced in other jurisdictions (for example, final resolution on the merits, privacy, quicker resolution, and ability to select the language and venue).

One key advantage arbitration offers is the ability for parties to preselect the lex causae (that is, the law governing the merits of the dispute). This is unless the underlying dispute is wholly a domestic affair. In contrast, litigants in Vietnamese courts must exclusively rely on Vietnamese law. Testimony on foreign law in Vietnamese court proceedings is currently not allowed. The ability to choose the substantive law allows the parties to better manage their risks, selecting and applying laws that cover potential issues specific to their commercial relationship.

Another key advantage is the ability to select qualified and impartial arbitrators. Vietnam’s corruption rankings are among the worst in the world and judicial bribery remains a major concern.

Finally, because Vietnam is a signatory to the New York Convention, arbitral awards are recognised and enforceable in more countries, including Vietnam, compared to court judgments, which are recognised on a reciprocal basis making the enforcement of foreign judgments more difficult.

While arbitration offers many benefits, the enforcement of arbitral awards in Vietnam remains challenging. The grounds for setting aside awards can be interpreted broadly when compared to the arbitration enforcement laws and practices of other countries.

Use of commercial arbitration

Legislative framework

Applicable legislation

2. What legislation applies to arbitration? To what extent has your jurisdiction adopted the UNCITRAL Model Law on International Commercial Arbitration 1985 (UNCITRAL Model Law)?

The Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) governs arbitrations conducted in Vietnam. Resolution No. 01/2014/NQ-HDTP (Resolution No.01), issued by the Supreme Court of Vietnam, provides further guidance on the implementation of certain provisions of the LCA.

The LCA refers significantly to the UNCITRAL Model Law and incorporates many important legal concepts, including a:

  • Tribunal’s ability to summon witnesses.

  • Party’s right to request, and a tribunal’s corresponding ability to grant, interim relief.

The Law on Enforcement of Civil Judgments (LECJ) controls the enforcement of arbitral awards and the Civil Procedure Code 2004 (CPC) governs the recognition and enforcement of foreign awards in Vietnam.

Mandatory legislative provisions

3. Are there any mandatory legislative provisions? What is their effect?

Most provisions in the Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) are not mandatory. The LCA allows the parties to freely decide many critical issues that govern the arbitral proceedings. However, there are some mandatory legislative requirements, including:

  • The arbitral award is final and binding.

  • The arbitration agreements must be in writing.

  • The subject matter of the arbitration must involve at least one party engaged in commercial activity (commercial is defined as a profit-making activity, for example, the sale of goods, services, investments and trade promotion) and cannot belong in the exclusive jurisdiction of court litigation.

  • Vietnamese laws apply when the underlying dispute does not involve any foreign element.

  • The arbitral tribunal must, as a threshold, decide its jurisdiction by determining the validity and subject matter of an arbitration agreement.

  • Arbitrators must be independent, objective, impartial and observe the law.

The cumulative effect of the mandatory provisions is a strong legal system generally in favour of arbitration. This reduces the “bottleneck” effect caused by threshold issues that typically plague other jurisdictions, that is, the validity and scope of arbitration provisions.

Limitation

4. Does the law of limitation apply to arbitration proceedings?

The statute of limitations to institute arbitration proceedings is typically two years from the date that a claimant has the right to take legal action. This is with the following two exceptions:

  • The statute of limitations for insurance contracts is three years from when the dispute arises (Article 30, Law on Insurance Business 2000).

  • The statute of limitations for damages with respect to cargo is one year from the date on which the cargo is delivered or should have been delivered to the consignee (Article 97, Vietnam Maritime Code).

The statute of limitations to enforce a foreign arbitral award is one year from the date the award becomes final.

Arbitration organisations

5. Which arbitration organisations are commonly used to resolve large commercial disputes in your jurisdiction?

The Vietnam International Arbitration Centre (VIAC) is the largest arbitration organisation in Vietnam. However, there are a number of arbitration centres, including:

  • The Asean International Commercial Arbitration Centre (ACIAC).

  • The Financial and Commercial Centre for Arbitration (FCCA).

  • The Pacific International Arbitration Centre (PIAC).

See box, Main arbitration organisations.

Arbitration agreements

Validity requirements

6. What are the requirements for an arbitration agreement to be enforceable?

Substantive/formal requirements

The Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) only requires that an arbitration agreement be in writing and contain language that establishes the mutual consent of the parties to resolve their dispute by arbitration. The written requirement can be satisfied in different ways and can take various forms, including the following:

  • An agreement made through communications between the parties via telegram, fax, telex, email or other forms prescribed by law.

  • An agreement made through the exchange of written information between the parties.

  • An agreement recorded in writing by a lawyer, notary public, or competent institution at the request of the parties.

  • A document such as a contract, company charter or other similar document, which contains an arbitration agreement, and referenced by the parties during the course of their transaction.

  • An agreement made through an exchange of statements of claims and defences that reflect the existence of an agreement proposed by a party and not denied by the other party.

Separate arbitration agreement

An arbitration agreement can be made in the form of an arbitration clause contained in a contract or in the form of a separate agreement.

Unilateral or optional clauses

7. Are unilateral or optional clauses, where one party has the right to choose arbitration, enforceable?

The Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) does not address unilateral or optional clauses. However, in theory if one party confers another party the right to arbitrate this may be sufficient to establish an agreement to arbitration.

In the context of consumer services and goods, arbitration cannot be unilaterally imposed through the provider’s general terms and conditions. Consumers can elect to litigate in court or arbitrate the dispute.

Separability

8. Does the applicable law recognise the separability of arbitration agreements?

An arbitration agreement is entirely independent of the contract where it is contained. Any modification, extension, cancellation, invalidation or non-performance of the underlying contract will not invalidate the arbitration agreement.

Breach of an arbitration agreement

9. What remedies are available where a party starts court proceedings in breach of an arbitration agreement or initiates arbitration in breach of a valid jurisdiction clause?

Court proceedings in breach of an arbitration agreement

A court will refuse to accept a case involving a dispute that is subject to a valid arbitration agreement. A party’s participation in a court proceeding does not act as a waiver of the party’s right to arbitrate the matter.

Arbitration in breach of a valid jurisdiction clause

If the parties did not agree to arbitrate, but instead agreed to resolve all disputes in court under a valid jurisdiction clause, the arbitration cannot proceed. If the scope of the jurisdiction clause is limited to certain matters, the parties can theoretically either waive the jurisdiction clause or agree to arbitrate matters not within the scope of the jurisdiction clause.

10. Will the local courts grant an injunction to restrain proceedings started overseas in breach of an arbitration agreement?

There are no regulations that specifically allow a local court to grant an injunction restraining judicial proceedings initiated overseas in breach of a valid arbitration agreement. The Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) simply directs a court to refuse to accept cases that are subject to arbitration and allows a court to decide whether a matter is subject to arbitration.

However, the LCA does allow a tribunal the power to prohibit or force a party from taking any action that may adversely affect the arbitral proceedings.

Joinder of third parties

11. In what circumstances can a third party be joined to an arbitration or otherwise be bound by an arbitration award?

The Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) does not contain any provision allowing the involuntary joinder of non-signatory third parties to an arbitration proceeding. However, a third party (with the consent of all parties) may theoretically voluntarily join the arbitration as a co-applicant or co-respondent.

A third party may nevertheless be bound by an arbitral award if the party is a party to another contract whose validity or enforceability is dependent on the contract that is subject to arbitration. For example, an award from a loan agreement containing a valid arbitration agreement can affect the guarantor of the loan. Similarly, an agent can theoretically bind the non-signatory principal.

Arbitrators

Number and qualifications/characteristics

12. Are there any legal requirements relating to the number and qualifications/characteristics of arbitrators?

An arbitral tribunal can be composed of one or more arbitrators as agreed by the parties.

Under the Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) a person who satisfies all the following criteria can act as an arbitrator:

  • Has the legal capacity to act under the Civil Code.

  • Possess a university degree and at least five years’ of work experience in the discipline studied.

  • In special cases, an expert who has highly specialised skills or qualifications can also be selected as arbitrator even if he does not have the requisite education and work experience.

The following cannot act as arbitrators:

  • Incumbent judges, procurators, investigators, enforcement officers or civil servants of the people’s courts, people’s procuracy, investigative agencies or judgment enforcement agencies.

  • Persons serving criminal sentences or whose criminal records have not yet been cleared even though they have served their sentences.

Independence/impartiality

13. Are there any requirements relating to arbitrators’ independence and/or impartiality?

An arbitrator must be independent and impartial, with the ability to quickly and promptly settle disputes.

Appointment/removal

14. Does the law contain default provisions relating to the appointment and/or removal of arbitrators?

Appointment of arbitrators

Under Article 40 of the Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) the parties are free to agree on the procedure for the appointment of the arbitrator(s). In cases where the parties agree that their dispute will be settled by a sole arbitrator, the claimant must state the name and address of the person whom the claimant selects as arbitrator. Unless otherwise agreed by the parties, within 30 days after receiving the claimant’s statement of claims, the parties must agree on the selection of a sole arbitrator or request the Arbitration Centre to appoint a sole arbitrator, within 30 days after receiving the claimant’s statement of claims (unless otherwise agreed by the parties). A competent court can, at the request of any party, designate a sole arbitrator.

Removal of arbitrators

An arbitrator is disqualified and can be removed in the following circumstances (Article 42.1, LCA):

  • The arbitrator is a relative or representative of one party.

  • The arbitrator has an interest related to the dispute.

  • There are clear grounds to conclude that the arbitrator is not impartial or objective.

  • The arbitrator was a conciliator, representative, or lawyer of one party before the dispute was brought to arbitration for settlement (unless the parties consented in writing to waive such a potential conflict).

Procedure

Commencement of arbitral proceedings

15. Does the law provide default rules governing the commencement of arbitral proceedings?

There are no laws that provide default rules governing the commencement of arbitral proceedings. When a dispute is settled by an arbitration centre, the time of commencement of arbitral proceedings is the time the arbitration centre receives the claimant’s statement of claims (unless otherwise agreed to by the parties)

In contrast, when a dispute is settled by ad hoc arbitration, the time of commencement of arbitral proceedings is the time the defendant receives the claimant’s statement of claims (unless otherwise agreed to by the parties).

Applicable rules

16. What procedural rules are arbitrators likely to follow? Can the parties determine the procedural rules that apply? Does the law provide any default rules governing procedure?

Applicable procedural rules

The parties are free to decide the applicable procedural rules. Arbitrators must respect the agreement of the parties if the procedural rules do not contravene any legal prohibitions or social ethics. If the parties do not specify procedural rules for the arbitrators to follow, arbitrators are likely to resort to the rules of the arbitration centre administering the arbitration.

Default rules

If the parties cannot agree on the governing procedure, the tribunal will decide the procedures, subject to the rules of the arbitration centre administering the case.

Arbitrator’s powers

17. What procedural powers does the arbitrator have under the applicable law? If there is no express agreement, can the arbitrator order disclosure of documents and attendance of witnesses (factual or expert)?

Under Article 49 of the Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) a tribunal has the right to apply interim injunctive relief based on a party’s request. The Civil Judgment Enforcement Authority will assist in carrying out the orders of a tribunal.

In addition, under Article 46 and Article 47 of the LCA, an arbitrator has the right to request that other organisations or individuals provide evidence or witness statements. However, in the case of non-cooperation, the tribunal can only request assistance from a competent court.

Evidence

18. What documents must the parties disclose to the other parties and/or the arbitrator? How, in practice, does the scope of disclosure compare with disclosure in litigation? Can the parties determine the rules on disclosure?

Scope of disclosure

Parties have the obligation to provide documents in support of their claims and establish facts relevant to the issues under dispute (Article 46, Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA)). However, there are no specific laws obliging the parties to provide any documents. In the event a party does not disclose supporting documents, there is no administrative or criminal sanction, but the party’s arguments can be severely undermined and not accepted by the tribunal.

There is no difference between disclosure in arbitration and litigation. Vietnam does not have any laws permitting party discovery. A tribunal can request the parties to provide evidence, but parties must make any request for evidence through a court or tribunal. There is no guarantee that a court or tribunal will accept a request. If a party refuses to provide evidence, there is nothing a tribunal can do. A party can seek court intervention, but the outcome is not predictable.

Parties’ choice

There are no provisions under the LCA that allow or disallow the parties to agree to what documents or information will be disclosed by either side.

Confidentiality

19. Is arbitration confidential?

Arbitration proceedings are confidential under the Article 4 and 21 of the Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA).

Courts and arbitration

20. Will the local courts intervene to assist arbitration proceedings?

Any competent court in Vietnam can intervene, at a party’s request, to assist arbitration proceedings. A competent court has the powers to order any of the following:

  • Appoint an arbitrator in an ad-hoc arbitration.

  • Replace an arbitrator in an ad-hoc arbitration.

  • Decide the validity and scope of arbitration agreements.

  • Assist in the collection of evidence.

  • Apply interim injunctive relief.

  • Summon witnesses.

21. What is the risk of a local court intervening to frustrate the arbitration? Can a party delay proceedings by frequent court applications?

Risk of court intervention

A party can frustrate or delay the arbitration proceedings with frequent court applications. However, any request for court intervention must comply with relevant laws. For example, a party can dispute the validity and scope of an arbitration agreement. If the party fails, the party can later challenge the appointment of an arbitrator, the mode of collecting evidence or later request an arbitral award be cancelled on applicable grounds. If there is a legal basis for the request, a party cannot be prevented from seeking judicial intervention.

Delaying proceedings

The Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) prohibits the parties from delaying the proceedings (that is, providing claims and defences, disclosing supporting documents and witnesses in an untimely manner). In the event a party seeks judicial intervention, the arbitral proceedings will continue until and unless a court issues a decision that requires the arbitration to cease temporarily or permanently.

22. What remedies are available where one party denies that the tribunal has jurisdiction to determine the dispute(s)? Does your jurisdiction recognise the concept of kompetenz-kompetenz? Does the tribunal or the local court determine issues of jurisdiction?

A party can raise the lack of jurisdiction argument with the tribunal or a competent court under the Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA). Vietnam laws recognise the concept of competence-competence, even requiring the tribunal to first decide its jurisdiction. This power is not exclusive and can be reviewed by a competent court, whose decision is final and binding on the parties and the tribunal.

The arbitral proceedings continue until the court decides that there is no valid arbitration agreement or limits the subject matter subject to arbitration.

Remedies

23. What interim remedies are available from the tribunal?

Security

The tribunal can award security, resorting to the rules of the administering body (if applicable) (Article 34, Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA)).

Other interim measures

The tribunal can order the following interim measures or interim injunctive relief (Article 49, LCA):

  • Prohibit any change in the status of assets under dispute.

  • Prohibit or force a party to take action that would prevent the proceedings from being adversely affected.

  • Seize assets under dispute.

  • Order the preservation, storage, sale or disposal of any asset under dispute.

  • Request temporary monetary payment between the parties.

  • Prohibit the transfer of assets under dispute.

24. What final remedies are available from the tribunal?

The tribunal has broad powers to award appropriate remedies, such as damages, injunctions, declarations, costs and interest. However, the remedies must have been specifically requested by a party and not be contrary to the fundamental principles of Vietnamese law. Remedies that are immoral, illegal or manifestly unreasonable, including excessive punitive or exemplary damages, may be deemed to contravene fundamental principles of Vietnamese law.

Appeals

25. Can arbitration proceedings and awards be appealed or challenged in the local courts? What are the grounds and procedure? Can the parties effectively exclude any rights of appeal?

Rights of appeal/challenge

The parties in an arbitration proceeding have the right to challenge and cancel an unfavourable award by lodging a petition with a local competent court (setting aside the award). An award cannot be appealed, that is, the merits of the underlying dispute cannot be re-adjudicated.

Grounds and procedure

A party must lodge a request to cancel an adverse award with a competent court within 30 days of receipt of the award. The merits of the dispute cannot be re-litigated. The aggrieved party can only request the court to review and cancel the award on the following grounds:

  • Whether there exists a valid arbitration agreement.

  • Whether the subject matter decided by arbitration falls within the jurisdiction of the arbitral tribunal.

  • Whether the arbitral tribunal was properly convened and whether the arbitration proceedings followed applicable procedures.

  • Whether the evidence was properly submitted.

  • Whether the arbitral tribunal was objective and impartial.

  • Whether the award contravenes fundamental principles of Vietnam law.

Recently there is an alarming trend of awards being set aside. Some of the awards are set aside on the grounds that there was no arbitration agreement, or that pre-arbitration negotiations were not exhausted. Some awards are set aside because it is contrary to the fundamental principles of Vietnam law, such as the principle of pacta sunt servanda (or the principle of objectivity).

This trend is a growing concern because court decisions setting aside arbitral awards are not usually subject to revision or appeal. There is a possibility that the Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) may be amended to address this shortcoming and allow court decisions to be appealed and/or revised.

Excluding rights of appeal

There is no right to appeal arbitral awards. However, the grounds to set aside an award can be considered waived if not properly reserved. Under Article 13 of the LCA, one party waives its rights to protest violations of the LCA, if during the arbitration proceedings the perceived violations were not properly raised. However, this Article does not apply if the award contravenes fundamental principles of Vietnamese law.

26. What legal fee structures can be used? Are fees fixed by law?

There are no prohibitions on the type of fee structures that can be charged by lawyers representing parties in arbitration proceedings.

27. Does the unsuccessful party have to pay the successful party’s costs? How does the tribunal usually calculate any costs award and what factors does it consider?

Cost allocation

The unsuccessful party must pay the arbitration costs (not lawyer fees) unless otherwise agreed to by the parties or ordered by the tribunal (Article 34, Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA)).

Cost calculation

The LCA defines arbitration costs as the:

  • Remuneration paid to the arbitrators.

  • Travel and other expenses incurred by the arbitrators.

  • Consultation of expert witnesses or other assistance requested by the arbitrators.

  • Cost of administering the arbitration and other services provided by the arbitration centre.

The costs usually correspond with the amount of dispute, and not with the time spent by the arbitrators.

Factors considered

The LCA allows the tribunal to allocate the costs between the parties, but in general the losing party bears the costs.

Enforcement of an award

Domestic awards

28. To what extent is an arbitration award made in your jurisdiction enforceable in the local courts?

A domestic arbitration award is fully enforceable, unless there are grounds for cancellation. The award creditor can request the provincial civil judgment enforcement authority where the award was issued to execute the award. In the case of an ad hoc arbitration award, the award creditor must first register the award with a competent court before requesting the civil judgment enforcement authority to carry out the award.

29. Is your jurisdiction party to international treaties relating to recognition and enforcement of foreign arbitration awards, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention)?

Vietnam has been a member of the New York Convention since 1995. Vietnam made four reservations at the time of agreement:

  • The New York Convention applies to contracting states.

  • The New York Convention applies to non-contracting states on the basis of reciprocity.

  • The New York Convention will be applied only to commercial disputes as determined under the laws of Vietnam.

  • The interpretation of the New York Convention before Vietnamese courts or competent authorities must be in accordance with the Constitution and the law of Vietnam.

30. To what extent is a foreign arbitration award enforceable in your jurisdiction?

To enforce a foreign award in Vietnam (including from the UK and the US) a party must first file a petition with the Ministry of Justice (MOJ) in the country’s capital, Hanoi (along with the award and relevant documents). The MOJ reviews the documents for compliance with procedural requirements and then transfers the documents to a competent court. The competent court then notifies the award debtor and the public prosecutor before considering the petition.

The grounds for refusing recognition and enforcement are those set out in Article V of the New York Convention and Article 370 of Vietnam’s Civil Procedure Code.

Length of enforcement proceedings

31. How long do enforcement proceedings in the local court take, from the date of filing the application to the date when the court makes its final order? Is there an expedited procedure?

The award debtor has 30 days after compliance is required to satisfy the award. If the award is not satisfied, the award creditor can request a competent enforcement agency to enforce the award after it has become final.

In contrast, the procedure for the recognition and enforcement of foreign arbitral awards is more time consuming. It can take one to two years from the date of submission to receive a final order. This is despite the approximate timeline of five months provided in the Civil Procedure Code 2004 (CPC) from the time the petition is first lodged with the Ministry of Justice until a final decision is rendered by the Supreme Court.

Reform

2. Are any changes to the law currently under consideration or being proposed?

Amendments to the Law on Commercial Arbitration No. 54/2010/QH12 dated 17 June 2010 (LCA) are currently under consideration to reduce the risk of awards being set aside. The discussions are very preliminary and no changes are expected in the coming year.

The Supreme Court has issued a Resolution and an Official Letter that clarify the grounds to set aside foreign arbitral awards. Resolution 01 was made effective on 01 July 2014. In addition to clarifying the grounds to cancel foreign arbitration awards, Resolution 01 reaffirms the jurisdiction of Vietnamese courts to issue interim injunctive relief. Official Letter No. 246/TANDTC-KT was sent to all provincial level courts in Vietnam, providing guidance on the application of the New York Convention with respect to foreign arbitral awards. Specifically, the Letter reminds the lower courts to apply the substantive laws and arbitration rules selected by the parties and not the Vietnamese Civil Procedure Code.

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Main arbitration organisations

Vietnam International Arbitration Centre (VIAC)

Main activities. The VIAC is responsible for resolving commercial, construction and financial disputes

Wwww.viac.org.vn

The Financial and Commercial Centre for Arbitration (FCCA)

Main activities. The FCCA is responsible for resolving financial, construction and investment disputes

Wwww.fcca.org.vn

The Asean International Commercial Arbitration Centre (ACIAC)

Main activities. The ACIAC resolves commercial disputes

Wwww.aciac.com

The Pacific International Arbitration Centre (PIAC)

Main activities. The PIAC resolves commercial disputes

Wwww.piac.com.vn

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 Online resources

Office of National Assembly

W www.vietlaw.gov.vn

Description: The website is provided by the Office of National Assembly. It provides Vietnamese versions of soft copies of the constitution, laws, ordinances, decrees, circulars and other sub-law documents.

W www.thuvienphapluat.vn

Description: The website is unofficial, but the largest provider of English-language translation of Vietnamese laws.

W www.vietnamlawinsight.com

Description. This is a legal blog run by LNT & Partners that has insight reviews and connects between the facts and the laws (including arbitration).

W www.vietnamlaws.com

Description. This is a law blog run by Allens Linklaters, which provides a subscription database of Vietnam law in English.

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Contributor profiles

Le Net, Partner, VIAC Arbitrator

LNT & Partners

T + 84 83 8212 357
F + 84 80 9103733
E net.le@LNTPartners.com
W www.LNTpartners.com

Professional qualifications. Vietnam, Attorney at Law.

Areas of practice. Infrastructure; financial services; dispute resolutions.

Non-professional qualifications. Lecturer, Ho Chi Minh City University of Law.

Recent transactions

  • Acting for the employer in a US$150 million ICC construction arbitration on the Saigon River Tunnel and East West Highway.
  • Advising the employer on the US$2.7 billion Metro Line No 2 Ho Chi Minh City
  • Advising the lenders in a US$345 million oil and gas project finance.

Languages. English, Vietnamese, Polish, French.

Professional associations/memberships. Vietnam International Arbitration Centre, Arbitrator. Drafting Committee, Principles of Asian Contract Law.

Publications.

  • Vietnam Contract Law, International Encyclopaedia of Laws, Kluwer Law International, Boston (1ST Edition, 1999, 2ND Ed 2012, 3RD Ed 2014).
  • Vietnam Corporate and Partnership Law, International Encyclopaedia of Laws (co-author), Kluwer Law International, Boston (1ST Ed 2012, 2ND Ed 2014).
  • Vietnam Intellectual Property Law, International Encyclopaedia of Laws (co-author), Kluwer Law International, Boston (1ST Ed 2012, 2ND Ed 2014).

Please refer for PDF by clicking the link HERE or HERE.

By Vietnam Law Insight (LNT & Partners)

Disclaimer: This article is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact the author Net Le at (net.le@LNTpartners.com) or visit the website: Http://LNTpartners.com

Enforcement of Contracts in Vietnam and the Risks of Bilateral Investment Treaty (BIT) Disputes

We are pleased to introduce to you our newest publication on Enforcement of Contracts in Vietnam which will be published in the Gakushuin Journal of International Studies on March 2016. This article is written by Dr. Le Net, Dr. Nguyen Thi Kim Vinh and Mr. Joseph McDonnell from LNT & Partners.

This article provides an acute analysis of the structural and procedural provisions of the frameworks for contract enforcement in Vietnam, addressing both domestic and foreign transactional disputes and the key issues associated with these. The link between Doi Moi, and consequential integration with the international economy and the influence of collective interests stipulated in the Constitution are discussed in this article, and we also consider examples from other jurisdictions to provide both insight and an understanding into this relationship that defines contract enforcement in Vietnam.

The first section provides a foundation for the analysis of contracts enforcement, discussing the cultural, political, and judicial roles that influence the provisions for contract enforcement in Vietnam. The second section discusses the key aspects of contract enforcement in Vietnam. The legal provisions for dispute resolution are discussed in this section, and both domestic and foreign contract enforcement frameworks are discussed, along with the practical issues related to both. The final section moves onto foreign disputes in Vietnam that fall under the jurisdiction of BITs, and addresses the key issues related to this from the Vietnamese perspective, and also through the lens of case studies as comparative examples.

Please refer for full article by clicking the link HERE.

By Vietnam Law Insight (LNT & Partners)

Disclaimer: This article is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact the author Net Le at (net.le@LNTpartners.com) or visit the website: Http://LNTpartners.com

New rules ease Public-Private Partnerships (PPP) implementation

The government recently released Decree 15 to provide a comprehensive legal framework for public-private partnership projects, replacing the old regulations. Net Le and Loi Huynh of LNT & Partners took a closer look.

In November 2010, a pilot scheme of public-private partnerships (PPP) was introduced (Decision 71), which was expected to boost PPP projects in Vietnam. As of 2014, there were 38 PPP infrastructure development projects proposed to the government. However, none of them were implemented. From a legal perspective, Decision 71 seems to have failed in providing a realistic framework for the operation of PPP projects. It also confused investors with a dizzying array of government decrees on build-operate-transfer (BOT), build-transfer-operate (BTO), and build-transfer (BT) models, outlined in Decree 108 (November 2009) which provided several amendments. Indeed, most of the infrastructure projects in Vietnam have been carried out in accordance with Decree 108 rather than Decision 71. As such, the government issued Decree 15 on 14 February to finally provide a comprehensive legal framework for PPP projects, replacing Decision 71 and Decree 108. Apart from regulations that remain unchanged, Decree 15 introduces new regulations which may encourage the development of PPPs.

Eligible projects for PPP

The list of the eligible projects for PPP under Decree 15 emphasises the need for the government to develop an integrated infrastructure which has the potential to foster national economic development. Decree 15 describes PPP as an investment arrangement between an authority, investor, and project company to perform, manage, and operate infrastructure and public service projects including:

– Transport infrastructure works and related services;

– Lighting systems; clean water supply systems; drainage systems; waste and waste water collection and treatment systems; social housing; resettlement housing and cemeteries;

– Power plants, transmission lines;

– Health, education, vocational training, culture, sports infrastructure works and related services; offices of state agencies;

– Science and technology, weather forcasting, economic zones, industrial parks, hi-tech zones, information technology parks; the application of information technology;

– Agriculture and rural development infrastructure and services associated with processing and consumption of agricultural products; and

– Other areas as decided by the prime minister.

The government has released Decree 15, intended to clean up sometimes perplexing and contradictory regulations

Financial structure

Excluding operate-manage (OM) projects and projects mentioned above, a PPP project shall have a minimum total investment capital of VND20 billion. Decree 15 allows the investors and the state to allocate financial resources and share the financial risks without a cap, whilst each stakeholder shall be subject to statutory conditions.

Private participation

Private participation shall comprise of the investor’s equity capital and other funding sources which the investor is responsible for raising.

The investor’s equity capital shall be not lower than 15 per cent of the total investment capital. In case the total investment capital is higher than VND1,500 billion ($71 million), the equity capital shall not be lower than 15 per cent for the portion under 1,500 billion Vietnam dong, and for the portion above 1,500 billion Vietnam dong, it shall not be lower than 10 per cent.

Regarding the loan capital, Decree 15 is unclear as to whether the investor may  receive a state guarantee. Previous legislation specifically set out that any loaned capital shall be raised without increasing the burden of public debt. Article 57 of Decree 15 reads that the government may mandate an agency on behalf of the government to guarantee the material supply, product, and service consumption as well as other obligations of the investor, the project company, or other companies participating in the PPP project.

State funding

Before Decree 15, state participation in a PPP projects was capped at 30 per cent under Decision 71, and 49 per cent under Decree 108. These caps had the effect of rendering PPP projects less attractive to investors, as they will have to shoulder a higher risk burden than the state. Decree 15 removes these caps. However, state funding is limited to the following purposes:

– Capital contributions for construction works of projects with business and fee collection from end-users, yet the collection is not sufficient for return on investment and profit;

– Payment for investors providing services in accordance with build-transfer-lease (BTL), build-lease-transfer (BLT), and similar contracts; and

– Support for construction of auxiliary works, site clearance, compensation, and resettlement.

State funding shall include funds from the state budget, central government bonds, local government bonds, official development assistance, and incentive loans from foreign sponsors.

Legal Perspective

Forms of PPP contract

Decree 15 expands on the number of PPP forms available, laying the legal foundation for contracts of build-operate-transfer (BOT); build-transfer-operate (BTO); build-transfer (BT); build-operate-own (BOO); build-transfer-lease (BTL); build-lease-transfer (BLT); and operate-manage (O&M) models. Subject to these forms of contract, the authority that has the power to sign and implement a PPP contract may propose other similar contracts for the review and approval of the prime minister. Previously, Decree 108 only governed BOT, BTO, and BT models, while Decision 71 was silent on the forms of PPP contract.

Governing law

Decree 15 allows parties to choose applicable foreign laws to govern project contracts and contracts guaranteed by the government. Under either scenario, the choice of foreign governing law will not have jurisdiction over Vietnamese regulations on the application of foreign law.

From this perspective, it is possibly the first time that domestic legislation refers to a specific regulation rather than the general term “fundamental principle of Vietnamese laws” which has no definition under the law.

Dispute Resolution

Disputes in a PPP project may be resolved by court or via arbitration subject to agreement by the parties. Decree 15 makes it clear that disputes which are resolved by arbitration in accordance with the project contract and related contracts are commercial disputes. Vietnamese laws only have regulations on commercial arbitration, thus, if the dispute is not commercial, the choice of arbitration would be null and void. Under Decree 15, the resolution schemes are different depending on if the state agency is disputing with a local or a foreign investor.

Protection of lender

Decree 15 provides the lender with the authority to designate a capable organisation to take over all or part of rights and obligations of the investor or the project company in case the investor or the project company fails to perform on its obligations under the PPP project contract or loan agreement. An agreement on such a takeover shall be made between lender and the competent authority or parties of the PPP contract. Decree 15 also allows the investor to assign all or part of its rights and obligations under the PPP project contract to the lender or another investor. In this case, an assignment agreement shall also be made between the assignee and the parties to the PPP project contract.

PPP flow chart

Below is a general flow chart showing the process from initiative to execution of the PPP project contract. It is still a lengthy process for an investor to pursue. Decree 15 allows a conversion from a public project into a PPP project provided that it satisfies the requirements under Decree 15. However, further guidance is expected since it is not yet clear whether such a conversion would require stakeholders to perform all the processes shown below.

This Legal Alert is not a Legal Advice. For more information about this article, please contact the author: Dr. Net Le, Tel: +84909759 699 Email: Net.le@LNTpartners.com

LNT & Partners is a leading full-service independent local law firm based in Vietnam with offices in Ho Chi Minh City, Hanoi, San Francisco and an affiliated presence in Hong Kong. The firm is among Vietnam’s most prominent, representing a wide range of multinational and domestic clients, including Fortune Global 500 companies as well as well-known Vietnamese listed companies on a variety of business and investment matters

By Vietnam Law Insight, LNT & Partners

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

Legal changes bolster market economy reform_Dec 2013

The National Assembly concluded a busy year which included the ratification of a revised Constitution, the Land Law and the Law on Public Procurement. It is expected the new laws will help develop a more liberal economy.

Le Net at LNT & Partners law firm takes a look at the developments and their anticipated effects.

Revised and Restated Constitution

The 1992 Constitution was revised after more than 20 years of Vietnam’s economic reform process. Once again, it underlines the leading role of the Communist Party, the state sector as the foundation of the economy and the notion that land belongs to the whole nation and is administered by the state. The new constitution states that private and foreign-invested sectors are granted equal rights to set up and run their businesses. The state sector is supported and maintained only in core industries.

The Constitution allocated more powers to the National Assembly and president. The National Assembly is now vested with the right to decide on national fiscal and monetary policy. The president has the power to appoint deputy prime ministers or ministers as proposed by the National Assembly, appoint high-ranking officials and high court judges. The Constitution also clarifies the power of the People’s Procuracy and establishes the State Auditing Agency.

The Constitution stipulates that any “unconstitutional” acts shall be resolved. The Constitution can be seen as a positive move towards the constitutional rule of law.

Three major legal changes should help liberalise the economy further

New Land Law

The new Land Law, which replaces the 2003 legislation, addressed concepts of landed property and compulsory purchases or seizures – a huge source of dispute in the last decade – particularly after notorious cases in Haiphong and Hung Yen. The new Land Law specifies the instances in which such compulsory seizures may occur, which mainly relate to ODA projects, infrastructure development or social housing projects. Moreover, the land price or land pricing method shall be decided by the state with an aim to limit its affect on the real estate market. In addition to land prices and compensation, the new Land Law reduces the scope for amended land zoning planning. The law clearly states that once zoning has been approved, it cannot be changed except under special cases. It is hoped that this strict rule will avoid unplanned urbanisation and the exploitation of those that control land allocations before real investors with fiancial capacity have an opportunity to invest.

The law introduces two concepts: a land price table and particular land price. While the land price table is introduced once every five years, the particular land price will be determined on a case-by-case basis, by a land valuation committee based on the land price table and market price. The land price table is used to calculate land compensation and land use fees for individuals or households, whereas the particular land price is used for land compensation and land use fees for economic organisations or foreign-invested enterprises.

An important part of the Land Law is devoted to land compensation payments and clearances. The law allows provincial people’s committees to determine land prices for compensation and provides a timeline for voluntary land compensation in the case of land recovery, following which the state could apply for a forced land clearance. The compensation is prioritised in the form of land compensation and, only when there is no land available, would monetary compensation be applied. The law also requires the land developer to propose a relocation project before implementing land compensation.

Foreigners and overseas Vietnamese are now allowed to receive land use right certificates if they are allowed to buy houses or apartments adjacent to land pursuant to the Law on Housing. It does not affect the right of foreign-invested enterprises to obtain land use right certificates for industrial land or residential land projects. The new law also maintains the status quo for projects that have already been granted freehold or leasehold status before the introduction of the new law on July 1, 2014.

New Public Procurement Law

The Law of Public Procurement, also effective from July 1, 2014, is introduced with the aim of reducing waste and corruption in public procurement, as well as encouraging private-public partnerships. The new law supplements new methods in the assessment of bids, including bidding concentration and tendering in specialist industries such as pharmaceuticals and medical equipment. Bid concentration is a new feature of this Law on Public Procurement, which authorises the project owner to organise bids for a single professional purchaser instead of multiple suppliers. This process may expedite the public procurement process while maintaining control over cost over-runs and co-ordination among the suppliers. The law implements and combines widely recognised international public procurement principles with local experience in relation to public procurement issues.

To enhance the efficiency of public procurement, the law hands bid appointments down to ministries or provincial people’s committees, rather than the prime minister. The decision-maker will also have to answer to supervisory authorities, to the public, and project owners.

To reduce the price adjustments or project cost over-run problems, the Law on Public Procurement prioritises fixed price methods. If other methods are used, such as lump sum unit price or adjusted unit price, then the bid decision-maker must explain why the selected method of public procurement is preferred vis-à-vis fixed price contracts.

In short, the three laws earmarked by the National Assembly mark a bold step towards stronger reforms to confer more supervisory powers and reduce the abuse of power, waste and corruption, while recognising the importance of professional and uniform executors.

All eyes are now on how the new laws will be implemented.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

Tender law offers value for contractors’ money

The National Assembly on November 26, 2013 adopted the Law on Tendering [refered to in VIR#1155 as the Law on Public Procurement], which is expected to encourage a more competitive environment for government bid packages. Le Net and Thai Huynh Ngoc Kim Ngan at LNT & Partners take some highlights.

The Law on Tendering will come into effect on 1 July 2014. Notable changes include the repealing of Section 1, Chapter VI of the Law on Construction (No. 16/2003/QH11) and Article 2 of the Law Amending and Supplementing a Number of Articles of the Law relating to Capital Construction Investment (No. 38/2009/QH12). With these changes, the new law will resolve the overlaps between the Law on Tendering and other laws such as the Law on Construction.

Aimed at addressing certain loopholes and issues related to the current legal framework on procurement, the new Law on Tendering was intended to provide new provisions to clarify these issues. It devotes a separate chapter to each of the following subjects:

Selection via online or e-procurement mechanisms to help simplify the bidding process and implement legislative information disclosure requirements for better transparency throughout the bidding process and project implementation;

Several options, including application of modified criteria (specifically on cost and contractor qualifications), in the evaluation of bidding dossiers by bidding organisers; and

Involvement of foreign contractors being made subject to two new conditions; namely, that they must (i) work in partnership with a Vietnamese company or sub-contract a local company; and (ii) employ only foreign workers when there are no qualified Vietnamese workers available for the project.

As such, the amended provisions are also designed to support local contractors participating in international projects. In addition, the Law on Tendering also includes many new terms and some new principles that aim to actively enhance competitiveness, decentralise public procurement and promote anti-corruption measures. It also introduces a new scope of application for official development assistance (ODA) projects. It is expected that the implementing regulations will rein in ODA projects to a more efficient level. Ideally, the regulations aim to determine the steps towards controlling procurement activities, ensuring fairness between the parties, and limiting corruption.

There are two examples where the Law on Tendering has proven its efficiency.

Total estimated costs and the procedure for bidding supplements

During the process of implementing the winning package, contractors often apply to adjust costs of the project scale related to the bid cost adjustment. Actual evidence shows that many projects are won by bids that are deliberately lower, but which later apply for an adjustment in the scale of investment leading to increased levels of investment. Therefore, this new regulation is intended to overcome this issue, through the appointment of sub-contractors via bidding. As a result, this regulation should contribute to restricting wastage of the state budget.

Responsibility of competent persons in bidding and direct appointment of contractor

Regarding the determination of competent persons, the regulation as described in Article 4(3) is a step forward. This allows quick decisions to be made on small packages. To avoid the downside of this regulation, the responsibility of the authorised individual is clearly defined. As a result, this restricts the abuse of power by an authorised individual, closes a loophole and creates a healthier bidding environment.

However, apart from progress on this issue, there remain a number of practical issues that should be supplemented and rectified in the decrees implementing the law.

Broad definition of state capital

The provisions of the applicable object are always a matter of controversy and present an interesting point. This law provides that procurement activities include “implementation of investment projects developed by organisations other than those specified in points a and b of this paragraph may use state capital, capital of state-owned enterprises, 30 per cent or more or less than 30 per cent but more than VND500 billion in total investment of the project be approved”.

Article 4(44), closely outlines the definition of “state capital”. The law defines state capital to include both equity and loan capital for the purposes of this provision, including capital of state owned enterprises or loans that are guaranteed by the state or secured against state assets. Due to this broad definition, most private public partnership projects (PPP) may fall into the scope of this application, because most public infrastructure projects may require state guarantees.

Consequently, the status of state capital under this law poses a great challenge to the current legal framework. As a result, different types of “state capital” outside the traditional meaning of “state capital” will be restricted. The broad application of this law may further delay the implementation of many projects to organise tendering, such as joint ventures between foreign investors and state owned enterprises, or PPP projects in which the state participates.

Race to the bottom

Time is not the only concern with the Law on Tendering. Quality is also an issue because it could be compromised by cost. Assessment methodology bids as described in Article 38 (1) of the Law on Tendering introduced lowest cost methods. This method is commonly used in a number of developing countries. However, in theory, businesses cannot simultaneously meet the multiple requirements of better quality and cheaper prices. Regrettably, the new law still follows the “cheap price” approach, which may turn out to be expensive in the long run because of low product quality.

The low price approach may also be paralysed by price adjustment provisions in the granting of the project. We understand that an adjustment in prices is “unavoidable” because the country’s macro-economy is still unstable. However, the particular price may be flexible, but the total price should be fixed, since all the risks, such as the escalating price of materials and labour costs, should be taken into account in the bidding price from the start. In reality, the adjustment of prices has led to the situation where the prices of all projects have been driven up to levels higher than the bids with many contractors intentionally delaying the construction process to have the prices adjusted.

Managing direct appointment of contractors

The method for the direct appointment of contractors should reflect real world practices but at the same time, promote openness, transparency and prevention of corruption in the bidding process. This is a significant change from the former Law on Tendering in that it now prescribes fixed price, cost evaluation and technical and cost methods.

The consideration should also be made when adding provisions that ensure objectivity, transparency, efficiency and limiting of corruption to the lowest price method. For that purpose, the law provides that the direct appointment should be adopted in simple or small-scale cases. However, what packages should be deemed as simple or small-scale? The current regulations are quite unclear, leading to several interpretations and different applications. Therefore, this should be further considered when applied in reality.

In addition, this new regulation resolves situations where projects win the bid but fail to meet their deadline because contractors lack capacity (only winning the bid on the basis of lowest price alone). The weight given to the lowest bid as a decisive factor and failing to take into account other factors, is a main cause for faulty and low quality projects. This new regulations also prove that selection of contractors should not only be based on the “lowest bid” but also take into account contractor capacity, qualifications and experience, and sources of supply. However, the regulations on evaluating contractors should further focus on contractor capacity because “quality of the project as the first and foremost priority”.

Overall, there are many positive improvements in the new Law on Tendering, and an intention to enhance investment efficiency and reduce corruption.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com