The following are some common questions concerning clauses in the contract that foreign buyers come across in Vietnam

CISG (United Nations Convention on Contracts for the International Sale of Goods)

CISG is an international treaty providing a uniform set of rules governing cross-border sales. Vietnam has not ratified CISG, and the treaty is not well-known in Vietnam. A general reference to CISG (“this contract is governed by CISG”) in a contract that is governed by Vietnamese law is invalid as CISG is not part of Vietnam’s legal system. However, the parties may use CISG as a template to draft their contract to the extent CISG and Vietnamese commercial law are consistent.

Customs

There is no export duty in Vietnam on most goods; exceptions apply in particular to natural resources. A list with goods to which export duty applies is contained in Circular of MoF. Export procedures are explained here: http://www.customs.gov.vn/English/Lists/CustomsFormalities/Exporter.aspx

Data protection

Services bought by foreign companies in Vietnam are often IT-related (data entry services, software development) and require the transfer of data into Vietnam from abroad. A number of laws contain data protection provisions (e.g. IT Law), but public awareness of the desirability to keep personal and company data confidential is almost non-existent. Sourcing contracts should, where sensitive data are concerned, contain a penalty clause that covers data leakage. To a certain extent, the local company can protect itself against careless use of customer data by its employees by having clauses in the labour contract and/or its internal labour rules that prohibit the unauthorized use of customer data. However, the best protection is a thorough education of the workforce and technical barriers, e.g. systems where local employees can only remote-access data without the possibility to download them. If a foreign company wants to transfer personal data to Vietnam in order to have them processed there, it has to check the laws of its home jurisdiction whether and under which conditions the cross-border transfer of data is allowed.

Deposit

A supplier will usually ask for a deposit before investing in production equipment and the purchase of raw materials. For the buyer, it is best if the investment of the supplier is higher than the deposit amount as in this case the supplier has an incentive to manufacture the goods as requested in order to recoup the part of the investment that is not covered by the deposit. A deposit can be secured by a bank guarantee. The best precaution for a buyer to take is a thorough background-check of the supplier.

Dispute resolution, choice of law

Foreign companies sourcing in Vietnam usually wish the contract with their supplier to be governed by foreign law and disputes to be resolved by a foreign court or arbitration body. It is, however, extremely difficult in practice to enforce a foreign arbitral award, let alone a foreign judgment, in Vietnam. Consequently, dispute settlement abroad makes, in our opinion, only sense for a foreign buyer if the Vietnamese supplier has assets outside of Vietnam against which the foreign buyer could enforce. If the Vietnamese supplier has assets only in Vietnam, we think that it is usually better to agree on Vietnamese arbitration (e.g. at the Vietnam International Arbitration Centre – VIAC, http://www.viac.org.vn, which has also foreign arbitrators on its panel).

The parties to a commercial transaction “with an international element” (i.e. where at least one party is a foreigner) are free to agree on the application of foreign law as long as the foreign law is not “contrary to the fundamental principles of Vietnamese law”. Unfortunately, there is no guidance as to what constitutes “fundamental principles of Vietnamese law”. One should be careful if the foreign law is less favorable to the Vietnamese party than Vietnamese law.

VIAC in principle accepts to settle disputes according to foreign law, although one should, before agreeing on the application of the law of a specific jurisdiction, check whether it is likely that any of the arbitrators on VIAC’s panel are knowledgeable about this law.

Force majeure

The supplier of goods or services will usually request that its obligations expire in a force majeure event (e.g. natural disasters). Naturally, the supplier is interested in a wide force majeure clause that may also cover events of which the risk, on closer reflection, should be borne by the supplier. Typically, a supplier does not want to be held responsible for electricity outages, strikes, and transport risks. However, it is up to the supplier to prevent these events or mitigate risks associated with them. Electricity outages can be prevented by backup generators, the risk of strikes (at least in the supplier’s own company) can be mitigated by fair treatment of workers, and the supplier would have recourse against the transport company with regard to most transport risks.

A force majeure clause should only provide for the suspension of the obligations of the supplier during the force majeure event (instead of the complete expiry of the obligations) and oblige the supplier to mitigate the effects to the furthest degree possible.

Incoterms

Incoterms are a set of commercial terms drafted by the International Chamber of Industry and Commerce (ICC) defining which party is responsible for transport and its costs and at what point of time the risk of loss or damage to the goods passes to the buyer. E.g. “CIF (‘cost, insurance and freight’) Incoterms 2010” means that the seller must deliver the goods to the port of destination (conclude a contract with the logistics provider and pay for the delivery and maritime transport insurance). The risk of loss or damage to the goods passes to the buyer as soon as the goods are on board of the ship. In Vietnam, as in any other jurisdiction, Incoterms only apply if the parties make specific reference to them in the sales contract. The ICC changes the definitions from time to time, so it is important to specify in the contract which Incoterms the parties have agreed on (e.g. “Incoterms 2010”).

Intellectual property

In some cases, the goods to be purchased in Vietnam are subject to intellectual property rights (in particular trademarks) of third parties. Trademarks can be researched online on the homepage of the National Office of Intellectual Property (NOIP; search mask only in Vietnamese). According to Vietnamese commercial law, the seller is responsible for assuring that the goods sold do not infringe on intellectual property rights of third parties. Nevertheless, the sourcing contract should, where appropriate, include a clause according to which the supplier warrants that it owns, or has a license with regard to, all relevant intellectual property rights. If a third party complains to the foreign buyer about a copyright infringement, the foreign buyer must inform the supplier promptly about this complaint. Otherwise, it risks losing its claim against the supplier.

Often, the foreign buyer transfers, at least temporarily, intellectual property to Vietnam (e.g. the design of shoes to be produced, or technology to be used, by the supplier). The sourcing contract should contain a clause which prohibits the supplier, on pain of penalties, from disclosing the intellectual property and using it for other purposes than the production of the goods ordered by the foreign buyer. Depending on the case, it should be made clear that the supplier is also prohibited from using leftover materials to produce an additional number of goods for sale in a parallel supply chain. Furthermore, the contract should make provisions as to the fate of the equipment used in production (e.g., what happens to the molds after the contractual relationship has ended?).

Foreign buyers should consider registering their trademarks even if they have no intention of selling in Vietnam. Otherwise, they risk that a local competitor registers these trademarks and tries to prevent the goods ordered by the foreign buyer from leaving Vietnam on the grounds that they violate the trademarks registered in the local competitor’s name.

Software is subject to intellectual property protection. The moral rights (right to give titles, attach his or her real name to the works, protection of the integrity of the works) rest with the author who is, in the case of software, the individual programmer who wrote it. It is possible for the author and third parties (e.g. the company employing the author) to agree that the third party should have the right to give titles and make modifications to the software. An organization that makes a financial investment to create software has the right to publish the work and exclusively holds the economic rights in it (such as making and distributing copies). In order to avoid confusion (who is the “organization that makes a financial investment” – the Vietnamese software company that employs the individual programmer or the foreign buyer who orders the production of the software?), a sourcing contract should state clearly to what rights the foreign buyer is entitled with regard to the software.

Together with other relevant factors, the contract terms should be adjusted accordingly. To get the best advice on your lease, please contact our lawyers through website: unilaw.vn.

Real estate leases are a vital piece of any business’ costs, and there are many risks. A lease is a legal contract that should be examined closely and understood completely. The lease term could be varied from one year, ten years, or twenty years. The longer the contract term is, the more legal-binding it must be. In fact, there have been cases in which two parties have filed lawsuits against one another because their contract was not legal-consciously made. This article addresses issues that need to be taken into account even before signing a commercial lease.

Is the lessor legitimate for rent?

The most common mistake that many entrepreneurs make is not verifying the lessor’s status. In a lease, legal-related information of the two parties should be clearly stated. Attention must be particularly focused on the legality of the rental location and the owner’s background check must be carefully done. This process is extremely important in order to avoid unseen issues or fraud that could lead to possible financial damages for the lessee.

In general, lessors can be either an individual or a legal entity. If the lessor is an individual, they must be able to present the certificate of land use right, the bricks-and-mortar ownership certificate and assets attached to the land. If the lessor is a legal entity, besides the above-mentioned documents (which could be replaced by a Decision issued by the State permitting the legal entity to rent the allocated land to businesses), this legal entity needs to show their Business Registration Certificate where leasing activities are authorized.

Escalation Clause

Another tough issue in commercial leases is “escalation clause”. This clause involves the base rent increases over the term of the lease. A fixed price is often applied for a short-term leasing contract, which is usually the first lease that many entrepreneurs sign. When the business grows, entrepreneurs are likely to consider signing a longer-term contract. In that case, escalation in price is commonly used by the lessor to pay for the building cost increases or inflation. While they are very common and complete legal, lessees have to be very careful with these clauses as they can be very costly. The percentage of the increase in price over each period of time must be specified clearly and completely understood by both parties.

Besides, lessees should also consider negotiating a large period of time for renovating or remodeling the building and, this time should not be added on as a rent. When lessors singly terminate the contract, they have to compensate lessees for these renovation costs.

Deposit

Deposit clause is another issue that tenants need to watch out. This clause is an indispensable part of lease agreements in Vietnam. To protect yourself as a tenant, the contract must specify the penalty lump sum that the tenant will receive in case the landlord revokes the contract before it comes to its end. Also, it is important to define conditions in which the tenant can receive the deposit total amount.

Compensation and penalties

Penalties and damages are indispensable when drafting a contract. This clause, however, is negotiated differently in each contract, depending on the characteristics of each business activity.

In brief, when drafting and negotiating a lease, both parties should pay attention to the following points:

(i). The lessor’s status for rent

(ii). Escalation clause

(iii). Deposit

(iv). Compensation and penalties.

Depending on which role you are playing, together with other relevant factors, the contract terms should be adjusted accordingly. To get the best advice on your lease, please contact our lawyers through website: unilaw.vn or call +84912266811.

The laws of Vietnam vest ownership of land in the Vietnamese homeland and do not recognize private ownership of land by individuals and organizations. The State is responsible for the administration of land throughout Vietnam on behalf of the Vietnamese people. The State may grant rights to use land (“Land Use Rights” or “LUR”) in the form of land use rights certificates (“LUR Certificates”) to individuals and organizations by way of land allocation or lease. The relevant People’s Committees are authorized to supervise the use and management of land in their respective localities on behalf of the State.

Under the laws of Vietnam, the right to use land is distinct from the ownership of buildings constructed on the land. Although the laws of Vietnam do not recognize private ownership of land, they do recognize and permit the private ownership of buildings constructed on such land.

Grant of land use rights

Only a legal entity established under the laws of Vietnam can acquire LUR or an interest in buildings attached to land. This means that a foreign investor must establish a Vietnamese subsidiary, either alone or together with a joint venture partner, in order to acquire LUR. In this and the following, such a subsidiary is referred to as “foreign developer”.

The type of LUR depends on whether the land user is a Vietnamese or a foreign developer. If the land user is Vietnamese, LUR may be granted by the State either by way of allocation or lease. A foreign developer may acquire LUR only under the form of a lease (save in the case of a LUR being contributed as capital by the Vietnamese party to a joint venture company).

Land use duration

If a land is allocated to a Vietnamese land user, the allocation can be, depending on the intended use of the land, on a “stable and long-term basis” or for a definite term. Land lease is always for a definite term only.

A foreign developer can obtain a land lease only for the duration of the investment project. The maximum duration of an investment project is 50 years according to the Law on Investment (exceptionally 70 years if the investment project involves large amounts of capital and recovery is expected to take long, or if the project is located in an area facing difficult socio-economic conditions). If the foreign developer strictly complies with the Land Law during the initial duration of the LUR, the lease may be extended at the discretion of the Government. No additional rent has to be paid for the extension.

If the foreign developer obtains, in order to construct residential housing, a land lease for a lump-sum payment, or obtains land in an auction (Art. 32 Decree 84), or is assigned an investment project involving land that was initially allocated on a “stable and long-term basis” (Art. 24 Decree 84), the duration of the land lease conferred to the foreign developer may be up to 70 years and may be extended on request with the same term without payment of additional rent.

If the foreign developer is a joint venture company with at least one Vietnamese shareholder and the Vietnamese joint venture partner has a LUR in the form of land allocation, it may contribute the LUR to the capital of the joint venture company.

A foreign developer can obtain a LUR in the form of a lease in order to erect a building on the land to be used as residential housing. If the foreign developer sells the residential housing complex to a Vietnamese, the Vietnamese purchaser can obtain a land allocation on a stable and long-term basis.

Land use fees, rent

In case of allocated land, the amount payable by the land user to the State is called “land use fees” and in the case of leased land, the amount payable by the land user to the State is called “rent”.

The land use fees must be paid in a lump sum while the rent can be paid in a lump sum or on an annual basis. However, if the rent is paid annually, the leased land can only be used by the foreign developer for the construction of residential housing for lease. If the rent is paid upfront for the entire lease term, the foreign developer is entitled to construct residential housing for sale and/or lease.

If a foreign developer leases land in order to construct a residential housing complex for sale, the lump-sum rent payable upfront corresponds, simply speaking, to the market price of the land as defined by the local People’s Committee or to the successful auction bid (if the foreign developer obtained the land lease as a result of an auction). A Vietnamese purchaser may buy the entire housing complex or single apartments or a block of apartments in the housing complex. The Vietnamese purchaser is entitled to obtain a land allocation for a stable and long term from the State without paying land use fees for this allocation (if the Vietnamese purchaser buys apartments, this is a land allocation for common land use). However, the foreign developer will usually have included, in the purchase price of the housing complex or apartment, the rent that the foreign developer had to pay upfront, and any increase in the value of the land on which the housing complex was built. The foreign developer can keep the capital gain resulting from an increase of the value of the land and is not obliged to pay it to the State if the project was implemented on or after 1 July 2007 (the effective date of Decree 84). The Vietnamese purchaser must pay a registration fee for registering ownership of the housing complex (or apartment) corresponding to 0.5% of the market value (set by the local People’s Committee) of the housing complex (or apartment)./