DOING BUSINESS IN VIETNAM: HOW TO SETTLE CONTRACTS WITH VIETNAMESE SUPPLIERS

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A foreign buyer should check very carefully with whom it enters into a contract. It is a common excuse for a Vietnamese party to say, if things went wrong, that it is not responsible for anything as it in reality just acted as, let’s say, an agent for the supplier (who will, in its turn, tell the foreign buyer that it also cannot be held responsible for anything as the contract is with the agent, not with the supplier).

Another common excuse is the claim that the person on the Vietnamese side who signed the contract was not authorized to do so. It helps avoid a lot of trouble later if the foreign buyer requests to see the business registration certificate of the Vietnamese party and insists on the contract being signed by the person registered as legal representative.

These things do not only happen in transactions involving foreigners, but also in transactions where all the parties are Vietnamese.

The 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 Vietnam 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 122/2016/NĐ-CP.

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. Art. 21, 22 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, , 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 favourable 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.

Liquidated damages

It is internationally common to specify, in the sourcing contract, the amount of damages to be paid by the supplier for faulty performance. Examples: “The supplier shall pay damages for each day the shipment is delayed in an amount equivalent to XX% of the value of the order”, or “The damages payable by the supplier for each grade below the agreed quality grade shall be USD YY per unit”. A liquidated damages clause benefits the buyer as it (i) relieves the buyer from proving the amount of the actual loss and (ii) induces to supplier to deliver quality and on time. Technically, liquidated damages and penalties are not the same, although they are often confused in practice. Whereas liquidated damages are meant to compensate the buyer, penalties are meant to penalize the supplier. According to the Vietnam Commercial Law, a party claiming damages must, amongst others, prove the amount of the loss (Art. 304). It is doubtful whether the parties may deviate from this provision by agreeing on a liquidated damages clause that, in its nature, relieves the aggrieved party from proving the amount of the actual loss. Rather, a clause that is intended to be a liquidated damages clause may often be construed as a penalty clause. Penalty clauses are allowed, but the Vietnam Commercial Law provides for a cap on permissible penalties of 8% of the value of the order.

Non-disclosure agreement

The process of selecting suppliers or service providers often requires the disclosure of product or business specifications. Potential business partners should sign a non-disclosure agreement before being provided with sensitive information. See also “intellectual property”.

Payment

Vietnamese commercial law allows the parties to agree on the time and mode of payment. Usually, the buyer would pay after the goods are loaded onto the ship which is evidenced by a bill of lading. The buyer transfers the money to the supplier after having been sent a copy of the bill of lading by fax. Alternatively, payment is effected via a letter of credit. A letter of credit offers more security to the supplier to receive payment, but involves more bank fees.

If a foreign buyer orders software in Vietnam, the payment clause could provide that (i) XX% of the purchase price are to be paid after signature of the contract, (ii) YY% after delivery, and (iii) ZZ% are kept by the buyer as a security deposit and transferred to the supplier after the software has run without problems for a specified period of time.

Place of delivery

Vietnamese commercial law allows the parties to agree on the place of delivery of goods (which is in practice often done by making reference to the Incoterms). If there is no specific agreement, the seller has to deliver the goods to the first carrier (if the contract contains a reference to the transport of goods), or at the place of storage, loading or manufacture (if this location is known to both parties), or at the seller’s place of business.

Quality and time of delivery

It is of utmost importance for the foreign buyer to check – either by own employees or through a trusted inspection company – the quality of the goods before shipment is made, i.e. while the goods are still in Vietnam. Such checks usually take the shape of factory audits, visits during production and/or packaging and/or tests of product samples. The sourcing contract should contain a clause allowing the buyer to carry out such tests. It is close to impossible to get money back if the goods have left Vietnam and later turn out to be defective. Foreign buyers purchasing regularly in Vietnam might consider setting up a representative office to perform quality checks. Representative offices must not engage in profit-orientated activities, but they are allowed to monitor the performance of contracts concluded by the headquarter.

Vietnam law allows the parties to agree on the characteristics of the goods, the time of delivery and the consequences of faulty performance. It is wise to be very specific and detailed in this regard as this will be the starting point for going after the supplier if the delivery was not satisfactory.

Subcontracting

Vietnamese law allows the parties to agree on a clause prohibiting the supplier from subcontracting, or limiting subcontracting to subcontractors approved by the buyer. This is an important clause if the buyer has conducted a background check on the supplier and now wishes to ensure that the goods are manufactured by the supplier and not by someone else.

Taxes

The VAT rate for exported goods is 0 (zero) %. The VAT rate for exported services is also 0 (zero) %. However, there are exceptions:

  • The normal VAT rate of 10% applies if the foreign recipient of the services has a permanent establishment in Vietnam. The Vietnamese tax authorities take a rather broad view of what constitutes a permanent establishment in order to protect the Vietnamese tax base.
  • The reduced rate of 0% only applies if (i) the foreign recipient of the services has no permanent establishment in Vietnam and (ii) confirms this fact in writing.
  • A number of services (e.g. data entry services) are subject to the normal rate of 10% even if they are exported.

If the Vietnamese service provider has to charge VAT on its services, the price it has to ask the foreign buyer to pay increases. The foreign buyer cannot get an input VAT credit (unless it is – but this is often not an option – registered for tax purposes in Vietnam)

Warranty

With some exceptions (e.g. real estate, houses), there is no “automatic” warranty in Vietnamese law. This means that if the buyer wishes to have rights under a warranty (repair free of charge, reduction of the price, replacement of the goods, return of the goods with refund of the purchase price), it must agree so with the supplier in the sourcing contract.

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