DOING BUSINESS IN VIETNAM: SOME COMMON QUESTIONS CONCERNING CLAUSES IN THE CONTRACT

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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.

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