The grounds to declare an arbitration agreement invalide under Vietnam’s law

1. Arbitration falls under one of the cases specified in Article 18 of Vietnam’s Law on Commercial Arbitration 2010

The first grounds to declare an arbitration agreement invalid is that: The arbitration agreement is invalid according to one of the circumstances stipulated in Article 18 of Vietnam’s Law on Commercial Arbitration (hereinafter called LCA 2010). According to article 18 of LCA 2010, there are 5 circumstances that an arbitration agreement could be invalid, namely: (i) Disputes arise in the domains falling beyond the arbitration’s jurisdiction defined in Article 2 of this Law; (ii) The party to arbitration agreement has no competence defined by law; (iii) The party to arbitration agreement has no civil act capacity under the Civil Code; (iv) The form of the arbitration agreement is incompliant with Article 16 of this Law; (v) A party is deceived, intimidated or compelled in the course of making the arbitration agreement and requests a declaration that such arbitration agreement is invalid; (vi) The arbitration agreement breaches prohibition specified by law.

1.1 Disputes arise in the domains falling beyond the arbitration’s jurisdiction defined in Article 2 of this Law

Article 2 of LCA 2010 provided that the arbitration has jurisdiction to settle the following classes of disputes: (i) Disputes among parties which arise from commercial activities; (ii) Disputes among parties at least one of whom conducts commercial activities; (iii) Other disputes among parties which are stipulated by law to be settled by arbitration. In Article 2(1) and 2(2) of LCA 2010, the legislator uses the sign “commercial activities” to determine the arbitration's jurisdiction. In Article 2(3), the sign “commercial activities” is no longer used to determine the jurisdiction of the arbitration, instead, that is the case other disputes which not related to “commercial activites” but can be resolved by arbitration under specific laws.

For example: Article 338 of Vietnam’s Maritime Code 2015, Article 198 of Vietnam’s intellectual property Law 2019 provided that: Intellectual property right holders have the right to initiate arbitration to protect their rights and interests. Thus, the arbitration's jurisdiction is very broad, it’s not limited to disputes related to “commercial activities” but also extends to other types of disputes such as intellectual property disputes, etc. Disputes other than those mentioned above are not fall within the jurisdiction of arbitration, therefore, according to Article 18(1) of LCA 2010 and Article 3(1) of Resolution No.1/2014/NQ-HĐTP dated March 20, 2014 of guiding the implementation of LCA 2010: arbitration agreement which established to settle these disputes are invalid.

1.2 The party to arbitration agreement has no competence defined by law

It seems like this provision is primarily governed the civil legal capacity of authorized subjects rather than natural persons, because the legislator uses the word: “Competence” - the word used to indicate that someone is authorized to do something for someone else. Indeed, article 2 of Resolution No.01/2014/HQ-HĐTP confirms this assumption by providing that: “The party to arbitration agreement has no competence means the arbitration agreement is negotiated by persons other than legal representatives or authorized persons, or authorized persons that act beyond his/her authorized entitlements”.  In principle, if the arbitration agreement is created by incompetent person, the arbitration agreement is invalid, however, there are still cases where the arbitration agreement isn't void although it's established by an incompetent person.[1] Article 3(2) Resolution No.01/2014/NQ-HĐTP: “If the arbitration agreement is negotiated by incompetent persons but the persons competent to negotiate arbitration agreements accepted or known but do not object to it during the negotiation or arbitral proceedings, such arbitration agreement is not invalid.”

It will be easy to determine whether the parties to the arbitration agreement have the “competence” to consult arbitration agreement or not if both parties to the arbitration agreement are Vietnamese, because, the “competence” will be determined entirely by Vietnamese laws. However, if one of the parties to the arbitration agreement has a foreign nationality, then the question arises: Is this party's “competence” clarified according to Vietnamese law or foreign law?[2] This issue is not regulated in article 2(2), however, based on Vietnam’s private international law principles, in most cases, the civl legal capacity of individuals and legal entities is determined by the nationality principles (the lex nationalis for individuals and the lex societatis for legal entities). Nevertheless, if arbitration agreement is established in Vietnam, the civil legal capacity of foreign party will be determined by Vietnamese law.[3]

1.3 The party to arbitration agreement has no civil act capacity under the Civil Code

According to Article 3(3) of Resolution No.01/2014/NQ-HĐTP: “The party to arbitration has no civil act capacity” means the minors; legally incapacitied persons or persons with limited legal capacity. These classes of people share the same characteristic is that they are not fully aware of the legal consequences of their acts, therefore, the arbitration agreements made by these people are often invalid due to lack of adequate expression of will. Article 18(3) of LCA 2010 does not clearly stipulate whether the civil act capacity of a foreign individual is determined by Vietnamese law or foreign law, however, according to Vietnam’s private international law principles, civil act capacity of foreigner shall be determined by the law which he has a nationality, unless such arbitration agreement is established in Vietnam.[4]

1.4 The form of the arbitration agreement is incompliant with Article 16 of this Law

Article 16 of LCA 2010 provided that “an arbitration agreement may be made in the form of an arbitral clause in a contract or in the form of a separate agreement”. In addition, the arbitration agreement must be made in writing, article 16(2) also stipulates the forms in which the arbitration agreement is considered to be in writing. Article 3(4) of Resolution No.01/2014/NQ-HĐTP provided that: The arbitration agreement which not satisfied the condition of formalities mentioned in Article 16 of LCA shall be invalid. As such, an arbitration agreement is invalid if: (i) is not made in the form of an arbitral clause in a contract or in the form of separate agreement and (ii) is not made in writing.

1.5 A party is deceived, intimidated or corced in the course of making the arbitration agreement and requests a declaration that such arbitration agreement is invalid

Deception means an intentional act of a party or a third person for the purpose of misleading the other party as to the subject, the nature of the entity or contents of the civil transaction which has caused the other party to enter into such transaction.

Intimidation, coercion means an intentional act of a party or a third person which compels the other party to conduct the civil transaction in order to avoid danger to the life, health, honor, reputation, dignity and/or property or that of its relatives.

As mentioned, an arbitration agreement is a contract and one of the basic principles of a contract in general and an arbitration agreement in particular is the free will of the parties, in other words, the validity of the contract based on free will of the parties. Thus, if the free will of the parties is distorted by any reason, the agreement will be invalid. Both deception, intimidation, coercion defect the free will of the parties, therefore, arbitration agreement which has one of these factors is invalid.

1.6 The arbitration agreement breaches prohibition specified by law

According to article 18(6) of the law and article 3(6) of Resolution No.01/2014/NQ-HĐTP, an arbitration agreement that violates the prohibition of the law is an agreement specified in Article 132 of Vietnam’s Civil Code 2005 (currently Article 123 of Vietnam’s Civil Code 2015). Article 123 of Vietnam’s Civil Code 2015 provided that: “Civil transactions with objectives and contents which breach legal prohibitions or which contravene social ethics shall be invalid; Legal prohibitions mean provisions of law which do not permit entities to perform certain acts; Social ethics are common standards of conduct as between persons in social life, which are recognized and respected by the community.”. Thus, the word “prohibition specified by law” in LCA 2010 does not refer only to the “Legal prohibitions” in Vietnam’s Civil Code 2015, but also the “Contravene social ethics” stipulated in Article 123.

2. Within the prescription to declare the arbitration agreement invalid

It can be said that, in addition to the necessary grounds that the arbitration agreement invalid under Article 18 of LCA 2010, in order to declare the arbitration agreement invalid, it must satisfy the sufficient grounds that there is still prescription to declare the arbitration agreement invalid. LCA 2010 does not provide the time to declare an arbitration agreement invalid, however, as a contract as well as a civil transaction, the arbitration agreement also falls within the regulation of Civil Code.

According to Article 132 of Vietnam’s Civil Code 2015, The time limit within which a request may be made to a court to declare a civil transaction invalid shall be two years as from the date on which: i) The representative of a minor, a legally incapacitated person, a person with limited cognition and behavior control or a person with limited legal capacity knows and should know the ward established and/or performed the transaction himself/herself; ii) The mistaken or cheated person in a transaction knows and should know that such transaction is established due to misunderstanding or cheating; iii) The person that threatened or compelled other persons in a transaction put an end to such acts; iv) The person lacking in cognition and behavior control establishes his/her transaction; vi) The civil transaction is established in non-compliance with form. The time limit for requesting a court to declare such civil transactions invalid shall not be restricted for transaction which invalid due to breach of legal prohibitions or contravention of social ethics. Thus, according to Article 132 of Vietnam’s Civil Code 2015, the prescription grounds is not mandatory to declare the arbitration agreement invalid in all cases. The prescription ground shall not apply to the case where the arbitration agreement is invalid because the dispute is not within the jurisdiction of the arbitration (Article 18(1)) and the arbitration agreement violates prohibitions of law (Article 18(6)).

Tran Duc Minh - Benjamin Law Firm