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Official Gazette

Tuesday, September 19, 2017

Commercial arbitration - increasing confidence in foreign direct investment

Updated: 14:54’ - 17/06/2014

Alex T. Larkin[1], Tran Si Vy[2]

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          Producing export garment in Singapore-invested STAR company in Chuong My district (Hanoi)__Photo: Danh Lam/VNA

Recent years have brought substantial economic growth and development throughout the ASEAN region and beyond, particularly in emerging markets like Vietnam, Laos and Cambodia, among others. As in any jurisdiction, this increase in development, along with an increase in cross-border transactions in the region, has driven an increase in commercial disputes, in terms of both quantity and complexity.  Foreign investors, when considering whether to enter a new market, typically consider the ability to resolve disputes by transparent and efficient means as a significant factor in their decision whether to carry out an investment project. 

Vietnam and Cambodia, while at somewhat different stages of development, are two examples of emerging markets of significant interest to foreign investors. Both jurisdictions offer investors a measure of political stability, rising consumer purchasing power, and low-cost, plentiful labor.

Vietnam has had a functioning commercial arbitration body, the Vietnam International Arbitration Center (VIAC), for more than two decades, while Cambodia is anticipated to bring its commercial arbitration body, the National Commercial Arbitration Center (NCAC), into operation by the end of this year, which will complement the country’s already-successful Arbitration Council, which hears collective labor disputes.  For both countries, the availability, or promise, of commercial arbitration is an encouraging factor for foreign investors to consider. In this article, we discuss commercial arbitration in Vietnam and Cambodia as examples of ASEAN emerging market jurisdictions which are making an effort to improve the commercial dispute resolution environment for investors.

Distinguishing commercial arbitration from court action

Fundamentally, commercial arbitration is a private dispute resolution proceeding based on an agreement of the disputing parties to have their dispute heard and decided by a private arbitration tribunal. In contrast, court action is typically administered by a state to some extent, is heard by a public institution, is presided over by a judge who is either publicly elected or appointed by government officials, and usually involves public proceedings. Further, court action, known as litigation, is often characterized as being inefficient, time-consuming, and susceptible to significant delays resulting from motions practice and rigid procedures and rules governing admissibility of evidence. Commercial arbitration generally involves flexible procedural rules and relaxed rules of evidence intended to expedite the dispute resolution process. Additionally, the parties to commercial arbitration, as well as the arbitrators, are typically motivated to resolve disputes quickly and with minimal expense.

In most jurisdictions where commercial arbitration is available, an agreement by the parties to the dispute is necessary to have the dispute heard by an arbitration tribunal. Such an agreement may be by formal arbitration agreement; a dispute resolution provision in the contract giving rise to the dispute, or by agreement after a dispute has arisen. Likewise, the parties usually have an option to agree on whether the arbitration will be binding or non-binding. Most arbitration is binding, meaning that the decision of the arbitration tribunal is final and not subject to appeal on the merits of the decision. In the case of non-binding arbitration, a party could pursue legal action in an appropriate court with respect to the same dispute, independent of the arbitration.

Commercial arbitration, where available, cannot be used for disputes other than commercial disputes, which most often consist of claims based on breach of commercial contract terms. Actions such as marital disputes, criminal matters, and most actions where a state-entity is a party, may not be submitted to commercial arbitration.

Commercial arbitration is typically available in two alternative forms; ad-hoc arbitration and institutional arbitration. Ad-hoc arbitration is established by the disputing parties to solve the particular dispute, typically without the use of an organized institution. The parties may choose to adopt a known set of arbitration rules, which govern the arbitration procedures, such as the arbitration rules promulgated by the International Chamber of Commerce (ICC) or the United Nations Commission on International Trade Law (UNCITRAL), or may choose to apply rules of their own making. The parties are free to appoint one or more arbitrators to hear the dispute, determine facts, apply law, and issue a decision. In ad-hoc arbitration, unless the selected arbitration rules require otherwise, the parties enjoy significant latitude in determining who the arbitrator(s) will be. The arbitrators may or may not have specific training related to arbitration, and may instead be selected based on their expertise in a particular area of law or sector of the economy.  For example, for an arbitration involving a construction dispute, the parties may wish to appoint an arbitrator with particular expertise in the construction sector.

Institutional arbitration, as opposed to ad-hoc arbitration, is a form of arbitration which is more organized, and which is administered by an institution having a permanent address, administrative apparatus and, usually, its own rules of arbitration.  The VIAC and the NCAC are examples of arbitration institutions.  Other well-known arbitration institutions include the Singapore International Arbitration Center (SIAC) and the Hong Kong International Arbitration Center (HKIAC), both of which have become known as reputable, highly professional dispute resolution forums. Arbitration institutions determine, as incorporated in their own rules, such things as qualifications of arbitrators, number of arbitrators making up an arbitration tribunal, the arbitration rules to be applied to proceedings, whether the institution will accept disputes arising outside of the jurisdiction where the institution is seated, and other factors. Institutional arbitration offers parties more structure and procedural certainty than ad-hoc arbitration, while still affording the parties significant discretion in determining the parameters of their dispute resolution process.

Under most arbitration rules, the parties, usually through their contractual arrangement, may choose the law to be applied to their dispute. Note that the law, which is the law of a particular political jurisdiction, is for the purpose of determining the legality of the actions of the parties. For example, determining whether one party to a contract breached its obligations under the contract and the consequences of such breach are issues of law. This differs for the arbitration rules, which govern the procedural formalities of the arbitration proceedings.

Why choose arbitration?

In many jurisdictions, arbitration is regarded as a more efficient and transparent form of dispute resolution than is court action. While commercial arbitration is focused on resolving disputes arising purely from commercial arrangements, and offers a streamlined approach to resolving disputes, courts are heavily loaded with many different kinds of disputes, and by law, must afford parties significant opportunities for appeals, reconsideration of judicial decisions, and the like, often referred to as “motions practice.” Depending on the litigation strategy of a party, they may engage in motions practice merely to delay the completion of a case or as an effort to frustrate the opposing party. There is often little incentive, on the part of the courts, to dispose of cases in an expeditious manner.

In contrast, commercial arbitration, being a dispute arising from commercial activities, and usually being conducted by an arbitration institution which is motivated to hear and complete arbitrations efficiently, lends itself to the rapid disposal of disputes.  To be clear, in commercial arbitration, all parties involved, including disputing parties, the arbitration institution and the arbitrators themselves, share a common goal, which is to resolve disputes quickly.

As an example of the heavy judicial caseload of courts which contributes the inefficient resolution of disputes, in 2007, the number of cases taken by the Hanoi People’s Court was 226 while there were only six judges to handle the cases, for an average of 32 cases per judge[3]. Therefore, on average, each judge took charge of 37 cases that year alone, in addition to the caseloads the judges carried over from prior years.[4] The situation is even more extreme in Ho Chi Minh City where there were about 1,000 cases in 2007 handled by 17 judges for an average of 59 cases per judge[5]. The combination of the public’s right to file legal action and the limited resources of the publicly-funded courts creates a significant disparity in the ratio of cases to judges.

Commercial arbitration, which typically is not publicly-funded, but instead is funded by the arbitration fees paid by disputing parties, is itself a commercial activity, with all participants financially motivated to resolve disputes efficiently. Moreover, in the interest of their own commercial development and exposure, arbitration institutions, as well as arbitrators, are motivated to produce results which demonstrate efficiency, fairness, and transparency, a motivation not necessarily shared by courts.

To a large extent, arbitration is a self-litigation process. The parties to a dispute are free to select or appoint their arbitrators, as opposed to court action where a judge is assigned to their case through court procedures typically overseen by a chief judge.  The involved parties may negotiate with each other on arbitration procedures, set the time-schedule for the proceedings, and even reach an agreement on admission of evidence, and whether the arbitration will or will not include hearings. In the context of commercial arbitration, an agreement of the parties to the dispute is viewed as “law” of the proceedings binding them and the arbitrators. This is in stark contrast to the rigid formalities of court procedures, which at times may not appear to be in the interest of any party. 

In addition to the advantages of arbitration, as compared to court action, discussed above, there are further factors making arbitration desirable for many parties. Commercial arbitration rules usually allow the parties to decide on the language of the arbitration proceedings, regardless of the language native to the jurisdiction where the proceedings are conducted. Courts, on the other hand, usually require that the official version of any documents filed with the court, and the language of any hearings, be that of the native language of that court’s jurisdiction, regardless of an agreement by the parties that a contract written in a different language be binding.  These are factors of significant concern to foreign parties who find themselves involved in commercial disputes. Further, under most arbitration rules, the parties may select arbitrators of any nationality, such that an arbitration heard in Vietnam could be decided by arbitrators from outside the jurisdiction, thus minimizing or eliminating the perception of “home-towning” which may arise in court proceedings involving a foreign party. 

Confidentiality of the proceedings, and of the arbitration decision and award, is another significant consideration. Commercial arbitration proceedings, which by their very nature are proceedings brought in accordance with a private-party agreement, are generally confidential. This contrasts with court actions, which are proceedings of public institutions and as such, most often cannot be confidential.  Confidentiality can be an important factor to parties who may not wish to have their grievances known to business associates, customers, suppliers, or the press.

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              Seminar on orientations to enhance the efficiency of FDI into Vietnam__Photo: Hoang Hai/VNA

Enforcement of arbitral awards

In some respects, commercial arbitration decisions are more final and absolute than judicial decisions. Given that parties to commercial arbitration typically agree, prior to commencement of arbitration proceedings, that the arbitration decision is to be final and binding, there is little, if any, opportunity for appeal or reconsideration of an arbitration decision, at least as to the substance of the dispute. In contrast, in the context of judicial decisions, except for a final decision by the highest court in a given jurisdiction, rules of civil procedure generally afford parties a number of opportunities, and rights, to appeal or seek reconsideration of decisions. Thus, even after a court has issued a decision, the action may continue for months or years as parties lodge appeals and engage in motions practice.

Despite the relative finality of commercial arbitration decisions in relation to the substance of disputes, given that commercial arbitration is a private, non-judicial proceeding, it lacks enforcement power.  Where courts have a state element giving them considerable enforcement power, to include ordering police action, seizure of assets, sale of assets, and the like, commercial arbitration institutions and tribunals have no such power. 

Enforcement of an arbitration decision requires a separate legal action, whether the arbitration proceedings were conducted locally or in a foreign jurisdiction. Such enforcement often involves an intricate marrying of international arbitration procedures, local or foreign law applied to the resolution of the dispute, and local laws and regulations governing the enforcement of the foreign arbitration decision.  While the specific procedures vary from jurisdiction to jurisdiction, in general the prevailing party in arbitration will file a request with the court, seeking issuance of an order to enforce the arbitration award. While the non-prevailing party generally cannot challenge the arbitration decision as to the substance of the dispute, they do have the right to oppose the arbitration decision or award on various other grounds, such as an assertion that the arbitration decision or the underlying arbitration agreement is unlawful or contrary to public policy, that the party did not receive proper notice of arbitration, or that the award was given in relation to disputes or matters falling outside the scope of the arbitration agreement. 

In the context of foreign arbitration decisions specifically, most countries, 149 to be exact, are signatories to the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (the NY Convention). In Southeast Asia, member states of the NY Convention include Vietnam, Cambodia, Thailand, Laos, and Myanmar, among others. Generally, states which are signatories to the NY Convention are obligated to provide mechanisms for enforcement of foreign arbitration decisions. The NY Convention has resulted in a far-reaching umbrella of regulations allowing for such enforcement. In member jurisdictions, enforcing a foreign arbitration decision is much more feasible than enforcing a foreign court judgment, which requires a specific bilateral treaty between the jurisdiction where the court judgment was issued and the jurisdiction where enforcement is sought.  Adopting the NY Convention has proven to be much more attractive than negotiating bilateral treaties for enforcement of court judgments. While much work remains to be done to streamline the enforcement process, as members of the NY Convention are currently at various stages of actual implementation of its provisions, the general acceptance and relative uniformity of the provisions of the NY Convention offer reason for optimism.

A look at commercial arbitration locally

While international institutions like the SIAC and HKIAC have established themselves as pillars of efficient and professional commercial dispute resolutions, there is reason for optimism on a more local level as well.  Here, we discuss two examples; Vietnam and Cambodia.

In Vietnam, the VIAC was founded on April 28, 1993, pursuant to Decision No. 204/TTg of the Prime Minister. With about 150 arbitrators, consisting of both local and foreign scholars having extensive knowledge in a wide range of professional expertise, the VIAC has become somewhat of a competitor to other arbitration centers in the region such as the SIAC and the HKIAC, at least for commercial disputes arising in Vietnam.  To date, there have been about 1,000 cases heard and resolved by the VIAC.[6]

Starting humbly, in its first year, the VIAC received six cases.  This figure increased quickly to reach 25 cases in 1996, 32 cases in 2004, 58 cases in 2008, and 83 cases in 2011.[7] Together with the growth in the number of cases, the VIAC has gradually developed the quantity of its arbitrators and opened its arms to foreign arbitrators.  In 2010, the VIAC had 123 arbitrators, of which six were foreigners while 117 were distinguished legal scholars of Vietnam.[8] Currently, the number of arbitrators of the VIAC is about 150 having extensive experience and expertise in nearly all areas of commercial disputes, including foreign trade, maritime, banking and finance, construction, manufacturing, intellectual property and more.

In its continuing endeavor to improve its framework for commercial arbitration activities, Vietnam has upgraded the Commercial Arbitration Ordinance of 2003 to harmonize it with the Law on Commercial Arbitration of 2010. Having more than two decades of experience and development, the VIAC offers great promise to act in accordance with international practices, ensuring its operation in an effective manner, and attracting foreign direct investment into Vietnam.

In Cambodia, the NCAC is preparing to launch to what appears to be a healthy mix of optimism and skepticism. The optimists view commercial arbitration as an attractive potential alternative to the courts, which are perceived by many as being inefficient. The NCAC is the product of Cambodia’s Law on Commercial Arbitration, which was enacted in 2006 and the related Sub-Decree on the Organization and Functioning of a National Arbitration Center, passed in 2009 (the Sub-Decree). Initial funding and assistance for the NCAC was provided by the Asian Development Bank and the International Finance Corporation, a member of the World Bank Group. Cambodia also enacted a new Code of Civil Procedures in 2007, which includes key provisions on execution of arbitration decisions, both foreign and local, as well as provisions allowing for courts to issue decisions for interim relief (injunctive relief) in the context of matters subject to arbitration proceedings.

In accordance with the Law on Commercial Arbitration and the Sub-Decree, the Ministry of Commerce established a commission which in turn appointed the initial members of the NCAC. Some of those initial members are currently undergoing training by internationally-renowned arbitration experts, associated with the SIAC. In addition to the initial members, certain entities, such as private sector enterprises, chambers of commerce, business associations, and the like, have been appointed as representatives with the right to vote in the General Assembly of NCAC. In accordance with Article 54 of the Sub-Decree, the role of the Ministry of Commerce is to be phased out, with the NCAC becoming a self-governing institution.

The NCAC has been actively working towards organizing itself as an institution.  It has established working groups which are, at present, developing the internal rules of the NCAC and the arbitration rules, among other things. The NCAC is anticipated to begin accepting disputes by the end of 2014. 

Just as the VIAC has done for Vietnam, the successful operation of a commercial arbitration center in Cambodia will contribute greatly to providing a measure of confidence to foreign investors that, should commercial disputes arise in the context of their investment project, a fair and efficient mechanism will be available to resolve such matters.

The ASEAN region is continuing its rapid economic development, and the continued increased availability of reliable institutions of commercial dispute resolution is key to the long-term continuation and success of that economic development. With well-established international institutions like the SIAC and the HKIAC offering commercial dispute resolution services in the region, coupled with more localized arbitration by institutions like the VIAC and the upcoming NCAC, foreign investors are finding themselves in an increasingly favorable environment for developing projects and engaging in business transactions.-



[1] Senior Adviser, Head of Dispute Resolution, DFDL, email: alex.larkin@dfdl.com

Alex’s experience includes more than 10 years of corporate and commercial law, litigation and arbitration, as well as intellectual property law, labor law, among others.  Alex has acted for clients in relation to civil litigation and arbitration in the United States and arbitration at the Singapore International Arbitration Center.  His experience also includes corporate transactions and advising, mergers and acquisitions and due diligence.  He holds a Bachelor of Science degree in Mechanical Engineering from the University of Washington and a Juris Doctor degree from Seattle University School of Law.

[2] Partner, Leadco Legal Counsel, email: vy.ts@leadcolawyers.com

Vy is a partner with Leadco Legal Counsel, a Hanoi based international law firm. He obtained a Masters Degree majoring in International Law in TLBU Graduate School of Law in Seoul and graduated from Hanoi Law University with a Bachelor of Economics Law. His practice is focused on foreign direct investment, cross-border transactions, corporate matters and commercial litigation.

[3] VCCI/DANIDA/VIAC.

[4] Supra note 1.

[5] Supra note 1.

[6] See more at http://www.viac.org.vn/vi-VN/Home/thong-ke-92.aspx

[7] Supra Note 4.

[8] Supra Note 4.

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