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Monday, September 26, 2022

The true story behind the veil of business cooperation contract

Updated: 09:44’ - 21/02/2012

Tran Si Vy[1] & Cao Qing[2]

Business Cooperation Contract, also known as “BCC”, is considered one of the direct investment forms that have been first introduced in the Law on Foreign Investment of Vietnam in 1988 and respectively regulated in numerous amendments to this law until the Law on Investment was enacted in 2005. According to the Law on Investment, “BCC means the investment form signed between investors in order to co-operate in business and to share profits or products without creating a legal entity.”[3] Article 23 of the Law on Investment further stipulates that “investors shall be permitted to sign a BCC in order to co-operate in production and to share profits or to share products and other forms of business co-operation. The contract shall set out the co-operating parties; the contents of the co-operation; the duration of business; the rights, obligations and responsibilities of each party; the co-operative relationship between the parties and the management organization as agreed by the parties.”

In practice, a number of BCC projects have been established and developed for years in Vietnam particularly in oil & gas industry, advertising, electronic games or logistics business.[4] Among all investment forms permitted by the law, BCC is perceived as less favorable to foreign investors. One of the reasons that may explain why a BCC is not attractive to foreign investors is that BCC simply does not create a legal entity nor a joint company so that the parties involved may take advantage of having the status of a joint company to fully and freely conduct their business operations.

Apart from being a “restricted investment form”, implementation of a BCC project creates significant risks if no legal consultation and systematic planning have been obtained.

Particular characteristics of BCC

In most cases, foreign parties to BCC are those who are considered to be technical, well funded and experts in their business areas. Whereas Vietnamese parties have comparative advantages in terms of land availability, natural resources, manpower or simply “licenses to do business.” In the telecommunications arena, for example, foreign investors mostly are telecoms companies equipped with rich experiences and perennial seniority. They also possess a steady financial capacity that meets all complex investment requirements in respect of technique and they can surely provide modernized equipment and facilities.

In contrast, Vietnamese parties are those who are capable of obtaining government approval for telecoms business and can provide human capital to carry out the BCC projects in their territory. In many cases, Vietnamese parties merely take charge of providing “logistics work” or “necessary support” (such as arrangement of a working office) for the BCC to run smoothly while they yield the right to lead or manage the project to foreign partners, not to mention a special circumstance under which Vietnamese parties just act as lessors who offer operating licenses “for lease” to foreign investors in order to participate in various of restricted investment areas in Vietnam.

In addition to certain rights and obligations, profit sharing and risk allocation committed, one of particular characteristics of a BCC is that the parties involved, especially foreign parties, always wish to convert the BCC into a Joint Venture Company (JVC) at an appropriate time in the future. This is understandable because JVC is a legal entity which can fully operate and manage all the business activities with less restriction. It is also more complete and perfect than a BCC which is merely formulated on the basis of a contract. The agreement to convert a BCC into a JVC has popularly appeared in many circumstances and it is one of the important conditions for foreign parties to consider investing in and cooperating with local partners for their projects in Vietnam.

Another particular characteristic is that a BCC normally exists for 10 years or more. The terms of a BCC are recorded in the certificate of investment granted by the authorities to the BCC parties and would be renewed after the original term expires. Investment made under a BCC is big enough to require a great amount of capital, huge experiences and special technical ability of investors. All of those factors give the BCC a good reason for lasting more than 10 years as investors need a long time to justify their investment costs or to recoup investment capital before getting gains.

Since a BCC is physically carried out in Vietnam and the parties involved agree to execute a project on a contractually mutual basis, the applicable law agreed by the parties to a BCC is normally Vietnamese law. Article 5 of the Law on Investment provides for principles of application of domestic laws as follows: “investment activities of investors within the territory of Vietnam must comply with the provisions of this Law and other relevant laws.” Even though the current Civil Code, in its section regarding civil relations involving foreign elements, does allow the parties to pick foreign laws to govern their contractual relationship in Vietnam, most of investors do not “dare” to choose foreign laws to govern the BCC due to the consideration of many unexpected disadvantages. Granted, for example, the parties involved choose foreign legislation as the applicable law to the BCC, they must guarantee that “the application of foreign law shall not contradict fundamental principles of Vietnamese law.[5] Further, both parties to a BCC or at least one of them should be able to thoroughly understand the foreign jurisdiction so as to execute their contract in the same way. Once disputes arise, the parties have no choice but hire foreign lawyers for help and support, which eventually creates unnecessary troubles and financial burdens to the parties.

Although the Law on Investment and other relevant legislations provide that the parties to a BCC are entitled to choose a dispute resolution body for their disputes among Vietnamese courts, Vietnamese arbitration bodies, foreign arbitration bodies, international arbitration bodies or an arbitration tribunal established in accordance with the agreements of the disputing parties.[6] However, there has been a tendency of employing foreign arbitration by the BCC parties for their disputes once the initial negotiation and discussion for the settlement failed or produced an unexpected result. In practice, one of the dispute resolution bodies that has been preferred by the parties is the Singapore International Arbitration Centre (SIAC). For years, SIAC has been the popular destination of the disputes for both the Vietnamese party and the foreign investor. Compared to other bodies, SIAC is famous for its features such as transparency, neutrality, reputation and independence.

Potential risks in BCC

Many investors mistakenly view BCC as a great business model because it not only provides simplicity and neatness, but also offers much more convenient structure than a JVC or a wholly foreign-owned company does. These two business vehicles are complicated and cumbersome by nature in terms of the management. In practice, however, it is another story. A BCC implicitly contains a great deal of risks. If investors do not carefully anticipate the matters which may potentially arise in the course of implementing a BCC, it is for sure that they would have to taste some bitter flour eventually.

The first risk could be easily seen as both parties to a BCC agree to use “legal entity” of only one party to carry out the joint business of the project. In common sense, doing BCC in such a way is generally named as “borrowing the legal entity.” Put in another way, the BCC project is usually run by one party or in one party’s name. In 2003, Thien Ma Company, a firm established by an overseas Vietnamese, signed a BCC with a local partner, Phu Tho Horse Racing Club, an administrative body with revenues under the Ho Chi Minh City Department of Sports and Tourism.[7] According to the agreements specified in the BCC, Thien Ma Company provided funds for the project while Phu Tho Horse Racing Club just contributed the horse racecourse. Since BCC does not create a legal entity, the parties must use the seal of Phu Tho Horse Racing Club as well as its legal entity for any business correspondences and operations. This actually restricted Thien Ma Company from engaging in marketing activities, approaching target clients and broadcasting the project’s images. The “borrowing legal entity” also led to many other troubles for Thien Ma Company, especially those related to its external affairs, simply because the company lost its active rights in making business operations, not to mention its financial contributions to the project. Ironically, being a paymaster for every investment, Thien Ma company remained as a silent investor and depended much on… the seal of its local partner for every business activities under the BCC. It was acceptable when all the parties had the equal voice. However, in the case of a dispute, let’s imagine what would happen if one party hides the seal and prevents the other from using the seal for the joint business of the BCC…

Additionally, the “legal entity borrowing” also makes the seal-holding party suffer a constant anxiety because their obligations are bound by each time of stamping. As the matter of fact, the BCC is made by both parties. However, in reality, there is only one who actually stands out for transactions; it thus by chance creates risks for the one who directly signs a contract on behalf of the BCC. Suppose a party to a BCC deceived or was in bad-faith and tried to induce the other party to use the latter’s legal entity status for wrong acts to seek mercenary proceeds, it must be hard to find out who is to be compensated or to be blamed.

One of the most significant and straightforward risks is the financial matters of the BCC. Once again, a BCC is not a legal entity, thus, all accounting work including receipts and expenses or calculation of business outcomes should be executed in accordance with the agreements reached by the parties. Circular No. 55/2002/TT-BTC issued on June 26, 2002, by the Ministry of Finance guiding the accounting regimes of Vietnamese enterprises, which is applicable to companies and organizations with foreign invested capital in Vietnam, allows the parties to a BCC to negotiate for one of them (either foreign or Vietnamese party) to take charge of the whole accounting work of the BCC.

Theoretically, in the end of a fiscal year, the party in charge of accounting work must draw the balance sheet for the implementation of the BCC with regard to revenues, expenses and business outcomes in order to determine the profits or loss of the project. It is problematic if the party responsible for accounting work intentionally suppresses the facts and information or controls the BCC account while providing no cooperation with the other party for disclosure of internal business information. In such a case, it is likely that BCC’s joint assets contributed by the parties, especially its investment capital, would be misused or even worse, misappropriated. Apparently, in order to avoid this situation, some investors, of course, request an auditing procedure whereby it enables them to scan all financial aspects of the BCC for a transparent financial situation. However, if the party in charge of accounting work is a highly able expert in the industry, it is not so hard for them to overtake other parties including its partner to a BCC and its hired auditor.

It is worth to note another technical risk, even minor, but possibly may leave some serious consequences. That is the case where the parties to a BCC refer their disputes to a foreign arbitration body such as SIAC for resolution. Solving a legal problem at a foreign arbitration body, when one first hears, may be regarded to be fair and would enable the parties to reach objectivity or just to avoid unexpected troubles such as “wheeler-dealer” negotiations, “behind-the-scenes problems”, and “subterraneous agreements”. However, choosing a foreign arbitration body to solve the problems may still trigger some risky issues.

First of all, by choosing a foreign arbitration body for the settlement of a dispute, the parties shall have to go in crowds to the foreign country where the proceedings take place. Litigation expenses for resolving the disputes at a foreign arbitration would be relatively high. All of these factors make the parties face a corollary of emptying their pockets for arbitration fees, accommodation and out-of-pocket expenses for litigation work. Second, as the case shall be heard at a foreign arbitration center which is based outside Vietnam and all proceedings must follow the internal rules of such centre, the parties to a BCC thus shall have no choice but hire a foreign lawyer to deal with the case on their behalf. In normal practice, the time schedule for solving a dispute (including but not limited to that related to a BCC) at SIAC, for example, would range from 12 to 18 months depending upon the nature or particulars of each dispute. With such a lengthy arbitration schedule, the parties to a dispute must pick their own pockets to pay for lawyer fees, per diem costs and other arbitration expenses. Having those troubles plus high costs and expenses for litigation work, it is not surprised if a claimant by itself regrets sometimes because of its decision to opt to pursue the case before a foreign arbitration body.   

Yet, an arbitral award, after being granted by a foreign arbitration body, must undergo a hard process of “recognition and enforcement in Vietnam.” Risk appears again as no one can guarantee the process of recognition and enforcement of a foreign arbitral award could go smoothly without any challenges triggered by the courts of Vietnam. Obviously, it makes no sense if a party who wins the case in arbitration but eventually fails to have his award recognized and enforced in Vietnam for execution. In this scenario, all of his time consumption, efforts and expenses could go with the wind.

As the foregoing, one can readily see that settlement of a dispute is naturally difficult, much more if it is solved in a foreign territory by a foreign arbitration. And until a judgment is made and further enforced in Vietnam, the parties to the dispute must undergo many hurdles while risk gets close to them at all times.

A bitter separation

Once the parties fall in the situation of “both the rice and the soup don’t taste good,” the separation of the parties to a BCC, needless to say, is inevitable. Their separation afterwards, unfortunately, makes things even worse and debatable. The Law on Investment, as a matter of fact, lacks any provisions regarding the legal order and procedures for liquidation of a BCC. Rather, it provides some vague provisions in connection with liquidation of an investment project. This triggers a significant risk for the parties since it is not easy to determine which properties belong to investors and which to the joint ownership. Similarly, it is difficult to draw a dividing line to clarify the financial obligations of each party and those of both parties before wrapping up the BCC given the situation where accounting work of the BCC is swayed by one of them.

Let’s examine an example: Company A (a foreign corporate investor) signed a BCC with Company B (a local company based in Vietnam) to engage in telecoms services business (mostly for international calls generated in the USA and terminated in Vietnam). As agreed by both parties in the BCC, Company A shall have the obligations of seeking customers in the USA and collecting the fees of the calls; Company B shall have the obligations of connecting the calls from the USA to the local networks owned by certain Vietnamese service providers such as Viettel and VNPT so that the calls can get through to Vietnamese end users. Apart from certain provisions as prescribed in the BCC, Company A agreed to advance Company B a certain amount on a monthly basis for which Company B shall then have the budget to pay the Vietnamese service providers for interconnection charges. The parties agreed to share the profits after deduction of all taxes and expenses incurred in both Vietnam and the USA. Everything seemed to be satisfactory for all until Company A suddenly ceased the payment of advance on the ground that Company B misused such advance for its own business. After several months from the date of ceasing payment, the unpaid advance owed by Company A to Company B was increased to a significant amount much larger than the BCC fund, a fund established by revenues of the project. A dispute arose thereafter and the parties came to an agreement to terminate and further liquidate the BCC. Company A proposed to use the amount left in the BCC fund to set off all financial obligations of the parties especially those related to payment for interconnection charges on the part of Company B. In doing so, the BCC would be liquidated and the parties would be released from any financial obligations whatsoever.

It is obvious that, Company A sought to confuse the joint properties of the BCC with the properties belonging to each party as well as the common obligations of the BCC with the individual obligations of either party in an attempt to shirk its financial burdens to pay certain advance amounts as it had committed to Company B (so that Company B could settle the debts with the Vietnamese services providers for interconnection charges). It became clear that the BCC funds were incurred from revenues of the project and thus should be distributed to the parties after deducting all taxes and operating expenses. Definitely, it should not be used to discharge the financial obligations of the parties which are separate from joint business in the BCC.

In this case, we may see that Company A and Company B is different business organizations with independent legal status and bearing different and separate financial obligations. Despite the BCC is the joint business of the parties, the legal responsibilities and assets of Company A, to some extent, must be distinguished from those of Company B for any matters other than what is defined otherwise in the BCC. The agreement made by Company A to Company B for the advance payment to the interconnection charges, therefore, can be perceived as individual commitment that binds Company A to pay such advance to Company B. In other words, Company A is not allowed to use the BCC fund which is joint properties of the parties to the contract.

It is worth to say that the Law on Investment and Decree 108/2006/ND-CP guiding the implementation of the Law on Investment (Decree 108) provides no legal order or procedures to terminate and liquidate a BCC. In practice, BBC is a foreign direct investment form and as such provisions regarding termination and liquidation of an investment project shall be seemingly applied to a BCC. According to Article 69.2 (a) of Decree 108, “in the case of liquidation of an investment project not associated with dissolution of the economic organization, liquidation shall be carried out in accordance with the law on liquidation of assets and liquidation of contracts.” Unfortunately, no one can find where “the law on liquidation of assets and liquidation of contracts” should be, nor do the Law on Investment and Decree 108 touch upon the order and procedures for payment to debts and financial obligations of the parties to a BCC in the case of a termination or liquidation. In this regard, it would be a never ending story to determine and to clarify each party’s legal obligations and finances before the liquidation.

Sign or not sign a BCC?

A BCC explores itself many problems and sometimes serves as a restricted investment form preventing foreign investors from penetrating and occupying the local market. This explains why the number of wholly foreign-owned companies and of JVCs is dominant over the number of BCCs in Vietnam. According to the statistics provided by the Foreign Investment Agency of the Ministry of Planning and Investment, from January 1 to the end of November 2011, there had been a total of 753 foreign investment projects established in the form of wholly foreign-owned company and 163 projects in the form of JVC while none in the form of BCC.[8] Up to now, Vietnam has had about 10,448 wholly foreign-owned investment projects, 2,620 JVCs vis-à-vis 219 BCCs projects in total.[9]

Vietnam joined the WTO five years ago and gradually opened its doors to foreign direct investment. Now, foreign investors have much more better choices for an investment project other than a BCC. In sum, it is advisable that foreign investors who consider utilizing a BCC for their investment activities should review every aspect of the contract carefully, especially the terms and the conditions in respect of legal structure, control of joint assets, operation management and the obligations.-

[1] Partner; (Leadco Legal Counsel, Hanoi, Vietnam); LLM (International Law, TLBU Graduate School of Law in Seoul, Korea); LLB (Economic Law, Hanoi Law University, Vietnam).

[2] PhD Candidate (School of Law, City University of Hong Kong); LLM (International Law, TLBU Graduate School of Law in Seoul, Korea); LLB (Law School of Nanjing University, China).

[3] Section 16, Article 3 of the 2005 Law on Investment.

[4] According to commitments of Vietnam to the WTO, foreign investors are only permitted to invest in the form of BCC in some industries. Five years after joining the WTO, almost all restrictions with regard to the form of investment applicable to foreign investors have been removed.

[5] Vietnamese law allows the parties to a contract to apply foreign law or international customs in certain circumstances provided that such application does not contradict fundamental principles of Vietnamese law. More specifically, Article 759 of the Civil Code provides, among the other things, that “a foreign law may also apply where the parties so agree in a contract provided that such agreement does not conflict with this Code [the current Civil Code] or any other legal instruments of the Socialist Republic of Vietnam.”

[6] See Article 12.3 of the 2005 Law on Investment.

[9] Supra note 7.


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