Choice of governing law clauses in contracts with foreign counterparties.

1. The governing law clause decides what the contract is worth in a dispute

The governing law clause usually sits at the end of the contract, drafted quickly and barely negotiated, until a dispute arises. Then three questions come up: is the clause valid, will the chosen law actually be applied, and can a decision based on that law be enforced in Vietnam?

These questions are independent. A perfectly lawful clause may not be applied in practice, and an award correctly based on the chosen law may still be unenforceable. This article looks at the right to choose the governing law, its limits, and what to address when drafting.

2. A precondition: the relationship must contain a foreign element

The parties may choose the governing law only if the contract has a foreign element, which under the Civil Code 2015 means one of three cases:

1. At least one of the participating parties is a foreign individual or a foreign legal entity;
2. All participating parties are Vietnamese citizens or Vietnamese legal entities, but the establishment, modification, performance or termination of that relationship takes place abroad;
3. All participating parties are Vietnamese citizens or Vietnamese legal entities, but the subject matter of that civil relationship is situated abroad.

The second and third cases matter in practice. A contract between two Vietnamese enterprises can have a foreign element, for example the sale of goods stored in a warehouse abroad, or a contract signed and performed entirely abroad. In these cases, the parties may choose the governing law even though both are Vietnamese.

Conversely, if the contract has no foreign element, a choice of foreign law has no effect.

3. The right to choose must be granted by Vietnamese law or a treaty

3.1. The right to choose the governing law is not automatic

In principle, the law governing a civil relationship with a foreign element is determined by the treaties to which Vietnam is a party or by Vietnamese law. The parties may choose only where a treaty or Vietnamese law allows them to.

This differs from many other legal systems. Under Vietnamese law, the right to choose is granted, not assumed. For contracts, two provisions grant it:

• The Civil Code 2015 allows the parties to a contractual relationship to agree on the law applicable to the contract, except in the cases discussed in section 4.1.
• The Law on Commerce 2005 allows the parties to a commercial transaction with a foreign element to agree to apply foreign law or international commercial practices, provided that these are not contrary to the fundamental principles of Vietnamese law.

3.2. The chosen law covers substantive rules, not conflict rules

The law chosen by the parties means its rules on the parties' rights and obligations, not its rules on choosing the applicable law.

In other words, the parties choose the substantive law and exclude that country's conflict of laws rules, so there is no renvoi. This makes deals more predictable: choosing Singapore law means applying Singapore's substantive law, not its conflict rules, which might point to a third country's law.

A related consequence is that the limitation period for a relationship with a foreign element follows the law governing that relationship. Choosing foreign law also means choosing that law's limitation period, which is often overlooked in negotiations.

4. The right to choose is limited in several cases

4.1. Immovable property, labour and consumer contracts follow mandatory rules

Contracts concerning immovable property. Transfers of ownership and other rights in immovable property, leases of immovable property and the use of immovable property as security are governed by the law of the country where the property is located. For property in Vietnam, Vietnamese law applies mandatorily and any contrary agreement has no effect.

Labour and consumer contracts. If the chosen law would reduce the minimum rights of employees or consumers under Vietnamese law, Vietnamese law applies.

Read this carefully: it does not ban the choice of law, but sets a protective floor. The choice remains effective except where it reduces the minimum rights under Vietnamese law. In practice, a foreign law clause in a labour contract with an employee working in Vietnam has limited value.

Changing the governing law. The parties may agree to change the governing law, but the change may not affect a third party's lawful rights that arose before the change, unless the third party agrees.

4.2. Cases in which the foreign law has been chosen but is not applied

A chosen foreign law is still not applied in two cases:

• Applying the foreign law would lead to consequences contrary to the fundamental principles of Vietnamese law. Note the wording: the foreign law is excluded when the consequences of applying it conflict with those principles, not merely because it differs from Vietnamese law. This narrows the grounds for refusal compared with the earlier rules.
• The content of the foreign law cannot be established despite the necessary steps under procedural law.

In both cases, Vietnamese law applies.

The second case is the biggest practical risk and the one parties least expect. If a Vietnamese court hears the dispute and neither party can prove the content of the chosen foreign law, the court applies Vietnamese law. The clause then has no practical effect, although it is perfectly lawful on paper.

So an enterprise that chooses foreign law must be ready to prove it, usually through a legal opinion from a lawyer in that country. Factor this cost in when deciding whether to include the clause.

4.3. Indirect limits through the exclusive jurisdiction of the Vietnamese courts

Under the Civil Procedure Code 2015, some matters fall within the exclusive jurisdiction of Vietnamese courts, including civil cases on rights in immovable property in Vietnam.

As a result, a dispute over rights in immovable property in Vietnam can hardly be resolved effectively by foreign arbitration or a foreign court, because the decision may not be recognised or enforced in Vietnam.

5. Without a choice, the law most closely connected with the contract applies

Where the parties make no choice, the law of the country most closely connected with the contract applies, with specific presumptions:

These presumptions can be rebutted: if another country's law is shown to be more closely connected with the contract, that law applies.

On form, the contract's form is governed by the law applicable to the contract; if the form does not comply with that law but complies with the law of the place of signing or with Vietnamese law, it is still recognised in Vietnam. This supports the stability of transactions.

A useful point for Vietnamese enterprises: if the enterprise is the seller or service provider and the parties make no choice, Vietnamese law applies. In negotiations, leaving out a choice of law clause is sometimes better than accepting the other side's proposed law.

6. The 1980 Vienna Convention applies automatically to many international sales

6.1. The Convention has applied in Vietnam since 1 January 2017

Vietnam deposited its instrument of accession to the UN Convention on Contracts for the International Sale of Goods on 18 December 2015, and the Convention has applied in Vietnam since 1 January 2017.

Vietnam made a reservation on form: the provisions allowing a contract to be made, changed or ended, or an offer, acceptance or other intention to be expressed, other than in writing do not apply where a party has its place of business in Vietnam. Vietnamese enterprises must therefore still make contracts and amendments in writing.

6.2. The Convention applies when both parties are in Contracting States

The Convention applies when the two parties have their places of business in different Contracting States. It applies automatically, whether or not the contract has a governing law clause.

The Convention may also apply where the rules of private international law lead to the law of a Contracting State.

6.3. Choosing Vietnamese law does not exclude the Convention

Stating that this contract is governed by the law of Vietnam does not exclude the Convention, because since 1 January 2017 the Convention has been part of Vietnamese law on international sales of goods.

To exclude it, the parties must say so expressly, because the Convention lets the parties exclude or vary it. Use specific wording, for example: this contract is governed by the law of Vietnam, excluding the United Nations Convention on Contracts for the International Sale of Goods of 1980.

Before excluding the Convention, consider that it is neutral, familiar to international counterparties and backed by extensive case law. Keeping it is often better than excluding it out of habit.

6.4. The contract still needs a national law for matters outside the Convention

The Convention does not govern the validity of the contract or the transfer of ownership; national law determined under the Civil Code still governs these. It also excludes some transactions, such as goods bought for personal use, auctions, securities and negotiable instruments, ships, aircraft and electricity.

So even where the Convention applies, the contract still needs a national governing law to cover matters outside it.

7. Incoterms and UCP 600 bind the parties only when incorporated

Incoterms and UCP 600 are rules issued by the International Chamber of Commerce. They are not treaties and do not apply automatically; they bind the parties only if the contract or letter of credit refers to them.

Their legal basis in Vietnam lies in the Law on Commerce 2005 and the Civil Code 2015 provisions on international practices, provided they do not conflict with the fundamental principles of Vietnamese law.

State the version, for example Incoterms 2020 or UCP 600, because versions differ. A general reference to Incoterms invites argument about which version applies.

As for the Vienna Convention: Incoterms cover delivery, transfer of risk and allocation of costs; the Convention covers contract formation, the parties' obligations and remedies. Where the contract refers to Incoterms, they take priority over the matching provisions of the Convention.

8. The choice of law and dispute resolution clauses must be kept separate

8.1. International arbitration involves four layers of law

These are often merged in drafting, which leaves the clause incomplete. The parties should distinguish:

1. The law governing the substance of the dispute: the law determining the rights and obligations of the parties, chosen by the parties.
2. The law of the arbitral procedure: the law of the seat. If the parties choose arbitration in Singapore, Singapore's arbitration law applies and Singapore courts can set the award aside. If they choose Vietnam, the Law on Commercial Arbitration 2010 applies and Vietnamese courts can set the award aside.
3. The procedural rules of the arbitration institution: the rules of VIAC, SIAC, ICC and other institutions, chosen by the parties.
4. The law of the arbitration agreement itself: the law that decides whether the arbitration clause is valid, which may differ from all three above. This layer is most often missed and causes many jurisdiction disputes.

8.2. Arbitral tribunals have more freedom than courts to determine the applicable law

The law applicable in arbitral proceedings is determined as follows under the Law on Commercial Arbitration 2010:

• Disputes without a foreign element: the arbitral tribunal applies Vietnamese law.
• Disputes with a foreign element: the law chosen by the parties applies; failing agreement, the tribunal applies the law it considers most appropriate.
• If neither Vietnamese law nor the chosen law covers a substantive issue, the tribunal may apply international practice, provided that doing so, or its consequences, does not conflict with the fundamental principles of Vietnamese law.

This differs notably from the courts. Without an agreement, an arbitral tribunal chooses the most appropriate law itself, while a court must follow the presumptions set by the Civil Code. Arbitration is therefore more flexible but less predictable.

Note that if two Vietnamese enterprises arbitrate a dispute with no foreign element in Vietnam, Vietnamese law applies mandatorily and they cannot choose foreign law.

9. Enforceability determines the practical value of the clause

Enforceability decides the practical value of the whole clause.

9.1. Foreign arbitral awards are recognised under the New York Convention

By Presidential Decision No. 453/QD-CTN of 28 July 1995, Vietnam acceded to the New York Convention 1958 on recognising and enforcing foreign arbitral awards, with three reservations:

1. reciprocity applies to awards from countries that are not parties to the Convention;
2. the Convention applies only to disputes arising from commercial relationships;
3. Vietnamese courts must interpret the Convention in line with Vietnam's Constitution and laws.

The Civil Procedure Code 2015 prescribes the cases in which recognition is refused, comprising two groups: the group to be proved by the party against whom enforcement is sought (the capacity of the parties when signing the arbitration agreement, the validity of the arbitration agreement, notice of the appointment of the arbitrators, the scope of jurisdiction, the composition of the tribunal and the arbitral procedure) and the group examined by the court of its own motion (disputes that cannot be resolved by arbitration under Vietnamese law, and recognition being contrary to the fundamental principles of Vietnamese law).

9.2. Foreign court judgments are much harder to recognise

Foreign court judgments are much harder to recognise. They are recognised only under a treaty between Vietnam and the country concerned, or on a reciprocal basis. Vietnam has not joined any multilateral convention on recognising foreign civil judgments, so few countries have a recognition mechanism with Vietnam.

The Civil Procedure Code 2015 lists eight grounds for refusing recognition, including: the judgment is not yet final; the defendant was absent and not properly served; the foreign court lacked jurisdiction; the time limit for enforcement has expired; and recognition would conflict with the fundamental principles of Vietnamese law.

9.3. The choice of forum often matters more than the choice of law

If the party against whom enforcement is sought is a Vietnamese enterprise with assets in Vietnam, a foreign arbitral award is far easier to enforce than a foreign court judgment. In practice, this is why the choice of forum often matters more than the choice of law.

Note also that the Vietnamese courts have been reorganised, which changes which court hears applications for recognition and enforcement. Identify the competent court at the time of filing rather than relying on older material.

10. Points to address when drafting

1. Check that the contract has a foreign element before adding a governing law clause. Without one, a choice of foreign law is invalid.
2. Keep four matters separate in the final clauses: the governing law; the dispute resolution forum; the seat of arbitration, if any; and the procedural rules. Merging them is a common cause of jurisdiction disputes.
3. Decide expressly on the Vienna Convention in international sale contracts: keep it or exclude it, but say so. Do not leave it to default, because choosing Vietnamese law does not exclude the Convention.
4. Name the version of Incoterms and UCP when referring to them.
5. Weigh the cost of proving foreign law if the dispute is likely to be heard in Vietnam. If it cannot be proved, the court applies Vietnamese law and the clause loses its effect.
6. Prefer arbitration to a foreign court where the other party and its assets are in Vietnam, because arbitral awards are far easier to enforce.
7. For contracts on immovable property in Vietnam, accept Vietnamese law and the jurisdiction of Vietnamese courts, which are mandatory.
8. For labour contracts, remember that a foreign law clause cannot go below the minimum rights under Vietnamese law.