VIETNAMESE COURT SET ASIDE A DOMESTIC ARBITRAL AWARD – THE HYDROPOWER CASE
It is well known that foreign arbitral awards are frequently set aside by the Vietnamese courts despite Vietnam’s accession to the New York Convention. For that reason, we advise our clients to arbitrate in Vietnam (e.g., VIAC arbitration) if they wish to enforce the arbitral award in Vietnam. However, even such a domestic arbitral award can be set aside by the Vietnamese court if the award or arbitral procedures do not comply with the fundamental legal principles under Vietnamese law. The Vinh Son – Song Ninh case guides us on what to be observed during the arbitral proceedings in order to avoid potential risks of setting aside.
In 2010, Vinh Son Song Hinh Hydropower Joint Stock Company (“VSSH”) and two Chinese Contractors contractors (PowerChina Huadong Engineering Corporation Limited and China Railway 18th Bureau Group Co., Ltd, collectively “Chinese Contractors”) signed a contract for the construction of energy line items for the Thuong Kon Tum Hydropower Project. This Project had a total approved investment of VND7,408 billion (more than USD 313 million) that drew numerous attentions of foreign investors.
In 2014, the Chinese Contractors unilaterally terminated the contract when they had only completed about 25% of the work volume with the reason that VSSH did not fulfill the payment obligation. In contrast, VSSH argued that the Chinese Contractors seriously violated the contract due to construction delay.
On 23 August 2014, Chinese Contractors commenced an arbitral proceeding against VSSH to the Vietnam International Arbitration Center (“VIAC”) to recover certain damages allegedly incurred by VSSH. In response, VSSH counter-claimed that the Chinese Contractors had breached their obligations under the contract that they did not complete the construction process in line with the schedule specified under the contract.
In the arbitral award issued on 10 April 2019, the VIAC tribunal ordered VSSH to pay and compensate the Chinese Contractors an amount of VND 2,163 billion (more than USD 90 million). VSSH immediately applied to the Hanoi Court to set aside this award on the grounds that the VIAC tribunal had made procedural irregularities in the arbitral procedures.
The Court’s decision to set aside
The Hanoi Court upheld VSSH’s arguments and decided to set aside the arbitral award made by the VIAC tribunal through Decision No. 11/2019/QD-PQTT (“Decision 11”) on 14 November 2019. The reasoning for the Court’s decision to set aside this arbitral award included:
(i) the arbitral tribunal failed to honor the parties’ agreement with respect to the venue of the hearing and decided to hold arbitral hearings in different locations (“First Ground”);
(ii) the arbitral tribunal referred to the International Bar Association rules and guidelines (“IBA Rules and Guidelines”) without fully reviewing the materials and evidence submitted by the respondent (VSSH) (“Second Ground”);
(iii) in determining the damage amount, the arbitral tribunal only relied on the expert’s opinion that was submitted to the tribunal by the Claimants (Chinese Contractors) without any due consideration of the submissions by the Respondent (VSSH) on the damage amount or seeking an independent assessment (“Third Ground”).
Analysis of the grounds in Decision 11
1/ First Ground
In this case, an agreement was reached between the Claimants and the Respondent to select Hanoi as the place of the hearing. However, during the proceedings, in response to the tribunal’s decision to apply for interim relief (ordering the Respondent to pay a security deposit of funds), the Respondent filed a petition to the Hanoi Court against the arbitral tribunal and two of the foreign arbitrators. By this petition, the Respondent sought to hold the tribunal, and the foreign arbitrators in their personal capacity, liable for losses caused by the tribunal’s decision.
There are no provisions that govern arbitrator immunity under Vietnamese law. Concerned over their personal liability, the tribunal exercised its discretion to change the place in which the arbitration council holds arbitral hearings to Osaka and Singapore. The Hanoi Court found that this was sufficient to warrant setting aside the arbitral award, as the change of hearing venue had departed from the parties’ original agreement reached during the arbitration.
In international arbitration, the determination of the “Place of Arbitration” is important because the law of the country in which the arbitration is located will often govern arbitration proceedings. In addition, international arbitration rules distinguish the place of arbitration from the place in which the arbitration council holds arbitral hearings.
In Vietnam, the Law on Commercial Arbitration 2010 (“LCA 2010”) does not have a clear definition of “place of arbitration” and “the venue of the hearing”. Article 3.8 LCA 2010 just provides: “Venue for dispute settlement means a place in which an arbitration council settles disputes which are selected as agreed by the parties or as decided by the arbitration council if the parties have no such agreement. If a venue for dispute settlement is within the Vietnamese territory, the award must be regarded as having been pronounced in Vietnam regardless of the place in which the arbitration council holds a meeting to issue such an award.”
It is not clear which of the three places: (1) the venue for dispute settlement; (2) the place where the arbitral award was issued; and (3) the venue of the hearing would be considered a place of arbitration under Vietnamese law. It is more reasonable to consider the place of the award, not the place in which the arbitration council holds arbitral hearings as the place of arbitration. Besides, it is not in line with the international practice that an arbitral award is set aside simply because of the venue of the hearing (not the venue for dispute settlement).
However, the Court’s decision to set aside this arbitral award has shown the Court’s point of view that the venue of the hearing is the venue for dispute settlement. The decision to set aside the award merely because the arbitral tribunal changed the place of hearing would become an unwanted precedent that the future award debtors may rely on to challenge the award whenever a procedural element does not adhere to the agreement of the parties, regardless of whether that element has any bearing on the substantive determination by the tribunal.
2/ Second Ground
In Decision 11, the Hanoi People’s Court determined that the arbitral tribunal violated Article 56.2 LCA 2010 when not considering the evidence and witness statement submitted by VSSH. Nevertheless, Article 56.2 provides “In case the defendant who has properly been summoned to attend a dispute settlement meeting but is absent without a plausible reason or leaves the meeting without the arbitration councils approval, the arbitration council shall still proceed with the dispute settlement based on available documents and evidence.”
Article 56.2 LCA 2010 mirrors Article 25.c of the Model Law, which aims to empower the arbitral tribunal to carry out its task when one of the parties does not participate, assuring the effectiveness of the proceedings. This provision on the procedure of the proceedings only directs the arbitral tribunal to adjudicate the dispute by assessing the available evidence rather than directing them to accept all of the evidence regardless of whether it has any relevance to the dispute.
Article 38.5 of the VIAC Arbitration Rules accords each arbitral tribunal broad discretion in unregulated matters: “In all matters not expressly provided for in these Rules, the Centre and the Arbitral Tribunal shall act in the spirit of these Rules and make all efforts for the dispute to be resolved in a fair and efficient manner.” Accordingly, unless otherwise agreed by the parties, the arbitral tribunal has the discretion on how to make evidentiary rulings (eg: by referring to the IBA Rules on the Taking of Evidence in International Arbitration or another set of rules).
In this case, as is usual in international arbitration practice, the arbitral tribunal took the IBA Rules as a reference when considering the validity, admissibility, relevance, materiality, and weight of the witness statement and other evidence. For instance, under Article 4.7 of the IBA Rules, if a witness fails to appear for testimony at an evidentiary hearing, the arbitral tribunal will disregard any witness statement by that witness unless, in exceptional circumstances, the tribunal decides otherwise. As recorded in Decision 11, VSSH’s witness did not attend the hearing and, in line with the IBA Rules, the arbitral tribunal had the discretion to not consider its witness statement. Yet, to ensure the utmost fairness for VSSH, the arbitral tribunal still decided to consider VSSH’s witness statement to some extent. However, because the VSSH and its witness failed to attend the evidentiary hearing, it waived its right to explain the importance and relevance of the witness statement. As a result, there is no obligation for the tribunal to rely on VSSH’s witness statement when considering the case.
Disregarding the above, the Court determined that the arbitral tribunal failed to consider the evidence submitted by VSSH and thus violated Article 56.2 LCA 2010.
3/ Third Ground
On the third ground, the Hanoi Court held that it was improper for the tribunal to rely on evidence from a party-appointed expert without having engaged its expert.
When there is a disagreement on the quantum of damages, as with other substantive matters, it is the right and obligation of the parties to submit arguments and supporting evidence, such as an expert opinion or inspection result or to request the arbitral tribunal to order an inspection. In that case, under Article 46 of the Law on Commercial Arbitration, the arbitral tribunal will have full discretion regarding whether to order an inspection. In other words, ordering an inspection is a discretion rather than an obligation of the arbitral tribunal. Arbitration is in general a private adjudication system, and it should be honored unless there is a fundamental departing from the law.
Especially, Decision 11 conflicts with the Decision No. 10/2019/QĐ-PQTT of the Hanoi People’s Court issued on November 12, 2019. In that case, during the arbitration, the award debtor also failed to submit evidence or request the arbitral tribunal to order appraisal under Article 46.3 LCA 2010. In that decision, it was also clearly stated that the consideration of the decision on the request for the valuation of assets was a matter of the content of the dispute within the jurisdiction of the arbitration council. Therefore, according to Article 71 LCA 2010, when the Court considers the application for annulment of the Arbitral Award, shall not review the content of the dispute that the Arbitral Council has settled.
In legal proceedings, if an arbitral award is nullified, the parties have the option to opt for arbitration again to resolve their dispute or resort to litigation in a competent court. However, if an amicable settlement cannot be reached, the entire dispute resolution process may need to be restarted. Therefore, it is crucial for courts to carefully scrutinize such cases and adopt a more accommodating stance towards arbitration. Otherwise, award debtors may exploit the setting aside proceedings to avoid fulfilling their obligations under the arbitral awards.
 UNCITRAL 2012 Digest of Case Law on the Model Law on International Commercial Arbitration