Choosing the laws applicable to international arbitration disputes

Applicable Law in Arbitration Proceedings

The determination of applicable law is an important factor in the dispute resolution process outside the court system. It is different from the Courts, in which the laws of a particular country generally prevail; arbitration gives the Parties the flexibility to choose the law that applies to the disputing Parties’ arbitration agreement.

In this article, BLawyers Vietnam briefly presents the issue of choosing the applicable law when settling disputes by international commercial arbitration.

1. Laws selected by the Parties

Decisions on applicable law play an important role in resolving disputes in commercial arbitration. The variety of content of commercial disputes often leads to a varied selection of appropriate sources of legislation.

According to the Law on Commercial Arbitration 2010 (“LCA 2010”), for disputes involving foreign elements, the Arbitration Council (“AC”) applies the law chosen by the Parties. If the Parties do not agree on the applicable law, the AC shall decide to apply the law that the AC sees most appropriate.

However, LCA 2010 also stipulates that if the Parties have chosen the laws of a particular country, the arbitration shall have to comply with the provisions of that law in resolving the dispute. This process can be complicated when the concept of “law” is unclear in content and scope. Parties can choose between international law, national law, or even universally accepted principles of international law. In addition, the LCA 2010 also raises the issue of whether the applicable law includes choice of law rules, and whether it accepts these references. This becomes important when the dispute is resolved in Vietnamese Courts, where the judge may refuse to accept the reference.

According to Vietnamese law on Commerce, Parties to commercial transactions involving foreign elements may agree on the application of foreign laws or international commercial practices if such foreign laws and international commercial practices are not contrary to fundamental principles of Vietnamese law. In addition, Vietnamese civil law prohibits the Parties in civil relations from applying or referring to foreign laws or international practices if the consequences of the application are contrary to the fundamental principles of Vietnamese law.

From the mentioned grounds, despite the provisions of LCA 2010 having opened the possibility for flexibility and freedom of Parties in international commercial dispute relations in deciding the applicable law to settle disputes, the LCA 2010 does not stipulate that the applicable law for settling disputes contrary to the fundamental principles of Vietnamese law will not be applied. If the Parties in a disputed relationship do not select the applicable law for resolution, the AC shall decide to apply the law that they see most appropriate to settle the commercial dispute.

2. Laws determined by the AC

According to the LCA 2010, the AC can decide to apply the law or rules of law as it sees most appropriate, not bound by the choice of law rules of the related countries. However, the LCA 2010 and its implementation guidelines do not specify what the “most appropriate” law is, so the source of the applicable law is not clearly limited. Thus, the decision of the AC to decide on the applicable law for dispute settlement is difficult and unpredictable for the Parties in a dispute relationship.

However, according to Vietnamese civil law on contracts with foreign elements, the law of the country with which such contract is closely associated applies when the Parties do not choose the applicable law. Specifically, the law of the country with which such contract is closely associated includes:

  1. The law of the country where the seller as a natural person resides or the seller as a juridical person is established in terms of sale contracts;
  2. The law of the country where the provider as a natural person resides or the provider as a juridical person is established in terms of service contracts;
  3. The law of the country where the transferee as a natural person resides or the seller as a juridical person is established in terms of contracts of transferring rights to use or intellectual property rights;
  4. The law of the country where employees frequently perform the job in terms of labor contracts. If an employee frequently performs the job in multiple countries or the country in which the employee frequently performs his/her job is unidentifiable, the law of the country with which his/her labor contract is closely associated shall be the law of the country where the employer as a natural person resides or the employer being a juridical person is established; and
  5. The law of the country where consumers reside in terms of consumption contracts.

Based on determining the law of the country with which such contract is closely associated, the Parties in the relationship can easily determine the law applied in case of a dispute. Therefore, in our opinion, the LCA 2010 and the guiding documents should add provisions about the most appropriate law, similar to cases determining the applicable law for foreign element contract dispute resolution under the Civil Code 2015.

The law applicable in arbitration determines the nature of the dispute and guides the arbitrator’s decision. Choosing the laws applicable is an important strategic decision in drafting arbitration clauses, helping to shape the settlement process according to specific needs and mechanisms. The clarification of applicable law ensures that the arbitration dispute resolution process is coherent and efficient.

The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at consult@blawyersvn.com. BLawyers Vietnam would love to hear from you.

Date: 13 June 2024

Writer: Thai Bui

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