If you read last week’s blog post, here, about bankruptcy in Vietnam you might have picked up on the possibility of further discussions of the issue in relation to the court’s actual behavior in the bankruptcy process. However, that is not going to happen–at least not this week–due to technical difficulties. (My Ubuntu OS won’t extract a .rar file sent by my research assistant.) Therefore, I am going to briefly discuss something that is very important to any transaction conducted in Vietnam, the freedom of contract.
WHAT DOES FREEDOM OF CONTRACT MEAN IN VIETNAM?
According to Wikipedia, freedom of contract is the process in which individuals and groups form contracts without government regulations. This is apposed to contract matters that are regulated by government such as minimum wage regulations, discrimination prohibitions, and–in Vietnam–restrictions regarding land transfer. In most legal systems there is a degree of freedom of contract that allows parties to a civil transaction–or ultimately a contract–to decide the terms and conditions of that contract free of government interference.
Vietnam’s constitution sets out this principle in Article 14:
citizens’ rights shall only be restricted when prescribed by law in imperative circumstances for the reasons of national defence, national security, social order and security, social morality and community well-being.
Otherwise, though unstated, citizens are free to exercise their rights–including the right to enter into civil transactions–in any way they wish. Thus, so long as the term of a contract does not violate the restrictions proscribed by the constitution through subsequently published laws and legislation the term will be allowed.
This concept is further explained in the introductory articles of the Civil Code–the law which governs all civil transactions in Vietnam.
Each commitment or agreement that does not violate regulations of law and is not contrary to social ethics shall be bound by contracting parties and must be respected by other entities.
Here, though, the restriction of law is added explicitly, thus, civil transactions (including contracts) are restricted only by the law and social ethics–a term that can be considered to include the elements listed in the constitution. Outside the bounds of the law and social ethics, then, citizens are allowed to exercise their freedom of contract to affect their civil rights however they choose.
The ultimate expression of this freedom is in the same article of the Civil Code:
Each person establishes, exercises/fulfills and terminates his/her civil rights and obligations on the basis of freely and voluntarily entering into commitments and/or agreements.
And this brings us to the formulation of principle that I have heard multiple times throughout my career as a lawyer in SE Asia. Unless the law says otherwise, the people may do whatever they like.
WHY IS FREEDOM OF CONTRACT IMPORTANT IN VIETNAM?
Freedom of contract is vital to parties seeking to enter into civil transactions (contracts) in Vietnam. Whether that party is a natural or legal person, a citizen or a foreign person. Freedom of contract allows a party to a contract to decide, unless the law otherwise requires, what they want to include in a contract and how they expect and perform their obligations in that contract. More importantly, freedom of contract prevents the courts and government agencies from interfering in the performance of a contract unless they have been given explicit power to do so in a properly approved and promulgated legal regulation.
The law of Vietnam contains many restrictions. That’s why you need a lawyer familiar with local law to help prepare contracts governed by Vietnamese law. Otherwise, a contract may include conditions that are not allowed by law, or are in violation of stated restrictions. In such cases, the freedom of contract does not apply–as the specific issue was legislated–and the courts have every right to interfere. To avoid the interference of the courts and to increase the likelihood of a positive and complete conclusion to a civil transaction, it is important to know what contractual matters are regulated and what matters fall under the freedom of contract.
For example, in drafting the constitutional documents of an enterprise the law requires certain aspects of the governance of such company be set forth. It is necessary for the charter of the company to include those aspects at a minimum in order to appease the requirements of law. However, beyond those regulated elements, the founders of a company may act within their freedom of contract to include additional elements in that charter.
Drilling down, many components of a company charter are required, but each individual element is allowed to be developed according to the freedom of contract of the parties. Only the inclusion of that component is required. Take, for instance, the idea of classes of shares in a joint stock company. The law requires that the charter of a company detail the types of classes of shares to be issued by the company and then sets out four classes of shares defined by law. The company, however, is not required to include all four classes and may define additional classes if they so choose. It is only required that they list their final decision in the confines of the charter which will be submitted to the regulatory authorities prior to issuance of the enterprise registration certificate.
Freedom of contract, then, allows the parties to a civil transaction great latitude when negotiating the terms and conditions of their transaction. Without this freedom, a contract would essentially be determined by the government through legislation and the parties would lose their ability to self-determine their contractual behaviors.
FREEDOM OF CONTRACT AND THIRD PARTIES IN VIETNAM
I’ve already mentioned the courts and the freedom of contract, but what about third parties?
To quote the Civil Code again:
Each commitment or agreement that does not violate regulations of law and is not contrary to social ethics shall be bound by contracting parties and must be respected by other entities
Note the bolded and italicized phrase “must be respected by other entities.” This is the key. For not only is the government bound by the freedom of contract between entities with civil rights, but other entities are legally bound to abide by such freedom.
This means I can enter into a contract with Acme Vietnam, a builder of widgets, for the delivery of three containers of their product. Because the contract does not involve land, or other restricted matters, the parties use their freedom of contract to decide that the contract will be governed not by Vietnamese law but by the relatively recently (2015) adopted UN Convention on Contracts for the International Sale of Goods, or CISG. CISG is an internationally recognized contract law that governs the sale and purchase of goods across country borders. What’s important, here, is that in any relationship based on our contract, the parties must use CISG, not Vietnamese law. Thus, when a dispute arises and the case is brought to arbitration per the dispute resolution clauses, the arbitration tribunal will apply CISG, not Vietnamese law because the parties chose CISG to govern the contract and the application of CISG was not prohibited by Vietnamese law.
Third parties, the courts and the government, and the contracting parties themselves are all bound by the decisions of the contracting parties as made under their freedom of contract. This broad ranging authority to decide for themselves what should be included in their own contract gives to parties the ability to dictate their own, and as agreed upon, their counterparty’s behaviors. Power, therefore, lies in the hands of the contractor, not in the government.
As always, if you have questions about what elements of contracts are controlled by law and are outside the freedom of contract in Vietnam, please contact your lawyer on staff or get in touch through our website at www.indochinecounsel.com.