Not too long ago I was looking at some labor law issues and tangentially saw a reference to a court case in Vietnam that addressed the issue of non-compete agreements. This intrigued me because the last time I looked into the issue there had been no real developments in the area and the consensus amongst lawyers in Vietnam was that non-competes were a “nice to have” clause in contracts with employees but that there was no provision for them in law.
A non-compete clause is an employer preferred clause in an agreement with an employee—usually highly skilled or executive level—that prohibits the employee from working for a competitor of the employer after finishing her term of employment. In Common Law countries this concept has been chiseled and limited so that there must be reasonable temporal and geographical limitations set on any non-compete agreement for it to be sustained by a court.
Vietnam has done little to address this issue despite the fact that most international investors come into the country and include it in their labor contracts. The National Assembly has yet to provide for them in the labor law or civil code and the Government has yet to issue any guidance to its ministries in how to enforce or obviate them. Nor have the courts, until recently, provided any real input on the issue. It is as if Vietnam doesn’t want to face the inevitable fact that a common clause in international employment contracts might just be unsupportable within its legal regime.
In fact, there are several clauses in the labor law that mitigate against non-compete agreements.
First, the labor code itself only governed the “labor relationship” and within the law, it was allowed that employers could protect business or technology secrets. It was assumed because it named those issues that the fact of its silence on non-compete agreements was deliberate and, therefore, non-compete was not included in the labor law.
Second, the labor law does positively ensure the rights of workers to freely choose their jobs and workplaces. A non-compete clause was seen by most Vietnamese lawyers as a restriction on this freedom and thus in violation of the labor law. This was coupled with the fact that the labor relationship defined in the labor law ended at the termination of the labor contract. As a non-compete clause is intended to survive beyond such termination, it is unclear whether its inclusion would be deemed to survive by a court.
Questions gathered. Because the labor law allows for more than one employment contract at a time, would a non-compete be permitted during the term of the employment? What if the non-compete was included in a separate contract that wasn’t part of the labor contract? Were there certain limitations that might be applied to make the non-compete more palatable to the courts and thus enforceable? What about the freedom of contract espoused in the civil code? Are there Constitutional issues?
None of these had been addressed until nearly two years ago when, on 12 June 2018, the Ho Chi Minh City People’s Court took up case number 55/2018/QĐ-PQTT, a petition by Ms. Do Thi Mai T. an employee of Company X for the court to cancel an arbitration award that upheld a non-compete clause between her and Company X included in an NDA she signed separately from her labor contract.
The language of the non-compete clause was included in the judgment of the court and reads as follows:
In the process of the employee being recruited or working with Company X and in the time of twelve months after termination of recruitment or cessation of employment with Company X, regardless of the cause of the termination of recruitment or cessation of employment, the employee agrees not to, directly or indirectly and in the totality of the territory, conduct work similar to or work with similar characteristics for any business in competition with Lazada.vn (…), that now or in the future will compete with the business of Lazada.vn, Recess and/or the related parties and principals of Company X.
In addition, the judgment of the People’s Court spells out the dates of the agreements, including the labor contract and the separate NDA. Unfortunately, the facts of the violation of the non-compete clause are not included, simply that, according to Company X, she violated it.
If this were a court in a Common Law jurisdiction, they would have the opportunity to examine the issue on multiple levels and to put forth some jurisprudence, but, as I examined a little bit here the job of the courts in Vietnam is not to interpret the law. And though I’m not sure what they are in fact supposed to do—we’re still researching this issue—they seem to apply the law and act simply as a means for enforcement rather than for interpretation. Whatever their ultimate responsibility (a case for another blog article) the People’s Court in this instance did not examine any of the potentialities but instead chose to ignore the labor law completely.
In essence, the court chose to treat the NDA as a contract not associated with the Labor contract and rather than examining the legality of a non-compete clause in the labor law context chose to apply the civil code to what it deemed to be a civil contract. It did not address timelines, freedom of choosing a workplace, or the limitations on the application of the labor contract. It simply cited the freedom of contract clause of the civil code and, finding that the contract between Ms. T and Company X was entered into without violating any of the laws regarding contract, the non-compete clause was enforceable.
At first blush, I must say I was disappointed in this judgment. When I learned that the court had addressed the issue of non-compete clauses I was excited. I thought there would be some jurisprudential reasoning to understand how they related to the labor law. But that’s my Common Law training coming into the fore. Vietnam’s courts don’t do that, with the slight exception of the Supreme People’s Court, and they can’t be expected to commit complicated reasoning to a simple trial where less than US$10,000 was at issue.
Upon further examination, however, I am impressed by what the court was able to do in the simplicity of its application of the law. It suggested that while non-compete clauses may or may not be effective in a labor contract, it would accept them as enforceable in a civil contract between employer and employee. This means that, so long as the employer does not rely on the labor contract to define its rights against the employee, non-compete agreements can be enforced—at least in Ho Chi Minh City.
This case also shows the importance that the court gives to the freedom of contract principles in the civil code. So long as the civil code applies—and the contract clause in question is not found to be governed by the commercial code or another branch law—the Ho Chi Minh City court is willing to recognize contractual clauses providing for concepts that aren’t contemplated by legislation from the National Assembly or by administrative guidance from the Government. That is big.