A Commercial Code in Transition


- by Joseph Holf, Business & Finance, Nha Magazine, July 2005


A bounding with potential, the economy in Viet Nam thrives amid a patchwork commercial code. With laws that are still developing, uncertainty sometimes exists in a land where commercial law and order can be scarce. Such a climate should not come as any surprise, considering that Vietnam endured isolation for years following the war.

Washington imposed a trade embargo. Furthermore, it forbade investment in and travel to the country. Washington also prevented Viet Nam from joining the United Nations until 1977. Thwarted by external forces, Viet Nam simultaneously coped with internal turmoil as the Communist government operated to rid all indications of capitalism from the newly formed Socialist Republic of Viet Nam. 

In the late 1980's, as the cloud of economic oppressiveness began to recede, a glimmer of hope emerged as Viet Nam made steps to start opening its economy with a restructuring plan. Washington followed suit by ending its trade embargo in 1994 and establishing diplomatic relations 1995.

Christopher Runckel with officials of a Vietnamese company in the steel fabrication industry during price negotiation in Hanoi

"A lot of the challenges they face in China they face in Viet Nam," explained the President and Principal of Portland, Oregon based Runckel & Associates, Christopher Runckel, a Viet Nam War veteran who is assigned to Ha Noi in 1994 as the first permanent diplomat to Viet Nam since the end of the war. "They are socialist economies transitioning to the capitalist way."

The transition gives rise to a lack of predictability in the laws governing business transactions and the resolution of disputes, which stems in large part from fact that the Vietnamese system is not based on precedent as it is in the United States. Rather, the Vietnamese legal system more of a hybrid system.

'Most [Asian countries] are in the process of changing laws so they are more in with Western business practices," added Runckel. "Predictability of legal outcomes is more difficult to determine than Taiwan or Korea."

Firms conducting business in Viet Nam face an array of legal challenges—more specifically, a gap exists between laws and practice, with laws changing on a frequent basis. Exacerbating matters, the central government is not very strong, while the courts lack independence. Disputes between two companies incorporated in Viet Nam must be referred to a Vietnamese court or arbitration. The governing law must be Vietnamese law.

"This raises a significant concern to foreign investors as Vietnamese judges and arbitrators do not have much commercial experience," said Tran Anh Duc, a Vietnamese lawyer from Ha Noi and a member of the Ha Noi bar whose role is to advise on all legal issues in Viet Nam, including the review of contracts and the structuring of business arrangements in Viet Nam.

According to Tran, judgments from foreign courts are not normally enforced in Viet Nam. When a party to a contract is located outside Viet Nam, people normally prefer to refer their dispute to arbitration outside Viet Nam.

"Arbitration in Singapore, Hong Kong or London has become more popular for international transactions with an expectation that foreign arbitral awards would be enforced in Viet Nam in accordance with New York Convention on Recognition of Foreign Arbitral Awards," said Tran. "As the laws of Viet Nam have not fully developed, there always exist certain risks that may affect the enforceability of contracts in Viet Nam."

The legal uncertainty that pervades the economy may account in part for the fact that foreign investment reached its peak in 1995 and 1996, and then dropped off in subsequent years. After several quiet years, though, foreign investment appears to be on the rise once again. Sponsors of many projects delayed due to the Asian Financial Project are returning to Viet Nam, particularly hotel and real estate projects. 

Many new investors are going to Viet Nam to explore the market, especially business delegates from the U.S. and Japan. While foreigners went to Viet Nam with big projects in 1995-1996, they invest mainly in small and medium projects now. Domestic business is likewise booming in Viet Nam. In 2004, the U.S. and Viet Nam did roughly $6 billion in business. Viet Nam exports textiles, shoes, shrimp, pepper, rice, various agricultural products, furniture, and some computer software. It buys Boeing airplanes, wheat, and factory machinery. Viet Nam is increasingly becoming an oil- and gas- exporting country as well.

"I often travel with American companies to Ha Noi and Ho Chi Minh City," said Runckel. "Most are surprised by the level of economic vitality, by how much building is going on."

The biggest difference in the courts is the quality of judges and the amount of training that they have. As a result, the cost of lawyers and litigating is less expensive. Intellectual property infringement is a big problem in Viet Nam, too. The court proceeding is troublesome, time-consuming, and does not afford sufficient protection.

"The main problem is the big gap between the law and the practice," conceded Tran. "To be a success in Viet Nam, you need to be very flexible and patient."

In spite of its legal challenges, Viet Nam competes effectively as a low-cost alternative to China. Labor costs are relatively low in Viet Nam, with an unskilled laborer earning $85-$100 per month plus benefits. Viet Nam is joining the World Trade Organization, and it is opening its market to the world. Viet Nam is also amending business laws, ranging from the Foreign Investment Law, Commercial Law, and Civil Code. These new laws will make conducting business much easier in Viet Nam.

Today, Viet Nam continues to develop at a rapid pace. It is also developing from a very low base. In 1987, the Vietnamese government implemented doi moi, or renovation, a policy that really took off with the lifting of the U.S. trade embargo. The economic acceleration began to occur in 1994-1995. The vast majority of Fortune 500 companies have a presence in Viet Nam today.

"There is still much to be done," Runckel said with optimism. Viet Nam is still a very rural, poor country. 

- Nha JULY I AUGUST 2005

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