Our series on operating under foreign jurisdictions examines a promising Asian alternative to China and India
Vietnam is a bright spot in the post-covid construction landscape. As an alternative to China and India, there are opportunities for foreign investors in the construction industry, notably in the real estate sector and in renewable energy projects. The latest version of the national power development plan, setting a framework for the period to 2030, with a vision for the period to 2050, is pending but expected to highlight the role of renewable energy projects, in particular ground-mounted solar, onshore and offshore wind projects. However, significant commitment to the market is required since services cannot be provided on a cross-border basis.
Vietnam is a member of the World Trade Organization, and construction companies incorporated under the laws of WTO member states (such as the UK) have access to the Vietnam market, subject to Vietnam’s commitment schedule for services, which does not permit provision of construction services on a cross-border basis.
UK construction companies must therefore form a subsidiary in Vietnam. While the subsidiary may be 100% foreign‑owned, foreign investors often prefer to partner with a local group in a joint venture agreement.
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The investment registration and incorporation process for a foreign invested company may take three to four months. The foreign investor must first obtain an investment registration certificate (IRC) for its business project to provide construction services. Once the IRC is issued, the Vietnamese company can be formed and issued with an enterprise registration certificate (ERC). The company must then obtain a construction licence for construction services before beginning operations. It can hire staff, although the ability to hire foreign employees is generally limited to more senior management roles.
Another structure for joint ventures features the local partner incorporating the Vietnamese entity, with the foreign investor subsequently purchasing its proportionate share of the capital. Instead of obtaining the IRC and ERC, the foreign investor must obtain approval for the M&A transaction from the local provincial authorities. While timing largely depends on the caseload and policies of the relevant investment authorities, obtaining the so-called M&A approval may be faster than incorporating a greenfield project.
Vietnam is a civil law system, the central piece of which is the 2015 Civil Code. Other crucial pieces of legislation for foreign investors include the 2020 Laws on Enterprises and Investment, and the 2005 Commercial Law.
Construction projects involving foreign parties or foreign lenders may use international standard form contracts, such as the FIDIC Silver Book. However, certain amendments will be required to comply with Vietnamese law, including in these key areas:
- Governing law and dispute resolution Foreign law may be selected by the parties to govern a contract, provided that a “foreign element” exists and that this would not violate the “fundamental principles of Vietnamese law”. There is no guidance as to what constitutes fundamental principles, and generally a foreign-invested company incorporated under Vietnamese laws is insufficient to constitute this foreign element. If parties agree to offshore institutional arbitration, although Vietnam is a signatory to the New York Convention, Vietnamese courts have a broad discretion to refuse to recognise awards considered to violate the fundamental principles. Other options may include onshore domestic arbitration.
- Force majeure Vietnamese law contains several expressions and definitions of force majeure in the Civil Code and the Commercial Law. Article 156.1 of the Civil Code defines force majeure as “an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible and necessary and capable measures being taken”. Construction contracts sometimes list specific events that constitute force majeure, but whether such provisions would be upheld if they failed to meet the Civil Code test is uncertain. Force majeure provisions should be drafted to meet all the Civil Code requirements.
- Liquidated damages These are not expressly recognised under Vietnamese law but there is a similar concept of “penalties”, an agreed amount set out in the contract and payable upon the occurrence of a specified breach. Parties are free to agree the amount, subject to statutory caps. Depending on whether the penalties have been structured as the sole and exclusive remedy, the non-breaching party may also be entitled to recover general damages if it can prove its losses.
- Limitation and exclusion clauses These concepts are generally recognised under commercial law, provided that they do not breach any statutory prohibition or contravene any “social ethic”, defined under the Civil Code as the common standards of conduct in social life that are recognised and respected by the community.
- Termination for breach Vietnamese law has no automatic right for a party to terminate for breach, and Article 428 of the Civil Code only permits unilateral termination where the other party “violates its obligations seriously”. If, however, a contract sets out a clear list of breaches that will entitle the other party to unilaterally terminate, this should be recognised under Vietnamese law.
David Harrison is a partner and Qin Sue Koh an associate in Mayer Brown’s Ho Chi Minh City office, while Matthew Chow is counsel in the Singapore office