COURT REFUSES TO RECOGNISE CIETAC AWARD FOR BREACH OF FUNDAMENTAL LEGAL PRINCIPLES UNDER VIETNAMESE LAW

JNH Industry Company Limited v. Minh Son Construction and Commercial Joint Stock Company – Decision No. 03/2022/QDST-KDTM, Hai Phong City Court, 28 September 2022

This case concerns a request by a Chinese company, JNH Industry Company Limited (“JNH”), for recognition and enforcement in Vietnam of a foreign arbitral award rendered by the China International Economic and Trade Arbitration Commission (“CIETAC”). The Hai Phong City Court refused the request on the ground that the award violated fundamental principles of Vietnamese law, particularly the principles of equality, good faith, and protection of both parties’ legitimate rights in contractual performance.

BACKGROUND

In July 2019, JNH and Minh Son Construction and Trading Joint Stock Company (“Minh Son”) entered into Sales Contract No. 19-JSNS/MS-01, under which Minh Son purchased a crane system and accessories from JNH, with a total contract price of USD 428,159 payable by letter of credit (“L/C”) and delivered under CIF term. JNH delivered the goods on schedule, but Minh Son refused to receive them and declined to make payment, leaving the goods stranded at Hai Phong Port.

JNH commenced arbitration before CIETAC pursuant to the arbitration clause in Article 12 of the contract. On 26 March 2021, CIETAC rendered Award No. (2021).Z.G.M.Z.J.C.Z.0797, ordering Minh Son to:

• Pay JNH USD 342,527.20 for the goods;
• Pay interest at 3% per annum from 01 October 2020 til’ full payment;
• Reimburse JNH’s legal fees of RMB 100,000 and arbitration costs of RMB 101,882.40.

The award stated that Minh Son must pay all sums within 30 days of issuance and that the award was final and effective from the date of its issuance. Minh Son failed to comply, and JNH sought recognition and enforcement in Vietnam under the 1958 New York Convention and the Vietnamese 2015 Civil Procedure Code (“CPC”).

The Respondent’s opposition

Minh Son opposed the recognition request, asserting that the CIETAC proceedings and final award violated both international and Vietnamese law. The company alleged serious procedural and substantive irregularities, including:

• Unresolved issues: The award did not address the handling of goods still held at Hai Phong Port or whether payment would entitle Minh Son to receive them.
• Errors in contract date and LC procedure: CIETAC recognized 22 July 2019 as the contract date, though the parties had executed the contract on 15 July 2019; the tribunal ignored Minh Son’s evidence of JNH’s late delivery and delayed submission of LC documents.
• Documentary discrepancies: The certificates of origin (CO) and quality (CQ) supplied by JNH were inconsistent with those issued by the named manufacturer, Henan Province Mine Crane Co., Ltd.
• Bad faith and fraud allegations: JNH allegedly falsified or misrepresented the CO and CQ, concealed them in the machine cabin rather than submitting them through the LC process.
• Right to terminate under CISG: Minh Son relied on Article 49(1)(a) of the CISG to justify contract termination on the basis of JNH’s fundamental breach.
• Procedural limitations during COVID-19: Minh Son claimed that pandemic restrictions prevented it from properly defending itself or submitting evidence in China, thereby breaching its procedural rights.

Minh Son therefore requested the Court to reject JNH’s application on the ground that the award violated fundamental principles of Vietnamese law as set out in Article 459.2(b) of the CPC.

THE COURT’S REASONING

Applicable law and jurisdiction

Both Vietnam and China follow the rules set forth under the 1958 New York Convention. The Court held that the request was within its jurisdiction under Articles 31.5, 38.3(a), 39.2(e) and 424.1(a) of the CPC, as Minh Son’s registered office located in Hai Phong. The application, filed by JNH on 13 December 2021, was made within the statutory time limit under Article 451 of the CPC.

Validity of the arbitration agreement

The arbitration clause in Article 12 of the sales contract validly referred disputes to CIETAC. The contract was signed and sealed by both companies through authorized representatives – Mr. Pham Quynh (Minh Son) and Mr. Miu Yi Cheng (JNH). CIETAC’s arbitration rules required a written agreement, which the parties satisfied. The clause was therefore legally effective under Chinese law.

Due process and notice

The Court reviewed evidence of CIETAC’s procedural notifications to Minh Son. CIETAC had informed Minh Son of its right to nominate an arbitrator and of the timetable under its expedited procedure (for claims below RMB 5 million, equivalent to around USD 714 thousand). Minh Son failed to request extensions or submit additional evidence despite such opportunities. The Court found no procedural violations in CIETAC’s notifications or conduct, and Minh Son’s reliance on COVID-19 disruptions was unsubstantiated.

Effect and finality of the award

The CIETAC award was final and binding, and no evidence was produced that any Chinese court had set it aside or suspended its effect. However, the Court proceeded to assess whether enforcement would contravene Vietnam’s “fundamental principles of law”.

Violation of fundamental principles under Vietnamese law

The Court found multiple substantive defects that rendered enforcement incompatible with Vietnamese legal principles:

• Unaddressed contractual obligations: The award compelled Minh Son to pay without resolving JNH’s obligation to provide valid shipping and quality documents (CO, CQ) necessary for customs clearance and transfer of ownership.
• Improper treatment of LC payment obligations: The tribunal’s view that documentary discrepancies did not excuse non-payment contradicted international banking practice under UCP 600 and ignored the buyer’s right to reject non-compliant documents.
• Failure to ensure equality and mutual performance: Vietnamese law requires balanced assessment of both parties’ obligations. CIETAC only assessed Minh Son’s breach, disregarding JNH’s own contractual defaults.
• Misapplication of the CISG: By rejecting Minh Son’s right to terminate despite JNH’s failure to deliver proper documents, the award contravened Article 49(1)(a) and Article 25 of the CISG.
• Contradiction with public policy and fairness: Enforcement would legitimize a transaction in which essential trade documentation was falsified or withheld, contrary to the principles of equality, good faith, and respect for lawful ownership under Articles 3 of the Civil Code and Articles 10, 11, and 14 of the Law on Commerce.

The Court stressed that recognizing the CIETAC award would create a precedent enabling non-transparent trade practices by foreign entities, distorting fair competition and undermining mutual confidence between Vietnamese and Chinese enterprises.

The decision

The Hai Phong City Court held that the CIETAC award violated fundamental principles of Vietnamese law and refused recognition and enforcement in Vietnam. Both parties retained the right to appeal within 15 days.

OUR COMMENT

“Fundamental principles” served as a substantive corrective in setting aside and recognizing procedures for arbitral awards

Article V.2(b) of the 1958 New York Convention provides that the local authority may refuse the recognition and enforcement of an arbitral award should it be contrary to the public policy of the country where such recognition and enforcement is sought. Mirroring this principle, Article 459.2(b) stipulates that the Vietnamese Court may refuse to recognize foreign arbitral award if such award is in contradiction to the fundamental principles (public policy) of Vietnam.

In Vietnam, the Courts’ interpretation of “fundamental principles” as well as its respective application in the setting aside and recognition of arbitral awards, are always a prominent and wildly inconsistent (in reasonings) topic across our Case Update series.

In this case, the Court did not merely look into procedural unfairness, but also further assessed the structural imbalance in the arbitral tribunal’s substantive reasoning: the tribunal imposed payment obligations on the buyer only, while disregarding the seller’s antecedent duty required for L/C payment, customs clearance, and the buyer’s ability to receive the goods.

Specifically, pursuant to various sources of law in both international and local Vietnamese contexts, the Hai Phong City Court found that JNH had fundamentally breach the contract (the duty to provide conforming documents being the CO and CQ) which subsequently prevented Minh Son from exercising its contractual rights and obligations accordingly.

Under Article 3 of the Civil Code, the lawful rights and obligations agreed between the parties must be mutually and equally respected, protected, performed and not be infringed upon. In tandem, Article 10 of the Law on Commerce set the principle of all traders are equal before the law in their commercial activities.

Hence, the CIETAC award ruling to enforce only JNH’s rights in isolation from its reciprocal contractual obligations, had created unfairness and contradiction to Vietnamese fundamental principles on equality in performing rights and obligations, leading to fundamental violation and ultimately the award was refused for recognition.

A demand for legal symmetry

While arguments could be made about whether the Hai Phong City Court, in fact, re-considered the merit of the case (which were under the absolute authority of the tribunal), which frowned upon when involving the recognition or the setting aside of arbitral awards, the Court’s ruling successfully emphasized that:

• The award failed to resolve the buyer’s corresponding right to receive lawful, usable goods; and
• Enforcement would result in unjust imposition of payment without transfer of sufficient documentation as contractually and lawfully required.

The above reflects a judicial expectation that arbitral awards must demonstrate equality in assessing the parties’ claim and arguments, allocating rights and obligations in a manner consistent with basic commercial logic and reciprocal performance.

A side note on the payment instrument of an L/C

JNH and Minh Son agreed on the way of payment for the purchase is to be made through an L/C (i.e., Letter of Credit) issued by MBank. While it is not mentioned nor made clear in the judgment, the reasoning of the Hai Phong City Court indicated that the L/C issued by MBank might have been subject to the terms of the Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (the “UCP 600“).

From what was inferred in the judgment, the L/C terms was that MBank shall make credit to JNH once JNH presents the sufficient dossier to the bank, which JNH has failed to do so within the effective period of the L/C.

Under the UCP 600, the credit arrangement is irrevocable, and such credit is deemed a separate transaction from the purchase contract between JNH and Minh Son. Consequently, it is understood that Minh Son, whether they wanted to or not, could not interfere with MBank’s process for implementing the L/C terms.

Hence, in accordance with the fact that JNH sued Minh Son to demand payment for the goods, by nature, the dispute should have been between JNH (the ultimate beneficiary to the L/C) and MBank (the issuing bank) rather than Minh Son (the applicant). However, Minh Son seemingly did not raise any argument regarding this matter during both the arbitral proceedings in China as well as the recognition procedures in Vietnam; thus, it is understandable that the CIETAC tribunal and the Hai Phong City Court did not raise any related reasoning accordingly.

Practical implications

This case carries several practical lessons for parties and counsel:

• For foreign sellers: compliance with L/C documentation may carries a decisive enforcement risk factor in Vietnam.
• For arbitral tribunals: awards involving Vietnam-related enforcement should expressly address the parties’ arguments.
• For enforcement strategy: an unchallenged arbitral award does not mean unconditional enforcement, especially where awards appear to legitimize commercially imbalanced outcomes.

FINAL WORDS

While the decision may be viewed as interventionist, it should not be read as hostility toward foreign arbitration. Rather, it reflects Vietnam’s insistence that international arbitration outcomes must not undermine core principles of contractual reciprocity, good faith, and documentary integrity in international trade.

This article aims to furnish our clients and contacts with general information on the relevant topic for reference purposes only, without creating any duty of care on the part of ANHISA. The information presented herein is not intended to serve, nor should it be considered, as a substitute for legal or other professional advice.

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