DECISION OF THE HO CHI MINH CITY COURT TO SET ASIDE A VIAC ARBITRAL AWARD – AN EXAMPLE OF HOW VIETNAMESE COURTS INTERPRET THE CONCEPT OF FUNDAMENTAL PRINCIPLES OF VIETNAMESE LAW

This case is a typical example of an application to set aside an arbitral award under the 2010 Law on Commercial Arbitration of Vietnam. The dispute centered on the VIAC Arbitral Tribunal’s decision requiring K Company Limited (“K”) to compensate R Clinic and Dr. E International Co. Ltd (“E”) a substantial sum calculated on the basis of projected future income under a licensing and exclusive cooperation agreement. The Court set aside the award, emphasizing that VIAC’s method of determining damages violated fundamental principles of Vietnamese law on compensation.

BACKGROUND

K and E began their cooperation in 2015 with two key agreements: a Licensing and Exclusive Business Cooperation Agreement signed on 28 September 2015, and a Distribution Agreement signed on 29 October 2015. Under these agreements, K was appointed as the exclusive distributor of E’s products and treatment programs in Vietnam. The cooperation was expected to last until 2025.

However, the Covid-19 pandemic forced K to cease business operations and close its clinic. Against this backdrop, on 12 October 2021, E commenced arbitration at the Vietnam International Arbitration Centre (VIAC), claiming compensation for various damages resulting from K’s termination of activities.

On 06 March 2023, the Arbitral Tribunal rendered Award No. 92/21 HCM, ordering K to pay a total of USD 789,127.36 to E, broken down as follows:

• USD 539.84: interest on unpaid royalties.
• USD 1,566.94: interest on unpaid product purchases.
• USD 743,210.50: damages for projected income from Dr. K1’s future work (2022–2025).
• USD 16,477: damages relating to future royalties.
• USD 27,333.08: Claimants’ legal costs.

In addition, the Tribunal ordered K to reimburse arbitration costs of USD 5,763.93 to E.

K challenged this calculation of damages as inconsistent with the fundamental principles of law and, on 23 March 2023, applied to the Court to set aside the award.

ARGUMENTS OF THE PARTIES

K’s arguments

On 23 March 2023, K applied to set aside VIAC Award No. 92/21 HCM, arguing that it violated a fundamental principle under Article 303.2 of the 2005 Law on Commerce.

First, K objected to the Tribunal’s order to pay USD 743,210.50 as compensation for Dr. K1’s future income, which had been calculated based on projected earnings from the time of damage until 2025, which violated the principle of “actual damage” when demanding compensation set forth in Article 303 (2) of the Law on Commerce.

Second, K pointed out that its clinics had closed from June 2022 due to Covid-19, an event expressly recognized as force majeure under the parties’ agreement, making such compensation unjustified.

Third, K argued that the USD 16,477 in future royalties was equally unfounded, as it too was based on future, hypothetical income rather than actual damage.

Four, K challenged the order to reimburse USD 5,763.93 in arbitration costs, noting that costs should be apportioned in proportion to the claims granted, whereas the above claims were unfounded.

E’s arguments

E objected K’s request to set aside the award, advancing four main arguments:

First, loss of actual income constitutes actual damage under the law. Article 361.2 of the 2015 Civil Code and Article 302.2 of the 2005 Law on Commerce both recognize income that would have been earned in absence of the breach, as actual damage. Furthermore, both have no provision limiting the time for calculation of actual damage. Given that the license agreement remained effective until 27 September 2025, calculation of lost profits and royalties up to this period was lawfully justified.

Second, K itself had previously acknowledged the above understanding of “actual damage”. In another VIAC arbitration (Case 65/22 HCM), K had claimed lost profits for the remaining term of a contract based on Article 302 of the Law on Commerce and a judgment from the Court of Ho Chi Minh City, thereby admitting that such calculation of damages was valid.

Third, Precedent No. 21/2018/AL (adopted by the Supreme Court) explicitly recognized lost profits for the remaining term of a contract as actual damage, providing direct legal support for VIAC’s award.

Fourth, the Court had no authority to re-examine the merits of the dispute. Under Article 71.4 of the 2010 Law on Commercial Arbitration, the Court may only set aside an award for serious procedural violations or breaches of fundamental principles, not to re-adjudicate issues already decided by the arbitral tribunal.

Accordingly, E maintained that VIAC’s Award No. 92/21 HCM was well grounded in law and precedent, and even K’s own litigation conduct.

DECISION OF THE COURT

The Court accepted most of arguments of K and set aside the award. The main reasonings are as follows:

As the future income of Dr. K1 was not accepted, the royalties based on such income also failed to meet the requirement of proving “actual damage.”

On K’s argument regarding arbitration cost, the Court held that this issue formed part of the content of the arbitral award itself and therefore would not be reviewed.

OUR COMMENT

Covid-19 as a Force Majeure Event

Based on the available information, it is unclear whether the Arbitral Tribunal duly considered whether Covid-19 constituted a force majeure event under the relevant agreements. Given the factual circumstances, the likelihood that such a question was raised before the Tribunal is significant.

Under Article 156.1 of the 2015 Civil Code, a force majeure event is defined as an objective event that is unforeseeable and unavoidable despite the application of all necessary measures and within capabilities. Covid-19, along with the consequential state disease-controlling measures – including border closures, lockdowns, and suspension of commercial activities – could  be considered fitting within this definition. These measures objectively prevented K from (i) continuing its business as a licensed distributor of E’s products and (ii) having Dr. K1 traveled to Vietnam to perform medical services, as entry was legally barred by the government.

Supporting evidence can be drawn from multiple legal sources:

• Vietnamese regulations: Prime Minister’s Decisions No. 173/QD-TTg (2020) and 447/QD-TTg (2020) explicitly recognized Covid-19 as a public health emergency (infectious disease) of global scale, spreading through 03 provinces of Vietnam within a week and reaching nation-wide impact within 02 months since first discovered, implying a strong apparent severity and hard-to-control characteristic of this pandemic.
• Article 79 of the 1980 CISG exempts parties from liability for non-performance caused by an unforeseeable impediment beyond their control. UNCITRAL commentaries provide the implication that contracting parties may refer to Article 79 in dealing with disputes arising out of the effect of Covid-19 leading to the arguments of force majeure[1].
• The ICC Force Majeure Clause 2020 expressly lists “epidemic” and “pandemic” as force majeure events.

On this basis, we concur with the Court’s view that Covid-19 constituted a force majeure event. Accordingly, pursuant to Article 351.2 of the 2015 Civil Code, K should not bear liability for contractual breaches resulting from such circumstances.

[1] Page 37, COVID-19 and International Trade Law Instruments: a Legal Toolkit by the UNCITRAL Secretariat.

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