HO CHI MINH CITY PEOPLE’S COURT SETS ASIDE ARBITRAL AWARD IN A CASHEW NUTS SALE DISPUTE

Company M v. Company S [2023] People’s Court of Ho Chi Minh City, Decision No. 696/2023/QD-PQTT

The Seller – Company M and the Buyer – Company S entered into Contract No. 1-21 and Schedule No. 1-21 in 2021 for the purchase and sale of cashew nuts of the 2021 crop season, with payment on a “document exchange” basis. During performance, disagreements arose over the set of documents, the crop season/quality of the goods, and the payment obligations under the Contract and the Schedule, as well as set-off relating to prior contracts. Following Arbitral Award No. 37/22 HCM ordering Company S to make payment, Company S filed a petition to set aside the award on grounds of violations of arbitral procedure and contravention of the fundamental principles of the law of Vietnam. Ultimately, the People’s Court of Ho Chi Minh City allowed the petition and set aside Arbitral Award No. 37/22 HCM.

BACKGROUND

Contract & Schedule (2021) – goods, documents, course of performance: Company M (the Seller, Ghana) and Company S (the Buyer, Vietnam) entered into Sale Contract No. TD-RCN-GHANA 1-21 dated 18/01/2021 (“Contract 1-21”) and Sale Contract Schedule No. TD-RCN-GHANA 1-21 dated 22/02/2021 (“Schedule 1-21”) for the sale and purchase of dried raw cashew nuts (in shell) from the 2021 crop season, to be delivered in five consignments. Payment mechanism: upon the Seller’s presentation of the complete set of documents, the Buyer shall pay 100% within three (03) business days. The document set must include: a full set of 3/3 original bills of lading; the commercial invoice and packing list duly signed and stamped; Certificate of Origin (C/O); a phytosanitary certificate issued in English by the competent authority of the exporting country; a practising certificate issued in English by the exporting country; and one original Certificate of Quality & Weight issued by the National Quality Control Department of the Ghana Cocoa Board.

Company S asserted that Company M failed to deliver the complete/correct set of documents, that certain certificates had expired, that the packing was non-conforming, and that the goods were of the wrong crop season; it further maintained that set-off issues under the parties’ 2020 contracts remained outstanding.

Set-off complaints & payment status: Previously, the Parties had Contract TD-RCN-GHANA 1-20 (26/08/2020) and TD-RCN-GHANA 2-20 (07/09/2020), under which a contractual penalty and default interest arose (payable by Company M). The Parties exchanged emails regarding set-off for the order; a document dated 20/05/2021 confirmed set-off for the order under Contract 1-21/Schedule 1-21. On these grounds, Company S did not make payment and proposed negotiation/mediation prior to arbitration.

Proceedings at VIAC & Arbitral Award No. 37/22 HCM (28/12/2022): The Arbitral Award (No. 37/22 HCM, dated 28/12/2022) partially upheld Company M’s claims and ordered Company S to pay:

• VND 12,075,671,400 – outstanding price;
• VND 208,560,000 – lawyers’ fees;
• VND 391,094,162 – arbitration costs.

As to Company M, it was to bear USD 4,083.35 in arbitration costs (equivalent to VND 96,775,315). The payment period was 30 days from the date of the award.

Application to set aside the award: Disagreeing with the above award, on 16/01/2023 Company S filed an application requesting the People’s Court of Ho Chi Minh City to set aside Arbitral Award No. 37/22 HCM dated 28/12/2022 of the Vietnam International Arbitration Centre (VIAC) at the Vietnam Chamber of Commerce and Industry.

Main grounds invoked by Company S:

• Violations of arbitral procedure: During the arbitral proceedings, Company S lodged a Complaint dated 28/10/2022 alleging that VIAC had failed to consider and issue a written response to its Procedural Submission dated 06/07/2022, which requested a review of “jurisdiction” and “procedural conditions” as well as the “legal validity, reasonableness and authenticity” of the file before deciding the case.
• Contrary to the fundamental principles of the law of Vietnam (Article 68.2.đ of the Law on Commercial Arbitration 2010), on the basis that the statement of claim contained inconsistencies in dates; numerous documents were mere photocopies/printouts, not notarised/certified/consularly legalised, and contained alterations; and that the arbitral award and the arbitral tribunal failed to respect the parties’ agreements by not considering the parties’ set-off agreement and by not considering the agreed form and formalities of the payment documents.

FINDINGS AND DECISION OF THE COURT

On the basis of the file and the arguments at the hearing, the Panel reviewing the application to set aside the award made the following findings and conclusions:

• On jurisdiction and time limit: The application falls within the competence of the People’s Court of Ho Chi Minh City because the arbitral tribunal rendered the award in Ho Chi Minh City; accordingly, this application lies within the jurisdiction of the People’s Court of Ho Chi Minh City. The application filed on 16/01/2023 was still within the time limit under Clause 1 Article 69 of the Law on Commercial Arbitration 2010.
• On submissions concerning the form of the claimant’s evidence: Company S’s arguments that “the statement of claim contains inconsistencies in dates” and that “documents are mere photocopies” were not accepted; the Court determined that the VIAC file complied with Article 7 of the VIAC Rules of Arbitration, and S failed to produce counter-evidence.
• On procedural defects at VIAC: Company S repeatedly complained and requested the arbitral tribunal to review jurisdiction under Article 43 of the Law on Commercial Arbitration 2010 (letters dated 03/06/2022, 06/07/2022, 19/09/2022, 02/11/2022). The tribunal did not issue a separate decision resolving the complaint to serve as a basis for exercising the right to request the Court within 05 days under Article 44 of the Law on Commercial Arbitration 2010 and Article 10 of Resolution 01/2014/NQ-HDTP; this constituted a violation of arbitral procedure.
• On the parties’ set-off agreement: The file shows that the tribunal received Company S’s set-off request but did not consider it on the ground that it fell outside the scope of the two contracts brought by the claimant. The Court clarified that the parties had a chain of transactions from 2020–2021 and had agreed on set-off (official letter dated 17/06/2021; email dated 20/05/2021 confirming set-off against the order under Contract 1-21/2021). Since the agreement is voluntarily entered into and in accordance with the law, therefore, the tribunal should have considered the claim afresh so as to completely resolve the parties’ rights and obligations. The failure to consider this agreement was improper.
• The above violations rendered the arbitral award contrary to the fundamental principles of the law of Vietnam, specifically the principles in Clause 10 Article 3 and Clause 4 Article 4 of the Civil Code 2015 concerning freedom and voluntariness of commitment and agreement; this falls within the set-aside ground at Point dd Clause 2 Article 68 of the Law on Commercial Arbitration 2010.
• Decision: To set aside Arbitral Award No. 37/22 HCM dated 28/12/2022 of VIAC – Ho Chi Minh City Branch; Company S shall not bear the fee; this Decision takes effect as from 17/05/2023 and is final.

OUR COMMENT

The above decision to set aside the arbitral award highlights the reasons for, and the manner of, applying the ground that an award is “contrary to the fundamental principles of the law of Vietnam”. It may be observed that this ground remains a constrained one and requires the Court to adopt a cautious approach.

• “Fault lines” between procedure and merits: Decision No. 696/2023/QD-PQTT shows that the arbitral tribunal committed two serious errors: (i) it failed to issue a separate decision disposing of the jurisdictional and procedural objections, despite Company S repeatedly submitting letters (03/06, 06/07, 19/09 and 02/11/2022) requesting a review of jurisdiction under Article 43 LCA; and (ii) it failed to consider the set-off request arising from the 2020 – 2021 contract chain, even though the file shows the parties agreed to set-off the debt from other contracts by email dated 20/05/2021. In the Court’s view, these defects seriously impaired the parties’ right to adversarial proceedings and their interests, which are principles protected by the Constitution and the Civil Code. This was not the Court “re-marking” the merits; it was checking whether the tribunal respected mandatory procedure and disposed of all claims that are inherently connected with the disputed relationship. Accordingly, the Court applied Article 68.2.đ LCA to set aside the award.
• Debatable reasoning on mandatory request for the arbitral tribunal to issue a separate decision on jurisdiction: The grounds for the Court to request the arbitral tribunal to issue a separate decision on its own jurisdiction seem contradictory with the Court’s conclusion. Specifically, Articles 43 and 44 of LCA do not clearly require a separate decision on jurisdiction. Furthermore, Article 10 of the Resolution No.01/2014/NQ-HDTP of the Supreme People’s Court allows such practice by stipulating that, in case challenging the jurisdiction decision of the arbitral tribunal before the Court but the arbitral tribunal has not yet issued a separate decision on its jurisdiction, the claimant must provide evidence proving its challenge. Besides that, the VIAC’s rules allow the arbitral tribunal to self-determine whether to issue a separate decision regarding jurisdiction or not
• Different view on handling set-off requests from other contracts: Addressing a set-off from another contract as a counterclaim in arbitration proceedings is a complex issue. In this case, the arbitral tribunal held that set-off from other contracts fell outside the scope of arbitration and consequently rejected the counterclaim of Company S. In contrast, the Court disagreed and held that the arbitral tribunal had authority to examine this counterclaim since both parties agreed to set-off, and by failing to enshrine this agreement, it violated the fundamental principle of Vietnamese law. The decision of the Court is, again to some degree, debatable. Even though the LCA, which allows that a counterclaim should be related to the dispute, implies the application of a wider scope of jurisdiction for arbitral tribunal to hear a counterclaim, the VIAC’s rules further narrow the scope. Article 10 of these Rules provides that a counterclaim must be based on the arbitration agreement on which the Claimant has relied to make the Request for Arbitration against the Respondent.
• Draft contracts and delivery terms tightly: The case also reveals that disagreement over documents, crop season, and quality can fuel open-ended disputes. Enterprises should standardize the “document exchange” condition (content, deadline for submission, and consequences of incomplete documentation), clearly stipulate the penalty and late-payment mechanism, and set out a clear sequence for debt set-off to reduce later controversy.

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