A multi-million dollar contract with a full arbitration clause can still land a business in court, stripping away all advantages of confidentiality and finality, simply because the signatory lacked a power of attorney or the named arbitration center dissolved years ago. For FDI and SME businesses in Vietnam, this is not a rare scenario but the most common legal risk discovered too late.
Is your contract's arbitration clause truly valid when a dispute arises, or is it merely a boilerplate phrase? Did the person who signed last year's amendment appendix have the authority to establish an arbitration agreement, or was it an operations director signing hastily without authorization? And is the arbitration center named in the contract still active or has it ceased operations? These questions may sound technical, but the answers determine whether you will resolve disputes quickly, confidentially, and with finality at arbitration, or have to start all over again in court after months of delay. The article below analyzes each ground that renders an arbitration agreement void under Vietnamese law, the most common practical scenarios, and how businesses can protect themselves.
Arbitration Agreements and Basic Conditions for Validity
Commercial arbitration can only resolve disputes when the parties have a valid arbitration agreement. Without such an agreement, or if the agreement is declared void, the court will assume jurisdiction, and all arbitration clauses in the contract become meaningless.
An arbitration agreement can be established in two forms: as an arbitration clause directly within the contract, or as a separate agreement concluded after the dispute arises. The crucial point to understand is that this agreement is completely independent of the main contract.
This principle of independence is a double-edged sword. On one hand, it protects businesses: even if the main contract is declared void, the arbitration clause can still be valid to resolve disputes arising from that contract. On the other hand, the reverse is also true: the arbitration clause can be void independently while the rest of the contract remains valid. This means that executing a contract lawfully does not guarantee that the arbitration clause within it is free of errors.
Regarding form, the Law on Commercial Arbitration requires the agreement to be made in writing, but the definition of "writing" is interpreted quite broadly. Exchanges via email, fax, telex, or any other form of written information exchange are recognized. Furthermore, a reference in a transaction to another document containing an arbitration agreement, such as company articles of association or commercial documents, is also considered valid.
Regarding scope, arbitration can only resolve disputes arising from commercial activities, disputes between parties where at least one party engages in commercial activities, or other disputes permitted by law. Disputes outside this scope cannot be brought to arbitration, regardless of the parties' intent.
Six Grounds That Render an Arbitration Agreement Void
Article 18 of the Law on Commercial Arbitration 2010 provides a comprehensive list of six grounds for declaring an arbitration agreement void. Resolution 01/2014/NQ-HDTP of the Justices Council of the Supreme People's Court offers specific guidance on each case.
1. The dispute falls outside the competence of the arbitration
Arbitration does not have jurisdiction over all types of disputes. Labor disputes between individual employees and employers, matrimonial and family disputes, administrative disputes, or matters falling under the exclusive jurisdiction of courts cannot be brought to arbitration. If an arbitration clause is drafted to cover these types of disputes, the void portion is at least the part exceeding the scope.
Common practical error: FDI companies use international contract templates with arbitration clauses applying to "all disputes arising out of or in connection with the relationship between the parties" and then apply that exact clause to employment contracts with staff in Vietnam. Such a clause will be void regarding individual labor disputes.
2. The person establishing the agreement lacks authority
This is the most common ground for invalidity in practice, especially for FDI enterprises that lack a legal department to scrutinize each signing instance. According to the guidelines in Resolution 01/2014, a person "without authority" is someone who is not the legal representative of the enterprise, or not a legally authorized person, or holds an authorization but signs beyond the scope of that authorization.
However, the resolution also notes an important exception: if the authorized person subsequently ratifies or accepts the arbitration agreement established by the unauthorized person, the agreement may escape being declared void. This poses a practical challenge: proving "subsequent ratification" is not always easy once a dispute has already erupted.
3. The person establishing the agreement lacks civil act capacity
Cases where minors or persons declared by court to have lost or have restricted civil act capacity establish an arbitration agreement will render that agreement void. This ground is less common in purely commercial contexts between corporate entities, but can arise when one party is an individual businessman or a sole proprietorship household.
4. The form of the agreement is non-compliant
Although the law recognizes many forms of writing, a purely oral arbitration agreement, or one only mentioned in meeting minutes without being explicitly reflected in a signed document, will be deemed failing to meet the formal requirements under Article 16. A common error in the startup and SME environment: both sides agree orally that "all disputes shall be referred to VIAC" during negotiations, but when drafting the official contract, they omit this clause entirely.
5. A party was deceived, threatened, or coerced
This ground differs from the other five in one key aspect: it does not apply automatically, but must be actively requested for invalidation by the affected party. If the deceived party does not raise the request, the agreement remains valid. The concepts of "deception, threat, and coercion" are determined in accordance with the Civil Code 2015.
6. The arbitration agreement violates prohibitory provisions of law
This is a "catch-all" ground when an arbitration agreement contains content strictly prohibited by law under regulations on invalid civil transactions. A practical example: parties intentionally insert contents into an arbitration agreement to circumvent mandatory regulations of Vietnamese law regarding a certain type of transaction.
"Inexecutable" Arbitration Agreements and the Distinction from Invalidity
In addition to the six grounds for invalidity, the law also recognizes another scenario leading to a similar outcome: an "inexecutable" arbitration agreement. These two concepts are often confused, but their legal nature differs. A void agreement means it never had validity from the beginning. An inexecutable agreement is one that is valid in form and content, but cannot be implemented due to practical circumstances.
Resolution 01/2014/NQ-HDTP lists four specific situations. First, the specific arbitration center named by the parties has ceased operations without any successor organization, and the parties cannot agree on a replacement center. Second, a specifically designated arbitrator cannot participate due to force majeure and a replacement cannot be found. Third, the designated arbitrator refuses to participate and cannot be replaced. Fourth, both parties agree to resolve disputes at a specific arbitration center but wish to apply the procedural rules of another center, while the charter of the chosen center does not permit this.
Legal Risks and Common Mistakes in Practice
Most cases where arbitration agreements are rendered void or inexecutable stem from a single source: contracts are drafted, signed, and circulated without review by a legal professional. Below are typical real-world scenarios.
The most common scenario relates to the signatory's authority. An FDI enterprise may have an operations director or sales manager sign an important commercial contract while the legal representative is abroad. There is no valid power of attorney, or one exists but the scope of authorization does not include establishing an arbitration agreement. When a dispute arises, the partner invokes Clause 2 of Article 18 to request a declaration of invalidity, and proving "subsequent ratification" at that stage becomes extremely difficult.
The second scenario involves ambiguous clauses such as "disputes may be resolved by arbitration or court at the choice of either party". Under the guidance in Clause 2, Article 7 of Resolution 01/2014, when an agreement contains unclear content that can be interpreted in multiple ways, the Civil Code is applied for interpretation. An "either/or" clause like this often leads to both parties suing in two different places simultaneously, with neither side being blocked, causing wasted costs and risking conflicting judgements.
The third scenario frequently appears in fast-growing enterprises that sign dozens of contracts each month using old, un-updated templates. The name of the arbitration center in the clause might be an organization that has merged or dissolved. By the time a dispute occurs, no organization exists to accept the case under the exact name written.
The fourth scenario is specific to FDI businesses accustomed to international contracts: writing "Vietnam International Arbitration Centre (VIAC)" but simultaneously requiring the application of "ICC Rules of Arbitration". These two elements conflict, because VIAC's charter does not allow the application of another arbitration institution's procedural rules without a separate agreement. Result: the agreement is valid on paper but inexecutable.
The Role of DEDICA in Reviewing and Preventing Arbitration Clause Risks
As part of its regular legal advisory services, DEDICA accompanies businesses in reviewing arbitration clauses before signing, not just after a dispute has arisen. Specifically, the DEDICA team verifies four key elements in each arbitration clause: whether the scope of the dispute falls within the jurisdiction of arbitration; whether the prospective signatory is the legal representative or properly authorized within the correct scope; whether the named arbitration institution is still active and the procedural rules are consistent; and whether the language of the clause is sufficiently clear to exclude parallel interpretations.
For foreign enterprises working in English or Chinese, DEDICA provides bilingual services to ensure the executed contract accurately reflects the parties' intent and meets Vietnamese legal requirements. When a dispute has already arisen and the arbitration clause is at risk of being challenged, DEDICA advises on early handling strategies, including the possibility of subsequent ratification or renegotiating the dispute resolution body before the matter escalates.
Conclusion
For an arbitration clause in a contract to truly hold value, businesses need to control five points prior to signing: (1) confirm whether the anticipated type of dispute falls within the scope of arbitration jurisdiction under Article 2 of the Law on Commercial Arbitration; (2) ensure the signatory is the legal representative or possesses a clear power of attorney that includes the right to establish an arbitration agreement; (3) retain evidence that the agreement was established in writing under Article 16; (4) verify the name and operational status of the named arbitration institution, while ensuring the procedural rules are consistent with that institution; (5) avoid ambiguous clauses like "either arbitration or court" which fail to specify which party chooses first. The most common errors in practice are unauthorized signatories and dissolved arbitration center names. Both errors are completely preventable if the contract is reviewed before signing, rather than discovered after a dispute has already occurred.
An unlawful arbitration clause is a silent risk residing in dozens of contracts businesses currently use without knowing. DEDICA reviews and standardizes arbitration clauses within the framework of its regular legal advisory services, including verifying signatory authority, updating arbitration institution names, and drafting bilingual clauses tailored to each contract type. Contact DEDICA to have our team of lawyers assess the arbitration clause in your contract before any dispute occurs.
The content of this article is for reference purposes based on legal regulations at the time of drafting. Each contract and dispute situation has its own unique characteristics; please consult a DEDICA lawyer for advice tailored to your specific case.
