Disputes in Construction Contracts with Foreign Investment in Vietnam

As international capital continues to flow into Vietnam’s infrastructure, real estate, and energy sectors, disputes in construction contracts involving foreign-invested enterprises have become increasingly common — and legally complex. This article provides an in-depth analysis of the latest legal developments surrounding construction contract disputes with foreign investment in Vietnam, covering their causes, legal foundations, dispute resolution mechanisms, and preventive solutions — helping businesses and investors better understand their rights and adopt effective strategies.

1. Characteristics and Causes of Construction Contract Disputes with Foreign Investment in Vietnam

1.1. Legal Characteristics of Contracts Involving Foreign Investment

Investment Mechanisms & Choice of Dispute Resolution

Under the Law on Investment 2020, disputes between investors — where at least one party is a foreign investor — may be settled by Vietnamese courts or arbitration (domestic, international, or ad hoc arbitration agreed upon by the parties).

However, if a construction contract is part of a large-scale investment project (e.g., BOT, PPP), the dispute may escalate into an investment dispute under international treaties, particularly if the relevant investment treaty contains an umbrella clause binding the State to contractual obligations.

Risks Related to Contract Validity, Governing Law, and Contract Form

According to the Law on Construction and its guiding decrees, construction contracts in Vietnam must comply with certain forms (e.g., lump-sum, adjustable unit price, cost-management-based contracts) to qualify for inspection, acceptance, and settlement.

If a contract fails to meet these formal requirements, it may be declared void (wholly or partially) under Article 129 of the Civil Code 2015. However, a partially performed contract may still be compensated for actual value delivered.

Selecting the governing law (Vietnamese or foreign) can also lead to disputes, especially when legal or policy changes occur during project implementation.

Common Causes of Disputes

• Delayed or non-payment: The most common cause — developers or clients often fail to pay on schedule or refuse payment for completed work.

• Variation orders or scope changes: Poorly defined mechanisms for handling design or scope changes lead to cost disagreements.

• Delays and poor quality: When contractors fail to meet deadlines or standards, owners impose penalties or claim damages.

• Defect liability and warranty: Post-completion defects often trigger disputes when contractors neglect repair obligations.

• Regulatory or policy changes: New laws affecting cost structures or technical standards often create conflict if the contract lacks an adjustment mechanism.

Legal and Policy Changes Impacting Rights and Obligations

Law No. 57/2024/QH15, amending the Law on Investment and related laws (effective from January 15, 2025), may affect ongoing projects, particularly in licensing, project transfer, and investment incentives.

Consequently, construction contracts involving foreign capital in Vietnam are under increasing pressure to adapt or face potential disputes due to new regulatory inconsistencies.

2. Dispute Resolution Mechanisms and Key Enforcement Issues in Vietnam

2.1. Dispute Resolution under Vietnamese and International Law

Negotiation and Mediation

This is the first and most encouraged step. Contracts may even require mediation before proceeding to arbitration or court.

In international investment disputes, many treaties and conventions also require mediation prior to formal proceedings.

Arbitration (Commercial / Investment)

• Commercial arbitration: If the contract includes an arbitration clause, parties may choose a domestic (e.g., VIAC, VCA) or international institution such as ICC or UNCITRAL.

• Investment arbitration (ISDS): Where the dispute arises from commitments between an investor and the State, the investor may initiate international arbitration under a Bilateral Investment Treaty (BIT) or International Investment Agreement (IIA). This applies when the dispute transcends a mere construction contract.

  In contracts with foreign investment, parties should consider including investment or ISDS-related provisions to mitigate risks.

Vietnamese Courts

If arbitration is not chosen, or if the contract specifies Vietnamese court jurisdiction, or if the dispute involves non-arbitrable matters (e.g., land ownership, State land recovery), the case may be brought before Vietnamese courts.

However, under the Law on Commercial Arbitration, foreign investors cannot litigate investment disputes in foreign courts — thus, court jurisdiction must remain in Vietnam.

2.2. Enforcement of Foreign Judgments and Awards in Vietnam

Recognition of Foreign Arbitral Awards

A prevailing party under a foreign arbitral award must seek recognition from a Vietnamese court before enforcement. This process can be challenging if the losing party has no assets in Vietnam.

Enforcement of Vietnamese Court Judgments

Judgments issued by Vietnamese courts are executed under the Law on Civil Judgment Enforcement of Vietnam.

Difficulties in Evidence Collection and Cross-border Procedures

International construction contracts often require witness summoning, evidence collection abroad, or judicial cooperation through international legal assistance mechanisms.

Government Commitments and Sovereign Risks

If the dispute involves governmental commitments or regulatory changes, investors may resort to ISDS arbitration against the State. However, such cases entail significant financial and reputational risks for the State, prompting strategic prevention and negotiation efforts.

3. Preventive Measures and Strategic Recommendations for Foreign Businesses in Vietnam

3.1. Drafting a Strong Contract from the Start

• Clearly define governing law and dispute forum:
  Prefer Vietnamese law combined with international or commercial arbitration clauses. If investment protection is essential, refer to BITs/IIAs — but ensure compliance with Vietnamese regulations.

• Include change-of-law and adjustment clauses:
  Contracts should provide mechanisms to adjust costs, schedules, and responsibilities when new laws, technical standards, or taxes are introduced.

• Secure payment, guarantee, and warranty provisions:
  Establish transparent payment schedules, require bank guarantees, retainage for warranty, and specify clear documentation for payment and final settlement.

• Address enforcement and security risks:
  Consider asset-based security, international guarantees, or local asset pledges to facilitate enforcement.

• Allocate resources for legal and procedural readiness:
  Budget for international legal counsel, translation, and compliance with international judicial cooperation procedures.

3.2. Strategic Actions When a Dispute Arises

• Initiate negotiation or mediation early:
  An early settlement attempt often saves time, cost, and reputation compared to prolonged litigation.

• Choose the appropriate dispute resolution forum:
  Depending on the dispute’s value and nature, select commercial arbitration, investment arbitration, or court litigation accordingly.

• Strengthen evidence collection:
  Maintain detailed records — acceptance reports, design documents, photos, site diaries, correspondence, and payment proofs.

• Prepare for international enforcement:
  Assess whether the counterparty has assets in Vietnam or abroad to determine enforcement strategy — recognition in Vietnam or abroad.

• Coordinate with government agencies (if applicable):
  For disputes involving government entities or policy commitments, maintain both legal and diplomatic channels to mitigate international escalation risks.

4. Conclusion

Disputes in construction contracts with foreign investment in Vietnam are multifaceted — combining elements of commercial contracts, international investment, regulatory change, and cross-border enforcement.

To minimize risk and safeguard interests, foreign investors should prepare from the contract-drafting stage, incorporate robust legal safeguards, and plan for dispute contingencies.

When disputes arise, choosing the right dispute resolution strategy, combining negotiation with litigation or arbitration, and preparing for international enforcement are key to achieving the best outcomes.

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