APPELLATE COURT REVERSES FIRST-INSTANCE DECISION, ACCEPTING RECOGNITION AND ENFORCEMENT OF ARBITRAL AWARD IN SHARE PURCHASE AGREEMENT DISPUTE

S C Company v. R Joint Stock Company [2023] High People’s Court in Ho Chi Minh City, Decision No. 95/2023/KDTM-PT

INTRODUCTION 

The dispute arose from the Share Purchase Agreement dated 08/9/2017 between S C Company (“Company S”) and R Joint Stock Company (“Company R”), under which Company S purchased 5,000,000 shares held by Company R in N R Long An Joint Stock Company. As Company R was alleged to have breached certain post-transfer obligations, Company S terminated the agreement and initiated arbitration at the Singapore International Arbitration Centre (“SIAC”). The SIAC Arbitral Tribunal issued Award No. 090 in 2022, ordering Company R to pay damages plus interest. On that basis, Company S filed an application with the People’s Court of Ho Chi Minh City (“HCMC Court”) for recognition and enforcement in Vietnam of the aforementioned arbitral award, but the first-instance court refused it in Decision No. 42/2023/KDTM-ST dated 10/01/2023. Company S appealed, and the Chief Prosecutor of the People’s Procuracy of Ho Chi Minh City (“HCMC Procuracy”) protested; the High-level People’s Court in of Ho Chi Minh City (“HCMC High Court”) accepted the appeal, amended the first-instance decision, and recognized and enforced the entire arbitral award in Vietnam pursuant to Decision No. 95/2023/KDTM-PT dated 24/8/2023.

BACKGROUND

The Agreement and the Dispute

On 08/9/2017, Company S (Japan) and Company R (Vietnam, formerly N R Joint Stock Company) entered into a Share Purchase Agreement (“the Agreement”), under which Company S purchased 5,000,000 issued and fully paid ordinary shares held by Company R in N R Long An Joint Stock Company for a total price of VND 174,375,000,000. After completion of the transfer, Company R breached certain post-completion conditions stipulated in detail in Clause 5.4 of the Agreement, including executing employment contracts with employees and contracts with customers. Consequently, Company S exercised its right to terminate the agreement under Clause 5.5.3 of the Agreement, demanding that Company R immediately repay 90% of the paid purchase price (equivalent to VND 156,937,500,000). Company R failed to perform.

Arbitration proceedings at SIAC and the Arbitral Award

The dispute was submitted for resolution at SIAC pursuant to the parties’ agreement. The governing law of the contract was Vietnamese law, and the arbitration rules were the SIAC Rules. On 06/7/2022, the SIAC Arbitral Tribunal issued Arbitral Award No. 090. The award was determined to be the final award of the Arbitral Tribunal, resolving the dispute entirely, terminating the arbitration proceedings, and taking effect for enforcement. With respect to the substance, the award declared Company S the prevailing party: confirming the termination of the agreement as lawful, ordering Company R to pay VND 156,937,500,000 plus interest at 10% per annum from 01/4/2020 until the date of payment, and to pay arbitration fees and costs as well as other reasonable expenses of Company S.

Application for recognition and enforcement in Vietnam

On 19/7/2022, Company S filed an application requesting the Vietnamese Court to recognize and enforce Arbitral Award No. 090 of 2022 issued on 06/7/2022 by the SIAC Arbitral Tribunal resolving Dispute No. ARB363/2020 between the Claimant Company S and the Respondent Company R.

In its opinion dated 07/11/2022, Company R strongly objected, citing numerous grounds alleging that the SIAC Award contravened fundamental principles of Vietnamese law, including:

• Failure to consider and apply Vietnamese law in resolving the dispute. Specifically, the Arbitral Tribunal failed to refer to the Commercial Law 2005 to require Company S to prove actual damages and treated the repayment amount as “liquidated damages” – a concept not recognized or governed by Vietnamese law;
• Breach of the obligation to evaluate evidence, as the documents submitted by Company S were merely photocopies without notarization, certification, or consular legalization;
• Violation of the principles of good faith and honesty by relying solely on inaccurate witness statements from Company S’s employees without objective, comprehensive, and full consideration of the evidence;
• Certain post-completion conditions in the agreement contravene the Principle of Freedom of Contract, and affect the rights of third parties (employees, customers);
• Company R does not receive documents, notices, summonses, and the original Award in accordance with regulations;
• The Arbitral Tribunal fails to consider and resolve Company R’s set-off claim, instead treating it as a counter-claim requiring a separate Statement of Counterclaim.

First-Instance Decision

In First-Instance Decision No. 42/2023/KDTM-ST dated 10 January 2023, the HCMC Court decided not to recognize Arbitral Award No. 090 of 2022 issued on 06/7/2022 by the SIAC Arbitral Tribunal, on the grounds that the Award failed to refer to or base itself on provisions of Vietnamese law and failed to resolve the counter-claim. In addition, the Court decided on the application fee and the right of appeal in accordance with the law.

Appellate Decision

On 16/01/2023, Company S filed an appeal against the first-instance decision. On 19/01/2023, the Chief Prosecutor of the HCMC Procuracy issued Protest Decision No. 514/QĐKNPT-VKS-KDTM proposing that the HCMC High Court conduct an appellate consideration in the direction of recognizing and enforcing Arbitral Award No. 090 of SIAC in Vietnam.

At the appellate hearing, Company S submitted that although the dispute between the two companies was a commercial dispute, the Arbitral Tribunal focused only on the contents agreed between the parties in the agreement for resolution. The agreement between the parties did not violate the law or fundamental principles. Therefore, Company S requested that the appellate panel accept enforcement in Vietnam of Arbitral Award No. 090. The representative of the High-level People’s Procuracy in Ho Chi Minh City (“HCMC High Procuracy”) also expressed opinions on the substance, stating that the findings of the HCMC Court were incorrect, and proposed accepting the appeal and protest, amending the first-instance decision to recognize and enforce the Award in Vietnam.

COURT’S FINDINGS AND DECISION

Based on the case file and the results of arguments at the hearing, the Panel of HCMC High Court in made the following findings:

• Validity of the Arbitral Award and jurisdiction to consider the application: Arbitral Award No. 090 was issued based on the parties’ arbitration agreement; it is the final award with legal effect. Both Vietnam and Singapore are parties to the New York Convention 1958, so the award is considered for recognition pursuant to Article 424 of the Civil Procedure Code (“CPC”) 2015. Company S’s application was filed within the time limit (3 years) as prescribed in Article 425.1 and Article 451.1 of the CPC regarding the right to apply and the time limit for submitting the application.
• Scope of review: Pursuant to Article 458.4 of the CPC 2015, when reviewing recognition of a foreign arbitral award, the Court shall not re-examine the dispute resolved by arbitration. The Court only examines and compares the award with provisions of Vietnamese law and the New York Convention to decide on recognition or non-recognition. The first-instance level exceeded its jurisdiction by re-examining the substance (application of Vietnamese law, evaluation of evidence, set-off of costs, etc.).
• Applicable law to arbitration procedure: The parties selected SIAC arbitration, so the procedure was conducted in accordance with SIAC Rules, without applying the Vietnamese CPC in resolving the dispute. Company R’s arguments regarding violations of Vietnamese procedural law fall outside the scope of application.
• Grounds for refusal of recognition: Failure to resolve the set-off claim (counter-claim) did not prejudice Company R’s interests, as the Arbitral Tribunal still reserved Company R’s right to initiate separate proceedings for costs under different procedures. Therefore, it did not deprive Company R of its right to sue, as found by the first-instance level. Company R’s other objections, such as: incorrect application of Vietnamese law; violation of principles of good faith and honesty; certain post-completion conditions contravening principles of freedom of contract and affecting third parties, all pertain to the substance of the dispute resolved by arbitration and do not fall under grounds for refusal of recognition.
• Decision: The Panel of the HCMC High Court accepted the entirety of Company S’s appeal and the protest of the Chief Prosecutor of the HCMC Procuracy, amended First-Instance Decision No. 42/2023/KDTM-ST dated 10 January 2023 of the HCMC Court, and recognized and enforced the entirety of Arbitral Award No. 090 in Vietnam.

OUR COMMENT

Reducing the tendency to rely on the argument of “Violation of fundamental principles of Vietnamese law”:

Previously, the argument of “violation of fundamental principles of Vietnamese law” (Article 459.2(b) of the CPC 2015) was often expansively and vaguely applied, leading to situations where courts inadvertently re-examined the substance of arbitral awards, which is beyond the scope of the jurisdiction.

In this case, the first-instance court refused recognition of the SIAC Award on the grounds that the tribunal incorrectly referred to Vietnamese law and failed to set off costs. The appellate court rejected all of these, affirming that such issues pertain to the substance of the dispute and are not grounds for refusal under Article 5 of the New York Convention 1958. By prioritizing the application of the international convention and limiting the scope of review to strict grounds (such as violation of public order), Decision No. 95/2023 significantly narrows the abuse of the concept of “fundamental principles”, replacing it with a narrower criterion of “public order” in accordance with the New York Convention.

Narrowing constraints from domestic procedural rules:

The appellate court clarified that when parties select international arbitration, the procedure must comply with the Rules of that international arbitration centre, without applying the Vietnamese CPC (such as requirements for consular legalization of evidence, evaluation of evidence under Articles 95, 108, 478 of the Civil Procedure Code). This provides flexibility for international arbitration, avoiding procedural burdens often imposed on domestic arbitration (as in cases of award setting aside for lack of consular legalization of powers of attorney). The result creates advantages for parties selecting foreign-seated arbitration while providing impulsion for reform of domestic arbitration towards a more international approach.

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