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Another Decree, another set of issues

The Government of the Socialist Republic of Viet Nam (the

Government) has promulgated a Decree that replaces,

amends, elaborates and partly consolidates existing legal

provisions governing the construction industry in Vietnam.

The operation of the Decree is broad and effective now.

Some of the changes and amendments brought about are in

some cases quite remarkable.

Introduction

Following brisk consultations, the Government haspromulgated a Decree (with the serial number 48/2010/

ND-CP) Decree 48) containing, within its 52 articles, several

important changes and additions to existing statutory

provisions governing the Vietnamese construction industry.

Unfortunately, in several respects, Decree 48 does not exhibit

the clarity and uniformity of legislative drafting required of

Vietnamese statutory instruments1, and numerous questions

arise as to its intended operation and the status of prior

statutory instruments.

A series of Alerts, starting with this one, will outline the moreimportant provisions of Decree 48, and identify the areas of

uncertainty requiring further guidance from the Government.

To whom does it apply?

Decree 48 applies to organisations and persons involved in

construction contracts governing projects where not less

than thirty percent of the capital2 invested in that project is

regarded as state capital. State capital that originates from an

official development assistance programme with a foreign

nation is still regarded as state capital.

Essentially, the expression construction contract denotes a

written agreement providing for civil relations in

construction activities3. Thus, it does not apply to

organisations and persons who enter into an oral agreement.

Nor does it apply to organisations and persons whose

construction project involves an investment of state capital

that represents less than thirty percent of the total capital

investment. It remains unclear whether the threshold test is

to be applied once-and-for-all at the time of execution (i.e.

Update

continued on reverse

August 2010

Decree 48/2010 a Critical Change to theConstruction Laws of Vietnam

A New Decree:

- Operates in the place of Decree No 99/2007/ND-CP and Circular 6/2007/TT-BXD,

governing all types of contracts, including contracts for consulting services,

construction services, EPC, and turnkey contracts.

- Introduces important changes applicable to such contractual matters as: pricing;

payment; parties rights, remedies, privileges, duties and obligations; insurance;

notification and substantiation of claims; and the commencement of arbitration.

This Alert:

- Provides a basic introduction to the Decree.

- Focuses on the immediate changes concerning notification and substantiation of claims

and the time limit for commencement of arbitration.

1As stipulated in the Law on Promulgation of Legal Instruments (Law No. 17/2008/QH12).2See Article 1 (Scope of regulation and subject of application), Clause 2 of Decree 48. This thirty percent threshold is not new to Vietnamese law, as it

was an indirect feature of the former Decree on Management of Work Construction Investment Expenditures and the Bidding Law.3See Article 2 (Interpretation of terms), Clause 1 of Decree 48.

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signing and/or sealing) of the construction contract, or

whether a subsequent decrease/increase in the level of state

capital, beyond the threshold level, will cause the Decree 48

to become ineffective/effective.

From when does it apply?

Decree 48 took effect on July 1st 20104, and applies as fromthat date5; however its requirements are not binding on a

construction contract whose status prior to July 1st 2010 was

v ang thc hin, which roughly translates as

"performed or being performed. The use of this expression,

rather than a reference to the date of contract execution, for

the purpose of this exemption, is highly unusual.

As a result of this choice of milestone, it appears that

organisations and persons to whom Decree 48 applies by

virtue of the character of their construction contract will not

escape the operation of its provisions merely because their

contract was executed prior to July 1st 2010. If for whatever

reason, say the operation of a condition precedent toperformance, there has yet to be complete or partial

performance prior to July 1st 2010, then arguably, the contract

will not be exempt from the operation of Decree 48. Few

change-of-law clauses would truly envisage such a

fundamental post-contractual change of law, and the legal and

commercial implications of the trigger for effectiveness in

Decree 48 warrant careful assessment on a case by case basis.

There does however appear to be a power, solely on the part

of an investment decider, to opt out of the application of

Decree 48 where negotiating parties (to whom the decree

would apply if the investment decider so decided) were in the

process of negotiating their construction contract

immediately prior to July 1st 20106. And yet, it is unclear

whether if that power were to be exercise, Decree on Man-

agement of Work Construction Investment Expenditures7

would spring back into life, notwithstanding the former

decrees repeal under Article 51 of the Decree 48. Would the

exercise of the power lead to a legal vacuum?

The main areas of change

Decree 48 introduces important changes and additional

statutory provisions in the following nine areas:

1. New party rights, privileges, duties and obligations

2. Material price inflation

3. Adjustment of Schedule

4. Payment

5. Construction insurance

6. Notification and substantiation of claims

7. Time limit for commencement of arbitration

8. Suspension and termination

9. Bilingual construction contracts

Subsequent Alerts will outline the more salient aspects

of its provisions relevant to these topics, and consider their

interrelation with the other Vietnamese statutes (eg, Law

on Construction7 and Circular Providing Guidance on

Contracts in Construction Activities9) and on the provisionsof parties contracts.

But for reasons of immediate, practical urgency, the

remainder of this Alert will draw immediate attention to the

seventh and eight topics, namely - new time limitations on

the notification and substantiation of claims and on the

commencement of arbitration proceedings.

Beware: Notification and substantiation of claims

Article 43 (Complaints in the course of performance of

construction contracts) introduces a statutory duty topromptly notify and substantiate contractual defaults within

thirty days after the default becomes known to the innocent

party. There are also the hallmarks of waiver provision in

relation to any claim that has not been so notified and

substantiated prior to the expiration of the deadline11.

Clause 3 requires that:

Within 30 days after detecting matters incompatible with

the signed contract, the detecting party shall promptly notify

the other party of such contents and complain about these

matters. Past that time limit, if no party lodges a complaint,

the parties shall comply with signed agreements."

The complaint must be sent to the correct address for

transaction or information exchange as agreed upon by the

parties in the contract.11 Unaccountably, Article 43 contains

no corresponding express requirement in relation to the

notification of a contractual default.

Is this a waiver?

The obligation of the parties to comply with signed

agreements is open to being construed as a temporary

waiver of rights and remedies arising from precedingcontractual defaults. Indeed, the style of drafting of this

provision throws up a number of subsidiary questions,

such as:

Can a party avoid the operation of Clause 3 simply bylooking the other way, refusing to acknowledge a

contractual default, and/or feigning ignorance of it?

continued on reverse

4See Article 51 (Effect) of Decree 48.5See Article 83 (Application of legal instruments), Clause 1 of Decree 48.6See Article 52 (Organization of implementation), Clause 1 of Decree 48.7

No. 99/2008/ND-CP.8No. 16-2003-QH11.9No. 06/2007/TT-BXD.10See Article 43, Clause 3 of Decree 48.11See Article 43, Clause 5 of Decree 48.

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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.

LONDON DUBAI BEIJING SHANGHAI HONG KONG SINGAPORE

OTHER UK LOCATIONS: BIRMINGHAM BRISTOL EDINBURGH GLASGOW LEEDS MANCHESTER

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Does the temporary waiver (if that is what Clause 3 isintended to create) arise following the expiration of the

thirty day period, or following the expiration of the period

within which there must be a prompt notification?

Does the temporary waiver arise where the complainanthas mis-addressed his complaint?

The show-cause procedure

Clause 4 of Article 43 provides that within thirty days of

receiving a complaint, the recipient must show cause why the

matters complained of do not represent a contractual default,

failing which the recipient will be deemed to have accepted

the complaint. A clearer expression of waiver is noticeable in

this context than one find in relation to the obligation to

notify and substantiate a complaint under Clause 3; however

there are several points of uncertainty here too, such as:

Does Clause 4 establish a conclusive presumption or

waiver, or a rebuttable presumption? Is it sufficient merely for the recipient of the complaint to

respond in the form that he or she thinks fit? There are

no particular manner or form requirements stipulated in

that regard.

Contractual notice provisions

Since Article 43 is not expressed so as to derogate from any

concurrent contractual notice provisions, as an article of

prudence, it is strongly recommended that all applicable

contractual notice provisions also be fully complied with.

Time limit for commencement of arbitration

There has been a noticeable change to the commencement

point for the two-year time limit for requesting an arbitration

to resolve a dispute arising from a construction contract from

"the date the dispute occurs "under the Ordinance on

Commercial Arbitration12 to "from the date the parties' lawful

rights and interests are infringed upon."13 This change brings

the position in line with the limitation period established in

the Civil Code, in relation to court proceedings14, and

corresponding legal norms in many other jurisdictions. And

yet, does such an early commencement point for the twoyear limitation period actually sit comfortably with the

practice in the Vietnamese construction industry of storing up

disputes for resolution en blocupon the achievement of

completion of the works? This change will surely compel a

new approach involving the taking of formal protective

measures during the life of the project.

Time to Act: immediate countermeasures

It will be apparent that Articles 43 and 44 of Decree 48 call

for an immediate change of behaviour by contracting parties

to whom the decree applies and is effective. Prudentcountermeasures will involve speedier, more sophisticated

document control procedures and revised time lines for the

initiation of arbitration with a view to preserving arbitration

as an available avenue of dispute resolution on the project.

Although the implementation of such countermeasures is a

matter largely for project management staff, we are ready to

consult with you with a view to designing and establishing a

suitable system to minimize embarrassment and more

importantly, to better preserve the working relationship of

the contracting parties.

12See Article 21 (Statute of limitations for initiating dispute settlement through arbitration), Clause 2 of Decree 48.13See Article 44 (Settlement of disputes over construction contracts), Clause 4 of Decree 48.14See Article 427 (Statute of limitations for initiating lawsuits related to civil contracts) of Decree 48.

Tu DinhConsultant

T: +852 2294 3314E: tu.dinh@pinsentmasons.com

Nicholas BrownPartner

T: +852 2294 3414E: nicholas.brown@pinsentmasons.com