1. The Big Picture: Investor-State Dispute Settlement Mechanisms in Vietnam

Vietnam is constantly making headlines as the new rising star in foreign direct investment (FDI) into Southeast Asia. Strategically tied in with most large global economies by multilateral free-trade agreements (FTAs), increasing numbers of Multinational Companies (MNCs) and Small and Medium-Sized Enterprises (SMEs) are discovering Vietnam as their gateway into Asia. Indeed, the country has managed to position itself well in the shadow of its overpowering northern neighbour China, still entangled in an unpredictable trade war and diplomatic disaccord with the USA and other western economies.

The sudden disruption of international supply chains due to the COVID-19 pandemic caused a further shift of global trade and investment streams to Vietnam's benefit. Rising uncertainty about the future of international trade has made Vietnam even more attractive, especially to those who priorly deemed Vietnam to be a 'high-risk' investment. Therefore, it is not a coincidence that Vietnam was one of the few economies globally that managed to expand by 2.9%, according to World Bank statistics.1

Much of this success can be attributed to the Vietnamese government's efforts to conclude a series of highly beneficial FTAs with regional and global partners. These treaties generally contain investment protection agreements (IPAs), which increase the accountability of member states by introducing new rules for dispute settlement in case of unilateral breach of the agreed bilateral investment conditions.

Extrapolating these developments, most forecasts agree that Vietnam is heading towards a bright economic future supported by staggering growth and hefty investments into its logistics and energy infrastructure. Large-scale projects such as refurbishing the electric grid, installing large capacities for the domestic generation and storage of renewable energy, and improving ports, roads, and bridges for a new decade of industrialisation require copious amounts of capital and know-how. Vietnam is poised to attract these funds and other resources in the form of FDI, continuing its successful strategy of the last decade.

IPAs play a crucial role in tilting the scales of investment decisions favouring developing countries, where the efficiency and transparency of local laws and practices can pose a significant concern. Being familiar and able to understand the complex structures of international treaties, FTAs, and IPAs has thus become a staple of doing business in emerging markets.

This legal update discusses Vietnam's most important IPAs and summarises the advantages of investor-state dispute settlement (ISDS) mechanisms for foreign investors. We have chosen the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as guiding examples for outlining available ISDS mechanisms. These FTAs are the most sophisticated and relevant treaties which include the bulk of Vietnam's global investment partners.

2. Summary: What is ISDS?

Many developing countries are entering into a growing number of bilateral investment treaties (BITs), FTAs, and regional trade agreements (RTAs). Significant differences distinguish them in scope and members, while most of them include provisions for the protection of foreign investors through ISDS. The value of these treaties lies in the ratifying countries' mutual commitment to providing beneficial conditions for investment based on most-favoured-nation, national treatment, and fair and equitable treatment principles.

Within the realm and scope of FTAs, ISDS mechanisms form a complementary dispute resolution regime. As the foreign investor's procedural tool kit, ISDS permits to sue signatories of international treaties for alleged discriminatory practices in their capacity as hosts of foreign investment. The substance of such procedures is typically an alleged breach of favourable treatment clauses by a host country to the detriment of a specific foreign direct investment. Members states usually convene on an ISDS scheme in addition to an FTA. However, there are also several FTAs that do not contain ISDS mechanisms or explicitly exclude them. When available, ISDS rules ascertain mutual compliance with agreed trade and investment conditions and endow foreign investors with a legal instrument to enforce their claims abroad.

Under global free trade policies, goods and services may be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions. FTAs and other treaties set out these preferential trade and investment conditions. They provide trade partners with commercial and regulatory advantages over their competition in countries not subject to such preferential treatment. However, these advantages are only as valuable as the legal enforcement instruments that support them.

Typical regulations incorporated in ISDS mechanisms are:

  • Scope of ISDS (who and what?);
  • Preconditions: Alternative Dispute Settlement or cooling-off period;
  • Composition of Tribunal (Ad Hoc Arbitration or Standing Tribunal);
  • Reference to Procedural Rules of international institutions or United Nations Commission on International Trade Law (UNCITRAL);
  • Rules for enforcement of arbitral awards under ISDS; and
  • Statutes of Limitation for ISDS claims.

The ISDS agreement forms the basis of any ensuing legal proceeding. The conditions and regulations under these agreements may vary. Typically, in IPAs, investors will find a notice provision requiring a prospect claimant to notify the host state of an arising dispute in writing. In some variations, an ISDS clause may impose a "cooling-off period", during which the counterparties must attempt to resolve the dispute amicably. In other cases, claimants may also have to exhaust any available local (legal or other) remedies during this period. Once this period has expired – assuming no other preconditions apply (e.g. mediation) – the claimant may commence arbitration.

Typically, ISDS agreements stipulate the rules that will apply to their proceedings. Less commonly, the agreement may permit the claimant to select a set of rules that the host state has pre-approved (e.g., the ICSID Arbitration Rules, ICSID Additional Facility Rules, UNCITRAL Arbitration Rules, and ICC or PCA Rules of Arbitration).

The ISDS agreement may include a reference to a particular seat of arbitration. In the absence thereof, the Arbitral Tribunal has discretion over its seat according to the applicable rules. This choice can be consequential because it establishes the supporting legal framework for the arbitration, including how and when the seat courts may intervene and the legal grounds and procedure for challenging a resulting award.

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Footnote

1. See for more information: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=VN  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.