Construction activities in Vietnam, particularly in such economic hubs as Hanoi capital and Hochiminh City are booming as the result of the fast developing infrastructures and residential towns. Since early 2000, there are more foreign companies coming to Vietnam for providing construction and engineering services to construction works invested by Vietnamese or foreign investors, particularly those from Japan for doing the ODA funded construction projects and from Korea following their national investors to set up factories and commercial buildings in Vietnam.

Coming back to the early stage of economic renovation when private business had not paid attention to real estate business, only State owned corporations under the communist leadership involved in building infrastructures and commercial works funded by the State budget or State original resources. There was, thus, no real concept of commercial contracts. There existed a perception that the principal - contractor relationship is like "decision maker - decision follower relation" where the principal giving instructions and directives, and the contractor obeying even if the signed contract states otherwise. The relation neither based on the rules of laws nor the rules of contract, but the rules of the payer. Since 1990s after shifting the economic system to market oriented, private businesses are promoted but that perception still remains heavily in the construction industry, particularly related to the State funded projects.

When private funded construction activities started booming, certain private investors bravely hired foreign companies to provide construction related services to their projects. Foreign experts brought in with certain new concepts and standards for construction contracts. Typically, the International Federation of Consulting Engineers (FIDIC) type contracts became highly recommended and preferable since they suggest some standardized terms and conditions that are quite fair to both principals and contractors. Now FIDIC type contracts are largely used.

Using FIDIC type contracts could help investors and contractors save time to prepare and draft comprehensive contracts. FIDIC type contracts set out certain standardized terms basing on international practices and common legal terms in different jurisdictions. However, Vietnam's regulations and practices may have differences.

1. Getting a licence

A foreign company (i.e. the company established and operating in another country) wishing to provide construction or engineering services in Vietnam must obtain a licence from construction management authority. As a matter of facts, administrative procedures in Vietnam commonly cause burdens and time consuming to enterprises. Typically the procedures are cumbersome for the reason of lack of transparency or qualifications of State officers. Without knowing the practices in Vietnam when undertaking the licensing procedures, foreign contractors may be difficult to get the licence for providing services. Thus, when contracting with the principal, contractors usually require the principal's obligations to provide assistances to get the licence.

2. Localization requirements

As a condition for granting a licence, foreign contractor who is a successful bidder must enter into a consortium with a Vietnamese contractor or a subcontract with a Vietnamese contractor, except otherwise permitted by the Prime Minister or regulated by laws. Nevertheless, there is no further detail guidance with respect to percentage of the local contractor's work as well as to the minimum time period of using the local contractor.

Vietnamese laws do not restrict foreign contractors on any percentage of foreign expatriates to be used to implement the construction works. They may bring in foreign engineers into the country for doing construction and engineering activities in Vietnam. However, Vietnam prohibits any use of foreign staff for the jobs that can be performed by Vietnamese labourers, particularly blue-collar workers and those do not need higher training or education.

3. Interruption circumstances

So far Vietnam is viewed to have lower standards related to protection of public interests and safety compared to other developed countries. However, the regulations are somehow abstract that may provide arbitrary rights to authorities for suspending construction activities, for instance, if the construction activities caused other adjacent works sinking, cracking, leaking, or threatening to be destroyed; caused environmental pollution to surrounding areas (without defining quantitative criteria of pollution); or caused traffic jams.

Lands are indispensable for habitants. In big cities like Hanoi and Hochiminh, lands are limited thanks to the crowed population but inefficient utilization and bad management of land areas. It therefore became one of the most luxury properties with very high price compared to low average income per capita. Nevertheless, when doing certain construction projects, on the ground stated in the Constitution that all lands in the country are owned by the people represented by the State (meaning there is no land owned by any citizen but land are used by the citizens), the Government may confiscate land of habitants and compensate them with statutory prices which are usually much lower than fair market price. Therefore, claims and boycotts from land habitants are usual in many investment projects. They do not have a statutory authority to interrupt construction activities but their class actions in certain cases may cause adversely impacts to interrupt the projects and construction activities. It happened many times that policy and lawmakers must have changed their policies to mitigate the problems. Interruption to construction activities shall adversely affect the time schedule to complete the works. Who will take the responsibilities with respect to the site clearance and class actions made by land occupations should be an important issue to address in the construction contracts.

4. Insurance requirements

Vietnamese laws require contractor to maintain certain insurances, such as professional liability insurance; insurance for materials, equipment and premises used in the construction; insurance for employee's accidents; and insurance for third party's civil liability. Noteworthy, those insurances must be purchased from an insurance company operating in Vietnam.

5. Statutory liability for defects

Under the current laws of Vietnam, the warranty period is set as at least 24 months for special and first-grade construction works and at least 12 months for other works calculating from takeover date. Contractor shall have statutory liability to repair any defects during the warranty period at its own costs, except defect and damages not attributed to the contractor, or due to breaches of laws by the principal, or due to wrong uses in accordance with operation manual. As same as the practices in other jurisdictions, warranty obligations can be assured by retention money or warranty bond.
It may be admitted in other jurisdictions that beyond the warranty period, contractors shall be free from liabilities related to quality of the works. In the context of Vietnamese laws, beyond the warranty period, Vietnamese regulations still bind the contractor's liabilities for defective design and construction works caused by the contractor, which may constitute the compensation for damages, or a violation of public laws, such as administrative sanctions or criminal offenses.

6. Liquidated damages and limitation of liability

The concept of "liquidated damages" is not clearly defined under the laws of Vietnam. The Civil Code states that, the contracting parties can agree a fixed amount of penalty in the contract in case a breach of one party causes damages to the other. Parties may agree that only penalty shall be applicable or penalty plus compensation for damages shall be both applicable to a breach. From the view on principle of damage compensation, the claimed amount must be actual, direct and consequential. Where parties just agreed on penalty amount without specifically stating in the contract a liability to compensate damages, only penalty can be applicable on a breach. Therefore, there may be a risk that liquidated damage clause, which is commonly used by international contractors, may not be fully enforceable on the ground and to the extent that liquidated damage amount is higher than statutory maximum penalty (i.e. 12% the contract value). Although this is controversial, the enforceability of liquidated damage clause in Vietnam is uncertain.

FIDIC contract forms suggest parties to state in the contract "limitation of liability" clause, whereby eliminating the liability for compensation of consequential damages, business loss and other indirect damages. The exception of compensation for consequential damages and business loss may not be fully enforced on the basis that business loss is not clearly determined as a direct or indirect damage. And as mentioned damages which are actual, direct and consequential from a breach are widely construed as eligible damages for compensation claims. Although this depends on the perception and views of different courts, which are controversial, enforceability of exception clause of business loss and consequential damages is uncertain.

7. Burdensome payment procedures

Payment procedures for state funded projects are usually more burdensome compared with other private funded projects. Vietnamese laws do not strictly govern the procedures for installment payments during the implementation of contract and gives a freedom to parties' negotiation. However, many State funded projects have complicated management structure and the project management unit may not have full authority to approve the payments. A complicated procedure with higher authority's approval requirements may cause delays to payment processes.

There are also regulatory procedures applicable to state treasuries for disbursement of payments to contractors under the contracts for construction of state funded projects that contractors and employers shall need to follow. Particularly the final settlement of investment expenses is a long process and shall need to be audited and approved by the Ministry of Finance or Prime Minister.

Since the authorities who have power to approve the budget are usually different from the authorities who have power in making specific approvals during the course of contract negotiation and implementation, there are in fact certain cases where the scope of works are added during contract negotiation or implementation. The additions were legally approved but if the price increased more than the approved budget, there shall be not sufficient basis to pay the increase to contractor.

Fluctuation of material and equipment market price is also a matter of concern since Vietnamese laws just provide limited criteria and basis for calculation of changes of contract price based on change of material and equipment market price. In cases where the changes fall out of the scope of the approved budget or permitted criteria, the principal may not have a basis to finally settle down the changed payments to contractor.

8. Governing law

Foreign construction companies have reasons to prefer the use of laws of their country, or of an advanced independent jurisdiction, to govern the construction contracts in Vietnam. An article of the Civil Code of Vietnam states that any transactions related to real estates in Vietnam must be complied with Vietnamese laws. This article appears to be broad given that construction related activities are all "related to real estates". Thus, a conservative legal point of view would see that parties can not choose laws of a foreign country to govern the construction contracts for construction of works in Vietnam, even if a party therein is a foreign entity.

The Government of Vietnam has issued very recently the Decree No. 48/2010/ND-CP to govern construction contracts in the projects having State capital of 30% or more. This Decree firmly states that construction contracts in those projects must be governed by the laws of Vietnam.