Nguyen Manh Dung and Dang Vu Minh Ha: ISDS Reform and the EU-Vietnam Investment

Protection Agreement – Challenge Accepted!

Paving the way for Vietnam towards a new generation of free trade agreements

Vietnam is now party to 66 BITs, 11 concluded FTAs (10 of which are in effect) and in the
process of negotiation for five others.

In particular, the Government and the National Assembly had taken the initiative by
introducing more than 100 pieces of new or reformed legislation to prepare the local
framework for compliance with the international standards of the trade deal.

The EVIPA is expected to help Vietnam to expand its potential and benefit from the
consequential growth of its trade opportunities. Notably, the EVIPA single-handedly
addressed both options of ISDS reform considered by the Centre for International Dispute
Settlement (CIDS), as reported in the recent note of the Secretariat of the UN Commission
on International Trade Law (UNCITRAL), namely (i) a permanent international dispute
settlement body; and (ii) an appeal mechanism for investor-state arbitral awards. Given its
novelty, this chapter aims to provide an insight to the ISDS mechanism in the EVFTA that
strikingly distinguishes it from other new generation FTAs and to analyse the effect of this
mechanism on Vietnam.

12.3 Factors affecting the workability and effectiveness of the ISDS mechanism under the
EVFTA

3.1 Vietnam’s Attitude toward Investor-State Disputes

As of August 2016, the government of Vietnam has been identified as the respondent of
eight investment arbitration cases, of which, as far as open to public, Vietnam has
successfully settled one case, won three, lost one, and has three still pending. Vietnam
potentially faces a high risk of being involved in investor-State disputes.

On 14 January 2014, the prime minister of Vietnam issued Decision No. 04/2014/QD-TTg on
the Promulgation of the Regulation on Coordination in Resolution of International
Investment Disputes (2014 Regulation). This Decision had been replaced by the Decision No.
14/2020/QD-TTg.

The 2014 Regulation clearly stipulates the tasks, powers and process of coordination among
state agencies and relevant authorities in the resolution of international investment
disputes before international arbitration or competent foreign tribunals, aiming at
protecting the lawful rights and benefits of the Vietnamese government and Vietnamese
state agencies.

The 2014 Regulation took effect from 3 March 2014 and seems to have proven effective in
resolving investor-state disputes by successfully connecting the relevant agencies through
coordination and cooperation. Before the promulgation of the 2014 Regulation, the
preparation and participation of Vietnam in ISDS was passive and disorganised.

As in the case of DialAsie, it might be the underestimation of the Vietnamese government

that led to a dispute of commercial nature to become an investment claim. However, the
official guidance provided by the 2014 Regulation assisted the competent authorities to
more actively cooperate to fulfil their assigned responsibility.

The 2014 Regulation is just the first step taken by the Government of Vietnam to manage
and resolve investment disputes in preparation for the trend of IIA reform. Through such
efforts, the government reveals its understanding of the drawbacks of traditional
investment arbitration and the risk of claims by investors. Thus, Vietnam has sought a new
regime of ISDS with the hope that the standing body under the EVFTA would remedy the
problems present in the current model of ad hoc investment arbitration.

3.2 Position of VN regarding the tribunal in the negotiation of the trade deal with the EU

Disputes between a Vietnamese investor and the EU and/or its member state or vice versa
will be resolved through a two-tier tribunal system in which the decision of the tribunal at
first instance subject to appeal before the Appellate tribunal. This investment tribunal
system (ITS) is considered as a ‘novel two-tier settlement mechanism for investment
disputes, combining elements of traditional ISA with judicial features’. Thus, following
Canada, it can be said that Vietnam is one of the first partners accepting in full the ITS model
proposed by the EU.

12.4 The EVIPA’s Regime for settlement of investor-state disputes

Although untested, the ISDS regime under the EVIPA appears highly promising as the
standing body can bring highly qualified and carefully appointed individuals to sit as
‘arbitrators’ on the Tribunal and Appeal Tribunal. These arbitrators would be bound by the
Code of Conduct stipulated in Annex 8 of the EVIPA.

4.1 Summary of the Amicable Dispute Resolution Methods under the EVIPA

4 methods of investor-state disputes, namely through negotiation, consultation, mediation,

and the ITS. These four methods must be utilised in turn, except for recourse to mediation.

4.2 The procedure for resolution of investor-state disputes through the ITS under the EVIPA.

4.2.1 Submission of claim

4.2.2 First proceeding

Under the EVIPA, a specific case will be heard by a division of three members from the nine
members of the Tribunal – one national of a member state of the EU, a Vietnamese national
and a member who is a national of a third country.

The division of the Tribunal will make every effort to decide the dispute based on consensus.
In the event that consensus cannot be reached, the matter at issue will be resolved by
majority vote. The decision made by the division of the tribunal is regarded as a provisional
award and can be subject to appeal.

The provisional award must be rendered within eighteen months from the date of
submission of the claims.

4.2.3 Appellate Proceeding

Either disputing party may appeal against the provisional award on one of the grounds set
out in Article 3.54(1) of the EVIPA: (a) that the tribunal erred in the interpretation or
application of the applicable law; (b) that the tribunal manifestly erred in the appreciation of
the facts, including the appreciation of relevant domestic law; or (c) those provided for in
Article 52 of the ICSID Convention, insofar as they are not covered by (a) and (b).

The ISDS mechanism under the EVIPA is significantly different from the traditional
investment arbitration model and it may take time for Vietnam to become fully acquainted
with the operation of the standing bodies and the dispute settlement proceedings.
Furthermore, a developing country like Vietnam will face a number of challenges in the
interpretation and application of the relevant provisions of the agreement. The next part
shall examine what Vietnam has to deal with in participating in such an ambitious IPA and
how the country will tackle such challenges.

12.5 Challenges that Vietnam will face in the implementation of the ITS under the EVIPA

5.1 Transparency

Unlike traditional treaty-based arbitral proceedings in which all the submissions and other
documents are kept confidential, the ITS under the EVIPA will be fully transparent and a
third party can seek to intervene in the proceedings.

According to the UNCTAD’s publicly available database on investor-state disputes, the

investment arbitration cases involving Vietnam have, to date, always been kept confidential.
As a characteristic of the more traditional treaty-based arbitration procedure, there is very
little publicly available information. The UNCITRAL Transparency Rules have been clearly
incorporated in the new 2013 UNCITRAL Arbitration Rules, and will therefore automatically
apply to disputes arising out of treaties concluded on or after 1 April 2014. In addition, a
number of key provisions from the UNCITRAL Transparency Rules are adopted in the ITS of
the EVIPA.

It is time for Vietnam to adapt to the transparency policies under the new generation of
international investment treaties. Although the relevant treaties also provide for reservation
of confidential and protected information, essential information on investment cases should
be made available to the public along with any potential intervention from third parties. The
Government of Vietnam should be prepared for such situations. Otherwise, Vietnam may
need to enhance domestic policy to contain disputes from the pre-arbitration stages or try
to settle the dispute through negotiation to contain disputes from the pre-arbitration stages
or try to settle the dispute through negotiation or mediation in order to ensure the
confidentiality principle still applies.

5.2 Qualifications of the members of the tribunal and appeal tribunal under the ISDS
Mechanism of the EVIPA

5.3 Enforcement of the Final Award

Vietnam has unfortunately become infamous for having a poor track record in the
recognition and enforcement of foreign arbitral awards.

After the five transition years, Vietnam has to treat and enforce the award as if it were the
local judgment of the Vietnamese court. In light of the inevitable, the government should
prepare to face the increasing number of investment claims and their potential outcomes.

5.4 Compatibility of Vietnamese Laws with the commitment in the EVIPA

5.7 Limited Capable Human Resources that Specialise in ISDS

12.5 Challenges which can be foreseen in considering the accession of Vietnam to one of the
world’s most ambitious and comprehensive FTAs. Furthermore, these difficulties are only
viewed from the investment perspective. There are still endless potential risks that can be
pointed out from many other perspectives such as economy and trade. Playing in a large
playground with giant partners, Vietnam should prepare to become acquainted with the
difficulties and challenges, and be prepared to take steps to sustainably develop.

Conclusion

It is said that opportunities are always accompanied by challenges, and for Vietnam,
participation in the most ambitious and comprehensive new generation of FTAs and
investment protection agreements should herald a period of intense preparation to face
plethora of challenges and difficulties, including the increase in number of investor-state
disputes against the Government of Vietnam. At the moment, it seems that the Government
of Vietnam is paying more attention to the opportunities that the EVFTA and EVIPA may
bring, while underestimating the potential underlying risks.

Particularly, the ISDS regime under the EVIPA, with the establishment of the first ITS,
presents many potential challenges for Vietnam not only in adapting to and implementing
the regulations therein, but also in building human resource capacity to strongly and
sustainable develop in such a new playground without any damage.

With the amendments to a number of important pieces of legislation, including the Law on
Investment, the Civil Procedure Code, and the Civil Code, Vietnam is showing positive
progression toward integration into the global playground with giant partners. Diligent
preparation is what Vietnam should aspire towards at the moment. Vietnam should make
use of the time prior to entry into force of the EVIPA to be well equipped before entering
the real battlefield.

As the new legislation and policy at both the domestic and international levels have still yet
to be tested, it is worth looking forward to what the future may bring and the next steps
that Vietnam will take to balance the opportunities and challenges, while sustainably
developing and reaping the benefits from entering the new global playground.

Nguyen Thanh Tu and T.C.Q. Vu, ‘Investor-state dispute settlement from the perspective of
Vietnam: Looking for a post-honeymoon’ in J.E. Kalicki and Anna Joubin-Bret (eds.), Reform
of Investor-state dispute settlement: in search of a roadmap (Brill Nijhoff, 2014).