1. Introduction
In the context of increasingly deep international economic integration, civil and commercial transactions involving foreign elements have become increasingly common. The participation of parties from different countries in the formation and performance of contracts raises an important issue concerning which legal system will govern the rights and obligations of the parties in the event of a dispute.
In practice, each country has its own legal system with different rules governing the formation, performance, and termination of contracts. Therefore, the right to choose the applicable law is regarded as one of the fundamental principles of modern private international law, ensuring the parties’ freedom of agreement and enhancing predictability in international commercial activities. However, whether this freedom constitutes an absolute right remains a legal issue that warrants further examination.
This article analyzes the legal basis of the right to choose the applicable law for contracts involving foreign elements under Vietnamese law, while also clarifying the limitations of this right in practice.
2. Overview of Contracts Involving Foreign Elements
According to the provisions of the 2015 Civil Code, a civil relationship involving foreign elements is a civil relationship that falls into one of the following categories:
- At least one party is a foreign individual or foreign legal entity;
- All parties are Vietnamese citizens or Vietnamese legal entities, but the establishment, modification, or termination of the relationship occurs abroad;
- The property related to the civil relationship is located abroad.
In such relationships, determining the applicable law is of particular importance because it governs the validity of the contract, the rights and obligations of the parties, and the mechanism for dispute resolution.
3. The Right to Choose the Applicable Law for Contracts Involving Foreign Elements
3.1. Legal Basis
Clause 1 Article 683 of the 2015 Civil Code provides:
“The parties to a contractual relationship may agree on the law applicable to the contract, except in the cases specified in Clauses 4, 5, and 6 of this Article.”¹
This provision recognizes the principle of party autonomy, a principle that is widely accepted in modern private international law.
Accordingly, the parties may choose:
- Vietnamese law;
- The law of another country;
- To change the chosen law during the performance of the contract, provided that such change does not affect the lawful rights and interests of third parties.
For example, a Vietnamese enterprise enters into a sales contract with a Japanese company. The parties may agree to apply Japanese law, Vietnamese law, or the law of a third country, such as Singapore, to govern the contract.
3.2. Significance of the Right to Choose the Applicable Law
First, it ensures contractual freedom.
Freedom of agreement is a fundamental principle of civil law. Allowing parties to choose the applicable law enables them to determine the legal framework most suitable for their transaction.
Second, it enhances the stability and predictability of international transactions.
When the governing law is determined in advance, the parties are better able to assess their rights, obligations, and legal risks.
Third, it promotes international trade and investment.
Recognition of the right to choose the applicable law contributes to a transparent business environment, aligns with international practices, and strengthens the confidence of foreign investors.
4. Are Parties Absolutely Free to Choose the Applicable Law?
Although Vietnamese law recognizes the right to choose the applicable law, such right is not absolute.
4.1. Limitation in Relation to Contracts Concerning Immovable Property
Clause 4 Article 683 of the 2015 Civil Code provides:
“The law applicable to contracts relating to immovable property shall be the law of the country where the immovable property is located.”²
This provision reflects the principle of lex rei sitae (the law of the place where the property is situated), which is widely recognized in private international law.
For example, if an apartment is located in Vietnam, then even where the parties are foreign nationals and have agreed to apply foreign law, matters relating to rights over that immovable property must still be governed by Vietnamese law.
4.2. Limitation Intended to Protect Employees and Consumers
Clause 5 Article 683 of the 2015 Civil Code provides that:
The choice of applicable law must not adversely affect the minimum rights and interests afforded to employees and consumers under Vietnamese law.³
This provision is derived from the principle of protecting the weaker party in contractual relationships.
In practice, where a Vietnamese employee enters into an employment contract with a foreign company and the parties choose foreign law, such choice must not deprive the employee of the minimum protections guaranteed under Vietnamese law.
4.3. Limitation Based on the Fundamental Principles of Vietnamese Law
Article 670 of the 2015 Civil Code provides that:
Where the consequences of applying foreign law are contrary to the fundamental principles of Vietnamese law, such foreign law shall not be applied.⁴
This is known as the public policy reservation mechanism.
For example, if the chosen law permits transactions that are contrary to social morality or fundamental principles of Vietnamese law, the competent Vietnamese authorities may refuse to apply that law.
4.4. Cases Where the Parties Do Not Choose the Applicable Law
Clause 2 Article 683 of the 2015 Civil Code provides that where the parties do not reach an agreement on the applicable law, the governing law shall be the law of the country having the closest connection with the contract.⁵
The determination of the “closest connection” depends on the specific type of contract. For example:
- A contract for the sale of goods is generally connected to the place of residence or establishment of the seller;
- A service contract is generally connected to the place of residence or establishment of the service provider;
- An employment contract is generally connected to the place where the employee performs the work.
This provision ensures that a contract will always be governed by a legal system, even where the parties have not agreed upon the applicable law.
5. Recommendations for Improving the Law
First, further guidance should be provided on determining the “closest connection” in order to ensure consistency in the application of the law.
Second, consideration should be given to expanding party autonomy in line with the development of international conventions and contemporary international commercial practices.
Third, more comprehensive guidance should be issued regarding the application of foreign law in judicial proceedings so as to improve the effectiveness of resolving disputes involving foreign elements in Vietnam.
6. Conclusion
Vietnamese law currently recognizes the parties’ freedom to choose the applicable law for contracts involving foreign elements through Article 683 of the 2015 Civil Code. This represents a significant development, reflecting Vietnam’s legal integration into the general trend of modern private international law while also safeguarding contractual freedom and promoting international trade and investment.
However, the right to choose the applicable law is not absolute. Vietnamese law imposes necessary limitations in order to protect public interests, safeguard employees and consumers, and ensure respect for the fundamental principles of the national legal system. Therefore, when entering into contracts involving foreign elements, parties should fully understand both the scope and limitations of their right to choose the applicable law in order to minimize legal risks and ensure the effectiveness of international transactions.
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Khuong Ngoc Lan