Outstanding debts, late payments, or deliberate failure to perform financial obligations under contracts for the sale of goods are common commercial risks. When negotiation and internal settlement efforts fail, a business may have no choice but to bring the matter before a competent dispute resolution body to recover the outstanding debt.
However, a key question that many business owners and legal departments need to consider is: Should the business initiate legal proceedings before a court or file a request for dispute resolution with a commercial arbitration institution?
1. Applicable Legal Grounds
- 2015 Civil Procedure Code: Provides for the jurisdiction, procedures, and process for resolving business and commercial disputes before the People’s Courts.
- 2005 Law on Commerce: Provides for payment obligations, contractual penalties, damages, and interest on late payments (Articles 50, 300, 301, and 306).
- 2010 Law on Commercial Arbitration: Provides for the conditions for resolving disputes by arbitration, the validity of arbitration agreements, and the legal effect of arbitral awards.
- 2008 Law on Enforcement of Civil Judgments (as amended and supplemented in 2014 and 2022): Provides for the jurisdiction and procedures for enforcement of court judgments and arbitral awards.
2. Prerequisite: Does the Business Have the Right to Choose Freely?
Before comparing the advantages and disadvantages of each method, the business should review the dispute resolution clause in the sale contract and any signed appendices:
- Where there is a valid arbitration agreement: If the parties have agreed in writing to resolve disputes at a specific arbitration institution (or through ad hoc arbitration), and such agreement is not invalid, the Court must refuse to accept the case pursuant to Article 6 of the 2010 Law on Commercial Arbitration. In this case, arbitration is the only available dispute resolution method, unless the parties subsequently agree to cancel or replace the arbitration clause.
- Where there is no arbitration agreement or the arbitration agreement is invalid: The business must initiate legal proceedings before the competent People’s Court.
- Where the contract has not yet been signed or the dispute resolution clause has been left open: The parties may enter into a written agreement to choose arbitration after the dispute arises. If the customer refuses to cooperate in signing a supplementary agreement, the business will only be able to file a lawsuit with the competent Court.
3. Comparison Between Court Proceedings and Commercial Arbitration
| Criteria | People’s Court | Commercial Arbitration (e.g., VIAC, STAC, etc.) |
|---|---|---|
| Basis of jurisdiction | State judicial authority, with jurisdiction arising directly under the law. | A valid arbitration agreement in writing between the parties is mandatory. |
| Confidentiality | Public hearings, except in cases involving state secrets or where business confidentiality is subject to a specific request. Court judgments may be published on the Court’s information portal. | Confidential proceedings. Information relating to the dispute, outstanding debt, technological know-how, and the business’s reputation is kept confidential. |
| Time for resolution | Generally lengthy (at least 4–8 months at first instance; if appealed, the appellate proceedings may take 1–2 years). | Generally faster and more flexible, with the schedule arranged according to the parties’ circumstances (typically 2–4 months to obtain an arbitral award). |
| Levels of adjudication & finality | Proceedings generally involve two levels (first instance and appellate) and may subsequently be subject to cassation or reopening procedures. A first-instance judgment that is appealed does not immediately take legal effect. | The arbitral award is final and binding. It takes effect from the date of issuance and is not subject to appeal or protest. |
| Initial costs | State court fees are relatively low and calculated based on the percentage of the value of the dispute in accordance with Resolution No. 326/2016/UBTVQH14. | Arbitration fees and arbitrators’ remuneration can be relatively high, particularly for disputes involving small or medium amounts. |
| Enforcement | Once a judgment takes legal effect, the civil judgment enforcement authority may directly organize enforcement, including compulsory enforcement measures. | An arbitral award is enforceable in the same manner as a court judgment; however, the losing party may apply to the Court to set aside the award in accordance with Article 68 of the Law on Commercial Arbitration. |
4. Which Dispute Resolution Method Should a Business Choose?
Depending on the characteristics of the outstanding debt and the business’s financial objectives, the following options should be considered:
Cases Where Court Proceedings May Be Preferable:
- The outstanding debt is small or moderate (below VND 500 million): The cost of arbitration may account for a disproportionately large portion of the amount to be recovered, reducing the overall economic efficiency of the recovery process.
- The customer shows signs of dissipating assets or absconding: The Court has the authority to apply urgent provisional measures, such as freezing bank accounts or distraining assets, with close coordination with the police and local authorities.
- The contract is poorly drafted or lacks an arbitration clause: This avoids wasting time attempting to persuade the counterparty to sign a supplementary arbitration agreement when the counterparty is already deliberately avoiding its payment obligations.
Cases Where Commercial Arbitration May Be Preferable:
- The dispute involves a substantial amount and the counterparty is an FDI or international enterprise: Arbitration institutions have arbitrators with specialized expertise in international commerce, and arbitral awards issued in Vietnam may be recognized and enforced abroad under the 1958 New York Convention.
- The business needs to optimize the time required to recover working capital: The single-level nature of arbitration proceedings may enable the business to obtain an enforceable award sooner, avoiding a scenario where the counterparty deliberately prolongs the recovery process through appeals in court proceedings.
- Confidentiality of business information is important: Arbitration can help keep the business’s financial position, business relationships, and pricing structure confidential from the market.
5. Documents to Prepare for Debt Recovery Before Filing
Regardless of whether the business chooses court proceedings or arbitration, it should proactively strengthen its evidence demonstrating the customer’s payment obligations:
- Legal and transaction documents: Sale contracts, purchase orders (POs), quotations, and amendments or supplements to the contract.
- Evidence of delivery: VAT invoices, warehouse release notes, delivery and acceptance records bearing the signature and/or seal of the lawful representative of the purchaser, and transportation documents.
- Evidence confirming the outstanding debt: Periodic debt reconciliation records, written payment commitments, and emails confirming the outstanding debt between the parties.
- Debt collection and payment reminders: Formal debt collection letters, payment reminders, notices of the application of contractual penalties or late-payment interest, and proof of delivery of registered mail.
The choice between court proceedings and commercial arbitration should be based on a careful assessment of financial costs, resolution time, and the feasibility of enforcement. To protect cash flow, businesses should standardize dispute resolution clauses from the contract drafting stage while maintaining a complete system for storing delivery records and periodic debt confirmations.
CONTACT LEGAL CONSULTANT:
TLA Law is a leading law firm with a team of highly experienced lawyers specializing in criminal, civil, corporate, marriage and family law, and more. We are committed to providing comprehensive legal support and answering all your legal questions. If you have any further questions, please do not hesitate to contact us.
1. Lawyer Vu Thi Phuong Thanh, Ha Noi Bar Association
Email: vtpthanh@tlalaw.vn
2. Lawyer Tran My Le, Ha Noi Bar Association
Email: tmle@tlalaw.vn
Nguyen Thuy Duong