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Cablegate: Vietnam: One Step Forward, Two Steps Back - Tyco

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 HANOI 000199

SIPDIS

SENSITIVE

STATE PASS USTR FOR DUSTR HUNTSMAN AND EBRYAN
USDOC ALSO FOR 6500 AND 4431/MAC/AP/OKSA/VLC/HPPHO
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: EINV ECON ETRD VM
SUBJECT: VIETNAM: ONE STEP FORWARD, TWO STEPS BACK - TYCO
SERVICES LOSES APPEAL ON ARBITRAL AWARD ENFORCEMENT

SENSITIVE BUT UNCLASSIFIED - HANDLE ACCORDINGLY

1. (SBU) Summary: On January 21, 2003, the Vietnamese
Supreme Court reversed a May 2002 landmark decision by the
Ho Chi Minh City Economic Court that would have recognized
an international arbitral award for the first time in that
city. The Mission has been assisting Tyco Services
Singapore since 2001 in its attempts to get two awards
enforced in Vietnam. Mission has also worked with the
Ministry of Justice, which had reviewed the case and issued
an advisory opinion to the Courts in support of Tyco's
position. The case was perhaps deceptively simple - the
court was asked to enforce a legitimate international
arbitration award, not reopen or reargue the original
dispute. However, at the real heart of this case is the
current lack of understanding at the highest judicial levels
of modern, market-based normal business transactions as well
as a continuing lack of transparency.
2. (SBU) Summary cont'd: The Supreme Court's reversal is
particularly disheartening in light of the earlier decision
by the HCMC Economic Court, which helped Vietnam garner much
positive international press and good will last summer. In
fact, the presiding judge from the Economic Court presented
a case-study at a USG-sponsored seminar that brought
together all Supreme Court judges from around the country to
discuss their important role in Vietnamese legal reform and
implementation of the BTA. Clearly, this decision, whether
overturned on review or not, will have a negative impact on
Vietnam's international reputation and its ability to
attract foreign investment. It casts further doubt on the
transparency and fairness of the legal process and raises
additional questions about Vietnam's ability to live up to
its obligations under the U.S.-Vietnam Bilateral Trade
agreement and the New York Convention. Mission recommends
that this issue be raised in the context of the BTA Joint
Committee meeting, not to argue the merits of the case but
to stress our expectation that U.S. businesses will be
treated fairly by the Judicial system and that international
commitments will be respected. End Summary.

BACKGROUND ON THE CASE AND THE LEGAL ENVIRONMENT

3. (SBU) The Mission has been working with Tyco Services
Singapore Pte Ltd., a subsidiary of U.S. firm Tyco
International regarding Tyco's attempts to get two
Australian arbitral awards enforced in Vietnam. We had also
consulted the Ministry of Justice (MOJ) to express our
interest and concerns regarding the case, the absolute need
for transparency of the hearing and the decision making
process, and the need for a full and fair hearing for the
U.S. company, especially in light of Vietnam's commitments
in the U.S.-Vietnam Bilateral Trade agreement (BTA). The
Ministry of Justice had reviewed the case and had issued an
advisory opinion to the HCMC Court in support of Tyco's
position. The case was perhaps deceptively simple - the
courts were asked to enforce a legitimate international
arbitration award, not reopen, review, or reargue the
original case.

4. (SBU) However, at the real heart of this case is the
current lack of understanding of modern, market-based normal
business transactions by a generally unprepared and
untrained legal and judicial system. The Vietnamese
judiciary consists of the Supreme People's Court, the local
people's courts, military tribunals, and other tribunals
established by law. The Supreme Court, which has three
regional seats - Hanoi, Ho Chi Minh City, and Danang - is
the highest court of appeal and review. The Ministry of
Justice administers most district and provincial courts, and
the National Assembly administers the Supreme Court. The
judiciary also has Economic Courts and other specialized
courts that resolve disputes in specific fields. The
Economic Courts have addressed few cases since their
creation in 1995. Cases are rarely appealed to the Supreme
Court, where the judges have little experience and training
in economics, trade and finance. In fact, most judges and
lawyers received their legal training in Socialist legal
systems and are ill-equipped to deal with market-based
concepts. In particular, the distinction between trade in
goods and trade in services is not well understood in
Vietnam. The MOJ attempted to clarify for the courts both
this difference as well as Vietnam's obligations under the
UN Convention of the Recognition and Enforcement of Foreign
Arbitral awards (the New York Convention). (Vietnam is not
yet a party to ICSID, but we are actively working with the
GVN towards this goal in which the GVN has expressed
interest.)

5. (SBU) In 1995, Tyco had provided construction services
for the Furama Resort Hotel in Danang for Hai Van Thiess
(HVT), now know as Leighton Contractors Ltd, an Australian-
Vietnamese joint venture construction company. Tyco never
received full payment and went to arbitration in Queensland,
Australia as specified in their agreement with HVT. In
2000, Tyco won that case, as well as a subsequent appeal by
HVT in Australia. When HVT refused to pay the arbitral
award ($2.2 million), Tyco filed an application in 2001 with
the Vietnamese Ministry of Justice to have the award
enforced in Vietnam under the Ordinance on Recognition and
Enforcement of Foreign Arbitration Awards. MOJ sent the
case to Danang. However, in July 2001, the Danang Court
determined that it did not have the authority to hear the
case because the company, HVT, had moved its headquarters to
HCMC, reorganized its ownership and renamed the firm
Leighton Contractors. In August 2001, MOJ sent the case to
the Economic Court of the HCMC People's Court.

THE FIRST CASE - THE GOOD..

6. (SBU) Tyco finally had its day in court in May 2002. In
its petition to the court to reject Tyco's claim,
HVT/Leighton attempted to reopen the validity of the
original arbitral award. They argued that the application
for enforcement be denied based on the allegation that the
original Consortium agreement was invalid because it had not
been certified by the Ministry of Planning and Investment
(MPI), Tyco did not have license for foreign contractors
from the Ministry of Construction, the consortium agreement
was not a "commercial" agreement and so was not governed by
the Ordinance on Economic Contracts or the Ordinance Foreign
Arbitration, the Queensland arbitrator had violated
procedures in settling the claims, and finally, the arbiters
were biased and unfair.

7. (U) In its clear, well-written, and focused May
decision, the HCMC Economic Court looked at each of these
issues in a fair and legalistic manner. The Judges Panel
confirmed that under the Arbitration ordinance, they were
not allowed to re-arbitrate the dispute and thus dismissed
the argument that the agreement was invalid. However, the
Court went further in its decision and explored the argument
on its merits. HVT/Leighton argued that the agreement was
invalid because the Ministry of Planning and Investment
(MPI) had not certified it and Tyco did not have the legal
capacity to sign because it did not have a license for
foreign contractors issued by the Ministry of Construction.
This argument hinges on an interpretation of the Ordinance
on Economic Contracts, which only covers agreements signed
between Vietnamese entities and foreign organizations in
Vietnam. As the agreement was for construction services, it
was not necessary for Tyco to have a presence in Vietnam.
The Panel found that the agreement was not governed by the
Ordinance since Tyco did not have offices in Vietnam.
Therefore, the agreement could not be found invalid under
that law. Going further, they found that even if the
Ordinance did apply, the agreement clearly stated that the
agreement would be interpreted and governed by Queensland
law in the case of disputes. Finally, even if Vietnamese
civil law did apply, HVT would have had to take Tyco to
court within one year of its signing in order to have the
agreement invalidated. Thus, the court ruled that Leighton,
on its own, cannot declare the agreement to be invalid in
order to avoid enforcement in Vietnam.

8. (U) The second argument that the agreement was not a
"commercial relationship" and thus the arbitral award could
not be recognized or enforced in Vietnam.(previous sentence
is missing a verb or something) This point is more
technical. However, in sum, HVT referred to a definition in
the 1998 Commercial law that the Panel ruled it did not
apply in this case, because it was not in effect at the time
the agreement was signed.

9. (U) The third argument that the Queensland arbitrator had
violated procedures in settling the claims was based on a
claim by HVT/Leighton that a decision by the arbiters had
added a clause to the agreement related to bank guarantees.
However, the Panel determined that this argument relates to
the substance of the dispute, and the Panel did not have the
authority to re-arbitrate the dispute.

10. (U) Regarding the fourth argument that the arbitral
decision was biased and unfair toward HVT/Leighton, the
Panel examined the arguments and found that the charge was
groundless and that the awards were issued in accordance
with Australian law, per the agreement. Thus, HVT/Leighton
was instructed to pay the award. HVT/Leighton promptly
filed an appeal to the Supreme Court.

THE SECOND CASE - THE BAD?

11. (SBU) The appeal of the Economic Court's decision was
originally scheduled to be heard before the Supreme Court in
HCMC on August 27, 2002. However, HVT/Leighton succeeded in
obtaining delays by changing lawyers several times, dragging
it out by almost 6 months. The Embassy weighed in with the
Ministry of Justice to express our concern over the delays
and the fact that the Court had actually exceeded its normal
statutory time to hear the case. When the case was finally
heard on January 21, 2003, the Supreme Court overturned the
earlier decision by the Economic Court, finding that the
arbitral award was not enforceable in Vietnam.

12. (SBU) Although we do not yet have the written decision,
EconOff HCMC attended the January 21 appeal hearing and
provided a preliminary readout of the proceeding. The
presiding judge stated in the initial oral decision that -
contrary to the lower court's decision - the court did not
have the authority to enforce the arbitral award due to two
factors. First, Tyco failed to apply for a license from the
GVN for its activities in Vietnam during the relevant
period. Therefore, it was operating outside the body of
commercial law that could be used to enforce the award (N.B.
We assume he means that Tyco, as a sub-contractor for
services, was not covered under HVT/Leighton's construction
license). In particular, under Vietnamese law, Tyco's scope
of work fell under "construction" rather than "commercial"
(i.e. service) activity, requiring a separate foreign
contractor's license. Thus the Panel apparently ruled in
favor of HVT/Leighton's original argument (see above) and
found the agreement invalid, and thus unenforceable, under
Vietnamese law. In essence, they ignored the arbitral award
and re-arbitrated part of the original case. They also
apparently largely ignored the MOJ's advisory opinion.

AND THE UGLY.

13. (SBU) Tyco's local attorneys told Econoff HCMC that
they were offered an opportunity to "become a friend of the
court." (N.B. We assume that's codeword for a payoff.)
They declined the offer (but would not supply specifics as
to who approached them) and lost the case. The local
attorneys believe - not provable, they note - that Leighton
took up a similar offer. The lawyers stressed that only
strong political pressure can counterweigh any payoff that
they believe was made. (Embassy Note: In December when we
were discussing our approach to the GVN on this issue, the
local lawyers pushed hard for the Embassy to write to the
Prime Minister, i.e. a political approach. It was and is
our position that in light of our attempts to reform the
judicial system in Vietnam, such an approach that bypassed -
and urged the GVN to bypass - normal legal channels was
inappropriate. We addressed this as a legal issue with the
Ministry of Justice, which we knew was also in agreement on
the legal facts of the case. End note.)

14. (SBU) However, Tyco's Hanoi-based representative was
disappointed that their local lawyers had missed several
important opportunities to clarify the legal nuances before
the Supreme Court. He noted that he "could have done a
better job (of lawyering) himself." (HCMC Econoff likewise
was unimpressed by the Tyco attorneys' performance in
court.) For example, when the Panel raised the issue of
whether Tyco required a license, the lawyers did not refute
the assumption that a license was necessary (as the Economic
Court had). Instead, the lawyer replied that Leighton
should have told them if it were necessary. A more
responsive answer arguing the law might have allayed some of
the court's concerns.

SUPREME COURT DECISION MAY BE REVIEWED

15. (U) Although, the Supreme Court is the final Court of
Appeal in Vietnam, the MOJ confirms information conveyed to
Econ FSN by one local judicial contact: Tyco can still
petition the case's review by senior judges in Hanoi.
However, review is case by case, and there is no mechanism
for automatic review.

16. (SBU) Tyco clearly regards the decision as a major
setback. As Tyco reviews its options, it has asked for
further Mission assistance in urging the GVN to enforce the
arbitral award. We will review with Tyco their analysis of
the Supreme Court decision, in light of the earlier Economic
Court decision, and explore appropriate options for action.

COMMENT

17. (SBU) This decision is particularly disheartening in
light of the earlier and much touted decision by the HCMC
Economic Court. Vietnam garnered much positive
international press and good will last summer regarding this
landmark case, the first international arbitral award to be
enforced in Vietnam. (N.B. There are several other cases
before the Hanoi Courts but none is final or involves a U.S.
company.) For once, Vietnam was praised for a legal
decision. In fact, the presiding judge from the HCMC
Economic Court was invited by the GVN to present a case-
study at a USAID-STAR project seminar that brought together
Supreme Court judges from around the country to review legal
reform and BTA implementation. When the Ambassador
addressed the Supreme Court judges at the opening of the
seminar, he stressed their important role in Vietnamese
legal reform and implementation of the BTA.

18. (SBU) Clearly, this decision, whether overturned on
review or not, will have a negative impact on Vietnam's
international reputation and its ability to attract foreign
investment. It casts further doubts on the transparency and
fairness of the legal process and also raises additional
questions on Vietnam's ability to live up to its obligations
under the BTA Investment Chapter. International arbitration
clauses are a key component of any business contract signed
by foreign parties in Vietnam. The Tyco case was the first
"successful" attempt by a U.S. firm to have an international
arbitral award enforced in Vietnam. The high court's
ruling - for whatever reason - will certainly cause many
here and abroad to rate Vietnam a bit higher on the
commercial risk scale.

19. (SBU) Mission recommends that this issue be raised in
the context of the BTA Joint Committee meeting, not to argue
the merits of the case but to stress our expectation that
U.S. businesses will be treated fairly by the Judicial
system and that international commitments will be respected.
PORTER

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