Application of Equity in the Absence of Legal Provisions

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Case Name: Cost Allocation in Failed Project Arbitration – Application of Equity in the Absence of Legal Provisions

Resource: https://www.viac.vn/thu-tuc-trong-tai/072-%7C-ap-dung-le-cong-bang-dieu-chinh-hop-dong-a215.html

Facts: A foreign company and a Vietnamese company entered into a cooperation contract to implement a project. The foreign company transferred a deposit, and the Vietnamese company performed certain preparatory tasks to facilitate the project’s execution. These tasks included administrative work, preliminary agreements, and operational groundwork. However, the project ultimately failed, leading the parties to terminate their cooperation. Following the termination, the Vietnamese company sought reimbursement for a portion of the costs it had incurred. The contract did not specify which party would bear these costs, nor was there a clear legal provision addressing such a situation. Consequently, the Vietnamese company submitted its claim to arbitration, where the Arbitral Tribunal resolved the matter based on the principle of equity.

Issue: When a commercial cooperation agreement does not specify responsibility for incurred costs in a failed project, and statutory law lacks explicit provisions on cost-sharing in such circumstances, can a tribunal apply equity to determine whether one party should reimburse the other for its expenditures? If so, what principles guide the application of equity in arbitration?

Holding: In the absence of explicit contractual provisions or statutory regulations governing cost-sharing in failed commercial projects, an arbitration tribunal may apply equity to allocate costs in a fair and just manner, provided that no applicable customary practice or analogous law exists.

Reasoning:

1. Lack of Specific Legal Provisions or Contractual Terms: The principal contract between the parties outlined tasks each party had to perform but did not specify how costs incurred in executing these tasks would be allocated if the project did not proceed. The contract’s termination clause (Article 4) did not address financial liability in case of failure, and no provision specified risk-sharing obligations.
2. Legislative Developments and Judicial Obligation: The 2015 Civil Code introduced a fundamental change by mandating in Article 14(2) that courts and adjudicatory bodies must decide civil disputes even where no specific law exists. Although this provision primarily applies to courts, the same rationale extends to arbitration, requiring tribunals to resolve disputes by relying on analogous laws, fundamental principles of civil law, precedent, or equity, as outlined in Articles 5 and 6 of the Civil Code.
3. Recognition of Equity in Vietnamese Law: Article 6 of the 2015 Civil Code establishes a hierarchy of legal sources for adjudicating cases where statutory law and contractual terms are silent. It prescribes the application of analogous laws where possible. If no analogous law is available, the fundamental principles of civil law (Article 3), judicial precedent, and equity must guide decision-making. While the Civil Code does not define “equity,” Article 45(3) of the 2015 Civil Procedure Code provides an interpretation, stating that equity is based on socially recognized notions of fairness, humanitarian principles, and the equal rights and obligations of the parties. Although this provision applies specifically to court proceedings, it serves as persuasive guidance for arbitration.
4. Application of Equity by the Arbitral Tribunal: Given the lack of specific contractual or statutory provisions regulating cost-sharing in failed projects, the Arbitral Tribunal applied equity as recognized in Article 6 of the Civil Code. The tribunal reasoned that, in cases where no governing law or agreement exists, adjudicators should apply general principles of fairness to ensure a just resolution. In this case, equity dictated that the costs incurred should be fairly distributed rather than being borne entirely by one party.

Legal Principles:

• Judicial and Arbitral Obligation to Decide Cases: Article 14(2) of the 2015 Civil Code mandates that adjudicatory bodies cannot refuse to decide a dispute due to a lack of applicable legal provisions.
• Application of Equity in Dispute Resolution: Article 6 of the 2015 Civil Code formally recognizes equity as a legal basis for resolving disputes when statutory law, contract terms, and customary practices do not provide an answer.
• Fundamental Principles of Civil Law: Article 3 of the 2015 Civil Code establishes overarching principles, such as fairness, which guide judicial and arbitral decision-making in the absence of explicit legal rules.

Lessons for Practice:

1. Importance of Comprehensive Contract Drafting: Commercial contracts should explicitly allocate responsibility for incurred costs in case of project failure to avoid reliance on equity-based adjudication.
2. Recognition of Equity in Arbitration: Arbitration tribunals in Vietnam have the authority to apply equity when resolving disputes where no statutory or contractual guidance exists.
3. Understanding Legislative Changes: The 2015 Civil Code requires adjudicators to decide disputes even when statutory law is silent, reinforcing the importance of fundamental legal principles and equity.
4. Legal Uncertainty in Cost Allocation: Since Vietnamese law does not explicitly regulate cost-sharing in failed projects, businesses should proactively negotiate and document risk allocation to minimize uncertainty in dispute resolution.