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Resource: https://www.viac.vn/thu-tuc-trong-tai/067-%7C-xac-dinh-ban-chat-cua-quan-he-hop-dong-a210.html
Facts: In 2000, Company T (Claimant) and Company S (Respondent) entered into an agreement titled “Economic Cooperation Contract” to jointly carry out a business venture involving musical instruments and audio-lighting equipment. Company T contributed a building to the project, while Company S was responsible for its commercial operation. Company T received a fixed monthly sum, denominated as a profit share.
Over time, the parties extended their cooperation under a second contract—Economic Cooperation Contract No. 02, signed in 2004 with a total duration of 15 years. Disputes later arose, and the case was brought before an arbitral tribunal under the Vietnam International Arbitration Centre (VIAC).
Company T asserted that the dispute should be resolved based on the framework of an economic cooperation agreement.
Issue: When the formal title and terms of a contract suggest one type of legal relationship (e.g., economic cooperation), but the parties’ conduct and contractual performance align with another (e.g., lease), under what circumstances may an arbitral tribunal or court recharacterize the contract’s legal nature ?
Holding: An arbitral tribunal (or court) has the authority, and responsibility, to determine the true legal nature of a contractual relationship based on its substantive content and the parties’ conduct, rather than the contract’s title or formal structure. If objective circumstances demonstrate that a contract functions as a lease (or another type of legal arrangement), the adjudicating body may recharacterize it accordingly and apply the legal provisions governing that contract type.
Reasoning:
The Arbitral Tribunal’s reasoning was grounded in the fundamental legal principle that the substance of a contract prevails over its form. Although the parties had labeled their agreement an “economic cooperation contract,” the Tribunal examined the actual content and the manner in which the agreement was performed. It found several critical inconsistencies between the contract’s title and its legal substance.
First, the agreement failed to meet the statutory requirements of a valid economic cooperation arrangement. There was no clear specification of the capital contribution ratios between the parties, which is essential in any partnership-based agreement. Moreover, the assets contributed by Company T—namely, a building—did not have clearly established legal ownership or land use rights at the time of contribution, rendering the legality of the contributed capital questionable. The contract also lacked a mechanism for distributing profits based on the respective capital contributions, which is a fundamental requirement in joint venture or cooperation models. Adding to these deficiencies, Company T continued to be responsible for land and property taxes on the building, indicating that ownership—and the burdens that come with it—was never transferred or shared with Company S.
Beyond these technical shortcomings, the Tribunal considered the actual conduct of the parties throughout the relationship. From the initial contract in 2000 to the renewed agreement in 2004, the arrangement had remained effectively unchanged. Company S had sole and autonomous use of the building, operating independently without joint decision-making or profit sharing in the true sense. Meanwhile, Company T received a fixed monthly payment, which was not tied to the profitability or operational results of the business being conducted on the premises. This pattern of behavior resembled a lease far more than a business partnership.
From a legal standpoint, the nature of the relationship aligned squarely with the definition of a lease under Vietnamese law. Article 480 of the 2005 Civil Code and Article 472 of the 2015 Civil Code both define a lease as an agreement in which one party allows another to use a property for a definite term in exchange for rent. The Tribunal concluded that the fixed monthly payment, the exclusive control granted to the user, and the continued tax obligations of the property owner all pointed clearly to a lease relationship.
The Tribunal also affirmed its authority to determine the true nature of the disputed contractual relationship. It referred to a 2014 VIAC arbitral award that recognized this jurisdiction, emphasizing that such determinations must be based on objective facts rather than how the parties labeled the agreement or what they subjectively intended. This approach ensures that the appropriate legal framework is applied and that the parties’ rights and obligations are properly understood and enforced according to law.
In light of the above, the Tribunal found that the relationship between Company T and Company S, in both legal form and practical substance, was one of lessor and lessee—not economic cooperation partners.
Legal Principles:
- Substance over form doctrine: Legal classification depends on the real content and practical execution of the contract, not its label.
- Civil Code provisions on lease: Article 480, Civil Code 2005 and Article 472, Civil Code 2015. These define the legal characteristics of a lease: a property is delivered for use in a fixed term in exchange for rent.
- Tribunal’s authority to characterize contracts: As recognized in VIAC arbitral precedent (2014), the Tribunal has jurisdiction to assess the true legal nature of the dispute based on objective evidence.
Lessons for Practice:
- Parties must ensure consistency between the contract’s label and its substance. Mislabeling a lease as an “economic cooperation” agreement may expose the parties to legal uncertainty or misapplied law.
- Clarity and compliance with statutory requirements are crucial, especially in joint ventures and cooperation contracts. Vague or missing provisions (e.g., capital ratios, profit-sharing terms, asset legality) may lead tribunals to recharacterize the contract.
- Legal consequences vary significantly between contract types—joint ventures entail risk- and profit-sharing, while leases impose clear obligations on payment and asset use. Parties must structure contracts with these distinctions in mind.
- Recharacterization is not rare—and is essential to ensure that disputes are resolved based on the true relationship between parties. Legal advisors should evaluate not only contract wording but also its commercial performance and asset treatment.
