Lawyer Nguyen Huy Hoang (*)

On 17 October 2023, a member of our Zalo group "Commercial Arbitration Group" shared with us about Precedent No. 69/2023/AL on the Competence of Commercial Arbitration to Resolve Non-Disclosure  and Non-Agreement Agreements Dispute ("Precedent 69") for the members' reference and discussion.

Precedent 69 is derived from Decision 755/2018/QD-PQTT of the People's Court of Ho Chi Minh City on recognition of an arbitral award of a case in which Bross & Partners was involved from 2017.

With Precedent 69, after nearly 6 years from the start of the dispute, the issue of whether commercial arbitrators are competent to resolve disputes on Non-Disclosure Agreement (“NDA”) and Non-Compete Agreement ("NCA”) (collectively, "NDCA”) has been clearly settled.

This is probably one of the positive events of commercial arbitration, especially in the context of many seminars related to the amendment of the Law on Commercial Arbitration.

In order to share and discuss to clarify the nature of the dispute mentioned in Precedent 69, and the context leading to the promulgation of Precedent 69, following my close friend, Attorney Luong Van Trung, I would like to share some of the following information:

  1. The dispute relating to NCA before the Arbitral Award:

1.1. In September 2017, I and my colleagues at Bross & Partners received a request for legal advice and support for the Vietnamese subsidiary of a world-renowned technology and e-commerce multinational corporation (the "Employer" or the "Company") in a dispute involving the NCA via commercial arbitration, accordingly, they wanted to sue 1 former senior employee (the "Employee") for violating her NCA, in particular the Employee violated the agreement by working for a competitor after terminating the labor contract (the "Labor Contract"), while according to the NCA, that Employee undertook not to work for competitors of the Employer within 12 months after the termination of the Labor Contract (the "Dispute"”). We were also informed by the representatives of the Company that they had previously consulted with a number of other law firms about this Dispute but had not received suitable and positive advice. As a professional habit, my colleagues and I (at that time Mr. Phan Tien Dong - now an Attorney and Attorney Nguyen Van Thai – now Partner of Bross & Partners) embarked on a quick study of the case and asked ourselves whether commercial arbitrators would be competent to resolve this Dispute, i.e. is this dispute a civil or commercial dispute? There were many different opinions in the legal community at that time. Even at Bross & Partners there are many different perspectives. In summary, there are 02 points of view, which are (1) this is a labor dispute because although the labor contract has been terminated, this dispute is related to industrial relations, in accordance with Article 3.7 of the Labor Code 2012, therefore, only the Court has jurisdiction to settle it and (2) this is not a labor dispute1, because when an NCA violation event occurs, the Labor Contract has terminated, therefore, commercial arbitration has competence  to resolve the dispute (legal issue no. 1). In the midst of my confusion (although I was in the (2) view), I asked a famous lawyer and my grand teacher (now deceased), whom not only I but  many other lawyers called "Master", and he asked me, "What was her legal status when she violated the NCA?" Immediately after hearing the suggestion of the Master, my colleagues and I quickly and decisively determined that this dispute was definitely not a labor dispute, because when violating the NCA, the violator no longer has the legal status of employee, the labor contract has been terminated, the rights and obligations related to labor relations2 have been resolved, therefore, commercial arbitration has competence to resolve the Dispute.

1.2. Immediately after that, we responded and gave quick advice to the Company and were selected by the Company as the consultant and support unit for them in the process of resolving the Dispute through commercial arbitration.

1.3. After that appointment of the Client, we continued to carefully study the case with the consistent view that this might be a new, unprecedented case, so we must do it carefully, determinedly and not fall into "rut thinking". However, after carefully studying the case and relevant laws, in addition to the competence of Commercial Arbitration as mentioned above, we still encountered some key legal issues that need to be carefully and fully prepared, namely:

(a) Is the NCA agreement, specifically the agreement that the employee cannot work for a competitor within 12 months after the termination of the labor contract considered invalid due to violation of the prohibition of the "law" (under the Civil Code 2005) or the prohibition of the "laws" (Civil Code 2015)? Can the NCA be deemed violating employees' right to work and choose their careers (Article 35.1, Constitution 2013, Article 9.2, Labor Code 2012, Article 10.1, Labor Code34 20125)?;

(b) According to the NCA, the two parties have agreed on a fixed amount of compensation instead of actual damages in the event of the Employee's breach (in fact, it is certainly impossible to prove how much damage the Company will incur when the NCA is violated). However, at the time when the two parties signed the NCA, the Civil Code 2005 ("Civil Code 2005") was still in force. Nothing in the Civil Code 2005 stipulates that the two parties have the right to agree on compensation at a fixed rate instead of compensation according to actual damage. The Civil Code 2015 ("Civil Code 2015") then contains indirect provisions on the right of the parties to agree on the amount of compensation, but it is not entirely clear; and

(c) How to prove that the business that the former Employee is working for is a competitor of the Company? Is the job position the Employee is doing similar to the position of the Employee at the Company? And how cam we collect evidence proving the Employee's NCA violation?

1.4. The above three issues and  legal issue no. 1 are also invoked by the Employee as the grounds  for requesting the Arbitral Tribunal to reject the Company's claim when settling the Dispute and when requesting the Court to annul the Arbitral Award.

1.5. Besides the nature of the disputed relation and competence of commercial arbitration we have analyzed above, regarding issues (i) and (ii), my colleagues and I (joined by Mr. Doan Thanh  Binh, now an Attorney at Bross & Partners) argue that the NCA is fundamentally a civil transaction, so it must be in line with the basic principles of civil law, including the principle of "freedom of commitment, agreement in establishing civil rights and obligations guaranteed by law".6 When there are no specific provisions to resolve the case, we should rely on the basic principles of the Civil Code as a basis for argument and settlement of the case. In addition, the Civil Procedure Code 2015 also stipulates the application of equity in adjudication as a source of law. Therefore, we believe that the signing of the NCA is completely free and voluntary, so the agreements of the NCA, if they do not violate the prohibitions of law or social morals, have reasonable and legitimate contents, must be respected by the subjects, specifically:

(a) With regard to issue (i), we argued that: The Constitution and the Labor Code provide citizens with the right to work, choose their profession and place of work but they may also have the right to waive that right by an agreement/civil act, provided they are free and voluntary when signing the agreement and performing such act. Therefore, the NCA does not violate the prohibition of the law. However, at the time of the Dispute settlement, in the NCA there was no provision to compensate the Employee (even a nominal amount) for their non-compete obligations, so there was much controversy regarding the issue of equality when the Employee entered into the NCA. After the Arbitral Tribunal's ruling, I learned that companies started to amend their NCAs, thereby adding a "loyalty" compensation for employees in the NCA.

(b) With regard to issue (ii), we argued that: As stipulated by the Civil Code, "Individuals and legal entities establish, exercise and terminate their civil rights and obligations on the basis of freedom, voluntary commitment and agreement. All commitments and agreements that do not violate the prohibitions of the law, are not contrary to social morals are valid for the parties and must be respected by other subjects",7  moreover,  the Civil Code stipulates compensation according to actual damages but also does not prohibit the parties from agreeing on fixed compensation, as long as it is reasonable and the parties are completely free and voluntary when establishing such agreement.

(c) In relation to (iii), we have collected some circumstantial evidence through social media to prove that the Employee has engaged in certain activities at a competitor with a similar position at the Company and has established a violation. However, in order to prove the Employee's violation, we must use appropriate skills through interrogation activities and arguments at the hearings of the Arbitral Tribunal. Fortunately, because the Employee was confident that the Arbitral Tribunal would reject the Company's claim because she believed that the NCA and arbitration agreement were invalid because it was an employment dispute, the Employee admitted to be working for the Company's competitor (this is probably the most difficult issue when resolving this type of dispute).

1.6. Our above arguments were accepted by the Arbitral Tribunal and the Arbitral Award ("Award") then, decided that (i) there was no basis for determining that the NCA violated the prohibition  of law and there was no basis for declaring the NCA invalid, (ii) the arbitration agreement was lawful, (iii) there were grounds for determining that the Employee violated the NCA, thereby accepting the Company's claim and forcing the Employee to compensate the Company for the amount of compensation agreed upon at the NCA for her violation. In addition, another important content that the Arbitral Tribunal stated in the Award is that the Arbitral Tribunal believes that the legal basis for the existence of the NDCA is the Law on Intellectual Property 2005 ("IP Law"), according to which the proprietary rights in business secrets of enterprises must be protected and "the owners shall apply necessary measures to ensure the trade secrets are not exposed and not easily accessible."8 This ruling of the proprietary is appropriate and supports our view that business secrets of enterprises are intangible assets of enterprises, as specified in the IP Law. Accordingly, confidential information, including business secrets, is subject to industrial property rights, a form of intangible assets of enterprises (Article 3.2, IP Law), and must be respected by the parties, including employees. Employers have the right to take necessary measures, including establishing NDCAs to protect their business secrets (Article 84.3, IP Law). Also under the IP Law, a violation of the confidentiality obligation stipulated in the NDCA is also considered an infringement of the employer's rights to business secrets (Article 127.1 (c) of the IP Law). This is the main reason for the parties to agree and establish NDAs and NCAs.

  2. During the Court’s review of the Award:

2.1. After the Award, the Employee requests to annul the entire Award at the competent Court  when she considers that (i) the dispute is not within the competence of the Arbitral Tribunal because it is a labor dispute, (ii) the arbitration agreement is invalid due to violation of the prohibition of law, in particular because the NCA violates the Employee's right to work – in violation of the Constitution and the Labor Code, (iii) The award is contrary to basic principles of Vietnamese law, specifically the principle of complying with the law and respecting the agreement of the parties. All in all, the basis on which the Employer proposes to set aside the Award in its entirety are the four issues we have outlined above. Once again, my colleagues and  I were trusted by the Company to advise and defend the Company at the hearing on setting aside the arbitral award at the competent Court. With well-prepared arguments and reasonable skills at the hearing and the objectivity, prudence and progressive thought of the Review Tribunal, including the Presiding Judge, the request to annul the Employee's Judgment in its entirety was not accepted, accordingly, the Award is enforceable

2.2. After the issuance of Decision 755/2018/QD-PQTT of the Review Tribunal (the "Decision"), I met and discussed with the Presiding Judge, one of the judges with experience in the field of economic and commercial disputes, understanding and supporting commercial arbitration. Seeing that this is a new, unprecedented case, I made a suggestion and said jokingly, "Can you consider submitting to the leaders for this case and decision to be selected as case law?". The Judge thought for a few seconds and told me to provide all records relating to the Dispute, except for the confidential materials. Later, I met with the Her Honor again and was informed that she had studied and submitted the case to the Supreme People's Court for case law review, and asked me to coordinate where needed. I answered that I am very willing because in my opinion with this precedent recognized it will have a positive effect on the judiciary, for commercial and corporate arbitration and also for employees (because if the NCA is recognized, employees have the right to negotiate (where possible), and thereby ask the employers to pay compensation for being “loyal” in accordance with the principle of equality, freedom, and voluntariness).

 3. After the Decision:

3.1. Shortly after the Decision was published, there were many articles written and debated, discussing aspects related to the NDCA, the Arbitral and Decision. In short, there are still 02 streams of opinion: (1) The Dispute is a labor dispute because even though the labor contract has been terminated, this Dispute is related to the labor relation, in accordance with Article 3.7 of the Labor Code 2012,9 therefore, only the Court has jurisdiction to settle the Dispute and (2) the Dispute is not a labor dispute because when the Employee violates the NCA, the labor contract  has  been  terminated,  therefore  commercial  arbitration  has  competence. Because I participated in the preliminary research on NDCA and also participated in the entire Dispute settlement process, I drafted 01 article and planned to share some opinions related to NDCA (with attached article) at 01 reputable economic newspaper of Vietnam. However, after submitting the draft article, I was informed that this content already has many articles so I  would not publish it at that time.

3.2. Sometime later, in 2022, my colleagues and I were selected by a subsidiary of a technology multinational corporation ("Technology Company") to advise and assist in a dispute also involving the NCA in commercial arbitration, whereby the Technology Company asked the Employee to compensate for an amount agreed upon at the NCA due to the Employee's violation of the NCA, specifically working for the a during 12 months after the termination of the Labor Contract ("Claim").

3.3. In the process of researching and resolving this dispute, we learned that on November 12, 2020, the Ministry of Labor, War Invalids and Social Affairs issued Circular No. 10/2020/TT-BLDTBXH ("Circular 10/2020/TT-BLDTBXH"). Accordingly, in Article 4.3, Circular 10/2020/TT-BLDTBXH stipulates that when detecting an employee's violation of NDA, the Employer has the right to request compensation from the employee as agreed upon by the two parties, specifically: (i) in case such violation is detected during the performance of the labor contract, the compensation for damage specified in Clause 2, Article 130 of the Labor Code shall be processed; (ii) In case of detecting violations after termination of the labor contract, it shall be processed in accordance with the provisions of civil law and other relevant laws. In my opinion and my colleagues’, this regulation is related to not only NDA but also NCA, because the basis for the parties to agree  and establish an NCA is also to protect business secrets of enterprises and related rights and obligations of employees, thus, the above provisions of Circular 10/2020/TT-BLDTBXH are fully applicable to NCA. This can be seen as a more progressive and open view by the Ministry of Labor, Invalids and Social Affairs in relation to the NDCA. Above all, this is a legally reasonable approach, because once the labor relationship has been terminated, the status between the parties when the violation occurs is no longer employer and the employee.

3.4. Therefore, when participating in the settlement of the above dispute in commercial arbitration, on the one hand, we still use the arguments when participating in the dispute settlement in 2017, on the one hand, we base on the above provisions of Circular 10/2020/TT-BLDTBXH to argue and request the Arbitral Tribunal to accept the Claim of the Technology Company. However, the Claim was not accepted by the Arbitral Tribunal because there was insufficient lawful evidence to prove the employee's violation of the NCA. However, the Arbitral Tribunal observes that: (i) NCA has legal effect, binding on the parties under Article 3.2, Civil Code 201510 and (ii) The arbitration agreement is valid even though the Employee requests the Arbitral Tribunal to reject the entire Claim of the Technology Company. We are of the opinion that such an award has substantially achieved the client's purpose, i.e. the Arbitral Tribunal once again recognizes the NCA and the Arbitration Agreement, although at that time there were also many questions as to whether the NCA dispute after the termination of the Labor Contract was a civil dispute, commercial business or not? and Does commercial arbitration have competence to resolve this dispute?

3.5. On August 18, 2023, the Council of Judges of the Supreme People's Court adopted Precedent 69 and on October 1, 2023, the Chief Justice of the Supreme People's Court signed the decision to announce Precedent 69 on the competence of commercial arbitration in settling NDCA disputes, perhaps the debate on the competence of commercial arbitration in settling NCA disputes after the labor contract has been resolved, so that the parties and tribunals will no longer have to spend time reviewing and evaluating such issue when resolving disputes.

3.6. In addition, there is an important content mentioned in Precedent 69 that is in Section [6], the Court's Judgment Section states "In addition, Ms. T contends that the NDA violates the  provisions on employees’ right to work, committing the prohibited acts under the Employment Law 2013, but the arbitral tribunal still recognizes the NDA, violating the principle of legal compliance for employees as well as the prohibition in the Employment Law 2013. Considering that Article 4 of the Civil Code 2005 stipulates: "The freedom to make commitment and agreement in establishing civil rights and obligations is guaranteed by law, if such commitment or agreement does not violate the prohibitions of law or social morals. In civil relations, parties shall act in a complete voluntary manner, neither party shall impose on, prohibit, coerce, threaten or hinder other parties’ acts. Lawful commitments and agreements are binding on the parties and must be respected by individuals, juridical persons, and other legal subjects". In this case, Ms. T vs Company R voluntarily signed the NDA, and upon the signing, Ms. T was a person with the full capacity to act as prescribed by law, not under threats, frauds, or coercions of will that force Ms. T to accept the signing of the NDA. Therefore, the NDA is valid. The arbitral tribunal's recognition of the validity of the NDA is completely lawful." In our opinion, this is the most legally important and significant content that we gain from this Dispute. Given the judgment of the Court in its decision to not annul the Arbitral Award and this finding enshrined Precedent 69, it can be said that there is an additional legal basis to be certain that the NDCA (including NDA and NCA) is effective, i.e. not invalid for violating the prohibition of law and social morals, even if disputes related to the NDCA are resolved by any tribunals in Vietnam, including the courts. That is an issue that we have worked hard on to defend the position that the NDCA is valid in the 2 cases which we mentioned above before the adoption of Precedent 69.

  4. Conclusion:

4.1. From the Dispute, we have earned much experience on many issues related to knowledge and skills when participating in the resolution of NCA disputes, in the context of many different or even opposing opinions regarding the NCA until Precedent 69 is published. Fortunately, the Dispute was agreed upon by the parties to be resolved by commercial arbitration. I myself was fortunate to have the support of the client, associates and legal experts, including our Master – the grand teacher of many of us lawyers (who had very valuable opinions) and the Presiding Judge (who listened and understood our views on the NDCA and commercial arbitration mechanism).

4.2. To sum up, we think that there are 2 key points from this Dispute that we would like share our view:

(1) In case a legal issue cannot be solved by specific provisions of Vietnamese law, it will be governed and resolved based on the basic principles of law. In this Dispute, we applied the basic principles of the Civil Codes, which are (i) the principle of freedom, voluntary commitment and agreement stipulated in Article 4 of the Civil Code 2005, now Article 3 of the Civil Code 2015 and (ii) the principle that legal subjects are entitled to act/agree on matters not prohibited by law unless such act/agreement violates the prohibition of law(s) or is against social morals (Article 4 of the Civil Code 2005 and now Article 3.2 of the Civil Code 2015).

(2) In problem solving, including solving legal issues, we should avoid “rut thinking”.

4.3. The purpose of this article is to share information about the process of our participating in the Dispute so that readers can understand the circumstances and basis of the adoption of Precedent 69 until the Decision on upholding the Award. This article is not intended to promote and discuss in depth the nature of NDCAs.

Please click HERE to read this Precedent No. 69/2023/AL (Vietnamese Only)