On October 1st, 2023, the Chief Justice of the People’s Supreme Court issued Decision No. 364/QD-CA on the promulgation of precedents, with the total number of new precedents being 7, and the effective date being November 1st, 2023. This Decision has increased the number of available precedents in Vietnam to 70.
Among these 7 new precedents, Precedent No. 69/2023/AL is one of the more notable ones, since this precedent focuses on disputes pertaining to non-disclosure and non-compete agreements – a fairly common type of agreement found in Vietnam’s labor market
In this article, CNC provides some evaluations on Precedent No. 69, thereby highlighting some issues regarding the practical application of this precedent.
Overview
Legal issues
In practice, non-disclosure agreements and non-compete agreements are two types of agreements that are fairly common in the labor market. Specifically, non-disclosure agreements or “NDAs” are agreements in which employees are legally bound not to disclose to any third party any confidential information that has been obtained through the course of employment by employers while the agreement is in effect. On the other hand, non-compete agreements or “NCAs” are agreements between employees and employers in which employees agree not work in similar positions or enter into competition with employers within a certain time period.
It could be said that NCAs are an “expansion” of NDAs as both share the purpose of preventing employees from disclosing confidential information of the employers to third parties, especially competitors of said employers. However, in order to further reduce the risk of employees disclosing information, NCAs would prevent employees from working for or participating in any competitive activities (such as working for their employer’s competition) against the employers within a given time period.
On the contrary, Labor Code 2012 and Labor Code 2019 have both recognized the right of employees and employers to agree on the confidentiality of trade and technological secrets. However, explicit specifications on NCAs and NDAs have yet to exist within the legal system at the time of writing. Hence, different approaches to these kinds of agreements have been adopted in both the academic sense and in the practical sense.
Recently, the Council of Judges of the People’s Supreme Court approved of Precedent No. 69/2023/AL on the jurisdiction of commercial arbitration pertaining to disputes on non-disclosure and non-compete agreements (hereafter referred to as “Precedent No. 69”). This precedent addresses provisions in which NCAs are contained, namely: “After the termination of employment contract, employees shall not work in similar positions or enter into competition with employers within a certain time period, any disputes resulting thereof shall be resolved via arbitration”
Specifically, Precedent No. 69 focuses on two legal issues related to NCAs, including:
- Are NCA independent of the employment contract signed between employees and employers?
- Are disputes on NCA fall within the jurisdiction of commercial arbitration? Provided that arbitration agreements exist within the NCA.
Summary of the case
In a particular case which is later made into Precedent 69, an employee and the employers concluded the NCA subsequent to the termination of the employment contract. The NCA specifies that the employee shall not work in similar positions or enter into competition with the employer within a certain time period (12 months) and any dispute resulting thereof shall be resolved via commercial arbitration.
After one year of the termination of the employment contract, the employers filed a request for arbitration to the Vietnam International Arbitration Center (VIAC) to request compensation from the employee for violating the NCA.
Soon after the Arbitral Award was issued by the Tribunal – which favord the request of the employer – the employee requested the People’s Court of Ho Chi Minh City to set aside FIDIC’s Arbitral Award.
Relevant law provisions
Clause 2 Article 2, Article 13 and clause 4 Article 35 of the Law on Commercial Arbitration 2010, clause 2 Article 3 Civil Code 2015 and Article 6 Resolution No. 01/2014/NQ-HDTP dated March 20th, 2014, of the Council of Judges of the People’s Supreme Court on guidelines for Law on Commercial Arbitration.
Adopted approaches:
According to Precedent No. 69, whenever employees and employers sign an NCA subsequent to the termination of the employment contract, and the NCA specifies that the employee shall not work in similar positions or enter into competition with the employer within a certain time period, and any disputes resulting thereof shall be resolved via commercial arbitration, the Court shall adopt the following approaches:
- NCA is independent of the employment contract;
- Disputes resulting from NCA fall within the jurisdiction of Commerical Arbitration.
Commentary on Precedent No. 69:
Precedent No. 69 managed to address some issues of NCA. The analysis of the merits and demerits of Precedent No. 69 shall be as follows:
Merits:
First and foremost, Precedent No. 69 has two merits
Firstly, Precedent No. 69 indirectly recognized the legality of NCAs
In many debates on NCAs, one of the most common topics is the legality of this kind of agreement. Prior to the promulgation of Precedent No.69, judicial practice has shown that the approaches adopted by the Courts in Vietnam on this matter are rather mixed. Specifically, there are two primary perspectives adopted by the Courts as follows:
The first perspective is that NCAs are inconsistent with the Constitution and laws. Specifically, NCAs violate (i) Article 35 of the Constitution 2013 on the rights to select careers, jobs, and workplaces of citizens, (ii) Article 5 and Article 10 of the Labor Code 2019 (equivalent to Article 5 and Article 10 of the Labor Code 2012 based on the time of the case used for Precedent No. 69) on the freedom to choose jobs, employers, and workplaces that are not prohibited by laws,[1] and (iii) Article 4 of Law on Employment on the rights to work, freedom of jobs choice, and workplaces of employees. Therefore, such agreements shall be deemed null and void according to Article 123 and Article 407 of the Civil Code 2015 due to violation of laws.
The second perspective is that NCAs are a legal agreement conducted between employees and employers, consistent with the fundamental principles of civil laws, namely, principles of freedom to reach an agreement and good faith in civil transactions.[2] Moreover, NCA agreements are consistent with clause 2 Article 21 of the Labor Code 2019 (equivalent to clause 2 Article 23 Labor Code 2012 based on the time of the case used for Precedent No. 69) on the rights of employers to negotiate with employees on the confidentiality of trade and technology secrets. The agreement that employees shall not work in similar positions or enter into competition with employers would reduce the risks of trade and technology secrets being disclosed to competitors of employers, thereby ensuring the stability of the employment relationship and the competitive edge of employers over other competitors within the market.
Against the simultaneous existence of these two perspectives in the judicial practice, Precedent No. 69 has managed to solve the most fundamental issues of NCAs by favoring the second perspective, which is the recognition of the legality of this type of agreement. Since the adoption of the first perspective, which is the rejection of the legality of NCAs due to Constitutional violation, would mean the recognition of the possibility that cases similar to the one used for Precedent No. 69 could be annulled due to “being inconsistent with the fundamental principles Vietnam” as provided for in Article 68.2.(dd) Law on Commercial Arbitration 2010 . In fact, the employee in this particular case had relied on the same basis to request the annulment of the arbitral award, however, said request was rejected by the Court.
As such, with the promulgation of Precedent No. 69, the legal system of Vietnam has officially recognized the legality of NCAs. This is likely to be recognized as one of the most notable merits of Precedent. No 69.
Secondly, Precedent No. 69 confirmed the separability of NCAs from employment contracts, provided that said NCA remains effective even after the termination of the employment contract.
Relative to the separability of NCAs, the Court did not provide any sound reasoning for this separability. However, Precedent No. 69’s confirmation of the validity of NCAs, provided that said NCA remains valid post termination of the employment contract, (hereafter referred to as “post-employment NCA” is nevertheless noteworthy.
Post-employment NCAs should be considered a conditional contract under clause 6 Clause 402 Civil Code 2015, with the condition being the termination of the employment contract. This means as long as an employment relationship exists and such a relationship were to come to a conclusion, the post-employment NCA takes effect.
However, would the same be applied in cases of annulled contracts? (especially in cases of full annulments and there exists no alternative employment contract). Because annulment of a contract would mean no employment relationship existing between the two parties in the first place, hence, the condition of “termination of employment contract” would not have taken place.
Regarding the aforementioned situation, in the opinion of this article’s author, a post-employment NCA remains in effect even if the employment contract is declared null and void. While it is true that the annulment of a contract would render the employment relationship non-existent, it would not deny the actual time the employee spent working for the employer and the possibility of the employee obtaining confidential information during this duration. If the annulment of the employment contract would also result in the annulment of a post-employment NCA, the employee would not be obligated to keep the information confidential or refrain from entering into competition with the employer. This would expose the employer to greater risk pertaining to competition within the market thus contradicting the message of the precedent, namely, the reasonable protection of the employer’s competitive edge.
On the basis of the aformentioned analysis, it could be construed that the recognition of the validity of a post-employment NCA, even if the employment contract is annulled, s necessary to protect the legal rights of the employer. In other words, unless the NCA itself is null and void, the annulment of employment contracts would not lead to the annulment of a post-employment NCA.
To sum up, the change, amendment to, or annulment of employment contracts would not result in the loss of validity of post-employment contracts thereby affirming the separability of NCA from employment contracts.
Demerits:
In addition to the 2 merits mentioned prior, Precedent No. 69 also has its share of demerits, which is the inconsistency with current laws of the finding of NCAs as within the jurisdiction of arbitration.
In the case used for the precedent, the Court has determined that the concerned disputes could be resolved via arbitration under clause 2 Article 2 of the Law on Commercial Arbitration 2010, thus indirectly affirming that NCA disputes are not individual labor disputes since such disputes do not fall within the jurisdiction of arbitration in accordance with Article 200 Labor Code 2012 (equivalent to Article 187 Labor Code 2019) on the jurisdiction over individual labor díputes. This finding of the Court is likely to be consistent with the law at the time, however, the same could not be said if it is put within the context of the current law.
To be specific, taking into account the time of the case, which is 2018, this is the time when Labor Code 2019 had yet to take effect and Labor Code 2012 was applied, instead. In the case used for Precedent No. 69, the relationship between the two parties based on NCAs could not be considered an employment relationship since it took place post termination of the employment relationship. Labor Code 2012 defines labor disputes as disputes arising out of “employment relationships”, therefore, the NCA dispute of this particular case is not considered a labor dispute.
However, it should be noted that the definition of “labor disputes” differs from one Labor Code to another. The scope of the definition of “labor disputes” in Labor Code 2019 is more comprehensive in comparison to its counterpart, in Labor Code 2012. Specifically, disputes emerging from “relationships directly related to employment relationships” are also considered labor disputes besides disputes arising out of “employment relationships”.
If similar cases are managed under the current laws (which include Labor Code 2019), NCA relationships between parties could easily be deemed “relationships directly related to employment relationships”. It is rather challenging to deny that NCA relationships are “directly related to” employment relationships emerging out of employment relationships since the desire to enter into employment relationships is what necessitates the existence of NCA. If employees refuse to sign an NCA with their employers, the employers would in turn refuse to enter into employment relationships with employees due to fear of information leakage. Therefore, based on Article 1 and point a clause 1 Article 179 Labor Code 2019, NCA disputes between parties are deemed to be individual labor disputes[3].
To summarize, the categorization of the dispute used for this precedent is inconsistent with the current law and should not be applied in other similar cases in the future. In other words, NCA disputes should be deemed as individual labor disputes, and therefore fall outside of the jurisdiction of arbitration.
Unaddressed issues of Precedent No. 69
One of the most significant roles of precedents is the unified guidelines for practical application in similar cases in the future. However, as mentioned above, Precedent No. 69 has left some fundamental issues of NCAs unadknowledged, which may result in potential inconsistency in application in future NCA disputes. Unaddressed issues of Precedent No. 69 include:
Unaddress issues of Precedent No. 69
Firstly, the Precedent does not address the limitation of NCA’s effect
Employment relationships are legal relationships between two parties with disparities in the economic hierarchy, in which, employees only have partial freedom of will while being subjected to the will of employers. As a result, employees would find it challenging to reject disadvantageous contract provisions proposed by the employers, among which NCAs are included. While NCAs are independent of employment contracts, if either of the parties to an NCA were to enter into such agreements involuntarily, the employment contract might be considered null and void. Hence, disadvantageous contract provisions contained within NCAs could be invalidated under clause 3 Article 405 Civil Code 2015 on the validity of disadvantageous provisions in model contracts.
However, Precedent No. 69 does not address the above-mentioned limitations of NCA’s effect. Meanwhile, this is a rather important issue for NCAs as the harmonization of benefits of the two parties in employment relationships is of great importance, and such harmonization must strike a balance between stable growth of the employer (competitive capability in the market) and the legal rights of employees (freedom to work, job selection, and workplace)
Examples of disadvantageous contract provisions include, but are not limited to:
(i) The scope of NCA’s effect (temporally and territorially)
NCAs would often require employees not to enter into competition with a former employer within a certain area and duration post termination of the employment contract. For instance, In the case used for the precedent, the affected area is the whole territory of Vietnam and the duration is 12 months.
The scope of the affected area and duration of NCA are necessary to evaluate whether or not employees are in disadvantageous positions. Since, if the affected area is too large and/or the duration of the NCA is too long, the freedom to work, select jobs and workplaces of employees would be greatly inflexible. Not to mention the over-reliance of employers on available trade secrets, technology secrets which would inhibit creativity and technology advancement
(ii) Scope of “similar jobs” and “enter into competition” with employers
The case used for the precedent mentions the employee’s obligation not to work in similar positions or enter into competition with the employer post termination of the employment contract. However, the scopes of “similar jobs” or “enter into competition” with employers haven’t been explored, thus leaving these two terms vague and open to multiple interpretations.
To address this issue, the first step is to identify the “competitors” of the employer under whom the employee could not work. The criteria that could be used for this identification are types of goods, services, prices, and customer bases,….[4]. Simultaneously, it is also necessary to prove that the new job of the employee is related to the position, information obtained during the employment under the former employer[5].
(iii) Equivalent benefits accorded to employees for compliance with NCA obligations
Precedent No. 69. does not mention any benefits accorded to employees for compliance with NCA obligations. As such, no solution is given to the state of employees undertaking the “non-disclosure” and “non-compete” obligations under NCA without being given any corresponding benefits. This could easily be viewed as disadvantageous contract provisions for employees since the employees – the disadvantaged party in this agreement – have to undertake additional obligations.
Secondly, the Precedent does not clarify the legal consequence of NCA violation
According to the arbitral award issued by VIAC, the employee in the case used for the precedent must pay “compensation” equal to 3 times the salary of the next month prior to the termination of the contract. However, the case used for the precedent makes no mention of the basis for the application of this “compensation”, as such the question of whether the nature of the “compensation” is that of a penalty or that of damage, is left unanswered. This matter is also disregarded by the Court when the employee requests the annulment of the contract since, principally speaking, the Courts are not allowed to review the content of a dispute that has been given an arbitral award.
This matter raises many questions, such as: “What are the legal consequences of a NCA violation by the former employee?” or “Would the employer be entitled to penalize the employee for an amount if a penalty clause exists?” or “Would the employer be entitled to request their former employee to terminate their employment relationship with competitors?”
Although this could be considered a rather important issue of NCAs, Precedent No. 69 did not address this issue in the slightest.
Thirdly, the Precedent does not resolve the issue of employees associating with competitors of the employers other than working in comparable positions or entering into competition with the employer.
Precedent No. 69 only provides guidelines for situations where NCAs stipulate that employees are not allowed to “work in comparable positions” or “enter into competition” with employers within a certain timeframe post termination of the employment contract.
However, it is also possible that the employee might associate with competitors of the employer instead of working in similar positions or entering into competition with the employer. For example, an employee could become a major shareholder or member of a competitor of the former employer, or operate a company that provides loans or insurance to competitors of the former employer rather than that of being a competitor themselves.
Precedent No. 69 has failed to address this issue, even though this is a fairly common occurrence for employees who are either seniors or executives.
Finally, the Precedent does not answer the question of “What would happen if a NCA takes effect “during the duration of the employment contract”
First and foremost, existing NCAs within the labor market may well be categorized by an effective duration within the following: (i) a NCA becomes effective post termination of the employment contract, (ii) a NCA becomes effective within the duration of the employment contract (iii) a NCA becomes effective simultaneously – both within the duration of the employment contract as well as post termination”
It could be observed that Precedent No. 69 could only be applied to (i) while (ii) and (iii) would have limited application despite their popularity within the labor market. The reason for said popularity is mainly because demands for confidentiality of trade and technology secrets by employers exist not only post termination of the employment contract but also within the duration of the employment contract. The objective of the latter is to ensure that employees DO NOT work for competitors or take any action that would be competitively against the employers throughout the duration of the employment contract.
Because (ii) and (iii) are effective when the employment relationship between the two parties has yet to be finalized, and this begs the question “Would the “non-compete” obligation of the employee be considered a contractual obligation per the employment contract, or an obligation under a completely separate agreement?: This question is also left unanswered by Precedent No. 69
Cases in which Precedent No. 69 could be applied
The purpose of any precedent is its application to similar cases. For Precedent No. 69, similar cases are:
Content-wise, there are many cases in which parties only specify that the employee is not allowed to disclose confidential information of employers to any third party while leaving the “enter into competition” with the employers unspecified (such agreements are often referred to as NDA), As analyzed above, NCAs are an “expansion” of NDA with the shared purpose of forcing employees to comply with the non-disclosure obligation. With this being the case, Precedent No. 69 could be applied to NDA disputes under similar circumstances without any issue.
Legalwise, the case used for the precedent only deals with NCAs emerging from employment relationships. In practice, NCAs also exist in other legal relationships in addition to employment relationships. For example, Mr. A and Company B signed a promotion contract, in which, Mr. A shall be the brand ambassador for some products of Company B and Mr. A must not partake in any promotion for competitors of Company B within a certain period of time. In this example, Precedent No. 69 could also be applied to disputes emerging from NCAs post termination of the promotion contract.
Mitigation of risks
With the above analysis, in order to enhance the efficiency of NCAs in dispute, parties in employment relationships need to consider measures for mitigation of risks when drafting a NCA.
NCAs must be made in writing and separate from the employment contract
Precedent No. 69 only affirms the separability of post-employment NCAs from the employment contract, it does not mean the same would be applied to a NCA which becomes or is effective throughout the duration of the employment contract. Therefore, parties are encouraged to make NCAs as a separate document from the employment contract rather than that of an annex or an inseparable part of the employment contract. This ensures the separability of NCAs from employment contracts form-wise.
Content of NCAs must be clear and reasonable
Although Precedent No. 69 recognizes the legality of NCAs, it does not mean all NCAs would be valid. As mentioned, disadvantageous provisions for disadvantaged parties (employees in this particular case) could easily be deemed invalid. As such, NCAs should clarify important aspects such as: duration, affected area, confidential information of employers, criteria to determine competitors, criteria to determine “enter into competition” with employers,… Moreover, these aspects must be reasonable and not gravely imprint the employees’ freedom of work.
Employees must be afforded monetary compensation or definite benefits for adhering to the obligations imposed by NCAs
As analyzed, during the negotiation process for the employment contract, employees only have partial freedom of will regarding the rejection of disadvantageous provisions. If the content of a NCA does not contain compensation for employees in the form of money or other specified benefits that are equal to the non-disclosure and non-compete obligations imposed on employees, this NCA could easily be deemed as a disadvantageous agreement for employees and thus null and void. Therefore, to ensure the validity as well as the separability of this type of agreement from employment contracts, parties must agree on reasonable compensation for employees in NCAs.
Legal consequences of NCAs must be explicitly specified in detail
In principle, Contracts are meant to be upheld. However, parties to the contract must anticipate all potential risks, even the risk of the contract not being upheld. Therefore, parties must have detailed specifications of legal consequences for NCA violations.
The most exemplary case of a NCA violation is employees working for competitors of the employer. Normally, it is very challenging to determine the damage caused by NCA violations, since an accurate price tag could not be put on confidential information. As such, to remedy this issue, parties should specify a reasonable value of penalty so as to discourage employees from committing NCA violations. At the same time, parties could also agree that a NCA is one of the basis for the termination of employment contracts.
Conclusion
Despite the demerits and unaddressed/unacknowledge issues, Precedent No. 69/2023/AL managed to resolve fundamental issues of post-employment NCAs such as the legality and separability of the foregoing. As Precedent No. 69 was recently promulgated, more time is required to observe the practical application of this Precedent whenever Courts handle similar cases in the future.
Reader criticism and contribution, including that of researchers, and legal practitioners is greatly appreciated to support the development of precedent(s) for similar disputes,
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[1] Judgment No. 420/2019/LD-PT dated May 15th, 2019 on the termination of employment contract with competitors of People’s Court of Ho Chi Minh City and Judgment No. 03/2023/LD-PT dated January 10th, 2023 on the compensation request for violation of employment contract of the People’s Court of Thanh Hoa District.
[2] Judgment No. 09/2010/LD-ST dated December 10th, 2010, on employment contract disputes of the People’s Court of Duc Hoa Ward, Long An District and Judgment No. 01/2013/LD-ST dated January, 22nd, 2013 on employment contract disputes of the People’s Court of X District, Ho Chi Minh City
[3] Tran Minh Tien, “Điểm mới trong xác định thẩm quyền thụ lý vụ án lao động của Tòa án”, Legal Profession Journal (Tạp chí Nghề Luật) No. 03/2020, page 72 – 74
[4] Do Ha Anh, Dang Huy Hoang, “Thỏa thuận hạn chế quyền việc làm trong lao động – Thực trạng pháp luật và kiến nghị hoàn thiện”, Democracy and Law E-Journal (Tạp chí Dân chủ và pháp luật điện tử) (30/09/2023) <https://danchuphapluat.vn/thoa-thuan-han-che-quyen-viec-lam-trong-lao-dong-thuc-trang-phap-luat-va-kien-nghi-hoan-thien>.
[5] Ung Thi Kim Lien, Nguyen Thi Nhu Hang, Pham Thuy Nga “Thỏa thuận hạn chế cạnh tranh trong pháp luật lao động Việt Nam”, Dissertation for 21st Eureka – School level of University of Law of Ho Chi Minh City, page 26 – 27.
