Discussing the legal value of contracts with payment clauses in foreign currency

Discussing the legal value of contracts with payment clauses in foreign currency
Posted date: 25/03/2024

Nowadays, the  thought of valuing foreign currencies and fearing the devaluation of the Vietnamese currency is becomming common and  growing among businesses and individuals. Along with world economic integration, many Vietnamese individuals and businesses have formed the habit of using foreign currency when participating in daily business transactions to maximize their benefits. Therefore, in many current transactions, the parties agree to use foreign currencies, especially the US Dollar (USD) as the currency for quoting, valuing, and recording. price, payment…. in the contract. Meanwhile, the foreign exchange management policy expressed in the Vietnamese legal system does not allow the free use of foreign currency in Vietnamese territory. This has brought many risks to the parties as well as giving rise to violations of the law, the worst consequence of which could be making the signed Contract invalid.

 

Legal regulations on foreign exchange

 

According to the provisions of Vietnamese law, "currencies of other countries or common European currencies and other common currencies used in international and regional payments (hereinafter referred to as foreign currencies)"[1] is considered a type of foreign exchange and the use of foreign currency in Vietnam must must comply with the provisions of Vietnamese law on foreign exchange, specifically the 2005 Ordinance on Foreign Exchange; Ordinance amending and supplementing a number of articles of the 2013 Foreign Exchange Ordinance.

 

The Ordinance amending and supplementing a number of articles of the 2013 Foreign Exchange Ordinance, effective from January 1, 2014, has overcome many inadequate provisions of the 2005 Foreign Exchange Ordinance. In particular, it adds to Article 22 of the 2005 Foreign Exchange Ordinance, a number of "quotation", "pricing", "price recording" activities that cannot be carried out in foreign exchange in the territory of Vietnam: "In the territory of Vietnam, all Transactions, payments, listings, advertisements, quotations, valuations, price recording in contracts, agreements and other similar forms by residents and non-residents may not be carried out in foreign exchange, Except for cases permitted according to regulations of the State Bank of Vietnam.

 

At the same time, Article 3 of Circular 32/2013/TT-NHNN guiding the implementation of regulations restricting the use of foreign exchange in the territory of Vietnam stipulates the principles of restricting the use of foreign exchange in the territory of Vietnam as follows: “In the territory of Vietnam, except for cases where foreign exchange is allowed as prescribed in Article 4 of this Circular, all transactions, payments, listings, advertisements, quotations, valuations, and price recording in contracts, Agreements and other similar forms (including conversion or adjustment of prices of goods, services, value of contracts, agreements) of residents and non-residents cannot be made in foreign exchange. ”.

 

Thus, in principle, in the territory of Vietnam, all transactions, payments, listings, advertising, quotes, valuations, recording prices in contracts... are not carried out in foreign exchange except in 17 cases listed in Article 4 of Circular 32/2013/TT-NHNN.

 

Example of a case of payment in foreign currency: Mr. Julien Michel Ranjard, who is living in Hong Kong, asked FDVN Law Firm, a Vietnamese enterprise, to advise, provide legal support, and represent him to carry out necessary legal procedures requesting Company A to refund the entire amount and compensate for damages due to delayed performance of obligations. According to the provisions of Clause 16, Article 4 of Circular 32/2013/TT-NHNN, residents are allowed to quote and evaluate prices in foreign currency and receive payment in foreign currency by bank transfer when providing goods and services to non-residents. On that basis, FDVN Law Firm signed a legal service contract with the customer and chose US dollars (USD) for payment. The contract has been performed and Mr. Julien Michel Ranjard has fulfilled the payment obligation to FDVN Law Firm by bank transfer.

 

So, if payment transactions are made in foreign currency, can tax be paid in foreign currency? In Article 27 of Circular 156/2013/TT-BTC, the currency for tax payment is Vietnam Dong, except in cases where tax is paid in foreign currency according to government regulations. However, at the present time there is no government document regulating the case of paying taxes in foreign currency, but there are regulations in a number of specific guiding Circulars (including: Circular No. 56/ 2008/TT-BTC dated June 23, 2008, Circular No. 176/2014/TT-BTC dated November 17, 2014, Circular No. 36/2016/TT-BTC dated February 16, 2016 with currency instructions Tax declaration and tax payment for oil and gas activities; Circular No. 38/2015/TT-BTC dated March 25, 2015 has guidance on tax payment currency for export tax and import tax).

 

In Clause 4, Article 2, Circular No. 26/2015/TT- BTC dated February 27, 2015 of the Ministry of Finance guiding on value added tax and tax management in Decree No. 12/2015/ND-CP dated December 12, 2015 of the Government detailing the implementation of the Law amending and supplementing a number of articles of Tax Laws and amending and supplementing a number of articles of Decrees on Tax and amending and supplementing a number of Articles of Circular No. 39/2014/TT-BTC dated March 31, 2014 of the Ministry of Finance on invoices for selling goods and providing services (effective from January 1, 2015) provide guidance on exchange rate as follows:

 

3. In case revenue, costs, and taxable prices are generated in foreign currency, the foreign currency must be converted into Vietnamese Dong at the actual exchange rate according to the guidance of the Ministry of Finance in Circular No. 200/2014/TT-BTC on December 22, 2014 provides guidance on corporate accounting regimes as follows:

 

– The actual transaction exchange rate for revenue accounting is the buying exchange rate of the commercial bank where the taxpayer opens an account..."

 

In point e, clause 2, Article 16 of Circular No. 39/2014/TT-BTC dated March 31, 2014 of the Ministry of Finance guiding the implementation of Decree No. 51/2010/ND-CP dated May 14, 2010 and Decree No. 04/2014/ND-CP dated January 17, 2014 of the Government regulating invoices for selling goods and providing services and instructions on the currency indicated on the invoice:

 

e) Currency stated on the invoice

 

The currency listed on the invoice is Vietnamese Dong."

 

In case the seller is allowed to sell goods in foreign currency according to the provisions of law, the total payment amount is recorded in the original currency, the text is written in Vietnamese.

 

For example: 10,000 USD – Ten thousand US dollars.

 

The seller also records on the invoice the exchange rate of foreign currency with Vietnamese Dong according to the average transaction rate of the interbank foreign currency market announced by the State Bank of Vietnam at the time of invoice issuance.

 

Therefore, up to now, in cases where individuals and organizations have revenue in foreign currency, they still have to declare and pay taxes in Vietnamese Dong (VND). When issuing an invoice, it is recorded in the original currency, the text is in Vietnamese and the exchange rate recorded on the invoice is the buying exchange rate of the commercial bank where the account is opened.

 

Does this violation make the Contract signed between the parties invalid?

 

A contract is an agreement between parties to establish, change or terminate the rights and obligations of the parties regarding a certain issue[2]. A legally valid contract must fully meet the conditions for validity as prescribed by law. In Clause 1, Article 117 of the Civil code 2015, the conditions for the validity of a transaction or contract are as follows: "a) The subject has civil legal capacity and civil act capacity in accordance with the transaction established; b) Subjects participating in civil transactions are completely voluntary; c) The purpose and content of the civil transaction do not violate prohibitions of the law or violate social ethics”. Civil transactions whose purpose and content violate the law's prohibitions are void[3].

 

Previously, the Civil Code 2005 (effective before January 1, 2017) stipulated that the conditions for contract validity include: "a) Transaction participants have civil act capacity; b) The purpose and content of the transaction does not violate legal prohibitions or is not contrary to social ethics; c) Participants in the transaction are completely voluntary". Civil transactions whose purpose and content violate legal prohibitions are void.  

 

Thus, compared to the Civil Code 2005, the Civil Code 2015 has replaced the phrase " violate legal prohibitions" with the phrase "violate the law's prohibitions". Accordingly, "legal prohibitions" here are understood as legal provisions that do not allow subjects to perform certain acts[4]. Provisions on these "prohibitions" may exist in laws or sub-law documents such as Decrees, Circulars, Ordinances... Meanwhile, "law’s prohibitions" are provisions in laws that do not allow subjects to perform certain acts[5] which means they are only in legal documents promulgated by the National Assembly.

 

According to Article 4 of the Law on Promulgation of Legal Documents 2015, ordinances and circulars are not laws. Therefore, transactions/contracts whose object is foreign exchange, specifically the agreement on prices and payment methods in foreign currency, are prohibited acts in the Foreign Exchange Ordinance, if the Civil Code 2005 is applied, it will be determined to be invalid. If the Civil Code 2015 is applied, this case is not a violation of the law's prohibition so it will not be invalid.

 

Thus, from the effective date of the Civil Code 2015 (January 1, 2017), the prohibitions that make contracts invalid can only be provisions of laws. This regulation is a progressive amendment to the 2015 Civil Code with a more "open" nature for parties to freely contract, respects voluntary agreements between parties, and limits declarations. declaring invalid contracts too many and arbitrarily.

 

However, this is a violation of foreign exchange laws, so it might still be fined pursuant to Clause 4, Article 23 of Decree No. 88/2019/ND-CP, for the act of "Trading, quoting, valuing, recording prices in contracts, agreements, posting, advertising goods prices, services, land use rights and other similar forms (including conversion or adjustment of prices of goods and services, value of contracts and agreements) in foreign currency not in accordance with the law", which will be fined from 30,000,000 VND to 50,000,000 VND for individuals. In case an organization commits a violation, the fine is 2 times higher than that of an individual, from 60,000,000 VND to 100,000,000 VND.

 

Judicial practice

 

That is the law, but in reality, when resolving foreign currency transaction disputes, the Trial Council still applies the spirit of Resolution No. 04/2003/NQ-HDTP dated May 27/ 2003 of the Council of Judges of the Supreme People's Court guiding the Ordinance on Economic Contracts to handle cases:

 

Firstly, if in the content of the contract the parties agree on price and payment in foreign currency while one or more parties are not allowed to pay in foreign currency, but in fact the parties have paid each other in Vietnam Dong is not considered invalid.

 

A typical case is a dispute over a goods purchase contract between the plaintiff, Ha Thanh Company - Ministry of National Defense, and the defendant, Thien An Steel Joint Stock Company according to cassation decision No. 70/2014/KDTM-GĐT dated July 29, 2014 of the Economic Court of the Supreme People's Court. According to the case, Ha Thanh Company - Ministry of Defense and Thien An Steel Joint Stock Company signed an economic contract on the purchase and sale of 816.97 tons (+/- 10%) of hot rolled steel, in coils, of Japanese origin. The total contract value is 7,422,000,000 VND. The debt acceptance record dated January 8, 2010 was signed after Economic Contract 03 09/HT-PT dated November 11, 2009 and before the parties delivered and received the goods (January 12, 2010). In Clause 1.1, Article 1, Contract No. 03-09 dated November 11, 2009 stipulates that the total value of the shipment is 7,422,000,000 VND (+/-10%), temporary exchange rate 1 USD = 18,500 VND, "price The above is a provisional price", so then on January 8, 2010, the parties signed a Debt Acknowledgment Minute to re-determine the value of the shipment. The Economic Court of the Supreme People's Court commented that although the Minutes were titled debt acceptance, they were actually a new agreement between the parties on the contract value, taxes and fees were agreed to be calculated in The US dollar is the pricing currency (to ensure the stability of the value of the contract), but payment is in Vietnamese currency converted at the actual selling exchange rate of Hanoi Commercial Joint Stock Bank... at each payment. In fact, Defendant Thien An Company also paid Plaintiff Ha Thanh Company in Vietnamese Dong via bank transfer at Hanoi Joint Stock Commercial Bank, Cau Giay branch, so the parties' agreement is not considered invalid and does not violate the Ordinance on foreign exchange management. The Court of First Instance held that the Debt Acceptance Minute was invalid because the parties agreed on the contract value in foreign currency, so it was incorrect to not rely on the Debt Acceptance Minute to resolve the case. The Court of Appeal held that the Debt Acceptance Memorandum was not invalid and had grounds[6].

 

Thus, in this case, the payment element in Vietnam Dong is very important, affecting the entire validity of the contract. If in the content of the contract the parties agree on price and payment in foreign currency while one or more parties are not allowed to pay in foreign currency, but then in fact the parties have paid each other in Vietnam Dong, it will not be considered invalid.

 

Second, if in the content of the contract the parties agree to pay in foreign currency and actually pay in foreign currency, while one or more parties are not allowed to pay in foreign currency, then the contract is considered completely void. The two parties restore the original situation and return to each other what they have received according to the provisions of the Civil Code.

 

A typical case is the request for payment of rent, deposit and fine between Mr. Y and Mr. T. On January 27, 2018, Mr. Y and Mr. Tran Van T signed a rental contract for Lot No. 73, Map number 10, at 42 Street P, District N, Da Nang City. According to this contract, the rental price is 2,400 USD/month. The lease term is 5 years. Deposit is 7200 USD equivalent to 3 months rent, paid every 6 months. The purpose of renting a house is to provide restaurant and hotel services. According to the contract, Mr. Y paid 06 months' rent in the amount of 14,400 USD according to payment authorization number 452985 dated February 9, 2018 and 03 months' deposit of 7,200 USD according to money transfer dated December 29, 2017. The total amount that Mr. Y paid to Mr. Tran Van T was 21,600 USD. On January 27, 2018, Mr. Tran Van T handed over the house to Mr. Y. The entire interior of the house was completely damaged, all sanitary equipment could not be used and served its purpose for Mr. Y's business. On February 27, 2018, Mr. Y had to hire a cleaning team at a cost of 30,000,000 VND to dismantle and move all old equipment out of the house and invest in replacing new equipment. Request the Court to review and cancel the rental contract signed on January 27, 2018 between Mr. Y and Mr. Tran Van T for violating the provisions of Vietnamese law. Request Mr. Tran Van T to return the deposit and 06 months' rent of 21,600 USD plus a fine equivalent to 03 months' rent of 7,200 USD for unilaterally terminating the contract. The total amount that Mr. T must return is 667,008,000 VND.

 

In the first instance judgment, the Court declared the house rental contract signed on January 27, 2018 between Mr. Y and Mr. Tran Van T invalid. Force Mr. Tran Van T to return to Mr. Y the amount of 500,256,000 VND, Do not accept the plaintiff's request to fine Mr. Tran Van T the contract amount of 166,752,000 VND, Do not accept the counterclaim of The defendant forced the plaintiff to compensate the property with the value of: 500,325,000 VND

 

The Court of Appeal found: The house rental contract was made on January 27, 2018,7 between Mr. Y and Mr. Tran Van T, which stipulated that the house rental price was in USD and in fact the parties also paid in USD. This transaction is carried out in the territory of Vietnam, therefore is governed by the provisions of Vietnamese law. Pursuant to Article 22 of the 2005 Foreign Exchange Ordinance and Articles 3 and 4 of Circular No. 32/2013/TT-NHNN dated December 26, 2013 of the State Bank of Vietnam, guiding the implementation of regulations restricting use foreign exchange in the territory of Vietnam, then this contract violates the prohibition of law. Therefore, the Court of First Instance, based on point c, Article 117, Article 131 of the 2015 Civil Code, declared the above house rental contract to be invalid and forced the parties to restore the original state and return to each other what they received in accordance with the law, so there is no basis to accept Mr. T's appeal request on this content. The appellate judgment declared: Rejecting Mr. Tran Van T's appeal, upholding the first instance verdict [7].

 

Thus, in this case, although the contract was established at the time the 2015 Civil Code took effect, in the content of the contract the parties agreed to pay in foreign currency, while the parties are not allowed to deal in foreign currency, it will still be determined by the Court to be completely invalid and will be handled according to the legal consequences of the void contract.

 

See some other judgments compiled at: https://fdvn.vn/tong-hop-ban-an-va-quyet-dinh-giam-doc-tham-lien-quan-den-tranh-chap- hop-dong-co-thoa-thuan-su-dung-goai-te/

 

Although the Economic Contract Ordinance has expired, Resolution No. 04/2003/NQ-HDTP has not yet had a replacement document, its spirit still ensures reasonableness, flexibility and compatibility with practical life.

 

However, determining whether transactions/ contracts with the object of foreign exchange will be valid or invalid depending on the case will be in conflict with the Foreign Exchange Ordinance and the 2015 Civil Code, when the Foreign Exchange Ordinance regulations prohibiting "all transactions in foreign exchange" and the 2015 Civil Code stipulates that transaction content that violates the prohibition of the Law will be invalid.

 

Some suggestions

 

From the above analysis, in order to avoid inconsistencies in legal provisions, avoid arbitrariness in judges' opinions, ensure the rights of parties in contracts/transactions, and The author proposes some ideas as follows:

 

Firstly, because of the important nature and impact of the use of foreign currency on national finances, it is necessary to develop a Foreign Exchange Law instead of a Foreign Exchange Ordinance, or concretize the spirit of the Foreign Exchange Ordinance into specialized legal documents to improve the legality of this issue. At the same time, amend the provisions in Article 22 of the 2005 Foreign Exchange Ordinance in the direction of not prohibiting the recording of prices and quotations in contracts in foreign exchange if such recording of prices and valuations determines the applicable exchange rate and is converted to Vietnam Dong when making payment. If so regulated, transactions in which prices are recorded and quoted as foreign exchange but actually paid in Vietnamese Dong will not violate foreign exchange laws and will not be invalid. Similarly, payment transactions in foreign exchange violate the provisions of the Law and are invalid according to the provisions of the 2015 Civil Code. This will help eliminate the "disparity" when applying the provisions on invalid transactions of the 2015 Civil Code to foreign exchange payment transactions, while limiting the number of contracts being declared invalid, causing harm to the legitimate rights and interests of the parties.

 

Second, the Council of Judges of the Supreme People's Court needs to have new documents specifically guiding this issue, and at the same time select judgments with appropriate guidelines and judicial principles to develop into precedents as basis for resolving similar cases./.

 

FDVN LAW FIRM

 

LIST OF REFERENCES:

 

[1] Clause 1, Article 4 of the  Foreign Exchange Ordinance 2005.

 

[2] Article 385 of the Civil Code 2015.

 

[3] Article 123 of the Civil Code 2015.

 

[4] Article 128 of the Civil Code 2005.

 

[5] Article 123 of the Civil Code 2015.

 

[6] Cassation Decision No. 70/2014/KDTM-GĐT dated July 29, 2014 of the Economic Court of the Supreme People's Court.

 

[7] Judgment No. 153/2019/DS-PT dated August 29, 2019 of the High Court in Da Nang on "Requiring payment of rent, deposit and fines".

 

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