On October 1, 2023, Precedent No. 69/2023/AL ("Precedent 69") was passed by the Council of Judges of the Supreme People's Court. It is a landmark decision; the Court determined that Commercial Arbitration has the right to resolve disputes related to non-disclosure and non-compete agreements ("NDA/NCAs”) …but it is necessary for the parties to separate the NDA/NCAs from the employment contract. Precedent 69 has both resolved past uncertainty and provides a path for enterprises to draft and sign such agreements.
The jurisdiction of arbitral tribunals and the separate treatment of NDA/NCAs from the employment contract
We start with Decision No. 755/2018/QD-PQTT dated June 12, 2018 of the People's Court of Ho Chi Minh City ("Ho Chi Minh City Court") in its decision resolving the "request for annulment of arbitral awards" made by Ms. Do Thi Mai T ("Ms. T") in her dispute with Company R Limited Liability Company ("Company R") regarding the assertion that Ms. T violated her NDA. The arbitral tribunal of the Vietnam International Arbitration Center (“VIAC”) deemed itself competent to resolve the dispute, arguing that the NDA is separate both physically and in its essence from the employment contract and thus is not subject to labor law. It ruled in favor of Respondent – Company R. Dissatisfied, Ms. T filed a petition with the Ho Chi Minh City Court requesting an annulment of the entire arbitral award on the grounds that the arbitral tribunal lacked jurisdiction to resolve the dispute. Ho Chi Minh City Court, however, concurred with VIAC making an argument similar to that of the arbitral tribunal. It also noted that throughout the arbitration process, Ms. T had not raised any objections to the jurisdiction of the arbitral tribunal. It concluded that the arbitration proceedings were properly conducted.
The Ho Chi Minh City Court further concluded that arbitral tribunals have jurisdiction to resolve disputes related to NDA/NCAs when the following conditions are met: (1) the arbitration agreement is valid and not objected to by the parties, and (2) the parties clearly acknowledge the independence of the NDA/NCA from the employment contract. This ruling of the court was later approved to become Precedent 69.
Decision No. 364/QD/CA promulgated by the Chief Justice of the Supreme People's Court dated October 1st, 2023 further elaborates on the matter. It sets out the conditions to apply this Precedent: “The employer and the employee enter into a separate non-disclosure and non-compete agreement asserting that after the termination of the employment contract, the employee is prohibited from engaging in similar work or competing with the employer for a certain period, [and that any] dispute will be resolved by Commercial Arbitration…” In this legal scenario, it is clear that the parties must first have signed an agreement separate from the employment contract and that the agreement is neither an integral part of the employment contract nor an appendix. Such agreement is a simple civil agreement specifying the rights and obligations of the parties under the Civil Code1, having a legally binding effect without relying on the separate employment contract that the parties have signed. The separability of the NDA/NCAs depends on both the form (a separate agreement) and the intention of the parties (the parties signing have full legal capacity and legal competence).
Nonetheless, factors that give rise to a cause of action arise only after termination of the employment contract. Hence, in cases where the employment contract has not yet terminated, but the employee violates her obligation to maintain confidentiality or she works for a direct competitor of the employer, the question arises, what type of dispute resolution mechanisms can be applied? Can parties still bring the case to commercial arbitration, or must they follow the labor dispute procedures? This issue is regulated in Circular No. 10/2020/TT-BLDTBXH of the Ministry of Labor – Invalids and Social Affairs dated November 12th, 2020. It states that if an NDA-related violation occurs during the term of the employment contract, it will be resolved under the Labor Code even if the NDA is a separate agreement. Whereas violations that occur after termination of the employment contract will be resolved according to the Civil Code and related laws2. However, language of the law is silent on the mechanisms to resolve violations of NCA-related provisions, and the approach depends on the agreement between the parties.
Precedent 69 establishes a scenario in cases where NDA/NCAs are considered to be independent of the employment contract and related disputes shall be resolved via arbitration. Nevertheless, note that the parties need to take into account when violations of NDA/NCAs occur in order to settle on a proper dispute resolution mechanism.
Considerations for enterprises when drafting an NDA/NCA with their employees
Firstly, the NDA/NCA should be an agreement physically separate from the employment contract. It should not be part of or an annex to the contract. This helps to separate the NDA/NCA from the employment contract. It helps to make it clear that the NDA/NCA is an independent agreement and is not part of the employment contract. If the NDA/NCA is considered an integral part of the employment contract, it may be seen to infringe the right of employees to freely choose an occupation3, as stipulated in the Constitution and the Labor Code. If so, it may be deemed void. For clarity and to avoid doubts, there should be a clause noting, for example: "This non-disclosure agreement and/or non-compete agreement between the parties is not a part of the employment contract". The language acknowledges the separation of the NDA/NCA from the employment contract.
Secondly, the term of the NDA/NCA needs to be clearly stated to ensure compliance. Typically, parties should stipulate that NDA-related provisions have an indefinite term, while commitment to an NCA should only apply for a certain period after employment ends. This aims to prevent disclosure of the employer's confidential information or the employee's joining employer's competitors immediately after termination of the employment contract. This latter is important because an indefinite restriction on employment - even with a competitor - may be seen as infringing an employee's right to work.
Thirdly, NDA/NCA must follow the law and satisfy all conditions of a valid civil agreement. When signing an NDA/NCA, employers should ensure that employees have the full capacity for civil conduct, act entirely voluntarily and without coercion, that the content of the agreement is not contrary to social ethics4, and above all, that they understand and comprehend the contents and requirements of the NDA/NCA to minimize the risk of rendering the NDA/NCA void. The essence of the agreement is the principle of voluntary consent. Employees retain their civil rights and the right to work, but they voluntarily waive or curtail these rights by entering into an NDA/NCA. Therefore, employees are expected to adhere to the NDA/NCA and accept the sanctions for failing to do so. Matters involving NCAs are particularly important, and the government and courts treat them carefully. That is, the right to be employed is very broad. It should not lightly be infringed. Hence, it is important that an agreement to forego their right-even in part-be seen to be separate from the employment contract. Moreover, such an agreement should be seen to be no more restrictive than necessary to protect the employer's legitimate rights.
Fourthly, there should be appropriate compensation for the employees who signed an NDA/NCA. Compensation is not mandatory, but it is in the employer's interest to be able to assert that while the employee did voluntarily limit her employment opportunities by signing an NCA, she was also compensated for doing so. By offering compensation, employers and employees can maintain a mutually beneficial working relationship, thus avoiding potential disputes.
Finally, it is essential to specify the applicable law and dispute resolution mechanism. As discussed above, acknowledgment of the complete separability of the NDA/NCA from the employment contract is crucial in choosing the dispute resolution forum. Therefore, enterprises should add a clause selecting the Civil Code as the applicable law to resolve disputes under the NDA/NCA. This further affirms the separation of the NDA/NCA from the employment contract. It is, of course, vital that if the parties agree to arbitrate their disputes, an arbitration clause must be included.
Precedent 69 marks a significant milestone in terms of legal development because now the validity of NDA/NCAs has been formally recognized by the Court, and an alternative dispute resolution may now apply to resolve disputes related to NDA/NCAs.
Footnotes
1. Article 385 of the Civil Code 2015
2. Article 4.3 of Circular 10/2020/TT-BLDTBXH of the Government dated November 12, 2020 elaborating and guiding certain articles of the labor code concerning employment contracts, collective bargaining council and jobs with hazards to reproductive function and child raising.
3. Article 35.1 and 35.2 of the Constitution of the Socialist Republic of Vietnam 2013 and Article 5.1.(a) of the Labor Code 2019.
4. Article 117 of the Civil Code 2015
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.