Risks of engaging in commercial transactions with foreign elements

What is commercial transaction with foreign elements?

From a legal standpoint, there is currently no specific definition of “commercial transactions with foreign elements“. However, fundamentally, the commercial transactions with foreign elements can be understood as transactions governed by the legal regulations on civil transactions involving foreign elements and the legal regulations on commercial transactions. Thus, a transaction is considered a commercial transaction with foreign elements if it meets the following two criteria:

Involving commercial activities:

• In terms of the transaction’s purpose, a transaction is considered to involve commercial activities if it aims to establish, modify, or terminate rights and obligations among the parties for profit-making purposes; and
• In terms of the transaction’s subject, the subject of the transaction includes goods, services, investments, trade promotion, and other profit-making activities.

Having foreign elements:

• At least one of the participating parties is a foreign trader; where a foreign trader is understood as a trader established or registered for business in accordance with foreign country’s law or recognised by foreign law, or
• All parties involved are Vietnamese individuals or traders, but the establishment, modification, execution, or termination of the transactions take place abroad, or
• All parties involved are Vietnamese individuals or traders, but the subject matter of the commercial transactions are located abroad.

Therefore, to determine if a transaction is considered commercial transactions with foreign elements, the transaction needs to be regarded as a commercial activity and has foreign elements. In this context, the foreign elements of the commercial transactions can be determined based on the nationality of the participating entities, the location where the establishment, modification, execution, or termination of the transaction occurs, and the location of the transaction’s subject matter.

Risks that traders may face up to in the commercial transactions with foreign elements

Risk of being deceived by partners and intermediaries in buying and selling goods and providing services

Businesses falling victim to deception by partners and intermediaries in commercial transactions with foreign elementsis not a new issue. In many cases, due to excessive trust in intermediaries, traders are willing to sign purchase and sale contracts and export goods without fully understanding who the purchasing party is, where their business is located, or whether the partner’s business activities are carried out in reality.

An illustrative example of this case is a scam involving nearly 76 containers of cashew nuts valued at over USD 20 million in 2022. Vietnamese enterprises had entered into contracts to sell cashew nuts to Turkey and Italy through the Kim Hanh Viet intermediary company, with the hope of selling a large quantity of cashew nuts during the challenging period following the pandemic. The payment method for this transaction was “Documents against Payment (D/P).” However, the original documents that were sent from Vietnam to Italy were “missing.” At that time, Vietnamese enterprises could have suffered significant losses if the original documents had fallen into the wrong hands.

From the case mentioned above, it can be seen that to minimise the risk of falling victim to cross-border fraud, businesses need to exercise caution before signing contracts for the purchase, sale, import, or export with foreign partners. Specifically, businesses engaging in commercial transactions with foreign elementsshould:

• Limit the use of high-risk payment methods such as deferred payments, issuing checks to collateralized sellers, Documents against Payment.
• Considering hiring third parties or directly visiting the partner’s headquarters location before signing the commercial contracts, and
• Thoroughly reviewing the commercial and legal terms of international trade contracts, paying close attention to clearly define the rights and obligations of each party in the payment and delivery process, etc.

Risks arising from language discrepancies

Language discrepancies are always a critical issue and can pose various risks in commercial transactionswith foreign elements. Language barriers can create difficulties for businesses engaging in commercial transactions with foreign elements to negotiate and reach mutually agreed terms with foreign traders.

In actual international commercial transactions, contracts are often drafted in bilingual or multilingual formats. In many cases, due to carelessness in drafting, the Vietnamese language and other languages used may not align, resulting in different interpretations of the contract’s content. Furthermore, if the contract does not clearly specify which language prevails in case of a language dispute, businesses engaging in commercial transactions with foreign elements may face the risk of having unfavourable decisions by arbitration or commercial courts.

Therefore, when engaging in transactions with foreign traders, businesses should:

• Using reputable translation companies or hiring highly competent individuals to carefully review the translations to ensure accuracy and alignment with the original content; and
• Clearly stipulating in the contract which language takes precedence in the event of a language conflict;
• Specifying in the contract which language will be used when resolving disputes at a dispute resolution body (if applicable).

Risk of price fluctuations in commercial transactions with foreign elements due to exchange rate changes

Each country or territory has its own currency, and the value of these currencies depends on the current economic conditions of that country. Currency values are subject to continuous fluctuations. In many cases, many businesses engaged in importing and exporting goods in commercial transactions with foreign elements have experienced a change from profit to loss due to rapid changes in the exchange rate between foreign currencies such as the US Dollar, Japanese Yen, or Euro when converting to Vietnamese Dong.

Therefore, before engaging in transactions with foreign traders, Vietnamese businesses must consider the foreign currency to Vietnamese Dong exchange rate changes throughout the entire transaction process. In addition to specifying the transaction value of goods and services, businesses should determine the exchange rate to Vietnamese Dong or the relevant bank to be used for payment at the time of settlement.

Above is the foundation related to Risks in commercial transactions with foreign elements that Phuoc &Partnersshare with readers. If you encounter any difficulties related to the legal field, please contact us. Phuoc &Partners is a law firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also considered one of the law firms with a team of staff specialising in the leading legal field in Vietnam and whose practice areas are rated top in the legal market such as Labour and Employment, Taxation, Mergers and Acquisitions, and Litigation. We are confident that we are one of the Law Firms providing the best legal services to our customers.