What is the reconciled solution for "decentralization" for branches?

Branches in the corporate governance structure are a common model for expanding operations by area, for operation and decentralization of contract signing. But in order to operate the branch in accordance with the law in practice, should the enterprise authorize the branch or the head of the branch?

Source: The Saigon Times

The "decentralization" of the branch of the enterprise is often expressed by power of attorney/authorization decision with the authorized subject being the branch. But the legal basis of the implementation of this authorization is in fact "different", so a harmonious solution is needed.

Is the branch the authorized subject or is it mandatory to be the individual head of the branch?

The Law on Enterprises 2020 (Law on Enterprises 2020) defines a branch as a dependent unit of an enterprise, tasked with performing all or part of the functions of the enterprise, including the function of authorized representative. The dossier of registration of branch operation must contain copies of legal papers of the individual, for the head of the branch.

This sentence shows that the Law on Enterprises 2020 recognizes a branch as an "operating unit" that can be given the function of representation, but is still closely associated with a human resource point, namely the head of the branch in legal procedures.

Meanwhile, the Civil Code 2015 (Civil Code 2015) argues according to the subject: "Individuals and legal entities can authorize other individuals and legal entities to establish and perform civil transactions"; "Branch... is a dependent unit of a legal entity, not a legal entity", "the head of the branch... perform tasks as authorized by the legal entity". Civil rights and obligations arising from transactions established and performed by branches belong to legal entities.

Thus, the Civil Code 2015 affirms two important points: (i) branches are not legal entities; (ii) When "authorizing" in the sense of representation in a civil transaction, the head of the branch is a valid authorized party within the scope and duration of the authorization.

Some businesses wonder that the wording in Article 44 of the Law on Enterprises 2020 is not consistent with Clause 1, Article 138 of the Civil Code 2015 because "the branch is not an individual or legal entity".  In the recent reply of the Ministry of Finance, it was emphasized: (i) the function, model, operation mechanism of the branch and the legal status of the head of the branch are internal matters, implemented in accordance with the Civil Code and the company's charter/statute; (ii) Clause 1, Article 138 of the Civil Code is a regulation on authorized representation in civil transactions; and Clause 1, Article 44 of the Law on Enterprises stipulates that branches represent enterprises to carry out production and business activities; Therefore, the "content" of the two regulations is different[1].

At the same time, the current system of enterprise registration guidance documents continues to "technicalize" the role of the head of the branch when requesting the registration of the head of the branch must have the head's personal legal documents.

Legal status in authorization

"Authorization" in business practice is often used in two legal classes: (i) internal authorization (assignment, decentralization, and delegation of administrative authority); and (ii) authorization in the sense of representation in the transaction (authorized representative) to establish and perform transactions with third parties. The Civil Code 2015 designs the meaning class (ii) according to the "subject – subject" model: the authorizing party and the authorized party must be individuals or legal entities.

"Authorized representation" entails important consequences: transactions established by representatives within the scope of representation give rise to rights and obligations for the represented; Conversely, transactions made by persons who do not have the right to represent or exceed the scope may not be binding unless they are recognized/not objected/or there is an error....

At this point, the matter of "authorizing whom" must be seen as a legal basis of the transaction. According to the Law on Enterprises 2020, the branch includes the function of authorized representation while the Civil Code 2015 affirms that the branch is not a legal entity. From the perspective of the subject of civil law, the branch is neither an "individual" nor a "legal entity", so it is difficult to consider the branch as an "independent authorized party".

The "head of the branch" has a specific legal position. The Civil Code 2015 directly records that this person performs the duties authorized by the legal entity within the scope and time limit of the authorization. At the same time, as stated, the law on enterprise registration requires the registration of the head of the branch in the registration dossier, thereby strengthening the role of a determined individual as the focal point in the signing, management, and internal responsibilities as assigned.

The Law on Enterprises 2020 stipulates that "the branch has the function of authorized representation", but the Civil Code 2015 affirms that "the head of the branch performs tasks as authorized". From a legislative technical perspective, this is not necessarily a contradiction if you look at the Law on Enterprises 2020 describing the functions of the branch, while the Civil Code 2015 describes the mechanism for the subject to carry out the authorization. This approach is also in line with the aforementioned Ministry of Finance's opinion that the connotations of the two regulations are different.

Source: The Saigon Times

Practice of authorization disputes

Recently, there have been many disputes about the authorization of legal entities to branches/representatives of branches. Usually disputes revolve around two situations:

Firstly, the branch signs a contract "by authorization" and can prove this authorization from the business, then the business is bound to be legally responsible for the authorization activity. Although the law still has "ripples" in terms of appropriate legal basis. A few recent cases show that the contract clearly states that the branch is signed under the authorization of the general director; The Arbitration Council shall determine the rights and obligations arising in the enterprise; and arguments based on regulations on the consequences of acts of representation and rights and obligations of legal entities for transactions established by[2] branches.

Secondly, the signatory (usually a person of the branch) fails to prove that he is authorized or exceeds the scope, leading to the partner being able to invoke the mechanism of "not giving rise to rights and obligations" according to the provisions on authorized representation of the Civil Code, except for cases where it is recognized, known without objection,  or have errors. Notably, in some situations, the person who does not have the right to represent signs but the transaction can still be binding if the business knows and accepts/does not object.

Harmonized solution

In order to solve this problem in the direction of the "right subject" of the authorized representation regime in the current Civil Code, enterprises should authorize the head of the branch, not just write as authorizing the branch.

The Civil Code 2015 has limited the authorized subjects to individuals/legal entities; at the same time, the Civil Code determines that the branch is not a legal entity and gives the mechanism to perform tasks "as authorized" to the head of the branch. However, if approached in accordance with the spirit of "separation of contents" stated by the Ministry of Finance, Article 44 of the Law on Enterprises 2020 can be considered as regulating the organizational function of the branch, while the Civil Code 2015 regulates the mechanism of representation in transactions, thereby leading to a harmonious solution:  The authorization document can still refer to the branch as the "implementing unit", but the signatory must be identified and clearly stated "in the name of the enterprise".

We believe that in all transactions with third parties, the "represented party" should be the enterprise and the signatory should be the legal representative or the head of another duly authorized branch/personnel, and the authorization document must clearly show that the scope of representation is the best solution according to the current regulations of Vietnam.

Lawyer Nguyen Van Phuc

HM&P Law Firm

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