Asia - adopting the right mindset - Phil Taylor

Lawyers should consider factors beyond the letter of the law – such as how it has previously been enforced and local culture – in order to give the best advice, adopting a unique approach to each jurisdiction.

Phil Taylor

Advising on and drafting a choice of law clause as part of a contract may not be a lawyer’s most exciting task, but it can have a big impact on the time and money a client spends resolving any potential dispute.

In Asia, as in any other part of the world, each party to an agreement will usually want it to be governed by the familiar law of its own home jurisdiction. But the final choice of law will depend on factors including the parties’ corporate cultures, their bargaining power and what countries they come from.


‘In China, although the written law can be clear, enforcement is rarely black and white’


Dan Harris
Harris & Moure

A party with enough leverage will generally try to designate the law of its own country in the agreement. If the counterparty resists, a good compromise will often be the law of a third legal jurisdiction. This has led to the common sight in Asia of a cross-border contract governed by the laws of England and Wales. As Nicholas Fluck, president of the Law Society of England and Wales, comments ‘English law provides the stability, predictability and clarity that business demands.’

A question of context

The best choice of law can, however, depend on the type of deal being done. ‘One is looking for a system that can best interact with mandatory local laws and that contains the juridical concepts essential to the transaction,’ says Nicholas Alexander Brown, a Pinsent Masons partner based in Hong Kong. Christopher Tahbaz, Senior Vice-Chair of the IBA Litigation Committee, and Co-Chair of Asian litigation at Debevoise & Plimpton, believes the most important consideration is
‘to select governing law from a jurisdiction with a well-developed and transparent commercial jurisprudence’. Doing so ‘maximises certainty of outcomes in the event of a dispute’, he argues.

International banks lending money for cross-border projects will often require English law to apply to the finance and security documents governing offshore investment vehicles; meanwhile high-yield debt transactions are more likely to be governed by New York state law, because of the history of those products. In other cases, some foreign systems of law seem to work better with local law than others. For example, New York law is often chosen for China-related aviation contracts because it shares certain good-faith principles with Chinese law (and there is no general principle of good faith in England and Wales).

Another factor is where the parties’ important assets are located, as Mayer Brown partner Jason Elder explains: ‘if a person had New York assets, you might decide that a New York choice of law is best.’ Geography has a part to play too. Using English law can make sense in many South and Southeast Asian jurisdictions, where local legal systems are derived from English common law. But in civil law-based North Asian jurisdictions, New York or California state law seems to be more appropriate.

Forced to go local

Some foreign investors may be forced to accept an agreement with an Asian counterparty that is governed by local law. This may be because the investor has insufficient bargaining power to get its own way, or that it decides, pragmatically, to make a concession to its Asian counterparty in order to preserve a good working relationship. This decision could cause serious problems down the line in developing jurisdictions, which suffer from a lack of legal certainty.

Merril Keane, Deputy Newsletter Officer of the IBA International Sales Committee and lawyer at Miller Nash, points out that ‘some risks related to choice of law may be different in Asian countries than in other jurisdictions. When you don’t have hundreds of years of practice and precedent to look at for guidance, you may not be able to predict outcomes very well’.

In countries such as Thailand and Indonesia, for example, the overarching law is often drafted vaguely, with the intention that regulatory bodies and other agencies will issue implementing regulations to fill in the gaps at a later stage. When such a system of law is applied to contracts, however, it can become difficult for an investor to know exactly what it is agreeing to, or how it can seek redress if a problem arises.

Tahbaz suggests lawyers take extra care when drafting to address this issue. ‘If parties choose governing law from a jurisdiction where the law is relatively less developed, it may be important to consider using clear – and perhaps more detailed – language in the contract to describe concepts that may not be that developed under that jurisdiction’s law, even if the local practice might be to have less detailed contracts’, he argues.

In some situations – commonly contracts giving security over a local asset, contracts dealing with real property, or government concessions – the parties will not have the luxury of being able to choose the governing law; local law will apply by default. Some countries have additional limitations. In China, for example, although Article 126 of the PRC Contract Law specifically allows parties to a ‘foreign-related contract’ to make their own choice of law to govern a related dispute, in the case of Sino-foreign joint ventures or contracts for Sino-foreign ‘joint exploration and development of natural resources’ in the country, the law of the PRC applies mandatorily.

Going local by choice

Choosing local law is not always a negative decision. Some Asian countries, such as Hong Kong or Singapore, have developed legal systems containing many principles and procedures, which will be familiar to foreign lawyers. In other cases, choosing foreign law may not be a sensible option. Darryl Daugherty, a Southeast Asia-based private investigator and professional researcher, gives an example. ‘Given the high degree of difficulty in enforcing foreign court judgments in Thailand, it’s preferable to use local law, but to do so under a detailed contract that precludes loopholes and is in full compliance with statutes and regulations,’ he says.


‘You are more exposed as a foreign company, and you have international regulators to answer to’


Antony Dapiran
A partner in the Hong Kong corporate department
of Davis Polk & Wardwel
l
 

Imposing foreign law on a more complex deal structure may not work either. ‘In an [Asian] onshore structure combined with an offshore structure, it’s difficult to wave a magic wand and say “Let’s have English law for everything,”’ says Rashed Idrees, a partner with Southeast Asian regional firm DFDL. ‘Both structures will have to work together to ensure the best protection for the client.’

Choosing a foreign governing law combined with the jurisdiction of foreign courts can also lead to local enforcement problems. ‘If dispute resolution is also in the Asian jurisdiction,’ argues Keane, ‘the law will be more familiar to courts or local arbitrators and the choice may facilitate enforcement’.

The right state of mind

The issues discussed so far reflect a particular business culture in which the written contract is king. This approach is not one which will necessarily be adopted by an Asian counterparty.

Nothing chosen

Some contracts, whether by design or omission, contain no express choice of law at all. In these circumstances, the system of law which is eventually applied to the contract in case of a dispute can depend on a number of factors. Where a case is being tried in the European Union, the courts will apply the so-called Rome I Regulation. Having been in force since 2009, and based on a 1980 Convention, the way in which it will be applied is now relatively predictable. Outside Europe, however, parties will have to depend on the jurisprudence of the particular court in which they find themselves.

‘Most major Asian legal systems contain conflict of law rules that establish criteria by which the presumed intentions of the parties, as to which body of laws will control their contract, are to be determined objectively,’ says Pinsent Masons’ partner Nicholas Alexander Brown.

There is little other international guidance on the matter. The Draft Hague Principles on Choice of Law in International Commercial Contracts (begun in 2006 by a working group of the Hague Conference on Private International Law) do not address the case where no choice of law is made, but focus on affirming ‘the principle of party autonomy with limited exceptions’.

It may be that one of the jobs for Association of Southeast Asian Nations (Asean) nations, as they seek closer integration, is to develop an overarching principle of determination of governing law, which could provide greater legal certainty for investors across the region.

‘In some parts of Asia, the significance of a contract is very different to that in the West,’ says Michael Pryles, an experienced chartered arbitrator and author of the book Dispute Resolution in Asia (Kluwer Law International, 1998). ‘In China, there is a great emphasis on the relationship between the parties, rather than a formal contract. In the West, people are very careful before they put a signature on a contract. In China, the contract is in a sense a manifestation of the relationship between the parties.’

Voon Keat Lai, Stephenson Harwood’s Greater China managing partner, adds that a less precise contract may also be a manifestation of a civil law approach to drafting. ‘In the common law world, people tend to be more precise in defining their relationships. For this reason, contracts are generally very long and detailed. China, like many civil law countries, does not rely on long contracts. They are very much drafted along principles and spirits. For this reason, interpretation is looser and may be seen by some as being “grey.”’

These comments point to another less tangible but equally important decision that lawyers and their clients need to make: which mindset to adopt when doing business in Asia. ‘In China, although the written law can be clear, enforcement is rarely black and white,’ says law blogger and Harris & Moure attorney Dan Harris. He feels lawyers need to take a different approach in many parts of Asia to that which they might take elsewhere, in order to deal with some of the challenges that the region can pose.

Keane feels that ‘in some Asian jurisdictions parties may be less likely to seek redress in courts or through other formal dispute resolution procedures.  Negotiation or mediation may be favored, or parties may attempt to renegotiate already agreed-to terms after the deal is done.’ In China this can even become part of the court process. ‘It is a regular part of every Chinese trial for the court to work to try to settle the case… there is a “settlement phase” right at the end of the trial, where the court always explores with the parties whether there is a basis for settlement, and cases often settle then,’ she observes.

In countries where the law is developing rapidly, new regulations can appear almost overnight. When this happens, experienced lawyers will look at how the authorities have enforced similar laws in the past to assess the actual risks to their client. A few years ago, for example, the Chinese government announced it was making all internet-to-internet telephony illegal. But believing that China’s public would never allow such a crackdown and therefore that it would never happen, Harris says he did not advise his clients not to talk on Skype.‘They just threw it out there to see what would happen,’ he says. ‘[In this kind of situation] we tell them what the law is, then we talk about our experience – and often we’ll say “Give us a couple of days and we’ll try to find out what’s going on.”

‘You can’t rely as much on the law as it’s written – that doesn’t mean you can just ignore the law. There’s a grapevine among China lawyers: you call your lawyer friends, even if you’re sure what the law is, and ask them what they’ve been hearing,’ Harris continues. ‘I’m happiest when the law and the grapevine say the same thing.’

An issue that can arise when helping a client form a company in China is whether the investor can do any kind of business in the country before the company is fully set up. Although it is technically illegal to do so, many carry out some initial scoping work in the interim period. But if they are caught, Harris says, the authorities tend to take a pragmatic approach, and the investor will rarely suffer any consequences if the authorities know that a genuine company registration is pending. Experienced lawyers will explain this precedent to their clients, clarifying that this is no guarantee as to what may happen in the future and leaving it up to them to make the final risk assessment.

Idrees’ firm, DFDL, carries out a lot of its work in Cambodia, Laos and Myanmar, whose legal systems are still developing in many areas. ‘We are constantly faced with decent-looking laws, but understanding, interpretation and levels of enforcement are at a very early stage with a number of them,’ he says. ‘Of necessity we deal with grey areas a lot, and because we’ve been there a long time, we are able to gauge what the local practices are going to be, how a law is to be implemented or enforced.

‘People often want to do something unprecedented or new and we are using undeveloped laws, rules and principles to help us in structuring those transactions. You have to think a lot more outside the box, and use your expertise and resources based on long and deep-seated experience in those markets.’

Greater exposure for foreign investors

Those advising in Asia also need to deal with what could be described as a goldrush mentality among some clients. That is, the assumption that it is possible to operate above the law, or under the radar, simply because the jurisdiction of choice is still in a relatively underdeveloped state, or because domestic rivals seem to get away with it. Lawyers warn that the law will eventually catch up with this kind of company.

‘Clients often say “Chinese local competitors get away without complying with rules”. That may be true, but if the regulators want to make a point, they will enforce the rules and often it’s the foreign company that gets enforced against – you are more exposed as a foreign company, and you have international regulators to answer to,’ says Antony Dapiran, a partner in the Hong Kong corporate department of Davis Polk & Wardwell.

The recent experience of GlaxoSmithKline, which at the time of writing is still under investigation for alleged bribery of doctors in China, is a prime example. It is widely acknowledged that corruption is endemic in the Chinese healthcare sector, with domestic companies playing a big part. Yet the authorities appear to have chosen to make an example of a high-profile foreign company.

Other companies may be willing to take risks in Asia that they would not take at home, based on the notion that there may be large payoffs in the form of commercial opportunities. ‘This usually doesn’t materialise,’ comments Stephen Pelak, a partner of Holland & Hart and a former export control enforcement and counterespionage official with the US Department of Justice. ‘What most companies find is that the Chinese government is going to look after its own industry rather than make good on promises to US or European firms, simply because they were willing to provide technology.’


‘I’m happiest when the law and the grapevine say the same thing’


Dan Harris
Harris & Moure

There are, of course, grey areas for investors in any country. But it is how lawyers work with them that can vary. In China, where legal frameworks are now relatively settled compared to other Asian jurisdictions, a lawyer’s job may be to try to help a client make the most of any grey areas. In more developing jurisdictions, the lawyer is more likely to be helping the client create structures that will stand the test of time as things continue to change.

‘We advise with one eye on what might happen as development occurs, and interpretation and enforcement develop. We keep an eye on ensuring clients stay within the bounds of the law at that point and where we think it might go,’ says Idrees. ‘It’s not about seeing how we can be sneaky or get round the grey areas, but ensuring that what we do is as watertight as possible for the future.’

For Elder, everything points back to client service. ‘The style of successful practice in Asia is different from in the US or UK, principally because you need to tailor your approach to your client to account for a wider range of cultures and levels of sophistication. It is your responsibility to try to deliver your service such that they will get the best value.

‘That’s what distinguishes a good lawyer from a great lawyer in Asia – someone who understands the local [issues] enough to give advice that the client can actually understand and use. We’ve done our job as long as we’ve sufficient and practical information to make informed decisions,’ he concludes. Adds Harris: ‘It’s wrong to act as though you’re only providing strictly legal advice; you are a better lawyer if you can step on to the business turf.’ It seems commercial awareness – a concept drummed into every modern day English law student and trainee lawyer – is especially important in Asia.


Phil Taylor can be contacted at phil@phiine.com