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Resilient commercial agreements - avoiding common pitfalls in Asia

  • Market Insight 07 November 2019 07 November 2019
  • Asia Pacific

  • Commercial

Contracting in Asia can be time consuming and complex, with unique and varied legal, commercial and cultural considerations. These can trip up those that are not adequately prepared. Clyde & Co set out below some of the issues we see clients face in this area, that they need to be prepared to deal with from the outset, to ensure that their commercial agreements are resilient and operate as they expect.

1. Foreign ownership restrictions/new licences

  • Are there foreign ownership restrictions which restrict a foreign-owned company from doing this business?
  • Do you require a local joint venture partner?
  • Is there any track record of issuing new licences in the applicable market?

2. Does it make sense to use your home form of agreement?

Whilst comforting and familiar, adopting your home form of agreement, without first considering the local law and practice, can be very dangerous. Have you considered?

  • Are there any local regulatory impediments to your proposed structure?
  • Is this how business is done in this market?
  • How does the local jurisdiction differ in terms of interpretation and analysis of contracts?
  • What provisions need to be included for local law compliance?
  • Does the agreement need to be in the local language?

These can lead to:

  • an understanding gap commercially between the parties in understanding what terms are being agreed;
  • a misconception as to what the contract actually achieves - compared to what the same document would in a similar situation at home; and
  • practical or legal difficulties in enforcement of such rights, where your home country approach differs from the in-country approach.

3. Does it make sense to make the agreement subject to your home law and jurisdiction?

Making your agreement subject to your home law and courts can be superficially attractive. The law would be familiar and the ease of obtaining a court order at home is understood. However, you need to consider:

  • Are there local laws requiring a specific law and/or jurisdiction for this kind of transaction?
  • Will a foreign judgment be enforceable against your counterparty?

One alternative is arbitration, and often this is more likely to be enforceable. However, have you considered?

  • Any special requirements for enforcement of an arbitral award in that jurisdiction
  • Availability of interim remedies and non-monetary awards?

Some regional jurisdictions like Hong Kong and Singapore are popular compromises, being regional but based on English common law with effective courts and arbitral centres. Furthermore, in Hong Kong there are certain reciprocal enforcement rights for enforcement with mainland China.

4. Is it OK if my contract is in English only?

  • Does your counterparty's negotiating team understand the terms?
  • Will their business team be able to understand and implement the terms?
  • Is there a requirement for local language for it to be enforceable?
  • Do you need to file a translated version with the authorities?
  • If it is bilingual, which language prevails in the case of conflict?

5. What about capital controls and exchange rate risks?

Many Asian jurisdictions (outside of Hong Kong and Singapore) have some form of capital control. This means government or bank approval may be needed to convert the currency and remit the payment into or out of the jurisdiction.

  • Is your counterparty legally going to be able to make the payments they have contractually promised you?
  • If you have a claim against the counterparty, how will you be paid?
  • Are you going to be able to rely on a guarantee obtained?
  • Asian currencies can also be volatile; so long (or even medium) term contracts should address the exchange rate position.

6. Are there any withholding taxes?

  • Will you be paid in full, or after withholding tax? 
  • Can you recover under a double taxation treaty? What documentation will you require to do so? 

7. Trade wars and geopolitics

  • What will happen to your contract in the event there is some geo-political instability, or trade-war?
  • What is the potential impact of tariffs and non-tariff barriers?
  • Will existing rules be applied differently due to geo-political issues? For example, will the goods be held up at customs, or will there be some form of arbitrary investigation, or licence non-renewal?

8. Intellectual property

  • Have you registered your IP in the relevant jurisdictions?
  • Do you have a local language version registered?
  • Have you considered if the jurisdiction recognizes unregistered IP and/or requires a recordal of the IP?
  • Are licences registered with the applicable IP registries and customs authorities required?

9. Data privacy & cyber

  • Are there local privacy laws, or other laws relating to data and cyber?
  • Do these laws restrict cross-border data transfers?
  • Is the purpose of this law to retain data and business in-country, or to protect the individual?

10. Due diligence on counterparties

  • What due diligence have you done on your counterparty and what can you do?
  • If you can't what other steps can you take to mitigate your risk?
  • Do they have a conventional group structure or a more "unconventional" one?
  • Are there assets offshore?

11. Bribery, corruption and sanctions

  • Do you understand the local laws on bribery and corruption?
  • Does your counterparty understand FCPA and UK Bribery Act?
  • Is your counterparty aware of US and UN Sanctions issues or just UN Sanctions?

Clyde & Co is well placed to guide clients through such issues across the Asian markets, based on over three decades of experience operating across the region, and a track record of working on difficult cases in difficult places.

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