International Business Law Advisor : International Business Lawyer & Attorney : Santiago Cueto Law Firm : Global Business Litigation & Finance Commentary

The International Law Prof Blog has passed along details about an upcoming teleconference, “Doing Business with Japan,” sponsored by the American Bar Association Section of International Law.

The conference could not come at a better time. Businessweek’s Daniel Kruger reported this week that Japan has overtaken China as the largest foreign holder of U.S. Treasury securities. The number is staggering--Japan is now holding $768.8 Billion in U.S. T-Bills.

Folks, the conference is a great first step towards bridging the trade gap and getting back some of those T-Bills.

Here are the details:

90-Minute ABA Teleconference on Doing Business with Japan

Are you interested in getting a better understanding of the legal system in Japan?  Or in the advantages (and dangers) of selecting Japanese law or Japan as a place to arbitrate?  Or other issues relating to doing business with (and in) Asia? 

There's a teleconference on "Doing Business with Japan" on Wednesday, February 24, 2010 from noon to 1:30 p.m. Eastern US Time.  The program is organized by the Asia/Pacific Committee of the American Bar Association Section of International Law.  Click here for the program description, speaker bios, and registration form.  Download Japan.  There is an extremely modest fee to call in ($15 for section members and $25 for non-members).  Register by Monday, February 22, 2010.

Looks like an excellent program. Will you be attending?

    -Santiago

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As an international business attorney, a focal point of my practice involves advising clients how to best handle cross-border disputes.  The most effective mechanism by far in resolving international dispute is international arbitration. Why?  International arbitration levels the playing field by taking away the home court advantage of parties on either side of a transaction.  

But the most attractive aspect of arbitration is that the awards issued by an international arbitration tribunal will receive worldwide recognition by countries that are members of one of the international conventions on the enforcement of tribunal awards.

Given the superior advantages arbitration has over litigation in resolving international disputes, it’s essential that you make the international arbitration agreement ironclad and bullet proof.  

Here’s how to do it:

             1.  Be Unambiguous.  

Unequivocally state that any dispute will be resolved through arbitration e.g. “Any dispute or difference arising out of or relating to this agreement shall be finally resolved by arbitration …”

              2.  Be Clear

Define whether arbitration is to be preceded by negotiation or mediation and designate a timeframe e.g. “If no agreement has been reached within __ days of the delivery of  written notice of the existence of a dispute, either party may serve a request for arbitration …”.

3.      Be Specific

Specify the administering institution and the rules to be applied e.g. “The arbitration shall be administered by the International Center for Dispute Resolution in accordance with its International Arbitration Rules

4.      Be Careful

Carefully select the site of the arbitration taking into consideration the quality of its arbitration jurisprudence and the respect of its courts for the arbitral process. e.g. China, no. Hong Kong, yes.

5.      Be Meticulous

 Meticulously set forth the number of arbitrators on the panel and how they will be      selected. Choose an arbitrator who demonstrates communicative proficiency, a firm appreciation of the rules of evidence and an acknowledged expertise in the industry in which the dispute arose or about the issues in dispute.

6.      Be Heard.

Designate the language of the proceeding. It is unsettling how many times parties overlook this provision and are forced to rely on a foreign translator to communicate every word of the proceeding.

7.      Be Final

 In order to prevent further review and appeals of an arbitral award once it is rendered, you must include a statement in the arbitration agreement that clearly states that the award is final e.g. “The arbitral award is binding, final, not subject to review, and not subject to appeal  by the courts in any jurisdiction." This provision is  particularly essential in jurisdictions where the laws allow parties to appeal an  award issued  in that country.

Follow the points I described above, and you’ll be well on your way to drafting a bullet proof international arbitration agreement. 

     -Santiago

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The Wall Street Journal and the Heritage Foundation released its annual 2010 Index of Economic Freedom.   Of the world's 20 largest economies, Hong Kong ranked first while the U.S. came in at number eight.  

According to the Wall Street Journal article, The U.S. is Not as Free as It Used to Be,  a number of factors contributed to the United States’ ranking lower than in previous years. The federal government's heavy-handed intervention in the financial and economic crises of the last two years was cited as the main factor.

There is another factor not mentioned in the article that I believe contributed to the US’ lower ranking--the lack of confidence in our nation’s dispute resolution regime.

Businesses are unwilling to wade into a pool of uncertainty to either prosecute or defend valid claims given the exorbitant cost of litigation. While inroads were made in the past decade towards the arbitration of business disputes, the trend has reversed itself under mounting pressure from special interest groups.

While I have no empirical proof, I have a feeling that the top 7 nations have made great strides in their dispute resolution regimes. It's no surprise Hong Kong is number one given its focus on arbitration, which I wrote about in an earlier post.

Check out the rankings below--what do you think? 

   -Santiago

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Brazil is on a roll.  Yesterday’s Financial Times included a special 10-page section devoted to Brazil. One of the articles, Olympic Accolade Sets Seal on Progress, written by Jonathan Wheatly, succinctly describes the “exuberant optimism” that has gripped the country since it was awarded the 2016 Olympic Games.  And the Wall Street Journal recently reported on the Brazilian stock exchange making spectacular gains in the article Brazilian Stock Scores Spectacular Gains on US GDP Growth.  This is following last month’s IPO of Banco Santander’s Brazilian unit, the world’s largest IPO so far this year, as reported in the New York Times article, Banco Santander's Brazil Unit Raises $8 Billion in I.P.O.

While these events are certain to fund rapid expansion in Brazil’s capital sector, the exuberance is tempered by a look at the long road ahead. Yet it is impossible not to be blinded by the bright future that seemed out of reach not long ago.  Antonio Quintella, country manager at Credit Suisse Sao Paulo put it succinctly:

Nothing is guaranteed. But it is reasonable to assume that [Brazil] won’t repeat the mistakes of the past…it is very difficult not to be bullish”

Brazil Should Ratify Bilateral Investment Agreements

Brazil has emerged from the global recession as the darling of international investors; this has created a wealth of investment opportunities.  However, it lags behind all other Latin American countries in one important respect: it has yet to ratify any bilateral investment agreements (BITs).  These agreements protect international investors when disputes arise in host countries. In light of Brazil’s recent good fortune, the time has come for Brazil to rethink its approach to BITs and implement measures to protect foreign investors.

Bilateral Invest Agreements Provide Important Safeguards

BITs obligate host countries to provide safeguards for foreign investment. If host governments fail to heed these safeguards, investors maybe awarded money damages. The following safeguards are among those afforded by BITs:

1. host countries are prohibited from expropriating foreign investment without compensation.
2. The agreements often include national treatment provisions, which require a government to treat foreign investors no less favorably than they treat domestic investors. They also often include most favored nation provisions, which extent the same protections afforded to foreign investors from one country to foreign investors from other countries.
3. foreign investors have the right to transfer funds into and out of the host country without delay.
4.  In addition to substantive protections, BITs provide powerful dispute resolution mechanisms. Under these mechanisms, Foreign investors may choose to resolve disputes in binding international arbitration such as in the International Center for Settlement of Investment Disputes (ICSID) and arbitral tribunals organized under the United Nations Commission of International Trade Law (UNCITRAL).

These agreements provide important safeguards against government mistreatment, mitigating some of the political risks associated with making investments in foreign countries.

Conclusion

Although Brazil’s reluctance to ratify BITs may help to protect it against claims by foreign investors, the recent surge in outbound Brazilian investment should cause Brazil to reconsider its position against international investment agreements. 

While Brazil is busy contemplating this proposition, there is a way investors can structure their investments to take advantage of BITs between other states. Stay tuned, and I’ll let you know how in a follow-up post.

Trend to Watch: A Surge in Investment Activity in Brazil Will Lead to the Adoption of International Investment Agreements

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**Update January 15, 2010**: The Republic of Ecuador and the class Plaintiffs have both challenged Chevron's arbitration claim in New York federal court. You can read about it here and here.

First, the United States. Then Ecuador. Now Holland. Chevron's wanderlust knows no bounds, as it recently filed a parallel international arbitration proceeding in the Hague (Holland).

The Arbitration Claim

As reported in this article in the Wall Street Journal and in this article in the New York Times,  Chevron filed an international arbitration claim before the Permanent Court of Arbitration in The Hague under the Rules of the United Nations Commission on International Trade Law (UNCITRAL). The claim is based on Ecuador's alleged violation of investment agreements, international law, and its treaty with the United States--the Encouragement and Protection of Investments Treaty.

Chevron’s claims relate to the Amazon oil lawsuit I wrote about in an earlier post.  In the arbitration filed in the Hague, Chevron alleges that Ecuador’s judicial process is broken and that the South American nation cannot fairly adjudicate the long-running oil pollution litigation.

Through the filing, Chevron seeks to enforce prior settlement and release agreements that the government of Ecuador entered into with Texaco Petroleum when the consortium was terminated, and to hold Ecuador accountable for its obligations under Ecuadorian law and existing international treaties.

Forum Shopping in the Hague Must be Condemned

Chevron's latest move is the litigation equivalent of three card monty and is yet another tactic to divert attention away from the trial taking place in Ecuador. Filing an international arbitration campaign at this point in time smacks of desperation and is a clear example of forum shopping, as Plaintiffs counsel Steven Donziger stated in this Reuters article.

Chevron first fought successfully to force plaintiffs to try their lawsuit in Ecuador rather than U.S. courts. Then it sought (unsuccessfully) to win indemnification in U.S. courts from a possible judgment in Ecuador. And now it's filed for arbitration seven thousand miles across the Atlantic in Holland. 

The Hague is arguably the most hallowed institution for the resolution of high-profile international disputes. Chevron's latest tactic all but mocks the institution's primary mission to administer justice. The Hague must not be utilized to frustrate legitimate legal proceedings taking place elsewhere.

Forum Shopping Creates Broad Incentives for Abuse

As Chevron's arbitration claim illustrates, the opportunity for one party to game the system and manipulate the outcome of a case by choosing a specific forum over another creates broad incentives for abuse. Among other things, forum shopping :

1. creates legal uncertainty (particularly for the defendant);
2. drains resources by imposing substantial additional costs on defendants, who must transport lawyers, documents, and numerous witnesses to the site of the trial – an expense that is multiplied when the trial is located far from the defendant’s place of business.
3. undermines the authority of substantive state law by calling into question the equity of the legal system.

Although under extremely limited circumstances forum shopping may prove a legitimate means to achieve a more just result, it is disproportionately utilized to avoid a just result by exploiting the points outlined above--as Chevron has done.

Conclusion

While an attorney's obligation to zealously advocate his clients' interest may involve forum shopping as part of the procedural calculus, the obligation must be tempered with a keen understanding of what becomes abusive litigation.

Trend to Watch: Given the High Profile Nature of Chevron's Claim, Look for an Increase in Similar Filings in the Hague

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The internet brought the once rarefied world of  international commerce into our living rooms. While one can now order wine directly from a vineyard located in Tuscany, this convenience  has led to a precipitous rise in international litigation.  One of the primary risks in transacting business internationally is the uncertainty in dispute resolution. Both parties will claim that their law governs the dispute. Naturally, this almost always results in protracted litigation over jurisdictional issues. While there are many methods to avoid such a situation, a savvy international lawyer, will negotiate favorable terms into the governing contract. There are a number of approaches an attorney can consider to resolve problems across national frontiers.

Drafting the Contract

Preliminarily, an equitable dispute resolution begins with prevention. This entails drafting a solid and well thought out contract.  I touched on this topic in earlier posts here and here.  Before transacting with anyone online, it is essential that you are fully aware of their terms and conditions of service and ensure you clarify anything you'd like to see in the contract. If your proposals aren't accepted, you're far better to avoid transacting to avoid problems, particularly where substantial money is at stake.

Alternatively, if you are drafting an agreement from scratch it is imperative that you decide mutually on the terms, particularly what is known as the choice of law clause. Choice of law refers to a particular designation in the contractual terms which stipulates that in the event of a dispute, both parties submit to an exclusive jurisdiction. This is usually to the favour of the seller's knowledge, although may even be a neutral jurisdiction to avoid perceived bias. Provided that the choice of law is stipulated in advance, it is a particularly effective way of ensuring disputes are properly resolved to the satisfaction of both parties.

Online Adjudication

Another highly effective way to tackle online litigation is to submit to the exclusive jurisdiction of some online adjudication service in the terms and conditions. This involves a third party, usually a totally independent party, which is designed to regulate and prevent bias or unfavorable outcomes. This eventually leads to a definite ruling one way or the other, which is helpful in ensuring that justice is done. Again, this is all down to the agreement and the way in which it is drafted. By good drafting, many of the problems of litigation can be weeded out before they arise, leading to a more fluid and resolved business relationship in general.

In addition to contractual disputes, much of international litigation is taking shape online, as more and more parties find problems in dealing with others in foreign jurisdictions. Primarily, the issues of copyright and theft of intellectual property becoming commonplace, as issues that strike to the very core of business online. Through establishing more regulatory online framework, it is possible, and indeed encouraged, for more efforts to be injected in regulating the way in which most of our business is conducted. In the coming years, there will likely be much development in Internet law, particularly of a trans-national ilk, which will have a natural knock on effect on offline litigation to the benefit of business and trade.

Conclusion

Online litigation has risen to the forefront of legal thinking in recent years with the rise of the Internet. As business becomes naturally more global, it is important to consider how disputes can be resolved, and indeed how this will pan out in the future. There are suggestions of further developments of voluntary online courts, which will hear cases and establish a code of ethics, and this can only be good news for those parties feeling aggrieved by the system. With each transaction, the Internet is becoming a more stable environment in which to conduct business, and a more regulated forum for marketing and commerce.

Trend to Watch: Look for an increase in litigation arising out of online transactions and a contemporaenous increase in alternative dispute resolution regimes such as online courts.

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on a trip to Beijing several years ago, I expected to be immersed in Eastern culture far away from the influence of the West.  I was shocked to find a Starbucks within the walls of China’s most sacred site--- the Forbidden City. The picture to the right is the photograph I took near Starbuck’s former outpost in the Forbidden City (the location was subsequently closed amidst great controversy, as reported in this New York Times article). 

Franchise Conflicts on the Rise

My experience serves to showcase the ubiquitous nature of the franchising concept in China. While not a new trend, the growth of franchising in China has created a set of imbalances exacerbated by the global economic downturn.  As Cecilia Lou writes about in her article Franchising Challenges in China on the China Law Insight blog, these new imbalances may strain relations between franchisors and franchisees:

This new imbalance may cause a franchisee to gradually deviate from the franchisor's control, the unified management standards, and quality requirements. The faster a franchisor expands his franchising businesses, the bigger a franchising territory is, the harder for the franchisor to control franchisees. Any deviation from the spirit of franchising will ultimately damage the franchised brand, and result in losing its market completely.

As Ms. Lou explained, there are a host of issues that may arise in a franchise enterprise. These differences may flare up to full-fledged disputes if measures are not taken early in the relationship to define operational and managerial parameters.

Ways to Avoid Franchise Disputes

One way to define these parameters is to develop a comprehensive policy manual that sets forth the tasks and roles of the key players. This is perhaps the most critical stage of any franchisor-franchisee business relationship. Without a comprehensive framework for defining roles, any disputes that may arise will burden the enterprise with unnecessary distractions and jeopardize the success of the venture.

As I wrote about in an earlier post, another way to offset or minimize the potential for disputes to get out of control is to draft an effective and well thought out dispute resolution provision in the franchise agreement. Doing so will place both the franchisor and franchisee on equal footing, which will temper any dispute that may arise during the course of the relationship.

 Trend to Watch: Look for disputes between franchisors and franchisees in China to increase as  foreign investment continues to pour into the region

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On August 4, 2009, China's Supreme People's Court issued a new regulation to encourage parties involved in conflicts to consider arbitration as an alternative means of dispute resolution. The regulation is in response to a rapid increase in lawsuits during the past two years. Under the new regulation, agreements achieved in arbitration or mediation by administrative bodies, mercantile organizations and industrial groups will have the same force in law as those judged by Chinese courts.

This latest measure is yet another step in the direction towards the establishment of a more favorable dispute resolution environment in Asia. As recently reported in this Economist article, China's labour laws: Arbitration Needed, arbitration continues to gain traction in resolving disputes in China.  Just within the past year, the International Chamber of Commerce (ICC) opened a branch of the Secretariat in Hong Kong where it set up its International Court of Arbitration. The branch secretariat, the first in Asia, has a case management team to administer cases in the region under the ICC Rules of Arbitration.  

In light of these recent developments, it is imperative for contracting parties to implement best practices in drafting China-related commercial contracts. While significant inroads have been made in the development of a more Westernized approach to dispute resolution in China, corporate counsel would be keen to carefully structure China-related commercial contracts to best safeguard against unexpected setbacks often encountered in nascent dispute resolution regimes.

In drafting an effective dispute resolution provision in this context, the most significant point is to agree to arbitration outside of China maximize the benefit of neutrality. While this point may seem obvious, many parties unfamiliar with Sino dispute resolution practices will assume that matters will be resolved under similar guidelines and principles adopted in a more familiar milieu.

Hong Kong and Singapore are the best regional alternatives to arbitrating a dispute in mainland China, as they are more closely aligned with the standards of leading European arbitration centers. Because it is a common-law jurisdiction and a part of the People's Republic of China, Hong Kong is uniquely positioned in international arbitration. As an arbitration venue, Hong Kong has benefited from the growing number of Chinese-related disputes arising from the surge of foreign investment rushing into Asia, and in particular China. Because it has kept its English common law-based legal system, foreign parties view Hong Kong as a more familiar and neutral forum for arbitrating commercial disputes. At the same time, Chinese parties regard Hong Kong as a culture-friendly venue due to its close proximity to the mainland.

In addition to negotiating an ICC arbitration in Hong Kong or Singapore, the other favored arbitral bodies in the region are the HKIAC arbitration in Honk Kong and the SIAC arbitration in Singapore. If it can be negotiated, another viable option is to arbitrate in one of the major European arbitration centers such as Zurich, Geneva, London and Stockholm.

Some additional best practices to consider are to keep the language of any arbitral provision as straight forward as possible and to be clear on the language that will govern the arbitration. Due to the wide gulf in language and culture, doing so will minimize the likelihood for misunderstanding.

Trend to Watch: Look for Hong Kong to increase its profile as a favorable seat of arbitration in Asia for disputes involving China-related commercial contracts.

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