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

Define. Scrutinize. Monitor.

About 11 years ago my firm was retained by a large computer company to file a claim against an Original Equipment Manufacturer (OEM) based in Taiwan for theft of trade secrets.  Our client had retained the OEM to manufacture what was then the first “all-in-one” motherboard. I’ll spare you the technical details but this technology was revolutionary.

The OEM was no dummy—it quickly identified the potential market for the technology. It subsequently went behind my client’s back and began selling the computers into other distribution channels under its own private label.

The OEM simply affixed its own label, “Brand X,” on top of my client’s equipment and passed it off as its own. The theft was ultimately uncovered at a trade show in Las Vegas several months later.  One of my client’s engineers happened to stop by a booth displaying some interesting technology-- a very familiar looking motherboard..

Upon closer inspection of the circuitry, it was discovered that the motherboard was exactly the same one that the engineer had designed 10 months earlier and outsourced to the shady OEM.

Upon learning of the trade theft, we immediately filed suit in federal court.  An extensive 5-year international legal battle ensued culminating in a  2 month long federal trial in which we ultimately prevailed.

I tell you this story as a cautionary tale on how important it is to make sure all details of your clients’ outsourcing endeavors are closely  defined, scrutinized and monitored.

The incomparable China Law Blog has a “not-to-be-missed” post on outsourcing appropriately titled China Outsourcing 101. The Legal Basics. While the post deals exclusively with China, I think it’s applicable when dealing with any OEM.  My friend Dan Harris lists five outsourcing basics including the need for trademark registration and non disclosure agreements:

1. Create and properly register your intellectual property rights in the United States or whatever country or countries in which you sell the bulk of your products. If you do not have a firm basis for your IP rights under U.S. law, you will have nothing to protect in China. Before you go to China, be sure your intellectual property is protected under U.S. law or the laws of whatever country or countries in which you sell your products. Protect your brand identity by creating and registering your trademark, slogan and/or logo. Register your important copyrights. Carefully identify and protect your trade secrets, proprietary information and know how. Patent what you can.

Doing the above will mean that no matter what happens in China, you will at least be able to protect your product to the fullest extent possible in the country or countries in which you sell your products.

2. Register your trademarks in China. Registration can protect your future access to the Chinese market, prevent the export of counterfeit goods from China, and prevent a competitor from registering your mark in China, which would prohibit you from exporting your own product from China. For more on the necessity of registering your trademark in China, check out, "WHEN To Register Your China Trademark" and "China Trademarks -- Do You Feel Lucky? Do You?"

3. Use a written agreement to protect your know how and trade secrets in China. Small and medium sized companies usually do not have an extensive portfolio of patents. Their most valuable intangible assets typically are their know-how and their trade secrets, which cannot be protected by formal registration. Chinese law, however, permits companies to contractually protect their know how and trade secrets by contract. Such agreements may (and in most cases should) also address issues such as non-competition and confidentiality. Without such a written agreement, no such protection is available. For more on using non disclosure agreements (NDA) in China, check out, "China Non Disclosure Agreements (NDA). A Really Good Thing."

4. Product Quality and Payment Terms. The rule here is simple. Do not make final payment to your Chinese manufacturer until you are confident you will be getting an on time shipment of the correct items and quantities at the quality standards you require. This usually means you must incur inspection costs in China and provide for a clear procedure for dealing with these problems as they arise. You must take the lead on this. You cannot depend on the OEM manufacturer to do this for you.

5. Use comprehensive OEM Agreements with each manufacturer. Small and medium sized businesses often enter into OEM manufacturing transactions with a simple purchase order. This is a mistake. The purchase order will not protect you. Your protection depends on your securing a signed written OEM manufacturing agreement with each Chinese manufacturer with which you deal. The ideal OEM agreement will address all of the issues discussed above while also addressing other basic legal issues such as jurisdiction and dispute resolution. This agreement should be in both Chinese and English, since the Chinese language version will control in China. For more on this, check out, "China OEM Agreements. Why Ours Are In Chinese. Flat Out."

I agree with all these points but would add where applicable drafting specifically tailored Technology Transfer Agreements where the OEM is also granted a license to market and sell the product within predefined parameters.

These agreements set forth exactly what a licensee is free to do under the patent rights. Depending on the claims in the patents, the licensee can be given the right to manufacture, have manufactured, use and/or sell the subject matter of the license. The agreements often set forth terms of exclusivity depending on the territorial rights granted.

The agreement should also state that the licensor owns the subject technology of the license (patents, patent applications, know-how trade secrets, trade marks and / or copyrights ), that it has the right to grant the license and that it has not granted a previous conflicting license.

What other precautions would you take when dealing with OEMs?

      -Santiago

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Its incredible how every business discussion these days centers on China.  While the U.S. and Europe struggle to get things moving, China continues to dominate the world's leading economic indicators.  GNP. check. GDP. check. FDI. check.

As more U.S. companies shift production to China, competitive forces have upped the ante for businesses to deliver the best price points. Because of the hyper-competitive nature of Chinese sourced products, some companies either unwittingly or by choice engage in some questionable business maneuvering to gain even the slightest of price advantages.

Now more than ever U.S. enforcement agencies are  keeping a vigilant eye on these suspicious business practices. Fun fact: The Department of Justice and Securities and Exchange Commission set a record in 2009 by bringing more FCPA prosecutions than in any prior year in the FCPA’s history. It looks like 2010 is going to be even busier for these folks.

A short but thorough overview of the FCPA as applied to China was recently published in BusinessForum China. The article is a good read for anyone with business activities in China. One point discussed in the article concerns the application of vicarious liability. This is where most U.S. companies run into trouble with the FCPA, so its important to consider the implications carefully: 

U.S. authorities regularly apply vicarious liability theories to hold parents liable for the misconduct of their subsidiaries and agents. Not surprisingly, MNCs subject to the FCPA often unwittingly incur FCPA liability through the misconduct of their Chinese subsidiariesand agents, without ever operating in China themselves. Although non-US subsidiaries, including Chinese subsidiaries,are usually not directly subject to the FCPA, if the parent is a US corporation or issues US securities, and authorised the subsidiary’s illegal acts, the parent may incur liability. In one notable example, a US corporation agreed to pay a total of USD 22 million in FCPA penalties for, among other things, allegedly using its subsidiary to process payments to agents and Chinese officials associated with SOEs.

According to US authorities, even if the parent corporation does not explicitly authorise the illegal acts by the subsidiary, the parent may nonetheless incur liability if it was aware of and failed to stop the illegal acts (which may constitute implicit authorisation); if it acted with “wilful blindness” (being aware of a high probability that a bribe will be paid and taking steps to avoid learning that fact); or if it discovered the illegal acts after the fact and then accepted monetary benefits arising from such acts. Nor can the parent escape liability simply because it is a minority shareholder in a Sino-Foreign joint venture. If the parent corporation cannot control the actions of the joint venture, it is still obligated to object to illegal acts, take reasonable actions to prevent the joint venture from continuing future criminal activity, and refuse benefits arising from the same.

Because vicarious liability is the easiest way for a U.S. company to unwittingly trigger an FCPA investigation, it's critical to keep track of what's going on in the supply chains, particularly when one or more subs or agents are involved.

The way companies have handled this varies. Some use auditors in the host country and others send reps to oversee the whole thing. 

How does your company handle this?

Trend to Watch: Look for 2010 to Be Another Record Year for FCPA  Enforcement Actions.

   -Santiago

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Because my international practice involves working with folks all over the world, I keep a keen eye on world holidays and do my best to schedule my work around them.  This is one of the best ways I can show my respect for other cultures.

The folks overseas always appreciate the extra attention to detail and you will be amazed how far this will take you in building long term relationships. 

There are several big holidays coming up in the next several weeks that will temporarily slow or even halt  the business activities of several countries. The two biggest holidays take place in China and Brazil. China celebrates its New Year next week and Brazil Celebrates Carnival the week of February 22.  

For other international holidays be sure to download the 2010 World Holidays Guide. The guide lists the main holidays of over 43 countries.   I’m not sure why Brazil and India were not listed but here they are:

Brazil

January 1 - New Year's Day
February 26-27 - Carnaval
February 28 - Ash Wednesday
April 13* - Good Friday
April 21 - Tiradentes Day
May 1 - Labor Day
May 13 - Ascension Day
June 14* - Corpus Christi
September 7 - Independence Day
October 12 - Our Lady of Aparecida
November 2 - All Souls' Day
November 15 - Proclamation of the Republic
December 25 - Christmas

India

January 26 - Republic Day.
February 12 - Mahashivratri.
February 26 - Milad-Un-Nabi
March 28 - Mahavir Jayanthi.
April 2 - Good Friday.
Aprril 5 - Easter Monday.
April 28 - Buddha Purnima.
August 15 - Independence Day.
September 2 - Janmashtami.
September 10-11 - Id ul Fitr (End of Ramadan).
October 2 - Mahatma Gandhi's Birthday.
October 17 - Dussehra (Vijaya Dashami).
November 2 Guru Nanak's Birthday.
November 5 Deepavali or Diwali (Festival of Lights).
November 16- 17 - 17 Idu'l Zuha/Bakrid (Feast of the Sacrifice).
December 7 Muharram (Islamic New Year).
December 25 Christmas Day.
December 26 Boxing Day.

*Cajun Nation

February 7-28  - Super Bowl celebration and Mardi Gras

*With so much going on, New Orleans might as well be a sovereign nation for the moment. Don't event think about getting anything done there in the next few weeks. With the Saints' Super Bowl victory and Mardi Gras, February will be a month-long holiday for these folks.

        -Santiago

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Corporate Codes of Conduct Played a Major Role in the Collapse of Apartheid in South Africa and Are a Viable Means to End Digital Censorship in China.

The remarks of U.S. Secretary of State Hillary Clinton yesterday that “we stand for a single Internet where all of humanity has equal access to knowledge and ideas” echoed the stern tone of Ronald Reagan twenty years ago when he challenged Soviet leader Mikhail Gorbachev: "Mr. Gorbachev, tear down this wall!" 

Fast forward to 2010 where digital walls have replaced brick and mortar to divide repressed citizens of authoritarian regimes from the world’s free flowing current of information and ideas.

Corporate Codes of Conduct a Viable Means to Challenge Digital Censorship in China

Secretary Clinton’s remarks concerning the” information curtain” dividing the world, reminded me of the apartheid era where much greater injustice and unspeakable acts against humanity were challenged and ultimately overcome through the use of corporate codes of conduct.

These corporate codes of conduct, which came to be known as the Sullivan Principles, were pioneered by the African-American preacher Rev. Leon Sullivan, a zealous promoter of corporate social responsibility.

 In 1977 Rev. Sullivan was a member of the board of General Motors. At the time, General Motors was one of the largest corporations in the United States. General Motors also happened to be the largest employer of blacks in South Africa, a country which was pursuing a harsh program of state-sanctioned racial segregation and discrimination targeted primarily at the country's indigenous black population

Corporate Codes of Conduct Originally Developed to Challenge Apartheid

Rev. Sullivan developed the codes to apply economic pressure on South Africa in protest of its system of apartheid. Before the end of South Africa's apartheid era, the principles were formally adopted by more than 125 U.S. corporations that had operations in South Africa. Of those companies that formally adopted the principles, at least 100 completely withdrew their existing operations from South Africa. The principles eventually gained wide adoption among United States-based corporations and played a significant role in the collapse of that regime.

In reflecting on the success of his anti-Apartheid efforts, Rev. Sullivan recalled:

Starting with the work place, I tightened the screws step by step and raised the bar step by step. Eventually I got to the point where I said that companies must practice corporate civil disobedience against the laws and I threatened South Africa and said in two years Mandela must be freed, apartheid must end, and blacks must vote or else I'll bring every American company I can out of South Africa.”

Given the success of the Sullivan principles in ending apartheid, we should look at applying the same principles to lift the information curtain in China.

Why Multinationals Should Adopt Corporate Codes of Conduct

Google, to its credit has pioneered this movement, albeit not under the auspices of any articulated corporate code of conduct as far as I know. Google's defiance of China's censorship mandate illustrates the power of corporate social responsibility initiatives to influence and reshape the repressive policies of authoritarian regimes.

While most major multinational companies consider a presence in China critical to their future success, Google has demonstrated that even the largest of corporations are willing to forgo short term gain in the interest of an ultimate triumph over censorship--similar to how corporations sacrificed profits to challenge apartheid in the 1970s and 1980s.

In Google's case this will come at a cost of an estimated $300 million a year in revenue. Although it will hardly make a dent in Google’s coffers, it’s a step forward in the right direction. Sure, China can thumb its nose at Google and Yahoo by pointing to Baidu and Alibaba.

But it risks the alienation of countless other multinationals who could conceivably adopt corporate codes of conduct and refuse to do business with China until the Great Firewall is torn down.

Conclusion

While the preferred course of action of companies concerned about censorship is to avoid repressive regimes altogether, it is likely that some companies will not choose that course. Those that do not should consider a corporate code of conduct so that they can turn their involvement in oppressive systems from a potential human rights liability to a neutral or maybe even positive act of engagement.

The challenge now will be to put these ideas practice by incorporating them into diplomacy and trade policy to apply meaningful pressure on companies to act responsibly through the adoption of corporate codes of conduct.

What do you think?

       -Santiago

 P.S.   A little about my interest in this area: I’ve been an advocate for corporate codes of conduct for well over a decade and authored an extensive note on the topic for the Florida Journal of International Law to address industrial oil pollution in Latin America:  Oil's Not Well In Latin America: Curing The Shortcomings Of The Current International Environmental Law Regime In Dealing With Industrial Oil Pollution In Latin America Through Codes Of Conduct  Viewed as a cutting edge proposition, the article has since been cited by numerous textbooks and academic journals including West’s Environmental Law treatise, the New York University Journal of International Law and the Georgetown University Journal of International Environmental Law.   

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 On a recent trip to Hong Kong, I noted several newly built skyscrapers filling up the remaining voids of the city’s skyline. From my perspective sitting in the Felix restaurant, perched atop a high rise on the other side of Victoria Harbor, it was easy to see how global economic and financial activity had shifted from west to east, especially to markets connected to the Chinese economy.

To illustrate this point, the Financial Times reported yesterday in its article China Eclipses U.S. in IPOs, that “Chinese stock exchanges raised double the amount of money secured by initial public offerings across the US in 2009, highlighting the region’s rising weight in international finance.Ken Poon of Citigroup said:

It is likely to be another busy 12 months [in 2010]. Expect more records to fall."

In light of the surge of economic activity, Hong Kong will likely remain the international arbitration hub in Asia for resolving commercial disputes. Due to its relationship with and proximity to the Mainland, Hong Kong has become the arbitral seat of choice for China-related arbitration.

Between 2007 and 2008, the Hong Kong International Arbitration Center (HKIAC) saw a 34% increase in the number of arbitrations handled by it, which was a significantly bigger increase than those enjoyed by fellow heavy weights American Arbitration Association (AAA), Center for Investment, China International Economic and Trade Arbitration Commission (CIETAC) and International Chamber of Commerce (ICC). This trends is indicative of the world's growing trust in the Hong Kong government's abnility to resolve disputes.

Two recent developments in Hong Kong arbitration are likely to cement Hong Kong's position as the hub for internatioal arbitration in Asia: The new rules of HKIAC and the implementation of the Civil Justice Reforms (CJR).

HKIAC Rules

The overall approach of the new Rules, which went into effect early this year, is to provide “light touch” administration. They are generally based on the UNCITRAL arbitration rules and are said to be inspired by the Swiss Arbitration Rules. The main purpose of the new HKIAC rules is to make arbitration more user friendly to arbitration users both in and outside Hong Kong. It will enable the Hong Kong business community and arbitration practitioners to operate an arbitration regime which accords with widely accepted international arbitration practices and development. The main features of the Administered Rules include:

1. The use of more user-friendly language;
2. The Administered Rules are designed especially with Chinese-foreign disputes in mind and are issued in Chinese and English versions;
3. If the parties to an arbitration are of different nationalities, neither the sole arbitrator nor the chairman of a three-member arbitral tribunal shall have the same nationality as any party unless specifically agreed otherwise by all parties in writing;

Hong Kong Civil Justice Reforms

The CJR is effectively a revamp of the existing civil procedure system. The new procedures are designed to change the litigation culture in Hong Kong, with the courts taking on a much more pro-active role in case management. Hong Kong courts, like those in a number of other jurisdictions, have struggled to address the increasing delays, complexity and expense associated with modern litigation.

Also, prior to the implementation of the CJR the HongKong courts had been held to lack power to entertain an application for a Mareva injunction (or other interim relief) in aid of foreign litigation proceedings. As part of the CJR, both the High Court Ordinance and the Arbitration Ordinance have been amended to make it clear that interim relief can be sought in aid of foreign proceedings and foreign arbitrations as an independent, free-standing form of relief, without being ancillary or incidental to substantive proceedings in Hong Kong.

Conclusion

The recent developments that have taken place in Hong Kong and that are referred to above will all contribute to making Hong Kong an increasingly attractive, and friendly, place for arbitration, as well as to reinforce Hong Kong as a hub for international arbitration in the Asia Pacific region.

Trend to Watch: Look for Hong Kong to Challenge Shanghai and Singapore as the Region’s Premiere Arbitration Center.

-Santiago

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 As reported by the Wall Street Journal's Lynn Cowan today, China has taken the global lead in initial public offering activity for 2009.

As Ms. Cowan reported, should  the pace continue, China will come out on top of "every other country, and even entire regions such as Europe and North America, for all of 2009." 

Global IPO Dominance

China's global monopoly of the year’s IPOs hardly comes as a shock given the sheer magnitude of the market and the Chinese government's mandate to privatize more companies, according to Thomas B. Fox Jr., head of global capital markets for the Americas at UBS AG. 

"So many areas are still government-held -- natural resources, telecommunications, banks, transportation -- it's hard to imagine a  country having an economy the size of China's with virtually none of the companies being public," he said.

The figures compiled by research authority Dealogic, as reported in this article in Forbes Magazine, illustrate that 38 companies have raised a total of $15.4 billion in their IPOs in China so far in 2009, making China the world's largest IPO market this year.

Although U.S.-based deals were nowhere near the levels seen before 2008, when there were on occasion more than 50 deals in a quarter, it will take some time for more U.S deals to come into the market given the SEC's  three to fourth month processing period. As a result of the lag time, there will be a more significant flow in IPO activity next year, as the companies registering now start to launch.

SEC Application Process to Blame for Poor U.S. Showing?

In light of the SEC's delay in processing new offerings, an argument can be made that the bloated bureaucracy encumbering the pace of applications has made the U.S. less competitive in the global landscape when it comes to raising publicly-sourced funds for flourishing companies.  A quick look at the chart illustrates the glaring divide:  the U.S. can lay claim to only one IPO while China can boast eight (Chart via Wall Street Journal via Dealogic)

Trend to Watch: China Will Boast IPO Dominance Into the 2nd Quarter of 2010

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on August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the Uniform Foreign Money Judgments Recognition Act.  The court’s full decision is available here. 

This case is unique because it is generally believed that United States courts will not enforce Chinese judgments given the lack of a treaty between the two countries on the issue and given that Chinese courts generally do not enforce United States judgments in China, which limits the argument for reciprocity in the United States. 

Trend to Watch: Look for California to become a favorable forum for enforcement of Chinese judgments in the United States.

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The economic landscape in emerging markets such as Brazil, China and India are beginning to show signs of life. These “greenshoots” are taking the form of IPOs, which are a leading historical  indication that world markets are springing back to life.

Emerging Market IPOs on the Rise

As reported in the Financial Times in the article Santander Launches Brazilian IPO, the Spanish bank, launched an initial public offering of its highly-successful Brazilian outpost making it one of the world’s largest initial public offerings of the year.

In addition, the Wall Street Journal reported in its article, Sinopharm plans $1.2 Billion IPO, that Sinopharm Group Co., China's largest pharmaceutical company, will attempt to raise up to $1.12 billion in an initial public offering in Hong Kong.

Not to be outdone by Brazil and China, India plans as many as 40 initial public offerings on the Bombay stock exchange in the next few months according to this article in Businessweek.

Risk Factors

In reading about these recent deals, I was reminded that, as a corporate lawyer, I am primarily in the risk management business. When a client seeks my advice on the complex legal issues surrounding an emerging market transaction, I always stress temperance over exuberance.  While  it is easy for one to get carried away with an opportunity to participate in a major securities deal,  counsel must advise a client of all the major risk associated with the listing.  As I wrote in an earlier post, due diligence is an integral part of the process. This is particularly true of emerging markets since government oversight can fall short of the standards set by developed markets. Based on experience, market research and analysis, I’ve identified 6 risk factors which can undermine the IPO process in emerging markets:

1. Potential conflicts of interest arising from the involvement of the candidates’ senior management in other competing but not openly disclosed businesses
2.  Litigation history of IPO candidate and key principals being omitted or insufficiently described in the prospectus;
3. Inaccurate statements of academic qualifications and technical expertise when describing senior management background and experience;
4. Undisclosed tax liabilities – a significant problem;
5. Undisclosed environmental problems or fines; and
6. Undisclosed industrial labor disputes in outlying areas

Conclusion

The main objective in this risk analysis framework is to ensure that public information including offering documents contain all material information about the issuer and its financial condition, and that no important information is omitted or understated. Careful analysis of these 6 key risk factors will minimize the likelihood of one succumbing to misplaced exuberance.

Trend to Watch: As the pace of emerging market IPOs picks up, look for more investors to be misled by omission or understatement of material information

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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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