Zachary Lau

Zachary Lau

Entrepreneur

 

 

 

Globalization of corporate sectors has allowed many homegrown companies the opportunities to venture overseas, through mergers, acquisitions or cross-border deals. In particular, of late, with the strong diplomatic ties between Malaysia and China, trades are increasingly made between the two nations. However, the different legal systems between the two countries have inevitably created challenges, especially in coming to terms on the prevailing law of the transactions in resolving corporate disputes.

In most jurisdictions, arbitration is an accepted method to resolve corporate disputes and hence, should be seriously considered by both sellers and buyers when drafting cross-border transaction agreements. Arbitration is popular because it is a less expensive dispute resolution alternative and generally, a private proceeding with no public documents, albeit the awards often are submitted in an enforcement action. Arbitration is more preferred than litigation because not only the outcome is generally more predictable, arbitration can maintain the ongoing corporate relationship between the parties without the formal and more adversarial nature of the courtroom litigation.

Homegrown companies dealing with overseas companies in China may include an arbitration clause in the contracts. The incorporation of an arbitration clause in contracts would mean that parties are required to first resolve any disputes related to the contract through arbitration. The arbitration clause should include the seat of arbitration (i.e. the place for arbitration) and the choice for arbitration rules. One set of arbitration rules in China that has well been accepted internationally is the CIETAC Arbitration Rules 2015, governed by China International Economic and Trade Arbitration Commission (CIETAC), headquartered in Beijing with a sub-commission in Hong Kong. Parties may opt for CIETAC Arbitration Rules 2015 with a seat in Hong Kong as Hong Kong is generally seen as an arbitration hub that is impartial from the Chinese political influence, especially when one party is a Chinese government-linked entity.

However, of course, it will be more advantageous for homegrown companies to opt for KLRCA Arbitration Rules 2015, governed by the Kuala Lumpur Regional Centre for Arbitration (KLRCA) in the heart of Kuala Lumpur. The reasons are two-folded. First, the cost of arbitration may be lower because the arbitration hearing is conducted locally and homegrown companies could engage local lawyers. Second, the familiarity of the local law. As the seat is in Malaysia, the Arbitration Act of Malaysia will apply. Nonetheless, it is notable that the decision on the contents of the arbitration clause such as the seat of arbitration and the applicable arbitration rules is generally made together by all parties to the contract, subject to the negotiation power of the parties.

Overseas expansion may be an aspiration of most homegrown companies, but it is essential to protect the interest of the company through the understanding of legal tools. The planning of a cross-border transaction often starts with the drafting of a contract and it is wise to incorporate a forward-thinking arbitration clause, that stipulates the right seat of arbitration and the right arbitration rules that sufficiently protect the company.

More information on CIETAC: www.cietac.org

More information on KLRCA: www.klrca.org

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