The world commerce & contracting principles: Can Asia embrace them?

Abstract

Negotiating a contract with Asian lawyers for the first time could be a baffling experience. Used to clarity on risk allocation and financial obligations, a Western lawyer is confronted with negotiations driven by consensus and contract provisions based on flexibility and good faith discussions. Musyawarah-mufakat (deliberation and consensus in Bahasa Indonesia) goes beyond ASEAN multilateral agreements and pervade doing business as well.

Embracing the World CC Principles is a constructive step in Asian contract drafting: they are not alien in concept and have counterparts in domestic civil or common law. The ability to quickly agree on the provisions covered by the World CC Principles provides a sense of collaborative relationship — an essential aspect of doing business in Asia. But Asian lawyers have yet to be familiar with the World CC Principles, be willing to embrace them, and advocate the benefits of imbedding the World CC Principles in their business culture.

If contract negotiation and drafting are hard enough by themselves, negotiation and contract drafting would likely be more challenging with an Asian entity and its Asian lawyers. Because as Tim Cummins notes, “Asia is different.” (Cummins, 2020)

Diverse Asia

Cultural values and business practices in Asia are different from those in the West (Benoliel, 2013, 1). Asia is “different” because it is exceptionally diverse. Such diversity runs through political and legal systems traceable to different colonial impositions. It is said that history, in addition to geography, plays a big role in business culture, that a country's culture is built over time, created by centuries of political and social-economic influences. This is definitely true with Asia (‘Overcoming Cultural Differences in Negotiations’, 2020). The Philippines had Spanish conquistadores, Japanese occupiers and American educators and constitution drafters, while Indonesia was colonized by the Dutch. The Portuguese, the Dutch and the British were in Malaysia, but Thailand was never colonized by Europeans. The forms of government that emerged post-colonization either reflected that of the colonizer or developed into a hybrid that took into account (among others) representation of varied ethnic and religious groupings. The Philippines, Indonesia, Malaysia and Thailand all now have legislative bodies with elected representatives. Most have a Prime Minister as head of government and a President as head of state, or simply one person serving both roles in the executive department. Only Thailand has retained a generally revered constitutional monarchy. The judicial systems of Asian countries are also fairly developed with lower or trial courts and an appellate system.

Colonialism left imprints in the legal systems that developed in each Asian nation. Having been under Spanish rule for more than a century, the Philippines’ Civil Code — the basic law that governs personality, marriage, family, succession (together with the later Family Code) and contracts in general — is based on the Spanish Civil Code. But commercial law is highly influenced by American statutes like the Uniform Commercial Code. On the other hand, the Malaysian legal system is based on common law while those of Indonesia and Thailand are based on civil law; predominantly Muslim Indonesia also observes Islamic (Shari‘ah) law.

In terms of demography and culture, Asia is an interesting mix of Chinese, Malay, and Indian ethnicities with various concentrations in each country. In religion, the Philippines is predominantly Catholic (the only one in Asia), Thailand is predominantly Buddhist, while Malaysia and Indonesia are predominantly Muslim (Indonesia constitutionally recognizes Christianity, Buddhism, Hinduism and Confucianism through its Pancasila principle) (‘Religious Composition by Country, 2010–2050’, 2010–2050’ 2015).

But diverse as they are, Asian peoples find commonality in certain values and principles that can be described as uniquely Asian. There is a premium placed on trust and personal relationships because they reduce the risk of doing business (Benoliel, 2013, 8). Harmony is precious. Consensus building (musyawarah-mufakat or deliberation and consensus in Bahasa Indonesia) is highly favored over an outright rejection of a proposition. Asians value “face” (Benoliel, 2013, 6) and the need to preserve it even under unpleasant circumstances through gracious exit mechanisms. While essentially personal, these values permeate business and commercial transactions, including negotiations and contracts.

It is no wonder that a Westerner negotiating with Asians for the first time would likely find the negotiations frustrating. A Western party used to negotiations that Tim Cummins calls “formulaic and process driven” — where negotiations are power based and positional — would likely find the Asian approach meandering. Asians are inclined towards flexibility in many contract provisions: good faith consultations, mediation with senior executives or trusted elders are not unusual in dispute resolution, while a Western negotiator expects definitive actions in default situations or disagreements between the contracting parties. And surrounding all of these is the seeming reluctance — even a discomfiting shyness — to outrightly reject a proposition or provide detailed reasons for doing so.

Strengths of the principles

The World Commerce & Contracting Principles (‘Principles’) could be a welcome tool both for Western and Asian lawyers engaged in drafting and negotiating cross-border contracts. The Principles’ strength lies in its standard provisions for contracts, its focus on how parties may allocate risks and responsibilities, and its succinct recommendations on how provisions may be crafted. The use of “plain English” also makes the Principles understandable for Asian negotiators whose mother tongue may not be English.

Even as the Principles serve as a template, they recognize provisions that nevertheless should be negotiated based on the industry, industry-specific laws, as well as the size and nature of the contract. While the Principles are easily applicable to a wide variety of contracts, it also reminds a user which provisions require customization to meet industry or market standards.

These features of the Principles serve parties who need a degree of instant like-mindedness at the commencement of negotiations. By establishing a platform on specific standard contract provisions, the Principles contribute to a sense of “collaborative negotiation” — a very important non-legal aspect of establishing relationships with Asian parties.

Equivalence breeds familiarity

From a Philippine perspective, the Principles should be easy to adopt as a contract drafting tool. Article 1306 of the Philippine Civil Code recognizes that parties “may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.” With the principle of party autonomy imbedded in the Philippine Civil Code, there is no legal impediment for a Philippine party to adopt the Principles for its cross-border contracts.

Many Principles are in the Civil Code itself, e.g. assignment and novation, ¹ force majeure ² and damages. ³ Others are specifically covered by special laws, e.g. mediation and arbitration, ⁴ and data privacy. ⁵ Jurisprudence has also contributed to the elaboration and refinement of these concepts over time. Easily finding Philippine legal equivalents of the Principles brings a sense of familiarity to a Philippine party and will likely nurture openness to their adoption.

Because the Principles provide only the basic framework for contract provisions, it does not result in the exclusion of but rather paves the way for the inclusion or application of more specific provisions of Philippine law when so required. The adherence of the Principles to applicable law of the parties lays the ground for this application. While a Philippine party is generally open to and often agrees to a foreign governing law, certain aspects even of a cross-border contract may nevertheless be subject to Philippine law. For example, real property located in the Philippines is subject to Philippine laws with respect to the substantive and formal requirements for its disposition and the creation of a security on it. ⁶

From the opposite perspective, the Principles also provide detailed guidelines where Philippine law may be scant or silent. A case in point is force majeure. As a general rule under Article 1174 of the Civil Code, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. The Civil Code is supplemented by case law specifying the requisites for an event to qualify as force majeure. ⁷ Without the Principles, a contract drafted by a Philippine party would likely rely on the foregoing hard and case law as to what constitutes force majeure, and leave the courts to determine whether an event indeed qualifies as a force majeure that exempts the obligor from the fulfillment of its obligations under the contract. With the Principles on the negotiation table, one is reminded not only to provide a list of force majeure events but also to ensure that the list should be “clearly described as illustrative and non-exhaustive” and further supplemented by a catch-all definition of force majeure, referring to any other circumstances beyond the affected party's reasonable control. With the Principles on hand, negotiating parties remember what are essential to agree on in the contract.

The Principles also provide awareness of provisions which may not necessarily be familiar to a Philippine party or typically included in local agreements but may be called for in a cross-border transaction by the counterparty. The Philippines has no specific anti-boycott laws but with the Principles, a Philippine party would appreciate a provision required by a counterparty that must comply with those laws. Similarly, audit of suppliers rights are neither legally provided nor common in private contracts (but is imposed on government contracts). ⁸ For one unfamiliar with the audit process, the Principles provide an expeditious checklist on its components, parameters and potential carve-outs. While admittedly the Principles do not provide for exhaustive coverage on these topics, the Principles provide ample introductory material to the uninitiated.

It is not within the scope of this material to find similar equivalence of the Principles in other Asian nations. But it would not be inaccurate to venture that the laws of Asian countries generally allow parties wide latitude to decide on their contract provisions — which includes adoption of the Principles. It would also not be farfetched to assume that concepts of force majeure, assignment and novation, and damages have equivalents in various Asian legal frameworks, be they grounded in civil or common law. This is also likely to hold true for alternative dispute resolution and data privacy, which are gaining rule-making attention and support in more recent years.

Embracing the principles, but why and how?

One may ask: why should Asians give up the “Asian way” of negotiating cross-border contracts? Why should Asians adopt an obviously non-Asian guideline as a negotiating and drafting tool? This Asian writer responds: because the Principles could serve as a practical platform where at the earliest stages of contract negotiations culturally different Western and Asian negotiators can easily agree on basic, standard contractual stipulations with assurance of fairness. The Principles provide both parties a focal point for initial agreement rather than divergence. The Principles contribute to efficiency in contract negotiation. Unfortunately, Asia and the Philippines have yet to be acquainted with the Principles.

World CC and the Principles need heightened exposure in Asia. For the first time in 2019, World CC (then IACCM) hosted members’ conferences in Sydney and Singapore, and would have done so in Melbourne in 2020. Asia is rich in highly accessible and culturally interesting host cities that World CC can consider in the future. Beyond members’ gatherings, World CC should also initiate smaller audience-targeted gatherings, e.g. industry — or professional sector-specific to introduce itself and the Principles.

The Principles seem to have taken a foothold among senior officers and managers directly involved in contracts, procurement, outsourcing, supply chain management and logistics. But what about the lawyers, in-house and external? Even as we are very familiar with and utilize globally accepted model agreements and forms, many of us in law firms have not encountered the Principles in the course of our numerous cross-border transactions. This unfamiliarity is echoed by similarly placed colleagues in Kuala Lumpur, Bangkok and Jakarta. Collaborations initiated by World CC with legal professional networks and associations would heighten lawyer's familiarity with the Principles. Those lawyers associations’ annual conferences or regional gatherings are open to novel approaches to lawyering, and the Principles easily qualify to be included in that discussion. Lawyers are creatures of habit and may take a while to be wrested away from their existing mindsets on negotiation and contract drafting. But consistent exposure to and eventual familiarity with the Principles should persuade Asian lawyers to embrace simplification in contract drafting, commit to retool themselves and, most importantly, advocate among their ranks and their clients the benefits of imbedding the Principles in their business culture.

There is hope in the future that when Western and Asian negotiators come together there is less of differences and more of commonalities, more of the familiar rather than the strange – because both have embraced the Principles to be their own.