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Focus: Myanmar accedes to the New York Convention

18 July 2013

In brief: In what will be seen as a positive move to attract inbound capital, Myanmar has formally acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Allens Special Counsel Nicola Nygh and Linklaters Associate Steven Pettigrove report.

How does it affect you?

  • The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) obliges Myanmar's courts to give effect to contractual provisions which provide for disputes to be resolved by arbitration and to enforce foreign arbitral awards.
  • Draft legislation implementing Myanmar's obligations under the New York Convention has been prepared although some uncertainties remain as to the details of the legislation and how it will be applied by the courts.
  • Nevertheless Myanmar's accession represents a significant step by the Myanmar Government in creating a legal environment attractive for foreign investment.

Background

Myanmar is an emerging market in Asia that is attracting significant interest from foreign investors. It is rich in natural resources, has a large population (approximately 60 million people), and requires substantial investment in key sectors of the economy, including infrastructure, telecommunications, power and financial services. Myanmar's accession to the New York Convention is the latest development in the process of facilitating foreign investment and economic growth. This process commenced after a new reformist government came into power in March 2011 after five decades of military rule.

Since March 2011, the Myanmar Government has engaged in a broad program of political, economic and legal reform. An important development in terms of domestic policy was the Government's abolition, in April 2012, of the country's grossly overvalued official exchange rate in favour of a market-based exchange rate system. The Government has also introduced a new Foreign Investment Law (the FIL), which came into force in November 2012. The FIL, along with the Foreign Investment Rules and the notification on restricted economic activities issued by the Myanmar Investment Commission earlier this year, provides the legal framework for foreign investment and identifies the forms of investment allowed, permitted sectors for investment, foreign ownership restrictions, and tax and duty incentives. Further legal reform is expected in a number of areas in the near future.

In recognition of the country's social, political and economic reforms, most major trading powers, including the European Union, the United States, Japan, Australia and Canada have progressively eased economic sanctions that have been in place against Myanmar for over 15 years. In April 2013, the European Union lifted all economic sanctions on Myanmar. The United States has suspended most of its trade and investment sanctions against Myanmar and lifted further restrictions in May 2013. However, most trading powers, including the European Union and the United States, have retained arms embargoes and targeted restrictions against certain individuals and entities accused of human rights abuses.

Each of these developments is an important step towards reducing constraints on Myanmar's growth and attracting foreign capital. Investors have nevertheless expressed concern about the absence of an effective mechanism for resolving commercial and investment disputes relating to Myanmar. Myanmar's accession to the New York Convention represents a significant step in addressing that concern.

Accession to the New York Convention

On 16 April 2013, Myanmar deposited its instrument of accession to the New York Convention. The accession formally took effect on 15 July 2013, when Myanmar became the 149th party to the New York Convention. The New York Convention is considered to be one of the most successful international conventions and an essential component in establishing a strong framework for foreign investment. It requires contracting parties to recognise and enforce foreign arbitral awards in their jurisdiction, subject to limited exceptions. The New York Convention also requires parties to give effect to contractual provisions that provide for the resolution of disputes by arbitration. It therefore enables investors to choose a neutral offshore forum for the resolution of investment disputes in preference to the local courts, if the parties have contractually agreed to arbitration.

While Myanmar is yet to introduce domestic legislation giving effect to its obligations under the New York Convention, its accession adds an important component to Myanmar's investment framework. The FIL introduced in November 2012 explicitly recognises investors' rights to agree contractually on their dispute resolution mechanism. While the FIL therefore allows foreign investors to agree to refer disputes to offshore arbitration (for example, arbitration seated in a recognised arbitration centre such as Hong Kong or Singapore), to date, there has been no reliable legal mechanism for enforcing foreign arbitral awards through the Myanmar Courts. Myanmar's accession to the New York Convention demonstrates the Government's intention to fill that gap. However, as explained below, a number of uncertainties remain regarding how its accession will operate in practice.

In addition, Myanmar is a party to a number of multilateral and bilateral investment treaties with countries in the Asian region, including the ASEAN Comprehensive Investment Agreement (the ACIA) and the ASEAN-Australia and New Zealand Free Trade Agreement (the ASEAN-ANZ FTA). The ACIA and the ASEAN-ANZ FTA grant applicable investors a range of investor protections and establish mechanisms for resolving investment-related disputes. Many foreign investors will seek to structure their investments in Myanmar to take advantage of the protections afforded by these agreements. Subject to the challenges identified below, Myanmar's accession to the New York Convention will establish a route for applicable foreign investors to enforce the protections granted by the ACIA and the ASEAN-ANZ FTA to investments in that country.

Challenges remain

Although Myanmar's accession to the New York Convention represents a very significant development, there remain grounds for caution. While we understand Myanmar has not made any reservations to the New York Convention, the enactment of domestic legislation implementing Myanmar's obligations under the Convention is likely to be a prerequisite to the successful enforcement of a foreign arbitral award in Myanmar. We understand that a new draft arbitration law has been prepared, which is based on the UNCITRAL Model Law on International Commercial Arbitration and will deal with the recognition of contractual provisions for arbitration and the enforcement of foreign arbitral awards. However, a large number of draft laws are currently pending consideration by Myanmar's Parliament and it is not known when the new arbitration law will be enacted.

As a practical matter, the rule of law in Myanmar has been significantly impacted by five decades of military rule and we are not aware of any foreign arbitral award having been enforced in Myanmar previously. Under the New York Convention, domestic courts may refuse to enforce a foreign arbitral award on the basis that it would be contrary to the public policy of that country. This exception has generally been interpreted narrowly. Countries whose courts adopt an expansive interpretation of 'public policy' are generally considered less investor-friendly. How the Myanmar courts will interpret this exception, particularly in respect of awards involving the Myanmar state, or state-owned enterprises, remains to be seen. However, we understand that efforts to train judges in Myanmar in dealing with New York Convention awards are already underway.

Corruption within Myanmar also remains a significant concern for foreign investors. In 2012, Myanmar ranked 172 out of 176 countries on Transparency International's Corruption Perception Index. However, the Myanmar Government has indicated its intent to tackle the problem. In December 2012, Myanmar ratified the United Nations Convention against Corruption. To comply with its obligations under that convention, the Government has established a committee to combat bribery and corruption in the public sector and is preparing an anti-corruption law.

Conclusion

Myanmar's accession to the New York Convention represents a significant step in the reform program initiated by the Myanmar Government. This development demonstrates the Government's intention to establish a friendly environment for foreign investment by enabling foreign investors to resolve commercial and investment-related disputes offshore and enforce foreign arbitral awards within Myanmar. The most urgent task for the Government now is to incorporate the provisions of the New York Convention into Myanmar's domestic laws by enacting new arbitration legislation. The first application to enforce a foreign arbitral award before the Myanmar courts will also be highly anticipated. While foreign investors will continue to adopt a cautious approach in contemplating investments in Myanmar, its accession to the New York Convention and reports of further anticipated reforms are highly encouraging.

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