LIFTING-THE-BARRIERS REPORT 2014 | LEGAL

Published date: December 2014

TABLE OF CONTENT

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1. Introduction


The Association of Southeast Asian Nations (ASEAN) has a deadline by end of 2015 to achieve regional economic integration under the ASEAN Economic Community (AEC).

The development of the AEC is of great interest to policy makers and businesses within the ASEAN region as it could provide significant benefits for the region and boost its economic growth. Elements of the AEC include the development of a single market region with free flow trading of goods, services, investment and transfer of skilled labour, becoming a competitive economic region and achieving integration into the global economy.

A number of reports have explored and compared the key factors contributing to the overall success on the implementation of the AEC. Among them are the laws that govern the region. It has been said that the harmonisation of legal rules is the way forward as it can help to remove uncertainty, reduce cost, generate greater business confidence, and ultimately advance ASEAN community-building goals.

There is no doubt that an effective legal framework is essential and good governance is absolutely necessary for economic development that is inclusive and sustainable. In reality, harmonisation is difficult as member states have to agree to policies which incorporate or reconcile a number of constituents or stakeholders. Further, harmonisation of ASEAN’s legal framework faces great barriers due to the disparity that exist between the economic development and social cultural status of ASEAN countries.

While the ASEAN members are embracing the importance of legal harmonisation within the region, efforts have been slow in adopting binding legal frameworks to govern the relationships between them. At present, there seems to be a preference in operating on an ad hoc basis of understanding and informal agreements. Regulations set by the governments within the region fall short of being clear, straightforward and transparent, and do not provide predictability in the application and enforcement of rules, nor facilitate citizen participation in governance.

As the deadline is fast approaching, ASEAN must have a stronger commitment to realise legal harmonisation. The private sector’s involvement is critical at this stage.

We have analysed some of the barriers and we believe it is essential for ASEAN policymakers and stakeholders to address them as soon as possible to support the overall AEC goals.

 

2.    Current Status of the Legal System in ASEAN

Integration of trade in services is one of the key initiatives needed to achieve the AEC. In 1995, ASEAN members signed the ASEAN Framework Agreement on Services (AFAS), mandating progressive negotiations on the liberalisation of trade in services. This was in recognition that intra-ASEAN economic cooperation will strengthen and enhance trade and investment among the ASEAN countries. Over the years, ASEAN has been pushing for liberalisation of its legal services as part of an effort to facilitate legal harmonisation.

Generally, legal harmonisation is based on the premise that “standardization would accelerate the process of legal convergence…reducing transaction costs for transnational investors and increasing the quality of legal institutions in countries whose institutions are less developed”.1 Standardisation is usually done through various ways. It can begin with central determination and control of data definitions, formats, and attributes followed by identifying common principles and practices and eliminating overlaps and redundancy. Observers have claimed that legal harmonisation could cut transaction costs and therefore foster international trade.

However, there are certain prerequisites that are required for an effective legal harmonisation system. To effectively undertake harmonisation in its legal services, a country should already have a fairly developed and well-functioning legal infrastructure in place. In addition, the existing legal infrastructure should be able to support its new implementation as intended. One cannot expect to have the intended result from the process of legal harmonisation just by the introduction of a new transplanted law or regulation. The process involves full understanding and co-operative measures from legal practitioners and bureaucrats who are part of the legal infrastructure of a nation, as harmonisation may possibly result in laws which are “lost in translation”. Moreover, apart from sharing the same level of legal infrastructure development, countries should ideally have similar levels of socio-economic development. It is not uncommon for countries to reject the idea of harmonisation in a situation where the basic needs of the nation are not even met or appear to be distinctly different from other countries.

Unfortunately, ASEAN does not meet any of the above-mentioned criteria. Not all of its member states have a developed, well-functioning legal infrastructure in place and certainly their levels of socio-economic development are not equal. Harmonisation may indeed be difficult for ASEAN as it needs to please a number of constituents and stakeholders within the region. Ideal legislation cannot be achieved because there are different users of law, each of whom may have different expectations. For ASEAN to achieve full legal harmonisation, good policies must be successful at reconciling those various points of view.

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Unlike the European Union (EU), ASEAN laws are far from being harmonised. Figure 1 shows countries in the ASEAN region at different stages of legal development. Broadly, the legal systems in ASEAN were analysed based on two factors of development:

  • Liberalised – The existence of policies and rules to relax the regulatory restrictions on the ability of lawyers (both local and foreign) to provide legal services in their jurisdiction
  • Liberal – The absence of regulatory restrictions on the ability of lawyers (both local and foreign) to provide legal services in the jurisdiction

Only a few of these countries have taken action to implement policies to regulate and enforce liberalisation of the legal services. For the purposes of our assessment, we have given greater weight to countries that have made concerted efforts to liberalise their legal professions. In evaluating what constitutes a “Developed Legal System”, we have used a combination of quantitative and qualitative data relating to civil justice (including the existence of impartial and effective Alternative Dispute Resolutions (ADRs) ), criminal justice, regulatory enforcement, protection of commercial contracts and IP rights, and absence of corruption in the judiciary, amongst others.

Based on the assessment, we can conclude that none of the member states of ASEAN possessed the same level of legal development and they are also at different stages in liberalising its legal services.

 

3.        Reality Check – Barriers to Legal Harmonisation

  1. Disparity between the countries
    Given the divergence in cultural, political and social makeup of the ASEAN countries, the path towards legal harmonisation is inevitably filled with potential pitfalls and challenges. A clear disparity in this sense is the inequality of market capture capabilities of the member states. This could be due to differences in economic development, infrastructure and labour skills. For example, Singapore has one of the most advanced economies in the world, with modern, world class infrastructure which has also successfully transformed itself into a strong financial center. The country has become an obvious choice for investments, listing of companies, as well as a place for legal certainty and resolution. In addition, Singapore has become the preferred seat for international arbitration.Comparatively, the lesser developed ASEAN member states have weaker economic strength and potential. There remains a large gap between the CLMV (Cambodia, Laos, Myanmar and Vietnam) countries and other nations within ASEAN, despite serious attempts for economic development throughout the region. Besides the CLMV countries, there are also pockets of underdevelopment in the other ASEAN countries. This naturally leads to regulatory inconsistency and wide gaps in legal infrastructure between the member states.
  2. Poor enforcement and acceptance level
    Research to date suggests that although the AFAS was drafted with the purpose of facilitating liberalisation of services, very few binding commitments have been made. Under the AFAS agreement, ASEAN members are supposed to commit to substantially deeper liberalisation efforts and remove all restrictions on trade in professional services such as legal services by the end of 2015.However, not all ASEAN countries have adopted an open market policy in their legal systems and many still have strict restrictions. As a result, legal services within the region remain heavily protected with a strong tendency by member states to shield their own national champions against foreign threats. Local lawyers are naturally apprehensive at the implication of competing with well-resourced regional or international law firms. Attempts to harmonise national legal rules have proven to be difficult, given the countries’ natural attachment to their respective legal traditions. This is compounded by ASEAN members’ aversion to the creation of any supranational authority.
  3. Liberalisation – Different form and level of restrictions
    Globalisation has swept across the region, bringing prosperity and innovation, as well as changed the legal landscape. Local legal institutions are challenged and they can no longer take their position for granted. ASEAN has constantly been promoting the value of market liberalisation. However we note that efforts have been slow in adopting liberalisation for the legal services and in most cases, the implementation is different from one country to another.For example, Singapore allows foreign law firms to practise foreign law by registering at the Attorney General’s Chambers. Singapore’s most significant step came in 2008 with the introduction of Qualifying Foreign Law Practice licences (QFLPs), which allow licensees to employ Singapore-qualified lawyers to practise in certain areas of Singapore law. Malaysia on the other hand, recently implemented a ruling where foreign law firms are allowed to open offices within its jurisdiction provided that they have proven expertise in international Islamic finance, which would be able to support and contribute to the country’s Islamic state of development.The restrictions in Singapore and Malaysia are in contrast with the Philippines where the general rule is that the practise of law is limited to the citizens of the Philippines. According to a study done by the Asia-Pacific Economic Cooperation (APEC), a foreign lawyer in the Philippines is not allowed to obtain a limited licence entitling them to offer advisory services in foreign and international law.Finally, the state of the legal system in Myanmar has been described as dismal. Enforcement is poor and Myanmar’s lawyers lack an independent bar association to set rules and standards and look out for their interests. With its recent opening, Myanmar has taken steps to curb its problems by appointing an interim committee to guide the creation of the country’s first politically independent national bar association. However, till date there have been no further updates pertaining to this new initiative. We note that similar initiatives of this kind have been undertaken in the past, which has so far found its efforts delayed.
  4. Access to Reliable Transparent Information
    Due to disparities and different government policies within the region, foreign investors need to look at the laws of each country when they consider investments. This proves to be a challenge especially for investors who are keen to obtain information from the lesser developed ASEAN member states such as the CLMV countries. Information is not easily available or transparent and often needs to be translated.Compared to the more developed countries of ASEAN, these problems are particularly acute in the CLMV countries, which have a poor management of records and where most of their laws and regulations are recorded in local languages. It becomes a hassle for investors as most often they need to drill down to find this information. In addition, investors need to analyse and study these laws and transactions as there are different regulations governing specific sectors, such as banking services or distribution of goods.Furthermore, there are often legal uncertainties pertaining to certain key legal definitions which are commonly used in contracts or other legal documentation. The reality is that there is often unclear drafting, or communication of policies, leading to misinterpretation. This lack of harmonisation of legal terms and uniformity in approach within the ASEAN region are formidable barriers to potential investors.
  5. Disparity starts from legal education
    Legal education differs from country to country, resulting in disparity of skills and knowledge. The level of legal education is not harmonised within the ASEAN region. To add to the difference, the legal systems of the ASEAN countries differ greatly, ranging from common law systems in Brunei, Malaysia and Singapore to civil law systems in Vietnam and Indonesia with hybrids of both laws existing in Thailand and the Philippines.This results in different forms of qualification in each member state. In most instances, the differences are so significant that foreign qualified lawyers are required to re-qualify in order to be able to practise. Furthermore, ASEAN law students are not taught in depth on their neighbour’s legal systems. The irony is that the students in ASEAN are usually more familiar with the EU and English laws than the laws in other ASEAN countries.

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4.    Recommendations to Facilitate ASEAN Legal Harmonisation

Creating a “level playing field” is a long term process which will involve time and a lot of efforts from each member state involved. However, the process is critical in order to achieve ASEAN legal harmonisation. This includes simplification, standardisation and harmonisation of laws, standards and policies governing the member states.

Meanwhile, in order to succeed in the short term, ASEAN should focus on the low-hanging fruits.

Some of these recommendations were proposed during the round table discussion:

  1. Harmonisation of contracts
    A contract is an agreement created when a duty does or may come into existence, because of a promise made by one of the parties. A contract creates obligations enforceable by law. Harmonisation of contracts plays an important part when it comes to attracting investors into the region as this eliminates ambiguity or uncertainty and discrepancy.

    Recommendation:
    Establish an ASEAN institution or an official body that has the authority to oversee the standardisation of contracts for each practice. If each member state should adapt to this ASEAN standardisation then there can be more certainty of investors doing business with the member states, as investors would be more confident in the region. Achieving full standardisation will prove to be difficult and not all contacts can be standardise but as a start, we should begin by analysing how best we could implement this new standardisation.

  2. Official governing language
    Language is another barrier that could be lifted with immediate action. We have issues where each country wants to have their own language to be the binding language. As ASEAN is a multilingual region, some of the terms used are not standardised or possess the same definition.

    Recommendation:
    Establish an ASEAN institution or an official body that is formed to govern the terms used to ensure that all these terms and definitions are standardised. For example certain definitions such as “market structure”, “profit” or “revenue” should have the same definition throughout the region as some countries may recognise and define these simple terms differently. This could lead to disparity and uncertainty causing investors to think twice because they are not sure whether their contract will be interpreted correctly. The proposed ASEAN institution should develop and keep a record of the terms used and make it standardised throughout member states. In addition, this ASEAN institution can also ensure that these terms are translated correctly when it is used in local languages.It is essential for ASEAN member nations to be able to communicate and understand one another to form an integrated community. Like it or not, English is the global language of business and is regarded as the international language in most major industries. Adopting English as the global language policy should start from education itself, by making English language a compulsory subject in schools and learning institutions. It will not be easy, and almost certain to meet with staunch resistance in different forms. Many may feel at a disadvantage if their English is not as good as others’, team dynamics and performance of a company can suffer, and national pride can get in the way. But to survive and thrive in a global economy, ASEAN must overcome language barriers—and English will almost always be the common ground, at least for now.

  3. ASEAN Arbitration Centre
    The rise in investment and trade in today’s fast-globalising world has generated a surge in cross-border transactions. This has inevitably led to a rise in cross-border disputes involving multinational companies as well as ASEAN entities that are beginning to flex their muscles abroad. Arbitration is gaining traction as a preferred dispute resolution mechanism for several reasons including affordability, speed, privacy, and the ability to settle disputes in a neutral location and choose one’s arbitrators.

    Recommendation:
    Establish an ASEAN Arbitration Centre that governs ASEAN arbitration matters and standardise arbitration classification within the region. This would eliminate any overlapping arbitration rules, low quality regulation, and uneven enforcement.

  4. ASEAN Registrar of Companies
    Investors dislike uncertainty. When outcomes are unclear or inconsistent, market activity tends to reduce. Regulations need to be clear, understandable, straightforward and predictable in their application. The regulatory institutions should operate in a transparent manner when developing new regulations and supervising firms. In addition, accessibility to reliable and accurate data is also important. Due to the disparities and different form of record-keeping, ASEAN constantly faces issues such as difficulty in obtaining updated information from one reliable source

    Recommendation:
    Establish a centre to act as the registrar for all information relating to the legal industry within the ASEAN region. This ASEAN registrar can also collect performance reports from all ASEAN countries with respect to their legal achievements or obstacles in fulfilling the action plans determined under the regional agreement or the AEC Blueprint. This can help clarify and make things more transparent, making it easier for investors when conducting research on ASEAN. It should also keep member states updated with the ever-changing laws implemented throughout the region with records of rulings and policies kept in a hassle-free one-stop format with ease of access of information. Details on legal practitioners or lawyers should also be kept within this centre to ensure all member states are in sync with the latest information in all aspects of the legal industry.

  5. Movement within ASEAN
    Observers and analysts often touch on topics regarding free-trade and ease of movement for goods and services within the member states of ASEAN. However, the movement of people is one of the most important aspects for businesses such as the legal services. The interaction between international clients and local lawyers is an essential push-factor for any successful legal industry.However, not many initiatives have been done for the ease in movement of people within ASEAN. For example, there has been a lot of talk on an ASEAN-wide tourist visa or a common business travel card without any concrete results. Compared to the European Union (EU) countries, the citizens do not need a visa or work permit to cross EU borders, however in ASEAN countries, ASEAN citizens still need both documents (e.g. Myanmar). Currently most businessmen of ASEAN travel around with their APEC Business Travel Card to facilitate travel to more countries, including a few in the ASEAN region.

    Recommendation:
    This simple barrier can be tackled if ASEAN could implement a system or introduce visa-free travel within member nations, as this could definitely help deepen regional integration.

 

5.    Conclusion

Come 1 January 2016, the implementation of the AEC will most likely not fully accomplished and will remain an ongoing project. The direction and commitment towards the AEC appears to be irreversible. The deadline merely functions as a push-factor to get all relevant parties started and be committed to a certain timeline.

Despite all the recommendations that were shared during the round table discussion, we note that there has been quite a number of non-governmental organisations formed that also share the same collaborative efforts to understand and harmonise the laws in the region. However, we also find that these organisations become inactive in their efforts gradually. It is important to ensure that all ASEAN institutions formed for this purpose remain active and constantly in charge of monitoring ASEAN standardisation and the progress of harmonisation of laws within the region.

To what extent full legal harmonisation can be implemented depends on the political will of each member state in ASEAN. It also depends on the national political support of adopting those laws and policies. Depending on how well-drafted a law or regulation may or may not be, not forgetting whose interests it is defending, it will have an impact on how such transplanted or harmonised legal product is enforced in practice. In the final analysis, such enforcement will determine the effectiveness of any legal harmonisation product.

Unfortunately, our assessment for this report reveals that the region is far from achieving full harmonisation of its legal services at the date of writing. Although there is no quick solution to achieving full legal harmonisation, we believe that if the above recommendation were implemented, the process of legal harmonisation among the ASEAN countries would be more successful.

 

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