LEGAL ISSUES ON BURMA JOURNAL No

LEGAL ISSUES ON BURMA JOURNAL No. 7, DECEMBER 2000
BURMA LAWYERS' COUNCIL

IN BRIEF

Constructive Engagement with Burma Sees Red Light

A compelling case has emerged which is of concern and needs attention in the region. The case refers to a joint venture in the Union of Myanmar (Burma) between a Singapore-based company, Yaung Chi Oo Trading, and the Ministry of Industry No. 1 of the State Peace and Development Council (SPDC). In 1993, the Union of Myanmar opened up its doors to foreign investment. The bankrupt Mandalay Brewery bubbled back to life. Mandalay Beer became a recognised brand name. A network of 40 pubs operated nationwide and it became the largest domestic taxpayer, generating revenue for the dilapidated state coffers. On November 11, 1998 the joint venture came to an abrupt halt when armed soldiers seized the brewery on the orders of the SPDC. The bank accounts of the partner were frozen and it was threatened with arrest for alleged misappropriation of funds soon after its final payment of $5.3 million.

The salient facts of the case are that the Ministry of Industry- No. 1 (MI-1) and Singapore based Yang Chi Oo entered into a joint venture in respect of the Mandalay Brewery for five years. According to clause 17 of the Myanmar Law 10 (Union of Myanmyar Foreign Investment Law), a contract shall be executed when a joint venture is entered into. An arbitration clause in the contract stated that all disputes between the parties must be referred to arbitration.

Before the end of the five-year term a dispute arose. The Ministry was required to refer the dispute to arbitration. On the contrary, however, the SPDC seized the factory and all the assets. This was highly arbitrary and was a clear case of taking the law into one's own hand. The SPDC subverted the legal process laid down by its own law. No subsequent filing of legal proceedings could legalize the previous illegality. Subsequently MI-1 commenced liquidation proceedings against Yaung Chi Oo in court under Section 162 of the Burma Companies Act. Yaung Chi Oo, pointing to the law on the subject, took objection. The court, true to its ilk under SPDC, did not entertain the objection. On the contrary, it appointed SPDC's favorite, the tycoon Steven Law, as liquidator so that it could influence the liquidation proceedings and secure a favorable outcome. In such proceedings, the normal course is to appoint the Official Liquidator or, if the parties agree a qualified independent Chartered Accountant may be appointed.

This step shows the SPDC's contempt for law. A legitimate question that may arise is why the SPDC did not go to arbitration. This process was surreptitiously circumvented because in the event of arbitration proceedings, the other partner would have more say and leeway. The appointment of an independent Receiver might be sought. The time-honored legal process has been hijacked by the SPDC to promote its own interests.

The issues that arise are:

1. Whether in view of the contract the liquidation proceedings are maintainable,

2. Whether the application of the Burma Companies Act discloses a cause of action, and

3. 3. Whether the provisions of Section 162 of the Burma Companies Act have been complied with.

As the Court is biased the following steps must be immediately taken to prevent further mischief: A stay application must be filed before the court of Liquidations to stay further proceedings, pending an intended appeal under section 173 of the Burma Companies Act. The appeal must be filed in a higher court under section 162(6) of the Act against the order in Liquidation, along with an application for an interim stay of the lower court's order, pending admission of the appeal. These are defensive steps. An application pursuant to the clause of the joint venture contract regarding arbitration, read with section 8 of the Burma Arbitration Act, should be filed in the High Court for the appointment of an arbitrator by the court. In the same Act there is provision for the court to stay all other proceedings. Once this stay can be obtained other things can be sorted out. The questions of forcible seizure, renewal for the second term, innovation of the contract, breach of terms and allied matters can be thrashed out in the arbitration proceedings, failing which the only forum left will be the Liquidation court.

Analysts say that the incident is the outcome of a power struggle between the two factions in the military junta, led by General Khin Nyunt, the intelligence head, who is for economic openness and favored the Singapore-based partner, and Maung Aye, the Army Commander, who is opposed to too much openness too fast. Be that as it may; the basic reason is the murky Investment Law 10/88 of Myanmar, to which the investors have been lured. And of course the arbitrary legal system, which is supposed to safeguard the said law. The joint venture in which the foreign investors are trapped is a contract between the foreign partner and one of the Ministries, executed under the Union of Myanmar Foreign Investment Law. Although it guarantees under clause 22 that there shall be no nationalization during the tenure of the contract, clause 14 of the Law gives overriding power to the Myanmar Investment Commission to decide matters and terminate the contract before the expiry of the contract period. Under the Law, the Commission is composed of the 11 Ministers concerned with trade and economy and it decides disputes between trading partners in which the ministries have direct interests and where the trading partners are not at all represented. In the instant case, MI-1, the violator of law will sit as a judge as a member of the Commission. Why the investors agreed to such a clause cannot be understood except as insofar as it represents their craze to earn quick money. The true nature of the unjust clause has come out in the open in the Mandalay Brewery case.

It is reported the Myanmar Investment Commission engaged an independent chartered accountant to compile a report, and the report found that the takeover was conducted "without legal sanction". The Singapore partner has invoked a clause in ASEAN's Agreement of Promotion and Protection of Investment 1987, which confers jurisdiction to arbitrate if a domestic forum refuses. This Act covers all the members of the ASEAN group countries. ASEAN will have to show its ability to protect foreign investment in the region through its dispute settlement mechanism. It will also be a test of Burma's commitment to ASEAN, as it directly violates the commitment to protect foreign investment given by Burma on joining ASEAN in 1997. The SPDC's flagrant abuse of both its own and international laws protecting foreign investment will make the protagonists of constructive engagement think twice. The fall-out of the Singapore case will grind investment in the region to a halt.

Ironically there need be no sanction. The suicidal policy of the SPDC, in politics as well as in trade, will meet with its nemesis. The highlight of the Yaung Chi Oo case is that, as in all fields of peoples' lives, SPDC flouts the Rule of Law. Economic and commercial laws, which govern foreign trade, are no exception. They are two sides of the same coin - the coin being the SPDC. The message is clear for future investors.