Tag Archives: Corporate Commercial

Letter of Credit in Mongolia – a Trade Finance Tool

Foreign trade is an important part of the economic life of any country and for Mongolia it is an essential part of its economic life. In recent years foreign trade in Mongolia is expanding, offering consumers a wide variety of goods and services. Thereby traders, both importers and exporters, must carefully and mindfully choose from range of trade finance tools to help their transactions run smoothly.

Most popular and commonly used trade finance tool is a letter of credit. Working with an overseas buyer can be risky because you don’t really know who you’re working with. A buyer may be honest and have good intentions, but business troubles or political unrest can delay payment or put a buyer out of business. In addition, due to different laws, different time zones, and different languages there might occur certain difficulties. A letter of credit spells out the details so that everybody is on the same page. Instead of assuming that things will work a certain way, everybody agrees on the process up front.

A letter of credit is a document issued by a bank that guarantees payment. There are several types of letters of credit, and some of them may be defined by their purpose. Still they provide security when buying and selling. Importers and exporters regularly use letters of credit to protect themselves.

Commercial letter of credit is a standard letter of credit that is commonly used in international trade and may also be referred to as a documentary credit. This is a negotiable financial instrument from an importer’s (buyer’s) bank guaranteeing that payment to an exporter (seller) will be the correct amount and received on time subject to the exporter presenting compliant shipping documents (assuming those documents meet the requirements listed in the letter of credit).

To get a letter of credit, importers must contact a bank in their home country and apply for opening a letter of credit. In Mongolia most banks issue letters of credit. In turn sellers must trust that the bank issuing the letter of credit is legitimate and that the bank will pay as agreed. If sellers have any doubts, they can use a “confirmed” letter of credit, which means that another (presumably more trustworthy) bank will guarantee payment. Sellers typically get letters of credit confirmed by banks in their home country.

However, prior to contacting a bank, important to remember that buyer and seller must have mutual agreement that the payment will be done with a letter of credit and list all requirements to shipping documents in the contract.

Issues with Mongolian Competition Law

Our Mongolian lawyers have encountered an unusual number of inquiries regarding Mongolian competition and anti-monopoly issues in the past few months. The scenario below takes a looks a common situation found in Mongolian trade.

Let’s assume that multinational company A currently sells to several Mongolian counterparties (Supplier Customers) who have a product import permit. Under the terms of sale, title passes to the Mongolian counterparty before the product is imported on either the Russian or Chinese border.

Mongolian wholesale client (Company B) proposes a profit-sharing agreement whereby Company B will Purchase products from Company A for purposes of:

  • storing product in Company B’s facilities and reselling to the other Supplier Customers within Mongolia; and
  • selling to wholesale clients provided that they are not already existing customers of the Supplier Customers.

In this scenario Mongolian Competition Law does not apply to the company A.  The Mongolian Competition Law does not apply to business entities which are not registered in Mongolia and are operating outside of its borders. Since the proposed transaction contemplated by the agreement would have company A deliver the products to the purchaser outside of Mongolian territory, the provisions of the Competition Law would not be applicable.

In our view, Company A and B would not be forming a monopoly because the transaction is cross-border, and A is not a “business entity” within the meaning of the Competition Law.

Company B only occupies approximately 1% of the domestic market for sale and supply of certain products. Accordingly, since it does not occupy a “dominant position” in Mongolia’s market (defined as a party which sells or produces 1/3 or more of a certain type of goods), the prohibitions in Mongolia’s Competition Law with regard to monopolistic activities would not be relevant to its operations.

With regard entering into agreements and monopolies, the following activities are prohibited under the Mongolian Competition Law:

  • mutually agreeing to fix prices of products;
  • dividing markets by location, production, services, sales, name or type of products or consumers;
  • restricting the production, supply, sale, shipping, transportation and market accessibility of products, investment, technical and technological renovation;
  • participating in competitive tender or bid auction or activities procuring goods, works or services by state and local funds having in advance agreed on the price, other conditions and criteria of products;

In addition, the following agreements or entered between business entities shall be prohibited where they contradict the public interests or create circumstances restricting competition:

  •  refusing to establish economic relations without economic or technical justifications;
  • restricting sales to or purchase by third parties of products;
  • collectively refusing to enter into agreements or negotiations which have significance for competition;
  • preventing competitors from joining organizations with the purpose of running their businesses profitably;

Mongolian business entities are prohibited to enter into agreements with effects as described above.

Liability of a Mongolian Company for Non-Compliance

We have looked at the requirement for a Mongolian company to have an internal control body and discussed a little about the forms such body may take. Our readers may be interested to note that while having such body is mandatory for a Mongolian company under law, there isn’t actually any penalty for a company that does not establish an internal control process.

What this means is that while there is no penalty for not having the review body, the Company will be considered liable under Mongolian law for any compliance violation or audit irregularity caused by the actions of the company’s officers or staff, which result in legal penalties or civil damages. By making the company responsible to maintain the internal control and compliance committee, the law makes the company responsible for any failure of compliance. Such liability will be in effect even where the non-compliance was accidental or was caused by the unapproved actions of a single staff member. The theory is that these things would not happen if the company had established and followed an appropriate internal control process.

Mongolian companies should therefore take the legal requirement to establish a Internal Control and Audit Committee seriously. The internal control system will allow company management to better ensure proper operations of the company and identify and stop potentially non-compliant behavior before it results in a larger problem, potentially carrying legal penalty. Since the law makes the company liable for non-compliance in any case, it makes sense for the company to establish internal procedures to reduce this risk.

Compliance Options for Your Mongolian Company

We talked yesterday about the Internal Control or Auditing Committee every Mongolian company should have. The Committee should operate by a set of rules, which the company approves and implements for itself. Government regulations stipulate that each, “Entity or organization must have its own internal control and auditing procedure in compliance with this regulation and consistence with its activities.”

To comply with this rule, the company must establish the Internal Control or Audit Committee, or for larger companies a complete department devoted to compliance may be used. Smaller companies have the option to appoint a single company officer to be responsible for compliance. This individual office, committee or department will have responsibly to conduct internal compliance reviews and audits.

Internal Control and Audit Requirements for Your Mongolian Company

All types of legal entities, regardless of ownership or organization details, are required to comply with state inspection requirements. Each company is required to establish an Internal Control or Auditing Committee comprised of company officials responsible for monitoring internal company operations and compliance. Whether the company is locally owned or foreign invested, or operating in mining sector, industrial manufacturing or providing a service, the company must establish an internal audit committee.

The Internal Control and Audit Committee is responsible for internal compliance issues for the company, to ensure the company meets all of its obligations as set out elsewhere in Mongolian law. The Committee is broadly responsible for compliance as regards meeting environmental impact and conservation obligations; ensuring quality of products or services provided by the company; monitoring working conditions and workplace safety and health; ensuring the company meets all obligations regarding property registration, utilization, storage and finally, the committee is responsible to ensure accurate accounting of financial records.

If you are unsure if your Mongolian company’s internal compliance and control procedures meet requires of the law, contact your Mongolian legal counsel for a consultation.

Employment Termination by Mutual Agreement

Yesterday we looked at termination of a Mongolian Employment Agreement due to an employee’s failure to meet disciplinary standards. In this post, we will look at another option for ending an Employment Agreement – termination by mutual agreement.

Where a company is not satisfied with an employee’s work performance but is not able to point to a series of breaches of discipline or an occurrence of serious breach and does not have procedures in place for a review Commission, the company has the option to directly negotiate with the employee, via a proposal to the employee to terminate employment. Mongolian law allows for termination of an Employment Agreement at any time if both parties agree. Often the agreement will entail some amount of severance compensation for the employee. Such severance compensation is not legally required but is required as a practicality to obtain the voluntary departure of the employee. Where a mutual agreement on termination is reached, it will legally be considered termination under the initiative of the employee, and the company’s risks of rulings against it at court are greatly diminished.

If employee agrees to such proposal, an employee must provide employer with written termination notice and may leave his/her workplace 30 days after presenting termination notice, unless the parties agree otherwise.

An employee’s written termination notice should come solely from employee’s own will and without improper influence or pressure from employer. So, if client will choose to negotiate with the employee, it is best to make sure the dismissed employee is happy with the termination deal and has no reasons to go to court against the employer. This is obviously most easily achieved by offering the employee generous terms of departure.

Breach of Employment Discipline

We have been posting series of articles describing the process for termination of an Employment Agreement for failure of the employee to perform. In short, it is not easy unless the company has a clearly defined and regularly used process for employee performance evaluation via a special review “Commission”. In practice, many smaller companies may not have such rules and will not have the time or resources to devote to such a review process by a formal Commission. If this is the case, what alternative options are there for a company to terminate an unsatisfactory employee?

If employee performance is an issue, our Mongolian lawyers advise our clients to look for patterns in breaches of employee discipline. Job “performance” and “discipline” are different grounds for termination under Mongolian law. Article 40.1.4 of the Labor Law provides that an Employment Agreement may be terminated at the initiative of the employer if the employee repeatedly “breaches employment discipline” or conducts a serious breach, as specified in the Employment Agreement, for which immediate termination of the Employment Agreement is stipulated. This may be useful as in many cases where an employee’s performance is inadequate there will also be breaches of discipline to consider.

Many Mongolian companies treat issues such as being late to work, poor work performance, or non-performance of assigned tasks as a breach of employment discipline under Article 40.1.4. Companies normally will specify within an internal employment handbook or rulebook a list of actions and behaviors which will be considered breach of employment discipline.

Where an employee has repeatedly breached employment discipline as outlined in the company rules the employer may choose to terminate the Employment Agreement. In making such determination, the employer must demonstrate multiple separate breaches of discipline. Each breach must be determined and proven separately. Each breach should be supported by a separate item of evidence. It is not mandatory for employer to impose disciplinary sanction on employee for every occurrence of breach, however the breach must be formally noted (usually via a disciplinary warning letter).

Under article 131.1 of the Labor law there are three types of disciplinary sanctions the employer may impose on an employee: a warning, decrease employee’s salary by up to 20 percent for up to 3 months, dismissal (termination of employment). Legislation does not require the employer to impose disciplinary sanctions in any particular order.

A Serious Breach under Article 40.1.4 includes actions or inactions which contradict the Employment Agreement obligations of the employee and which cause negative impact on the rights and interests of the employer such as damage of the employer’s property or harm to employer’s business or reputation. Actions which will be considered serious breach must be specified (listed) in the Employment Agreement. In the event of occurrence of any of the specified serious breach events, the employer may immediately terminate the Employment Agreement (a single occurrence is enough to support termination).

So, where an employee whose job performance is a problem also frequently comes into the office late or violates company policies regarding use of vehicles or communications with clients or co-workers, these disciplinary infractions may be used to build a case for termination of employment due to breach of discipline. Assuming all infractions are properly documented, this approach is less likely to be found to have been improperly applied by a court.

Termination of employment under Article 40.1.4 does not require severance compensation and there is no requirement for a notice period. Companies may consider termination under Article 40.1.4 in alternative to forming a Commission and doing a performance evaluation. A series of infractions and warning is all that is required to establish the legal case for termination.

What is the Mongolia Employment Performance Review Commission?

We had mentioned in our previous blog post about Employment Agreement termination due to lack of performance that a determination on non-performance must be made by a formal “Commission” of some sort. What is this Commission? How is it formed? Who should participate and sign off? What are its functions? We will review these questions below.

We note that in most cases it will likely not be appropriate to establish a review Commission and organize evaluation of skill or qualification for a single employee, regardless of whether management may think this employee’s performance has not been sufficient. As a matter of practical law in Mongolia, such a situation will likely be viewed by a court as discriminatory and likely based on personal reasons not truly related to job performance.

What exactly is the Commission required by Mongolian law? It is not simply a Human Resources professional or department. The company should have an established internal policy regulating the establishment and conduct of the professional review Commission, including appointment of members, number of members, rights and responsibilities of commission, operational procedures of commission, and other key points.

Within such policy there should be terms and regulations as to how employees’ skills or qualifications are to be evaluated for different jobs and positions taking into account the key skills and qualifications or requirements for different positions.

The Commission may take the form of an annual performance review conducted by Human Resources and other personnel duly appointed to participate according to the company’s rules for conduct of the Commission. During which the performance of each employee is evaluated along clear criteria set out for their respective position.  If an employee’s performance was found to be unacceptable by such Commission, the employee may be rightfully and legally terminated at initiative of employer. The Commission may include members of Human Resources department but should also include additional management personnel.

In practice, individuals in the following positions are often appointed as members of the Commission:

  • member of organization’s senior management);
  • head of unit/division/department;
  • employee’s supervisor;
  • HR manager(s).

The company Human Resources unit usually organizes the evaluation: assists and advises the Commission to plan and organize the evaluation, announces the upcoming evaluation, organizes actual evaluation process, combines results, presents results to the commission for review, etc. The Commission itself plans the evaluation, develops the tests and tasks for evaluation, reviews the results of evaluations, presents the results and reviews of evaluation to organization’s management, etc. Based on the evaluation results and Commission’s reviews the employer decides whether to promote, send to training, or dismiss respective employees. In most company policies there are two types of evaluation: scheduled and unscheduled evaluations. Scheduled evaluations may take place annually, or once in two or three years. It depends on organizations preference. Unscheduled evaluations usually take place at the request of employee: when an employee requests for promotion or for transfer to new job or position. Unscheduled evaluation may also take place at the initiative of employer: when employer proposes to employee a promotion or transfer to new job or position.

It is interesting to note that a spontaneous employer initiated review Commission will be considered valid for purposes of a planned promotion, but as mentioned above, will likely not be considered valid for purposes of intended termination.

Terminating Mongolia Employment Agreements for Non-Performance – Not So Fast

A client recently came to our Mongolian lawyers with a question regarding termination of an Employment Agreement (check out yesterday’s post to understand the differences between an Employment Agreement and an Employment Contract) for inability of the employee to meet performance expectations.

Article 40 of the Labor Law sets out the grounds for termination of an Employment Agreement at the initiative of the employer. Pursuant to Article 40.1.2, an Employment Agreement may be terminated at the initiative of the employer if it has been determined that the employee fails to meet the requirements of the job or position due to a lack of professional qualifications or skills. The Supreme Court of Labor Law as issued an official interpretation of this provision clarifying the meaning. The official interpretation states that the provisions of article 40.1.2 of Labor law refer specifically to an official finding and formal decision as to the employee’s condition as issued by a professional skill assessment “Commission” established by the employer organization (the company) or industry (in which company operates). The official interpretation of the law also states that the employer’s determination of the employee’s professional ability and skill for the job or position as unqualified for reasons such as absence of tertiary education or an education certificate shall not be grounds for the employer to terminate the Employment Agreement. In other words, the actual skills demonstrated on the job must be considered through a formal review process.

If the employer wants to dismiss an employee on the grounds of Article 40.1.2 of the Labor Law, the employer must obtain a proper evaluation of the employees’ skills or qualification and a decision of a Commission (as described above) that states that the employee is unqualified for the job or position. If such is not obtained and the dismissed employee is unhappy with the employer’s decision and goes to court, there is a high chance that the employer will lose in the court and will have to re-hire the employee or potentially pay additional damages in compensation due to illegal dismissal.

Proper termination of employment on grounds of Article 40.1.2 of the Labor Law should be done through the employer’s establishment of a professional skill assessment Commission. Such commission should properly organize an evaluation of skill or qualification of all employees with respect to their jobs and positions, including presentation to employees of official results of evaluation, obtaining each employee’s opinion on his/her evaluation results, presentation of commission’s decision, and so on.

If based on the official results of the review and commission’s decision the employer decides to dismiss the employee, employer must provide a written Termination Notice to the employee 1 month prior the termination. The Employer must issue a decision (usually a CEO’s order) specifying a period for the employee to hand over his/her duties, the date of employee’s last work day (same date as termination of Employment Agreement), and the amount of severance pay. Pursuant to the Labor Law, when terminating employment on grounds of Article 40.1.2 the employer must pay to employee a severance pay in the amount equal to at least one month average salary of employee.

Compliance with all proper procedures by the employer leading to the termination is important. In practice, employees dismissed on grounds of article 40.1.2 of the Labor law are frequently unhappy and often go to court against employer. In such case, for an employer who did not comply with all proper procedures as mentioned above (terminating the employee via the Commission process) this may result in a court finding in favor of the employee. If the employer is not able to provide clear documentary evidence that the employee indeed does not qualify for the job or position, the court is likely to find that the termination was based on personal (non-professional) reasons, resulting in a ruling against the employer.

Note that there are other options for an employer initiated termination under Mongolian law, which we will review in coming blog posts.

Mongolia Employment Contracts: One Size Does Not Fit All

A longstanding client of the firm which operates a company in Mongolia posed a simple question to our Mongolian lawyers, asking the best way under Mongolian Employment law to fire an employee who has not lived up to performance expectations. The question is interesting because it requires first determining what type of employee is to be terminated. In Mongolian law, not all employment relationships are equal. There are two difference kinds of employment in Mongolia each with different rules and different processes for termination of the employee.

The Labor Law of Mongolia provides for 2 types of employment: (1) Employment pursuant to an “Employment Agreement” and (2) Employment pursuant to an “Employment Contract”. It is important to understand that that these are two distinct types of employment under Mongolian law, subject to different rules, not simply a difference in translation.

In Mongolia, most employment relationships are pursuant to an Employment Agreement, which is basically described as an agreement to be employed for general purposes. While the actual role the employee performs may vary, no particular or unique skills are required on the part of the employee. This type of employment is defined by an Employment Agreement.

However, under the Mongolia Labor law, when an employer hires someone specifically for his/her high skills or unique talents an Employment Contract may be concluded, rather than a simple Employment Agreement. The Mongolian government puts out a list which sets out the positions subject to an Employment Contract.  According to the list, an employer may conclude an Employment Contract with Directors, Chief Executive Officers, General Managers, Division (department) Managers, and Chief (head) of Divisions (departments).  Other types of employees may only be hired pursuant to an Employment Agreement.

There are several differences between an Employment Agreement and an Employment Contract. Generally, an Employment Agreement for a permanent position is concluded for an indefinite term or if the parties mutually agree for a specified term. In the latter case, at the expiration of the term of the Employment Agreement if the parties do not propose its termination, and the employee continues to perform his/her work, the Employment Agreement is considered to be extended for the initial term.

Whereas, an Employment Contract may be concluded for up to a maximum of 5 years. When concluding an Employment Contract, among other terms, the parties must specify in the Employment Contract a detailed procedure for the evaluation of performance of the employee under the Employment Contract. When this is included in the Employment Contract, it is relatively easy to conclude upon evaluation of the employment contract whether the employee has sufficiently performed his/her duties. If the employee as performed sufficiently, the Employment Contract may be extended.

An Employment Contract must specify in detail all duties, responsibilities, rights, privileges, benefits of the employee, including a description of assets to be given under employee’s responsibility, the rules of possession, the use and disposition of such assets, final results to be achieved by the employee, the liabilities of the employee. Because under an Employment Contract the employer hires the employee specifically for his/her high skills or unique talents, such employee has more responsibility, accountability, rights, privileges and benefits than a “regular” employee employed under an Employment Agreement.