Contract management crucial when responding to OBOR

The interconnecting infrastructure of countries along the route for the One Belt, One Road (OBOR) initiative is relatively backward, with an urgent need for investment in, and construction of, such infrastructure as ports, airports, docks, highways and railways, presenting the perfect opportunity for Chinese cross-border investment and construction enterprises. But Chinese overseas investors also face legal, political, market and social stability risks.

High-speed rail boom

The OBOR initiative is dovetailing with the development of several regions and countries, with a trend of numerous investment and construction projects striding out onto the world stage. The most typical are in the high-speed rail sector. Relevant statistics show that high-speed rail plans that involve strategic co-operation agreements or potential co-operation intentions with China now total 34,700 kilometres, accounting for 37.2% of planned high-speed rail construction worldwide.

Of those, the central government-backed OBOR plan involves the construction of 26,300 kilometres of high-speed rail, accounting for 28.3% of planned high-speed rail construction worldwide and 76% of the total mileage of overseas high-speed rail that China hopes to participate in. The degree of familiarity with the “Chinese high-speed rail” brand is gradually increasing around the world.

Foreign risks

However, in stepping onto the world stage, Chinese enterprises have encountered all manner of problems. For example, in 2009, in the Mecca light rail project in Saudi Arabia, China Railway Construction Corporation Limited (CRCC) served as the general contractor and China Railway 18th Bureau Group as the actual construction company. As the level of the latter’s management of contract performance was not up to the needs of the international market, it failed in the course of the construction to promptly strengthen the management of visa and claim processes relating to contract performance, resulting in project visas and claims failing to achieve the actual effect of increasing quantities and extension of time. Once the project was completed, CRCC, a listed company, said the Mecca light rail project would cause it to sustain a huge deficit of RMB4.15 billion (US$645 million), close to half of its annual profit.

In the 2009 Poland A2 Highway project, the consortium led by China Overseas Engineering Group (COVEC) executed a contract with the Polish highway administration with a locked total price – which is incompatible with the management of visas and claims in international projects, making it difficult to obtain compensation from the owner when costs increase, works are varied and the period extended – ultimately leaving it with no choice but to withdraw from the project in breach of contract. Accordingly, the claim by the Polish highway administration against COVEC and its consortium is estimated at PLN741 million (US$187 million).

So, for a Chinese enterprise going global to comply with international norms, it must be familiar with, and adept at applying, international practice. For the contracting of an international project, a Fédération Internationale des Ingénieurs-Conseils (FIDIC) contract should be used. Such contracts are prepared and improved by FIDIC and fully protect the lawful rights and interests of both the employer and the contractor, while the contract terms satisfy the objective requirements of the international contracting of projects.

In accordance with international practice, the investor and contractor to an international project must use a FIDIC contract. All projects of such international financial organizations as the World Bank, Asian Development Bank, African Development Bank, and Kuwait Fund for Arab Economic Development mandatorily require use of FIDIC contracts. Chinese construction enterprises that are “going global” should also use FIDIC contracts.

Crucial juncture

In general, Chinese construction enterprises are still in the initial stages of going global, with the projects that they contract for in the international market generally being low-end, the contracting method mainly being general construction contractor and the FIDIC contract employed mainly being the FIDIC Red Book. Applying the “lowest bid” method in this low-end market is extremely detrimental to the competitive development of Chinese construction enterprises. On the international market, Chinese construction enterprises should give up the low-end market, consolidate the mid-range market and take on the high-end market, taking advantage of the OBOR era to complete international project technology transformation in the hopes of achieving good economic efficiencies.

Chinese enterprises, particularly construction enterprises going global, urgently need to “set out to sea” with legal services that are in keeping with international practice, something that places new demands on the international services of Chinese lawyers. However, there is a dearth of professional talent among Chinese lawyers who can meet such requirements. In this sense, China’s OBOR initiative urgently requires Chinese lawyers to provide legal services that are consistent with it, whereas the current service state and capabilities of Chinese lawyers indicate that they have now reached the “the most delicate of times”.

Taking the management of the performance of international project contracts as an example, to safeguard their own rights and interests and realize a profit, construction enterprises must be diligent with visas and skillful with claims. The reasons for the failures in the above-mentioned cases lie in unfamiliarity with the same. In this respect, Chinese lawyers should closely follow the projects to provide services and assist construction enterprises in enhancing their knowledge of international project claims and visas, understanding the concepts and the methods of application, and realizing that the management of international project visas and claims is the foundation for the management of contract performance.

Chinese lawyers should serve a construction enterprise in the course of construction, strengthen the management of the evidence of contract performance, carry out visa and claim procedures within the specified time limits in accordance with the contract, duly collect, fix, classify and manage the written evidence in the course of contract performance and use the evidence generated in the course of the project to protect their own lawful rights and interests.

In an international situation heated up by the OBOR initiative, Chinese enterprises have to keep a clear head, quickly adapt to international practice and comprehensively strengthen their management of contract execution and performance. Chinese lawyers need to grasp the massive commercial and development opportunities to enhance the quality of their services and accompany Chinese enterprises in going global.

Zhu Shuying is the director of City Development Law Firm and chairman of the construction project and real estate committee of the All China Lawyers Association