Domestic arbitration solution for looming OBOR disputes

By Zhu Shuying, City Development Law Firm
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Connectivity of the infrastructure in China and the 64 countries along the Silk Road economic belt and the 21st-century Maritime Silk Road (the Belt and Road) is an important support for implementing the “One Belt, One Road” (OBOR) initiative. In order to build these massive infrastructure connectivity networks, governments at all levels in China, and domestic investors, have gone abroad as transnational investors to establish co-investment contractual relationships offshore with other Chinese enterprises. These investors, as employers of infrastructure projects offshore, established numerous contractual relationships concerning construction projects with Chinese contractors abroad.

Large construction enterprises have become the general contractors of the projects of the OBOR initiative. When they undertake a number of large-scale infrastructure projects in countries along the Belt and Road, they establish a wide range of subcontracting relationships with domestic state-owned enterprises and private construction enterprises, which also went abroad due to the long-term domestic co-operation relationship among enterprises, the configuration of construction technology, the purchase and sale of raw materials and many other reasons.

ZHU SHUYING Director City Development Law Firm
ZHU SHUYING
Director
City Development Law Firm

In the process of fulfilling and executing contracts for overseas projects, it is inevitable that disputes will arise among Chinese investors offshore, among the employers and contractors, as well as among the general contractors and subcontractors, for various reasons. It is understood that disputes over engineering contracts must be under exclusive jurisdiction according to the laws of various countries (including China) and must be submitted to the courts where the projects are located. To avoid bringing lawsuits to overseas courts, Chinese companies usually specify in their contractual relationships that disputes be governed by Chinese laws and settled by China’s arbitration institutions.

The author, as an arbitrator with the Beijing Arbitration Commission (BAC) and Wuhan Arbitration Commission, holds office successively in the BAC as an arbitrator of disputes between the general contractor and subcontractor that occurred in Kuwait and Ethiopia, and which filed for arbitration in Beijing. The author also serves as presiding arbitrator in the Wuhan Arbitration Commission over two disputes between the general contractor and subcontractor that occurred in Libya and that filed for arbitration in Wuhan. It is agreed in their contracts that the disputes must be governed by Chinese laws and be settled through arbitration by the two Chinese arbitration institutions. It is worth high-level attention from the legal profession that these contracts have been entered into abroad, and the disputes therefrom were submitted to domestic arbitration.

If there is no effective and practical mechanism to settle the disputes arising from the OBOR initiative, more and more contractual disputes among Chinese corporations abroad may not be resolved properly, which may seriously affect the implementation of the OBOR initiative and the smooth progress of project construction, and also the international image of Chinese enterprises in relevant countries.

If similar disputes are resolved through litigation in the courts where the disputes occur, contradictions with foreign countries concerning China’s sovereignty may arise in terms of the governing law; it is inevitably time-consuming for the first instance and second instance of the cases, due to different languages and legal systems from China, which may also further increase economic losses of the parties.

Furthermore, if there is no bilateral agreement concerning mutual recognition and implementation of court judgments agreed to by China and the country where the projects are located, effective legal instruments cannot be recognized and implemented offshore. In light of this, it’s an international practice to settle commercial disputes through domestic arbitration by Chinese corporations abroad.

The final rulings of arbitration systems ensure the quick and efficient settlement of disputes. The New York Convention of 1958 enables the effective arbitral award to be widely recognized and executed among 156 contracting states, which effectively protects the legitimate rights and interests of the prevailing party, ensures the smooth progress of overseas projects, maintains the international reputation and credit of Chinese enterprises, and so facilitates the smooth implementation of the OBOR initiative. Therefore, it is wise, legal and most workable to settle disputes arising from the OBOR initiative through domestic arbitration. Accordingly, the author suggests establishing a (China) arbitration court for the OBOR initiative.

The OBOR initiative covers a wide range of countries and node cities. Among the 64 countries along the Belt and Road, there are only 10 countries that have signed civil judicial assistance treaties with China, but there are up to 57 countries that joined the New York Convention, among which 32 countries formulated arbitration law based on the UNCITRAL Model Law on International Commercial Arbitration. Therefore, it is most simple and effective to settle disputes arising from the implementation of the OBOR initiative through arbitration. Considering the fulcrum position and unique geographical advantages of Wuhan – an important city of central China as a thoroughfare for nine provinces – it is recommended to establish such an arbitration institution in Wuhan, which is not only consistent with international practice of a “third place of arbitration”, but also facilitates parties from different regions in China choosing the nearest place of arbitration, thus effectively and reasonably controlling the cost of resolving disputes.

Given the increasing number of projects in the OBOR initiative, more Chinese enterprises will go abroad. It’s imminent and imperative to establish a “(China) arbitration court for the OBOR initiative” for the purpose of integrating with the world economy, meeting the needs of mutually beneficial co-operation between China and Asia, Europe, Africa and other countries in the world, fully taking the unique advantage of a China arbitration system, properly handling disputes over project investment abroad by Chinese enterprises, and disputes among employers and contractors as well as among general contractors and subcontractors, ensuring the smooth progress of overseas projects, and promoting the smooth implementation of the OBOR initiative.

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

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