As the Belt and Road initiative advances, China is gradually establishing a “community of shared dispute-resolution mechanism” consistent with its Commitment to connecting the world in such a field, writes Frankie Wang

This year is the fifth anniversary of the Belt and Road initiative’s (BRI) implementation, but it is still too early to say that it has taken shape. At a press conference the State Council Information Office held in late August, Zhang Jun, the assistant to the Foreign Minister, responding to a reporter’s question said implementing a high-quality BRI was more than ensuring the class of specific projects. It also reflects the need to advocate compliance with laws of various countries, as well as recognized international standards and market rules.

It is true that, with the BRI’s continuous advancement, China’s determination to open its markets further and actively bring itself up to international norms also extends notably to the field of dispute resolution. In the past year, China has taken exciting new steps from mediation to arbitration or litigation, though various participants are still exploring possible future approaches to dispute resolution.

BRI is large in scale, with a variety of projects and transactions. May Tai, Hong Kong-based managing partner of Herbert Smith Freehills’ Greater China offices, says it is difficult to give a “one-size-fits-all” definition to relevant disputes. “It is still early days in the life of the initiative; arguably too early to identify a discernible increase in disputes,” she says. “However, we share the market’s expectation that Belt and Road will lead to a spike in commercial disputes. We may also see more claims against the states that host Belt and Road projects.”

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As for their nature, cross-border financial disputes have always been the focus. Shaun Wu, partner and chief representative of Shanghai office at Kobre & Kim, says he has seen many financing and shareholder disputes arising out of related infrastructure projects. “Such matters typically involve parallel proceedings with HKIAC [Hong Kong International Arbitration Centre] arbitration in Hong Kong, special-purpose vehicles in the BVI, parent holding companies registered in the Cayman Islands, and financing arrangements governed by the US law,” he says. “Chinese clients often need an integrated advocacy team to advise on litigation across the US, Hong Kong and offshore jurisdictions like the Cayman Islands and the BVI.”

Besides, this year, China has started to strengthen its global anti-corruption cooperation along the BRI to build a “clean Belt and Road”. Wu has noticed that regulatory and compliance investigations, in support of the BRI, have started to increase. “Many Chinese clients are also increasingly aware of international legal norms and regulatory standards,” he says.

Meanwhile, increasing awareness of compliance of both Chinese and foreign parties may bring about new types of disputes. “Many such disputes may increasingly be related to international fraud or misconduct … there will be increasing demand for practitioners like us, who can equally manage multi-jurisdictional litigation proceedings and cross-border asset-tracing recovery work,” says Wu.

FURTHER OPENING UP

With the Singapore Mediation Convention expected to open next year, mediation is drawing increasing attention. However, arbitration remains a popular approach to resolving disputes because it is especially suitable for BRI-related projects involving foreign elements, given the extensive adoption of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which allows better enforcement of arbitral awards across the world. In recent years, China has been more open to international arbitration, both at government and investor levels.

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According to HKIAC and Singapore International Arbitration Centre (SIAC) statistics from last year, parties from China remain top users of both of them. “As Chinese outbound investors gain more experience in cross-border disputes, they are relatively more receptive than before to offshore arbitration in the popular seats of Asia, such as Hong Kong or Singapore,” says Shi Lei, a consultant at Clifford Chance in Hong Kong.

China is also showing a more positive attitude on enforcing arbitral awards. Several judicial interpretations that the Supreme People’s Court recently issued to supplement existing laws are expected to facilitate enforcement of arbitral awards in China. These include the Regulations on Issues concerning Application for Verification of Arbitration Cases under Judicial Review of December 2017, which upgrades the “internal application system” previously applicable only to arbitration cases involving foreign or Hong Kong, Macau or Taiwan elements and extends its application to PRC cases not related to any foreign elements. According to the system, a court decision denying the validity of, or overrules, an arbitral award must be escalated, one level at a time to the Supreme People’s Court for final decision. This is expected to result in a much better enforcement of arbitral awards.

Things are also changing when it comes to enforcing foreign court judgments. Whether the foreign court judgements can be enforced in China has always been the key consideration for foreign companies. “Traditionally, Chinese courts had been quite conservative in enforcing foreign court judgments,” says Shi. “In the absence of international treaties, they seldom relied on the principle of reciprocity as ground for enforcing foreign judgments.”

However, China, as a member of Hague Conference on Private International Law, signed the Hague Convention on Choice-of-Court Agreements in September 2017. Although the convention has not been ratified, it is expected that there will be better enforcement in China.

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Terence Wong, a partner at Winston & Strawn in Hong Kong and Shanghai, shares the observation that “Chinese courts in recent years have shown a positive attitude in connection with enforcement of foreign judgments”. He lists several examples, including a joint statement of initiatives that China and 10 ASEAN countries announced in June 2017, covering the situation that, if there is no precedent in a nation refusing to enforce a judgment in another country, based on lack of reciprocity, then it should be presumed that there is mutual reciprocity between the two.

INVESTOR-STATE DISPUTES

It is also important to address the important issue of settlement of investor-state disputes. Most of the BRI projects relate to energy and infrastructure construction that, generally, need substantial investments in human and material resources over their long lifecycles. That is the reason that progress in projects is often dependant on local government support, which may, nevertheless, complicate the situation when any differences arise.

Eric Liu, a partner at Han Kun Law Offices in Beijing points out that instead of legal issues, many cross-border differences stem from political, religious and other factors, which may lead to disputes over contract performances. “For example, in some projects where the central government of the host country plays a leading role, the central government holds the majority stake. However, effective execution requires support and cooperation from local governments [in the host country],” he says. “If the central government lacks appropriate control over the local government, the latter’s failure to cooperate may lead to non-performance under the project. It may seem that the dispute is legal in nature, but attributable to political factors.”

“Other examples involve projects in regions with strong religious influences that are totally or partly executed not entirely consistent with the doctrines or purpose of the local religion. Consequently, the projects may fail to advance or be completed as agreed or as scheduled. In the same vein, breaches of contracts arise on the surface. Essentially, the disputes are attributable to failure to devote enough attention to religious considerations in the early stage of the projects,” says Liu. To this end, he reminds Chinese companies to take a holistic approach to the deep-rooted reasons of disputes wherever possible and take targeted measures.

This type of dispute has also attracted the attention of arbitration institutions in China. Last October saw the implementation of the International Investment Dispute Arbitration Rules of China International Economic and Trade Arbitration Commission (CIETAC), which fills the mainland’s gap in arbitration rules for international investment disputes. Now, investors and their home state may incorporate these rules in their investment contracts and treaties with host states.

However, it is worth noting that parties in this type of dispute are not equal entities. When the governments of relevant countries are involved, the prior position that nations enjoy may put the companies at a relevant disadvantage.

Matthew Hodgson, a partner at Allen & Overy in Hong Kong, specializes in disputes arising out of major energy & infrastructure projects involving states. “In terms of the most important considerations for clients, states and state-owned enterprises will be involved in all of these projects in some way and, sometimes, very extensively,” he says. “Unfortunately, states can make unreliable counterparties given the political changes, as well as the special legal powers and privileges they enjoy, including sovereign immunity.”

The sovereign immunity enjoyed by countries, such as host states, will enable foreign investors to sue in local courts only, and the judgments cannot be enforced in other countries. However, host states may choose to waive this right to attract more investments, and one of the ways is to join the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (also referred to as the Washington Convention).

Still, according to the statistics from the International Centre for Settlement of Investment Disputes (ICSID), as of this writing, there are some states along the BRI, including Russia and Thailand, that have signed the convention, but have yet to enforce it, meaning sovereign immunity still exists.

Another common practice for the host state to waive this right is to sign a Bilateral Investment Treaty (BIT) with the home state. Many legal experts say it is vital to study the BIT carefully. “In addition to suing your contracting counterparty, these [treaty] rights enable you to sue – or at least threaten to sue – actual governments,” says Paul Starr, a partner at King & Wood Mallesons in Hong Kong. “You must carefully structure your investment at tender time to qualify for treaty protection; you can’t just restructure later.”

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However, according to Allen & Overy’s Hodgson, “while China’s bilateral investment treaty network is one of the most extensive in the world, many of these treaties are not very investor friendly”.

Winston & Strawn’s Wong, agrees. “This is because certain bilateral investment treaties entered into by China in the early stages provide low levels of protection to Chinese investors,” he says. “For example, some of the BITs do now allow arbitration and others only allow arbitration on the dispute over the amount of compensation resulting from expropriation.”

For stronger treaty protection, Hodgson says, in many cases Chinese investors may insert a holding company in the Netherlands or in Singapore, for example – in the corporate chain. “Perhaps, the most important points are that the treaty offers the investor access to international arbitration, including in relation to breaches of the ‘fair and equitable treatment’ standard – this being the most often invoked and most often successful ground of complaint for investors,” he says.

Although many BRI investors are from China, after its market opens up further, the country can also be the respondent in an arbitration. Clifford Chance’s Shi says China appears to be more proactive in investor-state arbitration. “For instance, [China] successfully fended off a claim brought by a Korean investor before an ICSID tribunal in March 2017 and is now actively defending another case lodged by a German investor,” he says.

EXPERT TIPS

Although the legal environment is in favour of the development of dispute resolution, Chinese companies should bear in mind the difference between legal systems. “It is important to understand the legal environment of the Belt and Road countries, for example, by conducting a due-diligence exercise if necessary,” says Winston & Strawn’s Wong. “Do not automatically assume that the laws in China, or in any other jurisdiction, will be the same as in the Belt and Road countries.”

After thorough understanding of the legal environment, companies should carefully draft the dispute-resolution clause and governing-law clause. “Chinese clients can mitigate these risks by giving careful consideration to the dispute-resolution clause in the project documents at the drafting stage and selecting a well-regarded neutral seat for international arbitration, such as Hong Kong, Singapore, London or Paris for international arbitration,” says Allen & Overy’s Hodgson. He states that choosing a neutral seat, instead of the host state, for arbitration can avoid the interference with the arbitral process by the local courts.

Wong lists two examples to stress the importance of drafting relevant clauses. “Regarding the governing law clause, it would be prudent to investigate whether the relevant target country for investment has any limitation on the choice of the governing law of the contract,” he says. “For example, in Egypt, application of Egyptian law may be mandatory to a technology-transfer contract.”

As for the dispute-resolution clause, Wong says some types of disputes in target countries may not be submitted to arbitration. “In Russia, disputes relating to public procurement currently are not arbitrable,” he says. “Such disputes could only be submitted to the Russian courts.”

As for choice of the governing law, Liu from Han Kun reminds investors to consider how companies may be affected by the statutes of limitations in different jurisdictions. Accordingly, they should choose governing laws that are in their favour, therefore ensuring access to maximized protection. “For example, the statute of limitations generally is six years under Hong Kong laws and three years under PRC laws. If the client is highly likely to lodge any claim in the future, he or she must consider both advantages and disadvantages of the governing laws in many aspects.”

For investors, smooth solution of disputes should be a good outcome, but it is better to avoid those that may arise in the first place. Therefore, many experts stress the importance of engaging with lawyers at earlier stages and through the entire process.

Ernest Yang, a partner at DLA Piper in Hong Kong, says many Chinese clients seek lawyers for advice at the initial stages, but cut legal budgets once projects start. “This is fine for contracts that are one-off, with a short period of execution, such as several weeks or a month,” he says. “[But] this is dangerous for medium or long-term projects lasting several months or years.”

Starr from King & Wood Mallesons says lawyers can check the wording of the contracts and help clients with tender-risk assessments. “People wrongly think: ‘Oh, the lawyers are too expensive; we will only involve them later, if claims arise.’ But that is a false economy,” he says.

“The most important advice I can give to PRC clients is to get international infrastructure arbitration lawyers working early with your on-site teams, at tender time, to protect your rights from before signing the contract.”

INTERNATIONAL COMMERCIAL COURTS

In June this year, the China International Commercial Courts (CICCs) were established in Shenzhen and Xi’an to cover disputes relating to the Maritime Silk Road and Land Silk Road, respectively. The CICC deals mainly with civil and commercial disputes between equal parties. In other words, it does not have jurisdiction over trade or investment disputes between countries or between host states and investors.

In the Regulations of the Supreme People’s Court on Certain Issues Concerning the Establishment of International Commercial Courts (the regulations), Article 3 specifies the definition of whether a case is “international”. Herbert Smith Freehills’ Tai summarizes it as follows: “Cases are ‘international’ if one or both parties are foreign or domiciled outside mainland Chinese territory, [or] relevant legal facts have taken place outside mainland Chinese territory, or the subject matter in dispute is outside mainland Chinese territory.”

Unlike commercial courts in Singapore, Dubai and India, the CICC acts as a permanent establishment of the Supreme People’s Court, to which the one-tier trial system applies. Rulings of the CICC are not appealable. Sun Wei, a partner at Zhong Lun Law Firm in Beijing, expects that the CICC may be able to provide more efficient dispute resolution compared with international commercial arbitration proceedings, which are widely criticized for being lengthy and expensive. “If the outcome of the dispute may be eventually enforced in China, the CICC will be a very smart choice to avoid lengthy PRC proceedings for domestic commercial cases involving foreign elements that consist of first and second instances, [and] to prevent possible local protectionism,” he says.

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In addition, the entrusted mediation system and jurisdiction agreement apply uniquely to the CICC. Article 11 and Article 12 of the regulations state that the CICC supports parties to resolve international commercial disputes through dispute-resolution platforms that organically integrate mediation with arbitration and litigation or through any other approaches that they themselves select as they deem fit, and CICC may entrust the International Commercial Expert Committee or international commercial mediation institutions for mediation within seven days of accepting the dispute if the parties agree.

Article 2(1) of the regulations also states that cases the CICC accepts include “any international commercial case being submitted for trial of first instance that involves a subject matter valued RMB300 million or more, and in connection with which the parties have elected to submit to the jurisdiction of the Supreme People’s Court by agreement pursuant to Article 34 of the Civil Procedure Law”. Importantly, the agreements on jurisdiction must state that the parties submit to the jurisdiction of the Supreme People’s Court, but not the CICC.

The International Commercial Expert Committee, comprising 32 Chinese and foreign experts, is another highlight of the CICC. These experts are entrusted to mediate in international commercial disputes and offer suggestions on dispute-related legal issues, as well as on development of the rules, programmes and judicial interpretations and policies to be elaborated by the SPC. “There are only a small number of judges assigned to the CICC, but the CICC has also established a panel of international expert advisers that includes some of the biggest names in international arbitration, as well as experts on Chinese court practice,” says Herbert Smith Freehills’ Tai.

Although CICC judges are selected from among senior judges proficient in both Chinese and English as working languages, Chinese nationality is required, based on the PRC Law on Judges. “Foreign experts are not allowed to hear cases since they are not hired as judges of the CICC,” says Sun Wei at Zhong Lun Law Firm.

Besides, Article 9 of the regulations states that the evidence can be submitted in English without Chinese translation or authentication, which saves costs. However, it must be noted that there are superior laws to the regulations, including Civil Procedure Law and Law on the Organization of Courts. Tai mentions that what is different from equivalent courts in other countries is that the CICC is still a Chinese court, albeit with international features. “They will not include foreign judges, the language of the court is Chinese rather than English, and the procedural law of the court is Chinese,” she says.

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Arthur Dong, a partner at AnJie Law Firm in Beijing, says the CICC may be more flexible in resolving disputes involving multiple parties or contracts, although its proceedings and rulings may fall short of parties’ expectations on protecting confidentiality, compared with arbitration. “Since powers for arbitration stem from arbitration agreements, arbitral tribunals do not have any power to add any third party unless so agreed by the involved parties and the third party,” he says. “And it is often difficult for the parties to reach such a consensus after a dispute arises.”

Dong also mentions the CICC’s ability to seize property quickly by issuing a property preservation order, which is considered another of its advantages. “Under the existing arbitration proceedings, it is often difficult to obtain preservation orders quickly due to a complicated process involving many steps that require the preservation application to be submitted first to the arbitration institution before being forwarded to the court,” he says. “In comparison, the CICC may issue an order either prior to or during the proceedings and have it enforced by a designated court at a lower level.”

Whether the CICC will be accepted by both Chinese and foreign parties, particularly foreign parties, depends on the enforcement of the judgments, especially against the backdrop that the Hague Convention has not taken effect in China.

“[There is] difficulty in enforcing IC Court judgments in other jurisdictions that have no judicial assistance treaty or mutual reciprocity relationship with China for recognition and enforcement of judgments,” says Winston & Strawn’s Wong. “Non-Chinese parties may be reluctant to resolve disputes in a Chinese court due to unfamiliarity or other reasons.”

However, some experts express that it is still not the time to draw a conclusion. “Decisions on dispute resolution often depend on the parties’ relative bargaining powers,” says Tai. “It is too early to identify trends; we will have to watch and wait.”

More expert advice


There is greater emphasis in arbitration on documentary evidence … so it is vital to retain relevant paperwork even after the deal has been completed. It’s also essential to understand the contracts in full, and to comply with them to the letter. A client may be entitled to terminate a contract, but, if it fails to terminate as the contract requires, its claim for damages may not succeed.

MAY TAI
Managing Partner, Greater China
Herbert Smith Freehills
Hong Kong


万幸-Wan-Xing-达辉律师事务所-合伙人,北京-Partner-DaHui-Lawyers-Beijing
Wan Xing

We are dealing with several cross-border financial disputes in various higher courts. Whether arbitration or litigation is appropriate depends on the agreements in the contract. For example, in the American warrants disputes we are dealing with, the contract agrees to submit to the non-exclusive jurisdiction of the courts in the state of New York. The plaintiff finally chose to sue in Shaanxi Provincial Higher People’s Court, because they could not choose arbitration as it was under the jurisdiction of courts.

WAN XING
Partner
DaHui Lawyers
Beijing


In most disputes, dispute-resolution lawyers don’t have the chance to choose the way to resolve disputes, as the methods have been settled in the early stage of the project when signing the contract, which are chosen mostly by non-litigation lawyers who draft the contract. In most of the circumstances, they prefer to choose well-known arbitration institutions to avoid inappropriate support from courts in less-developed areas to the local entities.

ERIC LIU
Partner
Han Kun Law Offices
Beijing


Why do so many clients allow London or Singapore arbitration, or English or Singapore law? Hong Kong is an obvious choice, but clients say to us, ‘well, the host country doesn’t like Hong Kong, as it is a part of China’. But that is to misunderstand the advantage that Hong Kong arbitration can actually bring to the host country [along the Belt and Road], in terms of the mutual arrangement between Hong Kong and the Mainland for the enforcement of Hong Kong arbitration awards in China.

PAUL STARR
Partner
King & Wood Mallesons
Hong Kong


Yu Feifei
Yu Feifei

In cross-border disputes, the relevant arbitral awards – and court judgments under limited circumstances – are likely to be either made or enforced in foreign jurisdictions, and Chinese parties shall attach weight to the special requirements under relevant foreign laws. In particular, it is worth checking with local counsel in advance on the formality requirements that would affect the validity of certain legal instruments and actions, such as the local requirements on the service of process.

YU FEIFEI
Registered foreign lawyer
Clifford Chance
Hong Kong


It would be prudent to adopt international best practices when doing business in Belt and Road countries. For example, adopt standard terms of contract, such as FIDIC or JCT, for infrastructure projects in order to mitigate the risks and protect legitimate rights.

TERENCE WONG
Partner
Winston & Strawn
Hong Kong and Shanghai