Belt and Road Initiative

Since its launch in late 2013, the Belt and Road Initiative (the “Initiative") has been one of the most widely discussed topics of our time. The Initiative aims to connect Asia, Europe, and Africa along five routes, focusing on: (1) linking China to Europe through Central Asia and Russia; (2) connecting China with the Middle East through Central Asia; and (3) bringing together China and Southeast Asia, South Asia and the Indian Ocean.  The 21st Century Maritime Silk Road, meanwhile, focuses on using Chinese coastal ports to: (4) link China with Europe through the South China Sea and the Indian Ocean; and (5) connect China with the South Pacific Ocean through the South China Sea.[1]

According to the information from the National Development and Reform Commission (NDRC) in March 2017，China invested more than 50 billion USD on infrastructures in nearly 70 countries that have signed up to the Initiative; this is perhaps China’s most ambitious foreign policy to revive the ancient Silk Road from 2 millennia ago.  With such massive scale in overseas direct investment by the government and private investors, the Initiative brings enormous commercial opportunities, as well as potential disputes.  The majority of the deals in the Initiative are infrastructure projects, which, by its nature, would involve a large volume of contracts and agreements amongst various parties in multiple countries within and outside of the Belt and Road.  The projects will also unveil the differences between distinct local regulatory regimes, judicial systems, and the culture and political environment of each nation involved.

Hong Kong, being one of the major financial centers possessing extensive professional and commercial connections around the globe, and being renowned for having a well-established and independent legal system, also benefits from the Initiative by being an arbitration hub in resolving these foreign investment disputes.    

Risks for cross-border investment disputes

Despite the significant benefits brought by the Initiative, risks of disputes always come along with business opportunities, especially between countries with different legal traditions and cultures along the Belt and Road.  It is advisable that investors be aware of the risks and be mindful of what way they may opt to resolve any disputes.

1. Unfamiliarity with the legal system of the host country, in some cases, may expose the Chinese SOEs to excessive degree of political risks and legal uncertainties.  Considering the different traditions and legal regime of the nations along the Initiative, whenever dispute arises, the parties may have real concerns about the unfamiliar court rules and laws, the impartiality of the local judges and undue influence from the local governments to the courts, etc.

Even once the judgment is rendered, the difficulties in enforcement could make the whole proceedings futile. This could arise from issues such as inconsistent recognition of judgments and enforcement rules in different jurisdictions.

2. Litigation proceedings are generally conducted in open courts, where the media and public may have access to both the proceedings and the judgment. The potential reputational damage associated with the disputes and the disclosure of sensitive information during the process can therefore be one of the greatest concerns to the parties of the Initiative, especially for the SOEs and the government.

Thus, it is important for investors to think in advance the available dispute resolution mechanisms before disputes actually arise in order to better manage the risks of participating in the Initiative.  

Why Arbitration?

Though it is relatively expensive, as compared to court fees for initiating a litigation, international arbitration remains to be an attractive dispute resolution alternative. Parties opting for arbitration to resolve cross-border disputes would enjoy the following benefits:

1. Compared to litigation, confidentiality can be maintained in arbitration: sensitive details such as names of the parties, reasons of dispute, and the outcome will remain confidential. Furthermore, the confidentiality obtained in an arbitration proceeding in Hong Kong would be further preserved by the Hong Kong courts under certain circumstances. If either party subsequently requests to take the matter to court, the subsequent court proceedings will not be openly held and the court will also not be permitted to publish information relevant to the case without the consent of the parties.
2. Parties are given the autonomy to choose arbitrators. Thus, it is possible for parties to ensure the arbitrator is someone who knows the trade and practice, rather than someone who lives in the ivory tower and may not know the business;

Parties can also decide on the other details of the arbitration process (i.e. seat of jurisdiction, number of arbitrators, and procedural rules of the arbitration);

3. The process involves little involvement from local courts; hence arbitration awards will be neutral from any political influence. Parties from different countries can choose to appoint a panel of neutral arbitrators, who may be experts in the relevant area, and to hold the arbitration at a neutral venue; and
4. The process is time efficient. The award will be final and enforceable in all signatory countries of the New York Convention.

Why Hong Kong?

The unique geographic position of Hong Kong, being simultaneously part of China and also a special administrative region under “One Country, Two Systems" doctrine allows it to be the ideal seat of arbitration arising from the Initiative.

Hong Kong has been one of the major financial centers in Asia with a stable and independent legal system. The Hong Kong Arbitration Ordinance is governed by the UNCITRAL Model Law on International Commercial Arbitration, which is applicable globally. Arbitral awards made in Hong Kong are enforceable in 157[2] countries under the New York Convention, including most countries along the five routes of the Initiative.

In addition, Hong Kong comprises multilingual, legal and commercial professionals who are familiar with foreign investments and working with Chinese companies.  In 2016, there are 8,836 practicing solicitors and 1,375 barristers in Hong Kong[3]; hence when it comes to resolving foreign investment disputes arising from the projects and contracts related to the Initiative, professionals in Hong Kong are capable of supporting both Chinese and foreign parties with their expertise and understanding of different legal and cultural background. 

Therefore, Hong Kong is an attractive seat of arbitration both for Chinese parties looking to resolve the disputes close to home and for non-Chinese parties with concern about neutrality and independence.

The Recognition and Enforcement of Hong Kong Arbitral Awards in PRC

One of the greatest benefits of Arbitration is the enforceability of the awards. Therefore, the enforceability of the awards will be a key issue for the companies and their Belt and Road counterparties.

Hong Kong is one of the members of the New York Convention, meaning that the arbitration awards obtained in Hong Kong can be enforceable in 157 signatory nations of the Convention. Also, Hong Kong and Mainland China signed an Agreement on the Mutual Recognition and Enforcement of the Arbitration Award on 21 June 1999 (the "Agreement"). This allows the awards made in Hong Kong to be enforceable in the Mainland China. 

Moreover, with the launch of the Initiative, the PRC government also showed a positive attitude regarding the recognition and enforcement of the arbitration awards. In the Opinion released by the PRC Supreme Court in 2015, it was stated that the role of the international arbitration shall be promoted in the Initiative and the foreign arbitral awards shall be promptly and correctly recognized and enforced[4]. Amongst the recent ten cases released by the Supreme People’s Court regarding the Initiative on May 15, 2017, one case between Iemens International (Shanghai) Trading Limited and Shanghai Golden Landmark Co., Ltd showed how a PRC court recognized and enforced a foreign award made in an arbitration between PRC domestic entities. It can be seen that there is a positive tendency of the PRC court to enforce foreign arbitration held in accordance with the New York Convention.

Case Study

The following case study outlines a hypothetical and typical Initiative project, any resemblance to business, places, events or incidents is purely coincidental.

Fact

A Chinese SOE acting in partnership with a Belt and Road Fund (the “BRF"), entered into a joint venture agreement with a West Asia Oil & Gas Company (the “West Asia Co") for the construction of a refinery. The Chinese SOE also signed a sale and purchase agreement for the purchase of petroleum with advance payment. Both of the agreements contain a dispute resolution clause which provides that dispute that cannot be settled amicably shall be referred to and finally resolved by arbitration administrated by Hong Kong International Arbitration Centre (HKIAC) in accordance with HKIAC 2013 Administrated Arbitration Rules (the “Rules").

Later, the West Asia Co. was unable to fulfill its obligation under the sale and purchase agreement because of a civil war in its country. To make things worse, the Chinese SOE was barred by the government of the West Asian nation from accessing the refinery and its equipment is confiscated. The Chinese SOE wanted to bring claims against the West Asia Co for breach of the sale and purchase agreement and to seek compensation for expropriation by the government of its assets. Prior to the formation of the arbitral tribunal and shortly after submitting its notice of arbitration, the Chinese SOE discovered that the West Asian Co. would be transferring its assets.

Choice of HKIAC

The choice of arbitration gave the Chinese SOE possibility of appointing an emergency arbitrator under the 2013 Rules. The emergency arbitrator will be appointed in less than 24 hours and will issue an emergency decision within 15 days to prevent such transfer. The emergency relief in the arbitration proceedings avoided the possible delays where the party sought court-ordered injunctive relief in local court system.

Had the parties not agreed to arbitration agreements, the Chinese SOE would have to locate appropriate local counsel in the West Asian nation. At the time, there were limited local counsel experienced in handling large-scale international disputes, especially in less developed countries along the Belt and Road. Having a dispute litigated in a foreign court may also raise concerns about the governing law, the recognition of the judgment, the impartiality of the local judge, etc.

In this case, confidentiality of the case was important for both the Chinese SOE and the government fund. Litigation proceedings are usually conducted in open court and the judgments are publicly available. The fact of the project, the compensation amount of the judgment etc. are usually very sensitive to the parties regarding the case of Initiative. Therefore, privacy and confidentiality of the arbitration are more attractive in cases where the government or SOE are involved.

Whereas domestic litigation proceedings are often inflexible, parties are given more autonomy in the arbitration, including the seat of the arbitration and the rules that they will apply. Parties in this case choose Hong Kong and HKIAC may enjoy the below benefits:

Hong Kong is geographically proximate to mainland China, with good transport connections by air and sea to the rest of other nations along the Initiative as mentioned above.

HKIAC, ranked first for location, value for money, helpfulness of staff and IT services by GAR's Hearing Centers Surveys 2016 and 2017. HKIAC's facilities are convenient, modern and comfortable. They are located in the heart of Hong Kong’s central business district and are priced very competitively.

The 2013 Rules are also designed to deal with multi-party and multi-contract scenarios, which will be the normal situation arising in Belt and Road disputes[5].

HKIAC also launched a “free hearing space" initiative where at least one party is a State listed on the OECD list of development assistance (which 70% of the Initiative jurisdiction is covered).

Regarding the enforcement of the Awards as mentioned above, the Chinese SOE in this case shall make sure that the West Asian Nation is signatory party of the New York Convention, in order to make the award enforceable and final.

Bilateral investment treaty rights

Separately, the Chinese SOE can also commence an investment treaty arbitration if there is an existing Bilateral investment treaty (BIT) between China and the west Asian nation to get the compensation regarding the unfair expropriation. [6]

Conclusion

The Belt and Road Initiative promotes investment opportunities, economic cooperation and cultural exchanges between countries with a fruitful potential to shift the existing global economic environment.  Nevertheless, the Initiative will require time and effort to smooth out any regulatory and contractual obstacles between nations, state-owned companies, and other investing parties.  Where dispute arises, arbitration would remain to be an attractive resolution approach. Selecting a reputable seat of jurisdiction, arbitration institution and engaging experienced and knowledgeable arbitrators will help in achieving desirable results in the long run. Therefore, dispute resolution by way of arbitration and the location of Hong Kong are both highly attractive options, and are expected to become the top choice for many enterprises and organizations when considering their dispute resolution method.