China’s multibillion-dollar Belt and Road Initiative includes some of the world’s most complex infrastructure projects; ports, pipelines, and railways stretching from Beijing to Berlin.
As the initiative intensifies, so too have the legal disputes between investors, foreign governments and Chinese players, making the rules about how disputes are decided more important than ever.
Hong Kong and Singapore, two of the world’s most trusted centres for resolving international legal disputes, are competing to be the location of choice for settling belt and road disputes.
Hong Kong’s major international arbitrary institutions, including the Hong Kong International Arbitration Centre and the International Chamber of Commerce (ICC), last year established commissions to handle belt and road cases.
Meanwhile, Singapore and China in late January agreed to set up an international mediation panel to resolve disputes over belt and road projects, “a new way of settling cross-border commercial disputes that better reflects Asian values and is tailored to Asia’s needs”, according to Edwin Tong, Singapore’s senior minister of state for law and health.
“The belt and road projects are large, high-value projects and have the added feature of often occurring in countries that are more susceptible to political risk,” said Justin D’Agostino, the Hong Kong-based chair of Hong Kong ICC’s Belt and Road Commission.
“When the institutions financing belt and road projects assess the bank-ability of a project, they will invariably only finance the project if it is backed up with strong dispute resolution.”
Aside from continent-spanning railways and oil pipelines, the roll-out of the belt and road plan brings China’s way of legal thinking into contact with the laws of other nations. An agreed method that both parties trust to resolve any clashes is an essential part of belt and road contracts. Hong Kong and Singapore have emerged as competing centres to hear these cases, some of which involve tens of millions of dollars in dispute.
The most important factor in choosing where an international legal dispute will be settled is confidence, according to experts. Despite their feud, both parties need to feel confident in the process and trust that their outcomes will be upheld.
To attract belt and road arbitration cases, Hong Kong and Singapore must use their geographical and cultural proximity to China to make it comfortable, while simultaneously assuring foreign parties this proximity will not influence their decisions when it comes to sticking to international law.
Legal experts say the international dust-ups over belt and road projects provide the opportunity for China to export its approach to contracts and the rule of law, influencing international law one case at a time.
Rewriting the Rules
In a nod to Hong Kong’s suitability for these cases, it was announced last month that a much-publicised battle over a port in the African nation of Djibouti, between a world-leading port operator from the United Arab Emirates and a Chinese state-owned company, would play out in the Hong Kong High Court.
“This is evidence that the High Court in Hong Kong is quite rightly considered an appropriate place to handle a dispute between such parties,” said Vincent Connor, a lawyer specialising in infrastructure investment at the Hong Kong office of international law firm Pinsent Masons.
The tussle between UAE-owned DP World and Chinese state-owned China Merchants Group over Djibouti’s Doraleh Port is the latest example of how President Xi Jinping’s infrastructure investment strategy is bringing China into contact with the legal systems of nations that have signed up to the belt and road plan.
That the resulting clashes take place in international legal institutions like those in Hong Kong and Singapore, experts say, signals China’s support for the existing rules of international legal dispute resolution such as the New York Convention on Arbitration, the law that makes decisions reached through arbitration enforceable around the world.
However, the growing number of these cases, resulting from the sheer size and scale of belt and road projects, means China has more chances to influence international law according to its values.
“One of the biggest influences of the Belt and Road Initiative will be the export of the Chinese approach to contracting and the rule of law,” said Meg Utterback, a partner at King & Wood Mallesons, who has represented Chinese companies in international arbitration cases.
One example of this is the trend towards using mediation to resolve disputes, which Hong Kong ICC’s D’Agostino said could be more consistent with China’s outlook on problem-solving. “Parties from China have historically enjoyed negotiation and more conciliatory approaches to resolving problems,” he said, adding that belt and road projects provide an opportunity for China to integrate its approach into the thinking that shapes international dispute resolution.
The need for foreign governments and private investors to have confidence in China’s legal system led to the establishment of its own belt and road tribunal, the China International Commercial Court (CICC), said Mei Gechlik, director of the China Guiding Cases Project at Stanford Law School. “[How can] the Chinese government [encourage] foreign countries to open their doors and treat Chinese investors fairly?” she said.
“You need to increase confidence in Chinese courts and Chinese legal thinking.”
Bumps in The Road
The Belt and Road Initiative announced in 2013, now encompasses 68 nations and nearly 40 percent of global GDP. These nations have signed on to projects in transport and energy infrastructure, such as China’s US$5.9 billion commitment in 2015 for electricity generation in Malaysia.
China’s direct investment in belt and road countries has exceeded US$70 billion, according to Standard Chartered, and trade with these partner countries constituted nearly 40 percent of China’s total trade in the first half of 2018.
There have been some bumps in the road. Already, the potential debt burden associated with belt and road projects has prompted some nations to reconsider or scale back projects with the People’s Republic, such as Malaysian Prime Minister Mahathir Mohamad’s decision to renegotiate the multibillion-dollar East Coast Rail Link project.
In the case of the Djibouti port, DP World claimed China had convinced the government to violate a contract for the UAE port operator to exclusively run the nation’s ports in favour of China Merchants Group, which now operates a major port on the nation’s Red Sea coast.
The Chinese state firm is the same company at the heart of the controversy surrounding Sri Lanka’s Hambantota port. When the Sri Lankan government could not repay the estimated US$3 billion it owed to Beijing, China Merchants Group took an 85 percent stake in the port, receiving a 99-year lease on the facility and a nearby 6,000-hectare plot to partially relieve the debt.
HK, Singapore, or China?
In the past five years, the Singapore International Arbitration Centre (SIAC) handled more than US$30 billion of disputed claims in cases that involved more than 300 Chinese parties as well as most belt and road countries, according to a SIAC representative.
Over the same period, the Hong Kong International Arbitration Centre has handled nearly US$800 million in 500 cases contested by parties from the original 65 belt and road nations.
China has recently indicated its commitment to respect and enforce legal decisions made in Hong Kong and Singapore, though decisions in Hong Kong have a slightly better track record of being enforced.
Then there is the CICC, established by China’s Supreme People’s Court with courts in Shenzhen and Xian to resolve legal disputes over belt and road projects. The CICC is staffed with Chinese judges who have been educated in top legal institutions abroad and at home.
Though the CICC is a new institution, experts expect its influence to grow, because Chinese parties involved in belt and road projects may prefer cases be decided at home.
The decision where dispute resolutions will be located lies largely in the hands of entities providing financial backing for a given project, which is rarely national governments.
More often, a major international financial institution, such as the Asian Infrastructure Investment Bank (AIIB), is involved in this decision, and they have preferences for trusted locations for dispute resolution.
“Not all belt and road projects will be structured the same way,” said James Frye, director of the master of laws programme at the University of Hong Kong.
He said Chinese state-owned enterprises might prefer the CICC, while non-Chinese parties would be more likely to choose Hong Kong or another venue outside China as the forum for dispute resolution.
Singapore has particularly gained an edge with its growing reputation as a centre for mediation.
This August, the Singapore Convention on Mediation will be signed, granting similar weight to decisions arrived at through mediation as the New York Convention does arbitration.
“Mediation exposes the fact that before there was a legal dispute, there was a dispute,” said Peter Quayle, the head of corporate law at the AIIB.
“If you can intercede at the stage where the dispute has not hardened, this lends itself to the possibility of successful, fair dispute resolution.”