How to safeguard your business whilst expanding along the Belt and Road?

Five key questions to ask when signing Belt and Road contracts

The 2018 Asian Financial Forum, held in Hong Kong at the beginning of the year, played host to a number of in-depth discussions around China’s Belt and Road initiative. These projects are set to enhance investment along new economic corridors from Asia to Europe – and as the fourth most preferred seat of arbitration worldwide, Hong Kong has a key role to play.

As Norman Chan, Chief Executive of the Hong Kong Monetary Authority explained, Hong Kong has an important advantage in acting as a “super-connector” for driving regional trade and infrastructure projects. The territory will continue to be a primary springboard for investment in China and a key port and air cargo hub.

Hong Kong’s Financial Secretary Paul Chan Mo-po also commenced 2018 with a public discussion around the role Hong Kong will play in the Belt and Road initiative. He predicts that Hong Kong will be an important player and will likely see new infrastructure financing and other financial incentives to drive cross-sector growth. With China promising a reinvigorated push for Belt and Road initiatives in 2018 and Hong Kong well-positioned to play its part, businesses along the new Silk Road are now examining new ways to tap into Asia’s most ambitious trade and development strategy.

When capitalising on these new opportunities, businesses must however be mindful of potential risks as they prepare contracts. Concluding agreements between parties from countries with very different legal systems, political regimes and cultures, and at different stages of economic development, will inevitably present challenges – and a significant risk of legal disputes. Already we’ve seen examples of conflicting interests; from construction delays in first phase of a Sino-Thai high-speed railway project in 2017, to Malaysia renegotiating the terms of a major Belt and Road project with China earlier this year. Indeed, at Hong Kong’s Belt and Road Summit on 28 June, 2018, various sessions addressed some of the risks that accompany Belt and Road projects, including a panel on risk mitigation in infrastructure financing and one on how Hong Kong service professionals can help enterprises react to unexpected bumps in the road.

To avoid insoluble disputes, Businesses must ensure that Belt and Road contracts include an effective dispute resolution clause, agreed upon by all parties. To do this, companies should consider five key questions.

The first question to ask is, should an arbitration clause be included in the contract? Arbitration refers to a method of dispute resolution that results in a binding decision, or “award”, which is readily enforceable internationally. The process is conducted an internationally neutral setting. Arbitration is the most effective and commonly used means of resolving cross-border transactions. It allows parties to avoid the local courts of their counterparty and increase their chances of recovering any loss internationally. The right arbitration clause can help ensure the fair and efficient resolution of international disputes arising out of complex Belt and Road transactions. With an arbitration clause in the initial contract, organisations engaging in Belt and Road projects will have an important tool available to protect their business should a dispute arise.

Next, it’s essential to consider what kind of arbitration is right for the contract. An arbitration can be administered or ad hoc. Administered (or “institutional” arbitration) provides for a specialised, professional institution to help conduct and monitor the process. Institutions have tried and tested procedural rules available for parties according to which their case can be conducted. Administered arbitration is favoured for complex transactions and, in particular, where parties from Mainland China are involved as ad-hoc arbitration is not widely accepted in Mainland China. Ad hoc arbitration, on the other hand, is conducted without the involvement of a professional institution, so parties and arbitrators manage the process themselves.

The third key question for businesses to keep in mind is around which institution should administer the arbitration. Parties should choose an independent institution with a history of success in managing international cases, which offers mechanisms to increase efficiency and reduce costs. Arbitration institutions with strong China expertise can better bridge the different legal and cultural practices between Chinese and foreign parties, and increase prospects for the enforcement of awards in Belt and Road-related international disputes.

Then, organisations should also think about the best location for a seat of arbitration. The seat of arbitration determines which laws apply to the procedure of the arbitration and, crucially, the “nationality” of the arbitral award. Companies will want to choose a seat with an independent legal system and a strong enforcement track record for arbitral awards internationally. Hong Kong is ranked as the fourth most preferred seat of arbitration worldwide. This is due to its world-leading arbitration legislation, neutrality, large pool of multilingual professionals, independent and sophisticated judiciary and the pro-arbitration stance that its courts consistently adopt. The fact that Hong Kong is simultaneously part of China and an autonomous special administrative region with a mature and reliable legal system based on the English system, makes it a particularly strong choice for Belt and Road contracts.

The final question for businesses to ask concerns how the final arbitration decision will be enforced. By virtue of an international convention known as the New York Convention 1958 to which over 150 countries are a party, arbitral awards are enforceable almost all over the world and certainly in all major economies. As a result, arbitration is a much better option than litigation in national courts for enforcement purposes (because domestic judgments cannot be easily enforced overseas). Awards made in Hong Kong are directly enforceable in more than 150 jurisdictions including Mainland China, and Hong Kong has an excellent track record of enforcement globally and one of the highest records of enforcement in Mainland China.

Whilst the ultimate goal is to capitalise on Belt and Road business opportunities, businesses must also be ready to act in their best interests if disputes arise. With a well-drafted arbitration clause in the contract, companies will be better prepared and well positioned to reap maximum value from Belt and Road projects whilst protecting their business.