Chinese firms working on belt and road projects at risk of international disputes, say lawyers

Ten years ago China National Machinery Industry Corporation (Sinomach), one of the country’s largest international engineering contractors, found itself in hot water in the Philippines when the government suddenly scrapped a US$1 billion railway project just as construction was about to start.

It was not until late last year that the matter was settled out of court after arbitration proceedings in Hong Kong, initiated by Sinomach in 2012 as they sought US$100 million in costs and damages. Work on the 80-kilometre rail link that promises to more than halve the travel time between the capital, Manila, and Clark in Central Luzon, could finally begin, albeit at an estimated cost that had by now spiralled to US$4.9 billion.

The project, which had stalled because of legal questions over the contracts and allegations of corruption, is now one of the priority projects under the Duterte administration’s US$180 billion “Build, Build, Build” infrastructure spending spree to bolster economic growth, in which China is expected to be a key financier.

It serves as a stark reminder of the way the rug can be pulled from under a project without warning, leaving a company exposed to huge financial losses and legal risks in a foreign jurisdiction. It also shows how arbitration can eventually resolve such international disputes.

As President Xi Jinping’s “Belt and Road Initiative” – an economic strategy so far dominated by state-funded infrastructure and energy projects in emerging markets – enters its fifth year of implementation, those risks are increasingly unavoidable for investors and financiers.

But rather than waiting for things to go wrong, anticipating and mitigating the legal risks are key in these typically capital-intensive and long-term projects that often involve “national champion” partners in host nations, according to lawyers.