Arbitration essential in the new ‘Wild West’
With the Belt and Road seen as a risky business, companies are looking to alleviate many of the challenges involved
Chinese companies are looking West and with businesses jumping on China’s cross-continental trade bandwagon, the risks are becoming apparent.
Indeed, China’s drive to export goods and services across Asia, the Middle East, Africa and Europe via a “Silk Road Economic Belt” and a maritime “21st Century Maritime Silk Road” is beset with challenges. The trade corridors covered include more than 70 countries, with projects encompassing large-scale construction and infrastructure in transport, logistics, maritime, financing, telecommunications and information technology – and pitfalls along the road.
“A construction and infrastructure initiative on this scale will inevitably generate disputes”, wrote Mingchao Fan, Briana Young, and Anita Phillips in a Herbert Smith Freehills briefing in April 2018. With an estimated US$900 billion in projects planned or already underway, the project gives rise to a multitude of actual and potential commercial disputes to consider.
With so many parties involved, the risks are greater, particularly for entrepreneurs or SMEs. Such projects generally present a complex web of public and private investors and parties that are carried out over a long-term time period. For these reasons, many projects are risky because in case of disputes, it is often unclear how to address problems including non-payment or lawsuits, as the scheme covers legal, political and economic systems that are culturally diverse and at varying stages of development.
“Chinese companies, in particular, state-owned enterprises investing abroad, consider the potential rewards to be worth the risks – risks that include political unrest, project delays, cost overruns and project abandonment. The ‘Belt and Road Initiative’ encompasses countries and territories with significant political and economic risks, and the types of projects [in particular, their large scale and the deep involvement of government or state-owned enterprises of the host state] further enhance the risks,” said Clifford Chance in a June 2018 report.
“Arbitration is the go-to dispute resolution mechanism across borders, and for the Belt and Road [Initiative], it will have to be arbitration, because at the end of the process when you have your binding decision, if the other side doesn’t want to pay up, you can take the decision to the relevant local courts by virtue of an international treaty,” said Sarah Grimmer, secretary general at the Hong Kong International Arbitration Centre.
A key driver of arbitration’s effectiveness in dispute resolution is enforceability in more than 150 countries across the world through the New York Convention, ratified by 92 per cent of jurisdictions along the belt and road plan’s trade routes. With judges experienced in arbitration, a deep pool of experts including solicitors, barristers, engineers, architects, mediators, financiers, tax specialists and a supportive court system, Hong Kong is well placed to be an arbitration hub for the Belt and Road [Initiative].
“Arbitration has been an established practice in Hong Kong for decades, and has been used for construction, maritime and corporate shareholding disputes which are critical for the Belt and Road [Initiative]. With the large number of joint ventures with international parties involved, arbitration is even more critical,” said Grimmer. Hong Kong possesses a strong knowledge of Chinese culture, language and yet has its own common law system and international influences, and is well-placed to continue its traditional connections with Chinese parties and foreign parties.
“Chinese parties sign on to Hong Kong because there is a cultural affinity and it’s a part of China with the understanding that the legal systems are totally different, there is a bilingualism that you find in the city more than elsewhere,” Grimmer said.