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Managing risk along the Belt and Road of opportunity

By Max Bonnell and solicitors Ruimin Gao and Erin Eckhoff, King & Wood Mallesons

China’s Belt and Road Initiative is a visionary policy that aims to connect over 60 countries in Asia, Europe and Africa along five main routes of the Silk Road Economic Belt and 21st Century Maritime Silk Road. Affecting a total population of some 4.4 billion (approximately 63% of the world’s population) and generating an aggregate GDP of over USD20 trillion (approximately 30% of global GDP), it is an ambitious framework that is projected to see significant numbers of infrastructure and other projects set up under its auspices. However, with such strikingly ambitious vision comes unchartered risks.

Since its announcement by President Xi Jinping in late 2013, over 600 contracts have been signed by Chinese enterprises for projects in countries along the Belt and Road routes. This number of cross-border contracts is set to continue to increase, especially as it has been projected that Asia alone needs about US8 trillion worth of basic infrastructure projects for the 2010 – 2020 period. Other than infrastructure and related projects, logistics and maritime sectors are also likely to see heightened activity in the Belt and Road regions.

The significant opportunities of the Belt and Road also come with significant risks of legal disputes arising. This is particularly the case given that the Belt and Road sees commercial contracts being concluded between parties from countries with very different legal systems and traditions. The uncertainty of financial exposure or other negative implications in the event of a dispute is a confronting spectre that threatens every cross-border transaction.

We discuss three key risks for cross-border commercial disputes and the ways to prevent and minimise exposure in order to fully benefit from the Belt and Road opportunities.

Risk #1: Unfamiliar courts and laws

It is an intimidating prospect for commercial parties to have a dispute litigated in a foreign court as it raises questions of real concern – what is the applicable law? Will the judges be impartial? Will the decision be recognised abroad? These risks are particularly relevant for commercial relationships that span multiple jurisdictions. International arbitration provides a number of benefits for parties wishing to resolve a cross-border dispute but seeking to avoid ending up in an unfamiliar court system, especially if any ensuing decision is of limited enforceability. Parties have the freedom to choose the applicable law to the dispute, the location of any hearing, the Tribunal members and even the language of the dispute. Making these choices at the outset of a commercial venture provides a very tangible degree of certainty to cross-border commercial endeavours.

When choosing where to arbitrate it is important to choose an arbitration-friendly jurisdiction, as it is the courts of the “seat” (i.e. the jurisdiction to which the arbitration procedure is tied) that will play a supervisory role in any dispute. This supportive role can include issuing subpoenas against witnesses or for the production of documents of third parties and granting emergency or injunctive relief. It is also the courts of the seat of the arbitration which will usually decide any appeal or setting aside proceedings. For Belt and Road investors, the region has a number of excellent jurisdictions for arbitration, including Singapore, Hong Kong and Sydney, which offer established arbitral institutions and common law traditions.

Risk #2: Uncertainty of outcome and impact to reputation

Another significant area of uncertainty for commercial parties concerns the outcome of the dispute – when will it be resolved and what will be the final ruling? In this context, international arbitration provides another benefit in that arbitral awards are binding on parties as soon as they are rendered and are final, subject to limited and mostly procedural grounds for the award to be set aside by a court. This relative certainty of an arbitral award is in contrast to a judgement rendered by a domestic court which is typically subject to multiple levels of appeal or judicial review with accompanying time and cost implications.

Another key area of uncertainty concerns the potentially negative implications of a dispute on the parties’ reputations. A reputable brand is of paramount importance to commercial parties that are dealing in transactions and trade. For this reason, parties commonly prefer for disputes and final rulings, particularly adverse findings, to remain confidential in order to avoid negative publicity. Litigation proceedings are generally conducted in open court and judgements are made publicly available. Arbitrations, on the other hand, are confidential and conducted in private, making arbitration often preferable in cases involving trade secrets or confidential commercial transactions, as well as for governments and state-owned enterprises (SOEs).

Risk #3: Enforcement challenges

Even once a commercial party is successful in a dispute, the risks do not end there. Enforcement of a judgement or award is the final but most important aspect of the dispute, as an inability to effectively enforce a judgement can render the entire preceding dispute process redundant.

One of the key benefits of international arbitration as a means of dispute resolution is that arbitral awards are enforceable in more than 150 countries that have signed the New York Convention on the Recognition and Enforcement of Arbitral Awards (New York Convention). This offers a significant advantage over the enforcement of court judgements, which depends on the mutual recognition of judgements between States and typically requires legislation or another legal basis. Further, the process for enforcing foreign court judgements can differ significantly in different countries and can often pose difficulties for parties seeking enforcement.

When preparing commercial contracts, parties should opt for international arbitration if they want the option to enforce an arbitral award in one or more of the over 150 signatory countries to the New York Convention. In drafting the arbitration clause, though, parties must ensure that the seat of arbitration chosen is also a signatory to the New York Convention. This is because only arbitral awards made in a country which is a signatory to that convention can be enforced in another country which is a signatory to that convention.

The relative ease of enforcing arbitral awards globally is another reason why international arbitration is the ideal dispute resolution means for Belt and Road contracts. This has been recognised by the PRC Supreme People’s Court, which promulgated an Opinion in July 2015 stating that foreign arbitral awards relating to the Belt and Road should be promptly recognised in accordance with the law. The Supreme People’s Court also indicated strong support for use of international commercial and maritime arbitration for resolving cross-border disputes arising from the Belt and Road.

Lessons for businesses

Belt and Road is a ground-breaking initiative which will present significant opportunities as Chinese outbound investment in infrastructure reshapes international trade and relations. However, it is important to have the right tools to manage any accompanying risks in order to benefit from these opportunities. To this end, international arbitration provides commercial parties with mechanisms to mitigate risks, resolve disputes effectively and, ultimately, promote trade and commerce.

At its core, international arbitration upholds principles of due process and the rule of law whilst affording certainty and familiarity to parties who can tailor a dispute resolution process according to their own preferences and backgrounds. This is why, even though international arbitration cannot guarantee an ideal outcome for every dispute, it is unquestionably the best form of dispute resolution available when dealing with significantly different legal traditions and cultures, such as those along the Belt and Road routes.

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