Many Belts, Many Roads: The Legal Precedent of BRI Contracts

China’s Belt and Road Initiative (BRI) is one of the most ambitious infrastructure projects globally. It is the vast collection of development and investment initiatives that would extend from Asia to Europe, significantly expanding China’s economic and political impact. Currently, 71 countries are taking part in the Initiative, together representing more than a third of the world's GDP and two-thirds of the world's population.

China’s Belt and Road Initiative, or BRI, is one of the most ambitious infrastructure projects globally. It is a vast collection of development and investment initiatives that extend across Asia to Europe, significantly expanding China’s economic and political impact. Currently, 71 countries are taking part in the Initiative, together representing more than one-third of the world's GDP and two-thirds of the world's population.

A project of such scale requires greater commercial certainty and predictability for cross-border players by removing legal obstacles generated by the existence of different legal and judicial systems.

While Belt and Road offers a large-scale economic opportunity for the nations involved, it also raises the possibility of multiple international commercial disputes. Murphy Mok, a senior associate at the Hong Kong office of Herbert Smith Freehills who has been advising on Belt and Road projects, told Strelka Mag that an effective dispute resolution mechanism is a key to success for such projects.

Yulia Gromova and Andrey Zhileykin spoke to Murphy Mok about the specifics of the BRI legal landscape.

​

Yulia Gromova: The Belt and Road’s infrastructure project spans a variety of legal and regulatory frameworks and regulations. What problems might this entail for foreign parties, and how can those problems be solved?

Murphy Mok: Belt and Road is a long-term, multi-stage initiative that encompasses a wide range of projects across different sectors and geographical regions. Traditionally, the focus has been on infrastructure projects, such as roads and railways, and energy-related projects like power plants and oil or gas pipelines. However, in recent years, greater focus has been placed on technology and other sectors.

​

The parties of Belt and Road projects often require comprehensive legal advice on their investment to adequately protect their interests. Given the cross-border nature of the projects, proper compliance with laws and regulations in each of the relevant jurisdictions is crucial. Key legal issues include tax, labor, and local regulations and compliances – such as those having to do with land and the environment.

At the start of a project, it is important to structure the investment properly. In our experience, it is not uncommon for the client's parent company to be based in China, the project company in the host country, and a number of holding companies in other countries. This enables the parties to take advantage of efficient tax structures and/or investment protections under bilateral treaties between various countries.

Belt and Road parties also need to have in place a robust set of project agreements to govern their rights and obligations. Each agreement should clearly allocate project risks between parties. It should also contain a well thought out dispute resolution procedure. These steps will help reduce disputes, and deal with them efficiently when they arise.

And lastly, you need to have an exit strategy so when the project is completed (or aborted), the parties have an established plan to expatriate their investment out of the host country.

YG: Which parties are involved with Belt and Road investment deals?

MM: Many strategically significant Belt and Road projects are facilitated by the governments of China and the host state. These projects would usually form part of overarching investment framework agreements or memorandums of understanding between China and the host state. It is in this context that project-specific agreements would usually be negotiated and formalized between contracting parties.

​

To date, many Belt and Road projects are financed by Chinese policy banks, such as the China Development Bank and the Export-Import Bank of China, and Chinese commercial banks. However, multilateral banks and non-Chinese lenders are playing an increasingly important role in bridging the financing gap.

In addition to lenders, a typical contractual structure of a Belt and Road project would include the government and state-owned enterprises of the host state, the project company and its stakeholders, the main contractor (which are usually led by Chinese companies), subcontractors, suppliers, and credit export insurers.

YG: How may Belt and Road contracts affect sovereign immunity of host countries?

MM: Handling disputes with the host government or state-owned enterprises is a key issue that should be considered at the very start of the project, particularly during contract negotiations.

Sovereign immunity of the host government or state-owned enterprises is obviously a risk factor, and is one we would advise clients on in Belt and Road projects. The position regarding state immunity differs by countries, depending on their laws and practices. Getting local law advice on this issue is crucial. We would advise clients to do so early on in the project, and, where possible, to include waiver of immunity provisions in their contracts. But this is just the first step to handling disputes with host governments and SOEs.

It is equally important to put in place an adequate dispute resolution mechanism in project documents. In our experience, international arbitration is preferred by Chinese contractors and investors. It is common for agreements to provide for disputes to be resolved in major arbitration hubs such as Hong Kong, Singapore, or London. The parties would often apply the arbitration rules of established arbitration centers, such as ICC, HKIAC, SIAC, and LCIA. The ICC, in particular, has a broad geographical presence across the Belt and Road route and is well placed to handle Belt and Road disputes.

There are a few reasons why Chinese parties prefer arbitration. One is because it is an impartial and efficient process to resolve disputes. Since the process is confidential, arbitration also protects commercial parties’ sensitive business information and trade secrets.

Another reason is that the arbitral award is widely enforceable. Many countries around the world have signed on to the New York Convention, which means that arbitration awards issued in one member state can be enforced in another member state. Grounds for objection to enforce awards are limited.

When handling disputes with host countries, another consideration is to make sure there is consistency in the way issues are resolved across project contracts. When a dispute arises under one contract, this could affect other contracts within the contractual matrix (e.g. breach of contract by the host state under the investment agreement). To avoid contradictory outcomes, we usually suggest a consistent dispute resolution method across all related agreements, assuming this can be achieved.

Andrey Zhileykin: Could you please explain the implication of two new international commercial courts established by China in 2018?

MM: The two international commercial courts are set up to handle disputes arising out of the Belt and Road projects. One court is situated in Xi’an, and is intended to cover the cross-continental land portion of the Belt and Road Initiative. The other court is in Shenzhen, which aims to deal with disputes along the maritime routes. Beijing serves as the headquarters for both courts.

The international commercial courts in Xi'an and Shenzhen are relatively new. As of May 2020, the two courts have handled about a dozen cases. So far, we have yet to come across BRI agreements providing for disputes to be resolved by these courts. It very much remains to be seen whether these courts will increase in popularity amongst commercial parties as an option to resolve BRI disputes.

YG: What are the implications of the Digital Silk Road?

MM: The Digital Silk Road is one of several sector-specific initiatives within the broader Belt and Road initiative. It is aimed at enhancing digital connectivity and cooperation between China and the Belt and Road countries.

Digital Silk Road projects are reported to be over US$200 billion in value. Of the projects completed, a significant portion relates to fiber-optic cable and telecommunication networks.

Other projects relate to e-commerce, mobile payments, smart cities, data and research centers, and cloud computing. It is a rapidly changing and expanding area, as China places greater focus on its digital technology capabilities.

Chinese tech giants are leading the way on the Digital Silk Road. ZTE is a good example. It has established a presence in over 50 Belt and Road countries. Its wireless network and wired network cover the majority of those countries. Another example is Huawei. It has deployed more than half of the wireless stations and 50,000 kilometers of fiber-optic networks in over 50 African countries.

The current COVID-19 pandemic has made it abundantly clear that digital connectivity is vital and will become more so in the future. Half the world still lacks access to the internet right now, and Chinese firms such as ZTE and Huawei have a track record of building digital infrastructure, particularly in developing countries. They have made great strides in terms of increasing connectivity and investment in digital infrastructure along the Belt and Road.

The Digital Silk Road initiative will likely accelerate in progress in the coming years, starting with the 5G expansion. This is perhaps seen as a less risky and more attractive part of the Belt and Road Initiative for investors because it is cheaper and easier to deliver and capitalize compared to bigger and more long-term transport and energy projects.

More generally, we can expect to see much more investment in digital infrastructure not only along the Belt and Road, but globally. A year ago, the telecommunication sector was expected to have the biggest rebound after the pandemic. This is already happening now.

​

Murphy Mok

Murphy Mok is a senior associate at the Hong Kong office of Herbert Smith Freehills. He advises major Chinese and international clients on infrastructure and construction disputes and projects across Asia, Middle East, Europe, Africa, Australia and South America, with a focus on the power, oil and gas and transport sectors. Murphy has extensive experience in both contentious and non-contentious matters, covering international arbitration under various institutional rules (including SIAC, ICC, HKIAC and VIAC), project life advisory and contract drafting and negotiations.

​

​

​

​