Aisha Nadar, Advokatfirman Runeland AB
This is an extract from the third edition of GAR’s The Guide to Construction Arbitration. The whole publication is available here.
The BRI in the context of world trade
Throughout history, world events and technological advances have impacted on the patterns of trade and have given rise to structural adjustments to foster and facilitate trade.
In the 20th century, in which the rate of growth in world trade experienced during the last part of the century was unprecedented, technological advances in transportation, communication and logistics had an effect on the volume and pattern of trade by expanding the breadth of trading possibilities – making trade possible not only in raw materials and finished goods, but also in intermediate goods in the form of vertical intra-industry trade. This resulted in an increasingly integrated global economy, in which trade was being accomplished by companies and caused some, such as the noted Harvard professor Michael Porter, to suggest that nations had to adopt policies that facilitate the creation of competitive companies.
The efficient functioning of a company in the global economy can be hindered by a world order that is built on the concepts of ‘nation state’ and ‘national sovereignty’ as the optimisation of corporate returns is linked to the efficient allocation of resources, and economies of scale. This renders the control of national borders and the governance of markets not only matters of local concern, but matters of global concern. As such, systems of rules were put in place to support the efficient allocation of resources in a global business environment by eradicating impediments to cross-border trade. These systems were supported by a system of global (private) dispute resolution in the form of international arbitration. The General Agreement on Tariffs and Trade (GATT) of 1947 and its successor, the World Trade Organization (WTO), which came into force on 1 January 1995, were the post-World War II agreements focused on the facilitation of international trade through the reduction of tariffs and other barriers to trade.
Notwithstanding the unprecedented depth and breadth of the integration of the world economies and the economic growth realised through integration of the world economy, the failure to translate this economic growth into raised living standards and full employment for the entire population has caused many to look inward to address their nation’s individual situation.
While many in the world may be looking inward, China, now more than ever, is looking outward to enhance its connectivity with the world by taking lessons from history:
Over 2,000 years ago, our ancestors, trekking across vast steppes and deserts, opened the transcontinental passage connecting Asia, Europe and Africa, known today as the Silk Road. Our ancestors, navigating rough seas, created sea routes linking the East with the West, namely, the maritime Silk Road. These ancient silk routes opened windows of friendly engagement among nations, adding a splendid chapter to the history of human progress.
Spanning thousands of miles and years, the ancient silk routes embody the spirit of peace and cooperation, openness and inclusiveness, mutual learning and mutual benefit. The Silk Road spirit has become a great heritage of human civilization . . . Generation after generation, the silk routes travellers have built a bridge for peace and East-West cooperation.
History is our best teacher. The glory of the ancient silk routes shows that geographical distance is not insurmountable. If we take the first courageous step towards each other, we can embark on a path leading to friendship, shared development, peace, harmony and a better future.
Before identifying potential implications for the system of dispute resolution that will be required to support the BRI, this chapter first explores the BRI and the strides China has made since its 2013 launch.
As mentioned, the BRI was launched in 2013 by President Xi of China, during a speech in Kazakhstan, proposing to jointly build a Silk Road Economic Belt with Central Asian Countries and further proposing, during a speech to the Indonesian Parliament, to build a 21st Century Maritime Silk Road. President Xi underlined that the realisation of this objective required the construction of a transportation network to connect Asia with Europe and the Middle East by rail, sea and air.
In March 2015, China’s National Development and Reform Commission, together with its Ministries of Foreign Affairs and Commerce, published the first official document setting out the vision, guiding principles and defining routes with an action plan for the BRI (the Action Plan):
The Silk Road Economic Belt focuses on bringing together China, Central Asia, Russia and Europe (the Baltic); linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and West Asia; and connecting China with Southeast Asia, South Asia and the Indian Ocean.
The 21st-Century Maritime Silk Road is designed to go from China’s coast to Europe through the South China Sea and the Indian Ocean in one route, and from China’s coast through the South China Sea to the South Pacific in the other.
On land, the Initiative will focus on jointly building a new Eurasian Land Bridge and developing China–Mongolia–Russia, China–Central Asia–West Asia and China–Indochina Peninsula economic corridors by taking advantage of international transport routes, relying on core cities along the Belt and Road and using key economic industrial parks as cooperation platforms.
At sea, the Initiative will focus on jointly building smooth, secure and efficient transport routes connecting major sea ports along the Belt and Road. The China–Pakistan Economic Corridor and the Bangladesh–China–India-Myanmar Economic Corridor are closely related to the Belt and Road Initiative…
As noted above, both the Maritime Silk Road and the Land Economic Belt encompass a number of economic corridors:
- the China–Mongolia–Russia economic corridor;
- the New Eurasian Land Bridge;
- the China–Central Asia–Western Asia Corridor;
- the China–Pakistan Economic Corridor;
- the Indochina Peninsula Economic Corridor; and
- the Bangladesh–China–India–Myanmar Economic Corridor.
The Action Plan also highlights the building of the physical infrastructure network to re-connect Asia, Europe and Africa over land and link East and West via a network of sea routes, as a key objective of the first phase of the implementation of the BRI. That network is intended to comprise railways, highways, sea routes and air routes, electric power transmission and telecommunication grids, and oil and gas pipelines:
Facilities connectivity is a priority area for implementing the Initiative. On the basis of respecting each other’s sovereignty and security concerns, countries along the Belt and Road should improve the connectivity of their infrastructure construction plans and technical standard systems, jointly push forward the construction of international trunk passageways, and form an infrastructure network connecting all subregions in Asia, and between Asia, Europe and Africa step by step. At the same time, efforts should be made to promote green and low-carbon infrastructure construction and operation management, taking into full account the impact of climate change on the construction.
With regard to transport infrastructure construction, we should focus on the key passageways, junctions and projects, and give priority to linking up unconnected road sections, removing transport bottlenecks, advancing road safety facilities and traffic management facilities and equipment, and improving road network connectivity. We should build a unified coordination mechanism for whole-course transportation, increase connectivity of customs clearance, reloading and multimodal transport between countries, and gradually formulate compatible and standard transport rules, so as to realise international transport facilitation. We should push forward port infrastructure construction, build smooth land-water transportation channels, and advance port cooperation; increase sea routes and the number of voyages, and enhance information technology cooperation in maritime logistics. We should expand and build platforms and mechanisms for comprehensive civil aviation cooperation, and quicken our pace in improving aviation infrastructure.
We should promote cooperation in the connectivity of energy infrastructure, work in concert to ensure the security of oil and gas pipelines and other transport routes, build cross-border power supply networks and power-transmission routes, and cooperate in regional power grid upgrading and transformation.
We should jointly advance the construction of cross-border optical cables and other communications trunk line networks, improve international communications connectivity, and create an Information Silk Road. We should build bilateral crossborder optical cable networks at a quicker pace, plan transcontinental submarine optical cable projects, and improve spatial (satellite) information passageways to expand information exchanges and cooperation.
The BRI is a brand, rather than a master plan with specific criteria for project inclusion. It has generated Chinese investment in large-scale rail, road, port, airport, energy and telecommunications projects in BRI-participating countries, but has also resulted in some projects that were started before 2013 also being classified as BRI projects. Example of the projects, old and new, that are being classified as BRI projects include:
- the China–Myanmar crude oil and liquified natural gas (LNG) pipeline;
- the Padma Bridge (Bangladesh) Tunnel construction under Karnaphuli River (Bangladesh);
- the China–Kazakhstan passenger train;
- the Manas airport modernisation (Kyrgyzstan);
- the Turkey east–west high-speed rail;
- the China–Laos Railway;
- the Upgrade of Lancang–Mekong ship route;
- the Altai LNG pipeline (linking Xinjiang and Siberia);
- the Altanbulag–Ulaanbaatar-Zamiin-Uud highway;
- the Gwadar free zone development;
- the Karakoram Highway, Phase II (Thakot–Havelian);
- the Peshawar–Karachi Motorway;
- the China–Europe freight trains (39 routes linking China with nine European countries);
- the Hungary–Serbia railway;
- the China–Belarus Industrial Park;
- the China–Kazakhstan Khorgos; and
- the Port of Pireaus (Greece).
Beijing puts the investment required to build infrastructure supporting its BRI strategy at US$890 billion, while the Asian Development Bank estimates that the required investment in the infrastructure needs for Asia alone for the period between 2016 and 2030 would amount to US$26 trillion. So China will not be the only financier across the super-Eurasian continent.
To implement infrastructure projects related to the BRI, the Action Plan proposes ‘joint efforts to establish the Asian Infrastructure Investment Bank and BRICS New Development Bank, conduct negotiation among related parties on establishing Shanghai Cooperation Organization (SCO) financing institution, and set up and put into operation the Silk Road Fund.’ In line with this proposal, China established the Silk Road Fund, with an initial contribution of US$40 billion, in December 2014, and the Asia Infrastructure Investment Bank (AIIB) in 2016, with an initial contribution from China of US$50 billion, in January 2016. It is reported that between 2013 and 2017 China invested more than US$50 billion in economies along the Belt and Road route, and that number was reported to be up to US$90 billion by July 2018. AIIB has approved investment for BRI associated projects worth over US$5.3 billion since starting its operations, and the Export-Import Bank of China, which promotes foreign trade and investment, lent more than US$80 billion in 2015. In addition to Chinese investment in BRI-related infrastructure projects, six multilateral development banks (MDBs), including AIIB and the World Bank, entered into an agreement to enhance cooperation under the BRI; General Electric Financial Services is partnering with the Silk Road Fund to establish an energy infrastructure investment platform; and the Japanese government has promised to provide financial support to private Japanese banks for the financing of BRI projects.
Much of the Chinese investment is reported to be provided through financing, often on commercial terms, but not all of it is driven by commercial logic, but rather by geo-political interests. Projects that illustrate this are the port in Sri Lanka, for which China was willing to provide a US$1.3 billion loan, after the MDBs declined, and then agreed to take equity in the port when Sri Lanka could not pay the interest on the debt; and the US$46 billion plan to finance an ‘economic corridor’ through Pakistan, linking the port of Gwadar on the Arabian Sea to north-west China. China’s loans to Sri Lanka now exceed US$8 billion.
Those participating in project delivery are also multinational, albeit to varying degrees, when funding is not purely Chinese. The Centre for Strategic and International Studies (CSIS) recently calculated that, out of the contractors participating in BRI projects, 40.8 per cent were local to the host BRI nation, 30.2 per cent are non-Chinese companies from a country other than the one where the project was taking place and 29 per cent were Chinese. But of the projects that received Chinese financing, 89 per cent of those in the CSIS database were contracted out to Chinese companies. Chinese state-owned enterprises (SOEs) are also playing a leading role, with findings indicating that some 50 Chinese SOEs have invested or participated in nearly 1,700 projects in countries along the BRI over the period between 2014 and 2017. This finding is in line with the fact that, in 2017 Fortune’s list of world’s largest companies by revenue, 107 are Chinese firms, 75 of which were SOEs and seven of the 10 largest construction companies in the world by revenue are Chinese.
The above serves to illustrate that BRI has encouraged and facilitated significant investment in large-scale energy, rail, road and telecommunications infrastructure projects, including Chinese outbound investment. Although these projects are varied, they all have one thing in common – the potential for disputes and the requirement to resolve these disputes. The subject of the BRI and its implications for dispute resolution is addressed below.
The BRI and dispute resolution
As with most construction projects today, BRI projects are exposed to an extremely large spectrum of risks during the project life-cycle, linking the success of a project to the management of such risks. Owners of BRI projects will have to enter into the usual mosaic of contracts to allocate such risks, which may include separate contracts with the financiers, designers, suppliers, insurance providers, contractors and operators. These agreements may be state-to-state, investor-state or commercial in nature, calling for suitable methods of dispute resolution. The available dispute resolution tools range from unassisted party negotiation to litigation and arbitration. Cost and risk for each party can increase exponentially when a dispute crosses the line from a situation where the parties resolve the dispute themselves, or a third-party neutral facilitates, to determination by a judge or arbitrator. While many construction contracts provide for multi-tiered settlement of disputes, employing a sequence of dispute resolution tools, intending to promote early identification and resolution of issues and providing the parties a means of recourse, if disputes cannot be resolved, or avoided, at the first instance, generally the final dispute resolution mechanism is arbitration.
Over the past 60 years, since the signing of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, international commercial arbitration has proved capable of delivering enforceable justice under disputed international construction contracts. The fundamental characteristics of international arbitration comprise:
- cultural openness and neutrality in the approach to the settlement of the dispute or in the making of any determinations related to it;
- the premise of free will of the parties and a design that aims to satisfy the dispute resolution needs of business circles in connection with their international deals; and
- flexibility in the choice of the applicable procedural and the substantive laws.
Arbitration is also viewed as the mechanism of choice for the resolution of investor–state disputes under the 1965 Washington Convention.
Without yet reaching a conclusion, China and other international actors are engaging on multiple fronts to address the question if the currently available international dispute resolution machinery is sufficient and suitable to address the needs of the participants in the BRI, or may need to be modified or replaced.
In support of strengthening the currently available systems and the use of alternative dispute resolution tools and arbitration, the International Academy of the Belt and Road (IABR) has published the Blue Book Dispute Resolution Mechanism for the Belt and Road, in which it proposes a universal tiered dispute resolution clause in which conciliation is to be followed by arbitration. The IABR proposal includes an appeal procedure in the case of state-to-state and investor-state arbitration, which would not apply in the case of commercial arbitration. Further, the China International Economic and Trade Arbitration Commission (CIETAC) released its International Investment Arbitration Rules in September 2017 and held a Forum on the Prevention of OBOR Investment and Trade Risks in June 2018. The China Council for the Promotion of International Trade (CCPIT) intends to establish a Belt and Road International Dispute Management Centre.
Also in September 2017, signalling their willingness to support the use of arbitration and mediation in the resolution of BRI-related disputes, Hong Kong’s Minister of Justice, herself a renowned arbitrator, presented e-BRAM.hk (Belt and Road Arbitration and Mediation Center), and the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) elected nine Chinese experts as mediators and arbitrators. Further, early in 2018, two of the leading global arbitral institutions have launched BRI-related initiatives. In March 2018, the International Chamber of Commerce (ICC) announced that it had established a commission to review dispute resolution in relation to the BRI. In April 2018, the Hong Kong International Arbitration Center (HKIAC) announced the formation of an industry-focused Belt and Road Advisory Committee and the launch of an online resource platform dedicated to the BRI.
Signalling that more significant change may be required, in January 2018, the Leading Group for Deepening Overall Reform of the 19th Central Committee of the Communist Party of China approved a plan to establish a mechanism to legally resolve trade and investment disputes arising from issues related to the BRI, stating:
The goal is to lawfully settle commercial, trade and investment disputes regarding the Belt and Road Initiative, protect the lawful rights and interests of Chinese and foreign individuals on equal footing and create a stable, fair and transparent business environment with the rule of law, those at the meeting decided.
Efforts to set up the procedure and the organisation to handle disputes should follow the principles of extensive consultation, joint contribution and shared benefits and should be based on China’s existing judicial, arbitration and mediation institutions, the leaders agreed.
In line with this goal, the Supreme People’s Court will set up international commercial courts, with the first international commercial court being in Shenzhen for disputes related to the Maritime Silk Road, the second in Xi’an to settle cross-border commercial disputes related to the Silk Road Economic Belt, and the headquarters located in Beijing. September 2017 also saw China signing the Hague Convention on the Choice of Courts, which allows parties to choose the exclusive court in which any disputes arising under a commercial agreement will be resolved. It is viewed that, initially, the courts would mostly handle the cases involving Chinese investors in BRI projects. One reason for this is that China may be looking for better protection for its international BRI investments because, as noted in a recently published paper ‘For all of the thirty-five BITs China has already signed with countries along the Belt and Road, the ISDS provision is only applicable to disputes regarding particular amounts for expropriation compensation.’
Further showing a potential for more robust change, in July 2018, ‘China’s Ministry of Foreign Affairs and law society called on countries involved in the Belt and Road initiative (BRI) to improve international rules-based systems and establish dispute settlement mechanisms to fairly protect the rights of all parties.’ Their joint statement also ‘proposed the establishment of treaty-based mechanisms or institutions to prevent and resolve disputes and to strengthen mutual recognition and enforcement of judgments in civil and commercial matters.’ To date, there is no multilateral dispute resolution mechanism in place for resolving disputes that may arise between countries participating in the BRI.
So maybe it is true that the BRI does not require a new global dispute regime – as indicated in a February 2018 Global Times article, but certainly adjustments are needed. They are yet to be defined, and may need to address the significant geopolitical issues that may arise in relation to BRI disputes. Now that the financing can be predominately Chinese, Chinese outbound investors and contractors seek to retain more control over where the dispute should be resolved if offshore projects go wrong. As stated in the Action Plan, the ‘development of the Belt and Road should mainly be conducted through policy communication and objectives coordination. It is a pluralistic and open process of cooperation which can be highly flexible, and does not seek conformity.’ The objectives should be satisfied in regard to dispute settlement, if it is to be regarded as ‘fair’ in an international context. This conclusion appears to be supported by Bai Ming, a research fellow at the Chinese Academy of International Trade and Economic Cooperation, when he said ‘an international arbitration institution needs to win respect and acknowledgement from the international community, otherwise it would be useless. The courts that China plans to establish are not Chinese institutions, but China-proposed international organisations. They will be independent.’
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