Background

At the Belt and Road Forum in Beijing held in Beijing on 14-15 May 2017, President Xi reaffirmed China’s commitment to make the One Belt One Road plan the ‘project of the century’. This gathering was attended by 30 world leaders including leaders of ASEAN. In this gathering President Xi pledged investment of up to US$78 billion in countries along the One Belt One Road[1].

Since 2013, Xi has been rolling out his “Belt and Road” plans, committing funds from China and the Asian Infrastructure Investment Bank, and engaging global financial institutions such as the World Bank. This ambitious plan covers a large swathe from China through the former Republics of USSR to Russia, Africa and parts of Europe. Malaysia is one of the 64 countries outside China that have benefited from the Belt and Road Initiative, propounded by Chinese President Xi Jinping in the autumn of 2013[2].

With trade volume registering US$102 billion in 2014[3], Malaysia has already been China’s largest ASEAN trading partner since 2008 and its third biggest Asian trading partner after Japan and South Korea.  It is expected that the bilateral trade between Malaysia and China, which is growing at 8% yearly, will continue to expand.  This will also be true with the other countries along the Belt and Road.

Risks

The OBOR initiative involves Chinese companies investing into companies in the Countries along the Belt and Road.  Many of these investments are into infrastructure projects and development. The initial phase of these projects will involve a gamut of activities including preliminary risk assessment, project financing, setting up of joint ventures. Some of the investments will be into logistics, ports and manufacturing[4].

As these countries have various stage of developments and legal systems, it will be a challenge to even begin to match the companies capable of undertaking the OBOR Projects. At the beginning, parties will need to be certain of its partners standing and capability and the structure of the legal system of the Country receiving the investment.

One of the parties in the OBOR projects, will likely be a Chinese party who may come in alone or as part of joint venture into the investment. There may also be foreign consultants and contractors.

Conflict of laws

The parties’ challenge will be to secure each other’s commitments in a secure, comprehensive and enforceable contract[5]. These contracts need to be based on an agreed and understandable system of laws. Certainly each party will be most comfortable with their own laws eg.the Chinese investor would be most comfortable with its own laws and the investee companies will be comfortable with the law of the land. There may also be a cultural element as the international lawyers / consultants may be familiar with common law rather than the civil law systems of the OBOR Country.

Accordingly agreeing to the law governing the contract will be a challenge. I would advise that this has to be addressed and agreed in the contract before the parties commit. Failure to agree may mean that there will be a dispute as to the governing law even before the deciding tribunal embarks into the factual dispute.

Resolving Disputes

Once the governing law has been decided, parties will need to decide how they would want to resolve disputes arising. This decision must be prompted by objective criteria and not parochialism. There is no point in providing for disputes to be decided in a particular court when a decision of that court cannot be enforced in the Country where the losing party is located.

In international contracts, the primary advantage of international arbitration over court litigation is enforceability: an international arbitration award is enforceable in most countries in the world vide the mechanism set up under the New York Convention[6]. Other advantages of international arbitration include the ability to select a neutral forum to resolve disputes, that arbitration awards are final and not ordinarily subject to appeal, the ability to choose flexible procedures for the arbitration, and confidentiality.

For the most part, the general acceptance of the New York Convention worldwide means that enforcement is not problematic. However there is some evidence of problems of enforcement in China[7]. If this is the case, parties in large infrastructure contracts will do well to explore obtaining independent security eg. by way of performance bonds enforceable in a neutral jurisdiction.

Another area which parties have to be careful is the language of the arbitration. It must not be assumed that English will be the default language even where the contract is in English. The Chinese party may nominate a CIETAC Centre as the chosen arbitration venue[8]. The wise counsel advising the OBOR Parties would do well to be familiar with the available Arbitration Centres before agreeing to a particular centre in the contract. The Regional Institutes like KLRCA, HKIAC and SIAC will be able to find opportunities to offer its facilities to the OBOR Parties[9].

China’s One Belt One Road is certain to change the world economic landscape and propel development in many countries. It will certainly  provide opportunities to international contractors, advisors and professionals. In the eagerness to participate, parties should not neglect and overlook the need to have proper contracts in place including having the appropriate law and dispute resolution provisions.