China’s outbound investment boom has been to a large extent infrastructure-driven, with Chinese state and private contractors being increasingly retained to deliver roads and rail systems, power generation and electricity infrastructure, and telecommunications projects in many different jurisdictions.
Given the size and complexity of such projects, and the focus upon geopolitically and economically unstable parts of the world, it is especially important for all parties to Chinarelated infrastructure contracts to ensure they have a suitable and effective dispute resolution mechanism to enforce them.
These mechanisms should account not only for industry-specific characteristics in the infrastructure market but also for the unique factors which arise when resolving disputes in the China context. Below we consider a number of issues industry participants should bear in mind.
01 | Choose arbitration over litigation
Infrastructure projects, whether China-related or otherwise, will typically involve multiple parties, jurisdictions and contracts. These factors will often militate towards the use of arbitration as the preferred dispute resolution mechanism.
Given that most infrastructure disputes involve highly technical subject matter, parties usually feel they will be better resolved by an arbitrator hand-picked by the parties for his or her particular knowledge and experience than by a national court judge. Litigation in the home courts of one or other of the parties may also compare unfavourably to arbitration before a neutral tribunal (often situated in a third-party country). This may be particularly the case given that many infrastructure projects involve a level of state involvement.
Moreover, in an industry with relatively few participants in which long-term relationships are at a premium, confidential arbitration proceedings will often be preferable to litigation in which the case becomes a matter of public record.
Arbitral awards are readily enforceable worldwide. Over 145 other states, including China, are signatories to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Accordingly, the Chinese courts routinely recognise awards rendered in any other signatory states and vice versa. By contrast, it is considered practically impossible to enforce a foreign court judgement before the PRC courts.
It is also worth noting that, since 1995, the Chinese courts have also implemented a special reporting system for the enforcement of foreign arbitral awards. Enforcement of a foreign or foreign-related arbitral award can therefore only be refused by the Supreme People’s Court in Beijing, the highest court in the land. This removes the parochialism of the local courts from the equation. Again this contrasts with the enforcement of a domestic court judgment, which will be controlled by the local court to which the application is made.
Having said this, there may be circumstances in which a party may consider litigation preferable to arbitration. Much will depend upon that party’s strategic objectives and the facts in question.
02 | Do not forget the impact of PRC law
Even for infrastructure projects taking place outside of China, should one or other project participant be Chinese, PRC law will still impact upon the appropriate choice of dispute resolution provision.
There are certain types of dispute mechanism which may lead to a judgment or award being unenforceable in China.
This is the case when it comes to many foreign court judgments and also to certain categories of disputes which PRC law treats as being properly resolved in the PRC.
As suggested above, absent any reciprocal enforcement treaty with China, foreign court judgments are not readily enforceable in the PRC. Some of the key targets for outbound Chinese Infrastructure investment do not have reciprocity arrangements with China (as do key trading partners, including the US, the UK, Germany and Japan). Accordingly, court judgments rendered in those countries face significant obstacles upon enforcement in the Chinese courts. This, as above, contrasts with the wide applicability of the New York Convention when it comes to enforcing arbitral awards.
Chinese law also prohibits the offshore resolution of purely ‘domestic’ disputes, and the PRC courts will likely refuse enforcement of foreign arbitral awards rendered in relation disputes where there exists no ‘foreign’ element. China’s Supreme People’s Court has published two judicial interpretations (in January 1998 and July 1992) which indicate that a ‘foreign-related’ dispute is one: (a) that involves at least one foreign party; (b) where the subject matter in dispute is in a foreign country; or (c) where there are facts establishing the legal relationship between the parties which occurred in a foreign country.
Importantly, foreign owned but Chinese incorporated subsidiaries of foreign companies are considered domestic and therefore also restricted in their choice of venue. Arbitration awards or court judgments rendered overseas notwithstanding this prohibition will not be enforced in China.
03 | Know the differences between Chinese and international arbitration
In infrastructure projects, it may often be the case that the (local) project developer has bargaining power over the (often Chinese) contractor or sub-contractor. Nevertheless, it is generally true in many industries, as the bargaining power of cash-rich Chinese parties has risen over past years, so too has the pressure on their counterparties to accept arbitration agreements specifying arbitration in the PRC. In these circumstances it pays to be aware of the differences between Chinese arbitration as practiced by mainland PRC arbitrators and counsel, and the international variant.
Historically, Chinese dispute resolution practices have emphasised negotiation and conciliation and Chinese arbitration procedures are shaped by that tradition. Chinese arbitrators are inclined towards mixing arbitration and mediation (so called ‘med/arb’), routinely acting as both conciliator and adjudicator in the same proceedings.
Tribunals seated in China are also able to decide matters on an ex aequo et bono basis upon concepts of ‘fairness’ and ‘equity’ rather than in accordance with the strict terms of the contract and its governing law. Traditional Chinese arbitration is also relatively short-form by international standards. It is inquisitorial, rather than adversarial, the issues and argument driven by the tribunal rather than the parties with curtailed hearings, little room for witness cross examination, and often no document production.
Chinese arbitral institutions and tribunals also tend to play a larger role in the administration of a matter, often interposing themselves between the parties and occasionally conducting what amounts to separate ex parte discussions with each.
By contrast, international arbitration procedure tends to be more party-driven and adversarial. While arguably more certain and predictable, it can be perceived by Chinese parties as unfamiliar, inefficient and lengthy.
04 | Consider compromise venues
However, the same factors which lead Chinese parties to question the merits of foreign seated arbitration (witness cross examination, document production and an adversarial process) arguably allow parties a better opportunity to present their case and ensure greater certainty of process.
As increased Chinese outward investment drives cultural change, Chinese parties are beginning to acknowledge this benefit. This has manifested itself in an increasing acceptance of venues in Europe for example, with the arbitral rules of the LCIA, the International Chamber of Commerce (the ICC) and the Stockholm Chamber of Commerce (the SCC) all regularly agreed to by Chinese parties.
However, the two arbitral ‘seats’ which have benefited most from an increase in Chinese investment have been Hong Kong and Singapore. Both of these two Asian venues benefit from a certain cultural and geographical proximity to mainland China. However both have arbitration-friendly and impartial courts, a large pool of experienced counsel and arbitrators with the ability to deal with the complex issues raised in major infrastructure disputes.
Additionally, both have well-established local arbitral institutions (the Hong Kong International Arbitration Centre (HKIAC) and the Singaporean International Arbitration Centre (SIAC)) with modern, state-of-the-art arbitration rules and procedures.
There is little to choose between the two jurisdictions. However, it is worth noting that, in recent years Hong Kong has suffered from a perception issue – being seen by foreign observers as ceding excessive judicial and political control to the mainland Chinese authorities. Accordingly it is sometimes suggested that arbitration in Hong Kong may not be as impartial and independent as in some other jurisdictions.
In the authors’ opinion, this is not the case. Hong Kong is (and remains) a special administrative region of China and largely legally distinct. Parties can expect an impartial and independent process in that jurisdiction and can take for granted that the courts will maintain a rigorous ‘hands-off’ approach when it comes to exercising jurisdiction over Hong Kong seated arbitrations.
This approach has been bolstered by a recent string of proarbitration decisions in the Hong Kong courts. It has also been noted in the reasoning of an English court judgment handed down as recently as February 2015. In Shagang South-Asia (Hong Kong) Trading v Daewoo Logistics  EWHC 194 (Comm)) the judge held that the Hong Kong (not English) courts had jurisdiction over a dispute pursuant to an arbitration clause providing for ‘Arbitration to be held in Hong Kong. English law to be applied’. In his decision the judge recognised Hong Kong as ‘a well known and respected arbitration forum with a reputation for neutrality, not least because of its supervising courts’.
Hong Kong awards are, for the purposes of enforcement in the PRC, treated on a similar basis as New York Convention awards pursuant to a 1999 arrangement between the Hong Kong government and Mainland China.
It is also worth noting that Chinese arbitral institutions are themselves internationalising. China’s most prominent arbitral institution, the China International Economic Trade and Arbitration Commission (CIETAC), published new arbitration rules in 2012 and 2015. It is empowered to administer arbitrations outside the PRC and has opened an office in Hong Kong, giving parties a further ‘offshore’ option when it comes to arbitrating China-related infrastructure disputes outside of Mainland China.
05 | Investment treaty arbitration
Of particular significance to parties to infrastructure projects, where the state often plays a role, is investment treaty arbitration.
International commercial arbitration arises out of a direct, contractual relationship between the parties. However, arbitration rights may also arise from international instruments agreed between nation states, such as bilateral investment treaties (or BITs), multilateral investment treaties (MITs), or free trade agreements (FTAs).
These treaties establish terms and conditions for private investment by nationals and companies of one state in another ‘host’ state, ensuring that investments are afforded certain minimum protections from adverse treatment by the host state. They often usually include a dispute resolution mechanism allowing an investor whose rights under the treaty have been violated to have recourse to international arbitration. This is often under the auspices of the International Center for the Settlement of Investment Disputes (ICSID).
This mechanism has the benefit of removing the dispute from the jurisdiction of the national courts of the host state, whose very actions will have led to the complaint.
Notably China is a party to the ICSID Convention. It also has the world’s second most comprehensive network of investment and trade treaties after Germany. However, despite the availability of these remedies, there have been comparatively few BIT claims by Chinese investors, and only one (short lived) claim reported against China itself.
Nonetheless, it is highly likely that the numbers of investors submitting themselves to investor treaty arbitration will increase. This may well include Chinese infrastructure project investors commencing proceedings against the states in which the investment is made.