HKIAC in the Americas Demystifying Asia: Making Deals and Managing Risks

São Paulo, 21 June 2013

Session 2: A Chinese-Brazilian Joint Venture – Energy Sector Case Study

HKIAC in the Americas – Session 2 – Energy Sector Case Study, 21 June 2013 9

Energy Sector Case Study • Dec. 2009: China Oil secures US$10 billion loan from Mainland Development Bank (due Dec. 2012) • Feb. 2010: China Oil (Brazil) (COB) enters into a JV with Brazilian Mining Ore (BMO) to form Brazil-China Energy JV for oil/gas exploration and production

- COB owns 60%; BMO 40% - COB to provide a parent company guarantee - All disputes resolved in Hong Kong under 2013 HKIAC Rules

• May 2010: ANP grants Brazil-China Energy JV concession • March 2011: Brazil-China Energy JV enters into EPC Contract with Yankee Gas Brazil (YGB) for construction of US$8.1 billion natural gas pipeline

- Completion due Oct. 2012 - All disputes resolved in New York under ICC Rules

HKIAC in the Americas – Session 2 – Energy Sector Case Study, 21 June 2013 10

Energy Sector Case Study

• Dec. 2011: Construction begins • Apr. 2012: YGB’s sub-contractors stop work due to non-

payment; construction significantly delayed - Project will not be completed until June2013 - China Oil will not be able to repay loan to Mainland Development Bank - ANP claims breach of Concession Agreement - BMO discovers COB failed to provide parent guarantee

* * *

Lawyers get very excited…

HKIAC in the Americas – Session 2 – Energy Sector Case Study, 21 June 2013 11

The Cast

Lawyer for China Oil – Joseph Tirado, Winston & Strawn

Lawyer for BMO – Carlo de Lima Verona, Veirano

Lawyer for Brazil-China Energy JV - Jaime Luis Iglesias Gallardo, Garrigues

Lawyer for Yankee Gas – E. Whitney Debevoise, Arnold & Porter

***

Moderator – James Hosking, Chaffetz Lindsey

HKIAC in the Americas – Session 2 – Energy Sector Case Study, 21 June 2013 12

Parent Guarantees from Chinese SOE’s

Joseph Tirado

© 2013 Winston & Strawn LLP

COB’s Inability to Provide a Parent Guarantee

• COB may well be right to say that they cannot provide the requisite guarantee

• So what is the law here?

© 2013 Winston & Strawn LLP

Regulations of State Administration of Foreign Exchange (“SAFE”)

• The main SAFE regulations are

the Administrative Measures for the Provision of Guarantee to Foreign Parties by Domestic Institutions issued by the People’s Bank of China in 1996 together with the Rules for Implementing the Measures on the Administration of Foreign Guarantees Provided by Domestic Institutions issued by SAFE in 1997 (collectively, the “Foreign Guarantee Rules”);; and

the Notice of the State Administration of Foreign Exchange on the Issue of the Administration of Foreign Guarantee by Domestic Institutions issued by SAFE in 2010 (the “2010 Notice”)

© 2013 Winston & Strawn LLP

Foreign Guarantee Rules (1)

• “Foreign guarantees” include situations where a Chinese domestic institution undertakes to an institution outside the territory of China or a foreign-invested financial institution within the territory of China by means of issuance of guarantees that the Guarantor shall perform the obligation to repay where a debtor fails to repay the debt

• For guarantee in overseas engineering projects, before granting the approval for the foreign guarantee, SAFE shall review the scale of projects contracted, project risks, asset-liability ratios, the latest P&L of the guaranteed entity and verify and decide the upper limit of the guarantee amount (ie the concept of “capped” guarantees)

• Level of SAFE approval of the provisions of foreign guarantee short term (no more than 1 year), approved by at SAFE provincial level long term (more than 1 year) approved at SAFE national level

© 2013 Winston & Strawn LLP

Foreign Guarantee Rules (2)

• The provision of each foreign guarantee requires a separate SAFE approval. Where a PRC guarantor has a large number of foreign guarantees and it is recosnised as having good internal management, it may apply to SAFE for a foreign guarantee quota. If approved, no individual approvals would be necessary if the total foreign guarantee amount provided is within the quota (see the 2010 Notice)

• Maximum amount of foreign guarantee - the proportion of net assets to total assets of the PRC guarantor shall be no less than 15%, and the amount of each foreign guarantee or the quota shall not exceed 50% of the net assets of the PRC guarantor (see the 2010 Notice)

• Recent news releases suggest that SAFE may revise the Foreign Guarantee Rules in order to further lift restrictions on the provision of foreign guarantee and to promote Chinese enterprises’ offshore investment. http://www.ecsme.com.cn/jdxw/270097.shtml

© 2013 Winston & Strawn LLP

The risk profile

• There are other regulations from the State-owned Assets Supervision and Administration Commission (“SASAC”) and the China Securities & Regulatory Commission (“CSRC”) as well

• However, the risk profile for all parties here is significant

© 2013 Winston & Strawn LLP

What’s the problem here in practice?

• Does the inability of COB to procure a parent guarantee really matter? Likely, the answer is “yes” The failure to provide the parent guarantee may be an

event of default under the loan agreement May also be an event of default under the JV Agreement Termination risk Liquidity risk

© 2013 Winston & Strawn LLP

How to avoid this problem?

• Parent guarantees (esp unlimited guarantees) are a particular area of risk in this scenario

• Chinese and Brazilian companies who are investing together should grapple with this issue before contracts are signed, to avoid unintended events of default.

• Work arounds here may include Contract with PRC parent entity, ie avoid subsidiaries? Agree that parent guarantees shall be provided only to the

extent permitted by Chinese law? Performance bonds as an alternative?

BETWEEN A ROCK

HKIAC

AND A HARD PLACE

BMO’S IN-HOUSE COUNSEL PRESENTATION

EVERYBODY IS KUNG-FU FIGHTING

China has become the main foreign commercial partner to Brazil

According to the Brazilian Ministry of Development, in April, 2013 the sum of exports and imports to China has reached the mark of USD 3.2 million opposite to USD 2.8 in the Commercial Relations with the USA (DATAFOLHA)

Asia is the continent acquiring more products from Brazil, with 30% of the Country’s exports

Long is the Path of the Dragon-Warrior

Perils of Arbitrating in China

Who Makes the ultimate decision on arbitration clauses

The Golden Rule

Between a Rock, Hong-Kong, and a Hard Place

Find Inner-piece

HKIAC’s Experience with Brazilian Parties

Hong-Kong as an international Venue

HKIAC’s history of Arbitrations involving Brazilian Parties

Eternal discussion on reconciling common-law venues with parties of civil law origin. Is this an issue?

Dumplings in the Feijoada

Risk of Parallel Proceedings and Court Intervention in Brazil

Potential Disputes with ANP

Enforcement of Performance Bonds

Enforcement of Foreign Arbitral Awards

謝謝 / 谢谢 (xie xie!)

Obrigado!

Thank you!

HKIAC IN THE AMERICAS SESSION 2

BRAZIL CASE STUDY

PRESENTATION TO THE JV São Paulo, 21 June

2013

28

BACKGROUND

YGB does not pay the fees to its subcontractors

Work in the Project ceases

Project will not be completed in time

YGB's decision not to pay generates a potential dispute with the JV

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POTENTIAL DISPUTE WITH YGB

Mechanisms to try to avoid or mitigate the risks

ICC Arbitration in New York

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POTENTIAL DISPUTE WITH YGB/ MECHANISMS TO TRY TO AVOID OR MITIGATE THE RISKS

Tendency to play a more active role by the owner in the Project (Supply Chain Management)

Advance Payment

Payment Bond

Termination and/or assignment of subcontracts and/or call of performance bond

Project insurance

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POTENTIAL DISPUTE WITH YGB/ ICC ARBITRATION IN NEW YORK

ICC arbitration New York: pros and cons

Other alternatives: ICC in Beijing, Hong Kong, São Paulo

HKIAC IN THE AMERICAS Energy Sector Case Study Advice to Yankee Gas

Whitney Debevoise Sao Paulo. Brazil

June 21, 2013

Update on Construction Delays in Brazil

Possible Claimants Possible Claims Possible Fora Possible Defenses Possible Counterclaims Better Protection for the Future

Possible Claimants

Brazil-China Energy JV ANP China Oil and China Oil Brazil Brazilian Mining Ore Mainland Development Bank

Possible Claims

Breach of Contract Consequential Damages

– ANP Terminates the Concession – Brazil-China Energy JV Dissolves – China Oil Sued by Mainland Development Bank – BMO Claims Loss of Preferential Ore Sales

Possible Fora

ICC Arbitration – New York – Bilateral – Multi-Party; Multi-Contract

HKIAC Arbitration – Hong Kong – Multi-Party; Multi-Contract

Brazilian Courts New York Courts Other Courts

Possible Defenses; Counterclaims

Failure of the JV to Make Progress Payments Force Majeure

– Labor Action in Brazil – Foreign Exchange Controls

Defective Specifications

Better Protection for the Future

Contractual Waivers of Consequential Damages Pay-When-Paid Clauses Force Majeure Clauses Arbitration Clause Improvements