PAUL J. HAYES BARRISTER-AT-LAW

Paul J Hayes FCIArb Barrister & Arbitrator

Kuala Lumpur International Arbitration Week

Kuala Lumpur

15 May 2017

The China Syndrome:

Rethinking arbitration on the ‘One Belt, One Road’

PAUL J. HAYES BARRISTER-AT-LAW

Overview

I.  Introduction: OBOR, a new era for ADR

II.  The challenges for OBOR arbitration

III.  A Chinese arbitration regime?

IV.   Harmonisation? Regional institutional responses

V.  Conclusion: A new legal order?

Rethinking arbitration on the OBOR

PAUL J. HAYES BARRISTER-AT-LAW

Rethinking arbitration on the OBOR I. Introduction: OBOR, a new era for ADR

•  One Belt, One Road (‘OBOR’): Conceived by China in 2013. A new ‘Silk Road’ which seeks to connect China to Africa and Europe by land and sea. Goal is the promotion of unimpeded trade along the route. OBOR summit currently underway in Beijing – 29 states in attendance, incl. Russia and USA (Japan and India absent, as are many OBOR states).

•  An international investment project of an unprecedented scale, hallmarked by: •  USD$926B already invested in OBOR projects (9 x size of the USA ‘Marshall Plan’

post-WWII). •  Investment in 60 states along the route. 4.4 billion people (63% of the world’s

population) impacted. •  Infrastructure connectivity (ie. ports, highways, railway, power plants, etc). •  Consequent financial integration of participants – China’s role in financing OBOR

projects (China Development Bank; Export-Import Bank of China; Industrial and Commercial Bank of China). Cf China cross-border M&A activity: USD$100B (2014); USD$162B (2015). [Thompson Reuters]. Legal integration?

•  A new strategic framework for the region. Trade, geo-political & security considerations.

•  China accepts that the OBOR initiative cannot be achieved on its own – partnerships are vital to its success. Disputes on OBOR projects are inevitable. ADR response?

PAUL J. HAYES BARRISTER-AT-LAW

Rethinking arbitration on the OBOR II. The Challenges for OBOR Arbitration

•  As with all infrastructure projects, disputes are inevitable. Mediation/arbitration the accepted form of ADR for these cross-border disputes, given their international character due to the nationalities of the participants.

•  Noting the characteristics of OBOR investment and projects, consider the challenges for arbitration of OBOR disputes: •  Different cultures. •  Different languages. •  Different legal systems and commercial norms (incl. mandatory laws of seat or venue). •  Different arbitral institutions. •  Different approaches to the enforcement of arbitral awards.

•  It is a well settled proposition of both common law and civil law jurisprudence that society is better served where its rules are consistent, in that they can be identified with certainty and their application is capable of being predicted. [Bowring (Bentham), ‘The Works of Jeremy Bentham’ (Principles of the Civil Code), 1843, Pt 1, Ch17].

•  Therefore, harmonisation of arbitration laws for OBOR arbitration would seem to be a ‘good thing’. Not a novel idea (Cf Hanseatic League and lex mercatoria; FIDIC; CISG; etc). But harmonisation on what terms?

PAUL J. HAYES BARRISTER-AT-LAW

Rethinking arbitration on the OBOR III. A Chinese arbitration regime?

•  China’s preference for disputes to be resolved/determined in accordance with Chinese laws and conventions, is unsurprising due to China’s ‘ownership’ of the OBOR project.

•  The insistence by Chinese Banks and SoEs of CIETAC disputes clauses in OBOR contracts (or BIAC disputes clauses), can lead to arbitration problems: Chinese - default language, default seat, mandatory laws; communications protocols, etc.

•  The establishment of the OBOR Arbitration Court by the Wuhan Arbitration Commission in October 2016, to adjudicate on OBOR disputes in accordance with a special set of rules.

•  The ‘Blue Book on the Dispute Resolution Mechanism for the Belt and Road’ released in HK by the International Academy of the Belt and Road on 11 October 2016 [Rimsky Yuen SC, 5th Asia Pacific ADR Conference (Session 1), 12 October 2016] – a proposed uniform dispute settlement mechanism: mediation first, then arbitration.

•  Chinese preference for Hong Kong seat due to the reciprocity HK enjoys with Chinese courts on enforcement of arbitral awards. Cf PRC Supreme Court Opinion, July 2015 supporting recognition and enforcement of international arbitration awards in accordance with Chinese law.

•  More thought needs to be given by parties to the ‘one minute to midnight’ disputes clause when finalising OBOR contracts. With whom does the bargaining power truly rest here? Is China really going to risk losing a vital cog in the OBOR project over a disputes clause?

PAUL J. HAYES BARRISTER-AT-LAW

Rethinking arbitration on the OBOR IV. Harmonisation? Regional institutional responses

•  Challenges brought about by different BITs and MITs re investor-state arbitration. Meaning of ‘nationals’ and ‘investment’ will vary from treaty to treaty and amongst different OBOR projects. Also, China, has been a somewhat reluctant participant in investor-state arbitration.

•  Many regional arbitration institutions along the OBOR (and within China itself) all pitching for a slice of the OBOR arbitration cake, all with different incentives and procedural rules.

•  Different regional arbitral institutions offer unique advantages, depending on the specific arbitration requirements: expertise; panels; neutrality; rules; facilities; admin support; etc – and should press to remain involved in the arbitration process on OBOR, rather than be overwhelmed by an ‘all roads lead to Beijing’ OBOR arbitration regime.

•  Malaysian leadership. Malaysia-China Business Council’s commendable initiative in October 2016 to provide a neutral forum for OBOR investment dispute settlement – focus on harmonising arbitration law amongst states along the OBOR – more transparent rules and more certainty in enforcement. Leading role/opportunity for KLRCA.

•  States, investors, institutions and other stakeholders should consider implementation of a uniform set of OBOR Rules (based on the UNCITRAL Rules), perhaps with a Hong Kong seat common to all arbitrations, but otherwise requiring parties, or the arbitral tribunal (possibly institutionally appointed) to decide applicable law; language and venue (if not otherwise decided by the parties).

PAUL J. HAYES BARRISTER-AT-LAW

Rethinking arbitration on the OBOR V. Conclusion: A new legal order?

•  The symbiotic link between trade and security is well established in international relations and it would be naïve in the extreme to believe that China would be indifferent to protecting its investment along the OBOR, on its terms – it is very much in China’s state interest to do so, thereby raising a strategic imperative. OBOR is an ambitious project which greatly benefits the region. However the project which is ostensibly about trade opportunity, also carries with it geo-political and strategic consequences, which will present challenges to the sovereignty of many of its participants.

•  The soft extension of China’s geo-political influence along the OBOR route through the slow and patient extension of the reach of Chinese law (through OBOR arbitration on Chinese terms), is but one example of such a potential challenge facing OBOR states.

•  China is alert to perceptions of greater regional political influence as a consequence of OBOR, apparent from when recently it recast OBOR’s English translation as the more benignly expressed ‘Belt and Road Initiative’ (‘BRI’) and also when it countered allegations of buying political influence by lending to economically challenged states, by setting a debt limit for each such state and ensuring that most OBOR projects will be profitable.

•  The best insurance for functional trade, stability and prosperity for all OBOR participants is to ensure that ultimately, an independent New York Convention arbitration regime applies to the resolution of OBOR disputes, in the form of a harmonised rules-based order, agreed upon by all stakeholders. The time for this integral element of OBOR to be built, is NOW.