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Disputes Related To The Belt And Road Initiative: Are They Truly Different From Those Arising Out Of Past Global Investment Initiatives? By Baptiste RIGAUDEAU*

4 May 2021 10:15 AM | Anonymous member (Administrator)

Paper presented at the AfAA 2nd Annual International Arbitration Conference, 15th - 16th April 2021.

Executive Summary

The Belt and Road Initiative (BRI) is arguably a one-of-a-kind investment initiative, with many features separating it from past international trade or investment efforts.  However, a comparative analysis of disputes arising out of the BRI or relating to BRI projects with disputes arising in connection with these past initiatives reveals significant similarities, in particular in relation to the type of dispute resolution mechanisms used to resolve them.  Yet, these significant similarities do not overcome the specificities of BRI disputes, which are highly political and often resolved out of court through negotiations.  Knowing and taking into account such specificities allows disputing parties to make the most of dispute resolution mechanisms to achieve greater bargaining powers during these negotiations.  The below article presents a short description of similarities and crucial differences pertaining to BRI disputes, while drawing conclusions with respect to the attitude parties must adopt to resolve these disputes efficiently and with success.

Introduction

The Belt and Road Initiative (BRI), since its formal launch in 2013 has attracted a large amount of media and political attention from relevant public and private stakeholders.  That attention has been prompted by the perceived difficulty for non-Chinese parties to systematize the BRI, to understand its scope and workings, and to define the requirements to secure their involvement in this “one of a kind” investment initiative.

That the People’s Republic of China (PRC) has portrayed the BRI as a century defining, extraordinary initiative is no surprise (although some have depicted it as just a simple attempt to revive millenary old trade routes).[1]  But, the PRC’s portrayal admittedly also accords with an objective, even cursory, review of the BRI.

First, from an economics standpoint, the BRI is an extraordinary investment initiative, which cannot be considered equally to other trade and investment initiatives.  The amount of capital invested by the PRC led financial institutions, such as the Asian Infrastructure Investment Bank (AIIB) and the Export-Import Bank of China (China EXIM Bank), is unmatched by other past investment initiatives, including those initiated for reconstruction purposes.[2]

Second, the BRI’s geographical scope is also unmatched by other past investment initiatives.  The BRI currently involved projects on four of the six continents (Africa, Asia, America and Europe).[3]

Last, from a political standpoint, the BRI arguably distances itself from comparable past investment initiative by the debate it has stirred between political forces supporting and opposing it.  This debate has given rise to various levels of misinformation, in the context of growing trade and political tensions, mainly involving the US and the PRC.  

But, what about disputes relating to BRI projects? Do these disputes differ in type, scope, nature or any other relevant aspect from disputes relating to other past investment initiatives?

Given the type and size of the projects involved in the BRI, disputes have arisen and will continue to arise, with their resolution a key element determining the outcome of the initiative as a whole, i.e. either they are resolved efficiently and they do not signal the end of the relevant project when they arise; or they are not resolved efficiently and they result in the stalling/abandonment of the project, on top of creating unwanted bad publicity for the initiative as a whole (with damaging effects to the reputation of both the investing and the host States).

Analyzing the specific features of the BRI disputes gives an appearance of déjà-vu to many arbitration lawyers (Section 1).  However, differences exist and identifying these peculiarities conditions the efficient resolution of BRI disputes, whether inside or outside of the courtroom (Sections 2 and 3).

1       BRI disputes Appear no different from other disputes relating to past trade/investment initiatives

According to recent International Chamber of Commerce (ICC) statistics and upon review of their inherent characteristics, BRI disputes appear no different from disputes that have traditionally arisen in relation to past trade initiatives.  The sectors, nationality of the Parties or types of disputes relevant to BRI projects are those which have been traditionally handled through ICC Arbitration (Section 1.1).  Likewise, disputes involving loan defaults at a State level have been common throughout history, and the BRI is not immune to such controversies (Section 1.2).

1.1         Commercial disputes relating to the BRI appear no different from traditional commercial disputes

According to ICC statistics, sectors which have been frequent users of ICC commercial arbitration are unsurprisingly also those most involved in BRI commercial disputes.  ICC statistics show that the “Energy” and “Construction” sectors amounted to around 27 % of the ICC Court of Arbitration total caseload in 2018 (most recent year such statistics were compiled), and around 35 % of the ICC ADR Centre caseload.[4]

Likewise, parties often involved in ICC arbitration disputes are located in prominent BRI countries.  Out of a total of 2282 parties involved in ICC arbitration cases in 2018, 1044 parties were incorporated in one of the 93 “Belt and Road” countries.  Hence, approximately 46% of all parties involved in ICC Arbitration cases that year were from BRI countries.

In 2018, the top five most active BRI countries in ICC arbitration cases were Italy (with 87 cases involving Italian parties) followed by the United Arab Emirates (69 cases), Turkey (62 cases), the PRC (59 cases) and South Korea (54).

Likewise, large and complex construction projects are frequent users of ADR mechanisms (often using as dispute resolution mechanisms a combination of dispute boards, mediation and arbitration).  These types of projects are the most frequent in relation to the BRI, and the underlying contracts at issue often include a combination of these sophisticated mechanisms.  As a result, the disputes relating to these projects also are handled through frequently used dispute resolution mechanisms.  Hence, the resolution of such disputes benefits from past dispute resolution practices developed and refined over many years.

1.2       BRI disputes over State to State loans and sovereign debt are no different from those arising from past trade/investment initiatives

BRI projects, as is well known, are driven by State initiative and financing.  Most of the projects that have been labelled as BRI are financed through loans extended by the PRC Government through the AIIB or the China EXIM Bank.  While the terms and scope of these loans is difficult to ascertain, they are negotiated at State level, following the signature of Memorandum of Understandings (MoU) between the PRC and the Host State.[5]

Incidents relating to the repayment of these loans have already led to tensions between the PRC and borrowing States.  But it is unknown whether these disputes have resulted in court or arbitration disputes.  None are currently in the public domain, which suggests they are rather resolved through direct State to State negotiations.  In this respect, these disputes are no different from those which have arisen in the past in relation to State to State loans or to loans extended by multilateral lending institutions such as the International Monetary Fund (IMF) or the Asian Development Bank (ADB).

Within the context of the BRI, the PRC appears to be playing the diplomatic negotiation game as well as and along the same lines as other occidental States or multilateral lending institutions that have been involved in such kinds of disputes in the past.  In other words, it appears to be willing to negotiate restructuring or delays in repayment of loans against various types of considerations, just like other traditional international lenders have done in the past in relation to their own loans.[6]

While using interstate negotiations are nothing new in these circumstances, the solutions yielded by these BRI specific negotiations have differed from those adopted in the past.  The most striking example of this difference has also been one of the most criticized BRI-related events so far.  It involves the port of Hambantota, which was famously leased to a Chinese State-Owned Entity (SOE) for 99 years, after Sri Lanka defaulted on loans which had been extended by the PRC to finance the project.[7]  Likewise, the fact that the PRC has recently simply chosen to discontinue previously granted loans reveals a new strategy to deal with payment incidents at State level. 

2       BRI Disputes are different because of the State element

The main aspect that differentiates BRI disputes from those that have arisen in the past seems to be the omnipresence of a State element, notably even in relation to commercial disputes (Section 2.1).  That particularity must be taken into account by parties involved in these commercial disputes, and it reinforces the need to include solid dispute resolution mechanisms in their contracts.

2.1         BRI projects involve a large element of State intervention

The BRI is a highly politicized and much discussed investment initiative, partly because its main driver is the PRC.  The PRC has every incentive to ensure that the BRI proceeds in a timely manner and presents an attractive investment opportunity for both host and investing countries.  At the other end of the spectrum, critics of the initiative, such as the US, challenge the feasibility of the BRI or question the legitimacy of its apparent and underlying motives.

As a result of that global attention, the States themselves, particularly the PRC so far, have been involved at all levels of the BRI projects, either directly or indirectly.  Directly, diplomatic negotiations have taken place between the PRC, as the main lender, and State borrowers, on the terms of the loans, the performance of each party’s obligations, and the consideration given in return for these loans.  Indirectly, Chinese SOEs are heavily involved in the actual implementation of the BRI projects, their involvement being often a condition precedent for the relevant BRI project to be implemented.  Many BRI projects have been funded by the PRC on the condition that they be implemented by Chinese SOEs (whether it be as main contractor or subcontractor), with a predominantly Chinese workforce, and using Chinese material.  As a result, the Chinese State has eyes and ears on the ground and is able to monitor every detail of the implementation of a project and get involved to resolve an issue.

The consequence of State involvement in BRI projects is that whenever issues threatening the timely or actual completion of a project arise, Chinese SOEs (and the PRC by ricochet) will be made aware rapidly.  Hence, PRC authorities will seek to find a solution quickly.  In practice, this highlights the importance of out of court negotiations.

2.2         BRI disputes often are resolved in parallel to the courtroom

Examples of BRI disputes being arbitrated and litigated have recently surfaced more frequently, thereby putting the emphasis on the need for parties to BRI contracts to adopt robust dispute resolution mechanisms.  These examples have also shown the tendency by parties to these contracts (whether they be public, quasi-public or private) to seek the resolution of their dispute through negotiations parallel to any arbitration or court case.  That preference for settling disputes amicably (through negotiation or mediation) will come as no surprise to professionals experienced in dealing with Asian parties and disputes.  However, this preference needs to be understood and considered by all parties involved in BRI contracts and disputes.

Non-Chinese parties also need to consider that, although their bargaining power might appear lower, they can gain leverage in negotiations by demonstrating their ability to enforce their contractual rights efficiently through a robust, independent and binding dispute resolution mechanism.  Such mechanism can be a combination of dispute boards, mediation and arbitration, administered by a reputable dispute resolution institution.  The end objective is to demonstrate to the counterparties involved that, if need be, the parties will have to go through a neutral process, where unequal bargaining powers or appearances thereof will not matter, and which will yield a result (whether it be a dispute board’s decision or arbitral award) enforceable efficiently and quickly against assets located all over the globe.  The sole demonstration of one party’s ability to assert rights efficiently will often be enough to enhance its negotiating stance significantly, thereby levelling the negotiating playing field.

In this regard, it is worth noting that several arbitral institutions, including on the African continent, fit the bill and provide adequate options to parties during contract negotiations.  In other words, while Chinese counterparts may be willing to push a non-negotiable contractual package (which would include their preferred dispute resolution clause), non-Chinese parties have many options to propose during negotiations to achieve the simple objective of being able to enforce their contractual rights before a neutral, efficient and experienced forum.

3       BRI disputes’ additional differences

3.1         Lack of Dedicated ISDS mechanism

The second notable difference between BRI related disputes and disputes arising out of past trade/investment initiatives is the current lack of a dedicated investor state dispute settlement (ISDS) mechanism covering BRI investments.  There currently exists an ISDS mechanism, based on a network of International Investment Agreements (IIAs), and arbitration institutions specialized in administering these disputes, the most prominent being the International Centre for Settlement of Investment Disputes (ICSID).  ICSID, which forms part of the World Bank Group, was created following the signature of the 1965 Washington Convention (ICSID Convention).[8]  That generalist ISDS mechanism does not cover specific types of investment disputes and instead can be used by all types of investors, if they and their “investments” meet the requirements enounced in the relevant IIA and the ICSID Convention.

So far, no ISDS system specific to the BRI, let alone to BRI investments in Africa, has been created.  In other words, BRI investors have had to resort to the general system to settle their dispute with host states.  As an example, a Chinese investor, Beijing Everyway Traffic and Lighting Tech Co Ltd. recently launched an ad hoc arbitration against Ghana on the basis of the China-Ghana BIT.  That arbitration, although not strictly related to a BRI project, includes features that will likely resemble those of future BRI investment arbitration disputes.  Yet, in the absence of a BRI specific ISDS forum, these disputes and the related parties, run the risk of falling within the general system, when their interest may be to provide for another type of ISDS system, or to adapt protections afforded to foreign investors to their involvement with a BRI project.  In this regard, the initiative to create the China-Africa Joint Arbitration Centre (CAJAC) does not appear to cover all potential types of BRI disputes, in particular those arising between foreign investors and host states.

3.2         Impact of Environmental and social issues

The third major difference is the role of environmental and social issues in the disputes relating to the BRI.  These considerations have hardly been discussed in relation to other past trade/investment initiatives, while they now often are at the centre of disputes, including those relating to the BRI. 

Indeed, the first sign of the importance of such issue is the Chinese President’s 2016 declaration to the Uzbek parliament that the BRI would be “green, healthy, intelligent and peaceful”.[9]  Guidelines have even been issued to ensure the green implementation of BRI projects.[10] 

Environmental issues raised in relation to BRI disputes result in the relevance of environmental laws and regulations, either domestic or international, being enhanced.  It will also result in the larger involvement of environmental NGOs and actors, either local or international, into the dispute resolution process, through the possibility to file lawsuits in local courts against BRI actors, or to act as amici curiae before local or international tribunals ruling on BRI disputes. 

Social issues, notably those relating to the social legitimacy of BRI projects, will prompt similar actions by NGOs or social groups, or local communities.  These aspects will have to be carefully considered by litigants in order to fully understand their impact on questions of liability of States or on issues of causation between a State measure, and the alleged damage suffered by a private investor.[11]

________________________

* Associate, LALIVE

[1] See the BRI official website at https://www.beltroad-initiative.com/belt-and-road/

[2] Compare the estimated USD 13 billion of investment pertaining to the Marshall Plan to the estimated USD 8 trillions of the BRI.

[3] See interactive map from Boston University at https://www.bu.edu/gdp/chinas-overseas-development-finance/

[4] See ICC ADR Centre Rules at https://iccwbo.org/dispute-resolution-services/mediation/icc-international-centre-for-adr/

[5] See for example the Memorandum of Understanding signed between the PRC and the Democratic Republic of Congo (DRC) on 6 January 2021 at https://news.cgtn.com/news/2021-01-07/China-and-DRC-sign-MoU-on-Belt-and-Road-cooperation-WQDfnIxRq8/index.html.

[6] See about the growing demand for restructing of BRI loans at https://tfipost.com/2020/08/china-gave-away-billions-of-dollars-as-bri-loans-to-different-countries-now-they-are-not-coming-back/ and on the specific demand for restructuring by Zambia at https://www.scmp.com/news/china/diplomacy/article/3122836/chinas-top-diplomat-holds-debt-talks-zambia-after-appeal

[7] See explanation of Sri Lanka situation at https://foreignpolicy.com/2021/03/02/sri-lanka-china-bri-investment-debt-trap/

[8] See ICSID website at https://icsid.worldbank.org/resources/rules-and-regulations/convention/overview.

[9] See report on President’s Xi’s speech at https://www.globaltimes.cn/content/989967.shtml

[10] See Green Development Guidance for BRI Projects Baseline Study Report, released in December 2020 by the BRI International Green Development Coalition.

[11] See Jus Mundi Wiki Note, Social License to Operate, by Baptiste Rigaudeau and Emilie McConaughey.



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