A Smoother Road

A Smoother Road


As the mammoth Belt and Road initiative touches some 70 countries, complex commercial disputes cannot be avoided. But while the opportunities may come with risks, lawyers in Asia say there are a variety of measures companies can employ to help protect themselves and their business interests.  

 

It’s been more than six years since the PRC’s ambitious Belt and Road Initiative (BRI) kicked off, but it seems that interest has yet to fade. In January this year, the New York Times reported that Chinese companies had signed Belt and Road contracts worth close to $128 billion last year – an increase of more than 40 percent compared to 2018.

But not everything has gone smoothly. In more recent years, political tensions and concerns around debt imbalance have complicated matters. For businesses too, there is a rising risk of disputes as complex projects stretch across multiple jurisdictions. And lawyers say that unless you’re properly protected, you’re playing with fire.

PREPARATION IS KEY

Nils Eliasson, an international arbitration partner at Shearman & Sterling, outlines that many of the Belt and Road projects are ambitious “high-value and technically challenging projects involving complex financial, political and legal considerations, particularly since many of the Belt and Road countries lack political and financial stability.”

By way of example, only two out of the top 12 recipients of Belt and Road investments are classified as Tier-1 jurisdictions for “safe” investment, Eliasson says, citing a study commissioned by the Shanghai Municipal Commission of Commerce.

Given such a risky backdrop, he advises that companies seek to protect themselves from the outset of the project “during the contract negotiation stage,” negotiating contractual safeguards, “such as express limits on financial liability and an appropriate mechanism for resolving disputes,” he advises, noting that “Companies should also consider structuring their involvement in Belt and Road projects to benefit from any available bilateral and multilateral investment treaty protections.”

But the preparation doesn’t end there, he warns. “Companies should also exercise effective contract management throughout the lifetime of the project, including by adhering closely to contractual requirements and maintaining comprehensive documentary records. Effective contract management is key to reducing the risk of disputes and to increase the likelihood of success where disputes cannot be avoided.”

Mahesh Rai, a director at Drew & Napier, agrees that there are precautions that companies can take to protect themselves over the course of the project. “Companies should carefully provide for contractual mechanisms to monitor and manage any changes which have time and cost impact on the infrastructure project. They should also have provisions to address disputes in the course of the project early on. Employers, in particular, should include provisions requiring timely notice of claims for extra payment and extensions of time to be made to the contract administrator to ensure that they are not taken by surprise by such claims later on,” says Rai.

PRIORITISE THE PAPERWORK 

When it comes to the preparation side of disputes, John Choong, partner at Freshfields Bruckhaus Deringer puts it simply: It’s always better to avoid a dispute than to prepare for one. And, given the complexity of agreements that may arise along the way, Choong advises taking a bird’s eye view, and scrutinising the entire process carefully.

“At the contract drafting stage, it is important to pay close attention to the language used in the contract. The golden rule is that words will be given their natural and ordinary meaning and you do not wish to have a dispute over interpretation. Companies should also think through the life of the contract under various fact patterns to ensure that the contract is sufficiently detailed to provide certainty in different scenarios – such as if a dispute were to arise,” he advises.

Meticulous record-keeping is also necessary Choong says. Additionally, keeping “contemporaneous evidence – that is, evidence recorded at the time of or in the immediate aftermath of an event,” is key.

“In the eyes of the courts and tribunals, evidence created long after the event (especially after a dispute has arisen) will be given less weight than contemporaneous evidence, due to a perception that parties may be engaging in posturing. If possible, companies should maintain contemporaneous records as a regular practice,” he advises.

The dispute resolution clause is also a highly significant “sometimes over-looked” provision, says Choong. “We advise our clients to draft the dispute resolution clause thoughtfully, to protect themselves. A contract is only as strong as its dispute resolution clause – it provides the tools to protect the parties’ rights and interests, should a dispute arise.”

Disputes aren’t only challenging for companies, they can also serve as something of a deathblow for projects, says Ellrico Situmorang, partner at Indonesian law firm Parulian Situmorang & Partners.

“Disputes is something that infra-structure businesses really want to avoid, especially during the construction process. In many cases we have seen projects being abandoned or not being taken care of, because there is a running dispute between the stakeholders or between the parties involved in the process of the project,” he says.

Preparation is highly important, notes Situmorang, but there are also other strategies to consider. “There are many ways that parties can avoid disputes. In my experience, they need to be open from the very beginning of the process – that’s important. If necessary, the parties can create an ad hoc mechanism to settle the differences among them, regardless of the size, before they can put their dispute to an open litigation,” he says, noting that a collaborative mindset and good communication can help smooth the way.

CONSIDER CLIENTS’ NEEDS 

Given the likelihood of increasingly complex disputes on the horizon, lawyers advise developing close client relationships in order to ensure adequate risk assessments are carried out. “From the outset of an infrastructure project, we will work closely with our clients to ensure that the specific legal, financial and political risks associated with the project are comprehensively addressed in the contract,” says Eliasson.

In cases where the client is a contractor, the team will also consider how projects can be structured to benefit from investment treaty protections. “The combination of contractual and investment treaty safeguards offers powerful protections for resolving disputes,” Eliasson adds.

But there are other factors to consider too. Eliasson warns that companies must always ensure that contracts contain effective dispute resolution clauses “such as arbitration under a recognized set of arbitral rules in an arbitration-friendly jurisdiction (e.g. arbitration under the HKIAC Rules in Hong Kong), as this is the mechanism through which the terms of the contract are enforced. The contract should also comprehensively allocate risk between the parties, including through express limitations and caps on liability, the availability of hardship and force majeure, and termination and suspension provisions.”

Rai tells Asian Legal Business that sometimes it’s not just about preparing clients for conflicts, sometimes his team join the process once a dispute has already begun. “If clients come to us early enough, we prepare clients for potential disputes by making sure that the necessary documentation of the issues in dispute is in place. The clients are in a better position after consulting us as we assist with giving an assessment of the merits of their claims and defences, as well as advising them on how best to address areas which may give rise to disputes. This not only helps the client to best prepare its case for eventual dispute resolution proceedings, but there is often an element of dispute avoidance in our advice relating to how to sidestep potential pitfalls and avoid a dispute arising,” he says.

Additionally, for projects worth more than S$500 million ($370 million) in value, Rai notes that parties can consider incorporating the Singapore Infrastructure Dispute-Management Protocol (SIDP) in their contract.

“This would provide for a ‘standing’ Dispute Board (i.e. to be engaged at the start of a project and which will remain in place for its duration). Dispute Boards have been used as a method of avoiding and resolving disputes in the infrastructure sector for over forty years. Such Dispute Boards are made up of neutral individuals whose role is to assist with the swift and cost-effective avoidance and resolution of disputes without the need to resort to more expensive and time-consuming arbitration or litigation,” he says.

Prawidha Murti, a partner in the dispute resolution practice of Indonesia’s Oentoeng Suria & Partners,  which operates in association with Ashurst, tells Asian Legal Business that “whilst you can never insulate yourself against every risk of disputes, setting out the most comprehensive clauses on every foreseeable risk is the best way to protect businesses should a dispute arise. Hopefully, this will mean all parties will be prepared with sufficient certainty to determine the right actions to take moving forward, minimizing the need for formal dispute settlement processes,” she says. But while protections are highly important, designing negotiation and/or mediation within the dispute settlement clause, helps to ensure that disputes can be settled “quickly and amicably in line with the business interests of the parties.”

SEND IN THE LAWYERS

While preparation certainly helps smooth the way, there’s no substitute for having the law on your side from the very beginning. Seeking legal advice from the get-go helps outline challenges sooner and proceed in the right way, say lawyers.

“It is extremely important to involve lawyers – internal or external – at an earlier stage of a dispute,” says Choong. “This may include engaging a team of international disputes lawyers who can provide legal and strategic advice, including utilising procedural tools in multiple jurisdictions where necessary. They can also provide advice on selecting suitable arbitrators and experts.”

His team also work to prepare their clients by training their in-house lawyers on managing disputes, Choong notes, adding that “In-house lawyers play a critical role in facilitating communication between the external lawyers and the business team, and in helping our clients put their best foot forward.”

Legal guidance for the business team is also highly important according to Choong, but something that is “often overlooked.” “The business team has first-hand involvement in the day-to-day operations of a company, and it is extremely useful to ensure that they can identify early signs of a dispute and know how to deal with them properly. As mentioned earlier, it is important to develop a practice of keeping contemporaneous records throughout the life cycle of the project. The business team plays a key role in providing factual input in that context,” he says.

ARBITRATION RISING

When it comes to resolving disputes, the epic rise of arbitration cannot be underplayed. Recent developments have also reinforced the strength of the Asia market as a hub for this – the signing of the Singapore Convention on Mediation in 2019, while a recent agreement between authorities in Mainland China and Hong Kong that enables Chinese courts to grant interim measures in support of arbitrations seated in Hong Kong, has also been praised.

Indonesian firm Kudri & Djamaris say that arbitration has been acknowledged as “a more favourable approach than litigation especially in area of international commerce contract’s dispute, partly because its perceived advantages felt by the disputing parties.”

“Its wide array of advantages such as, but are not limited to, its nature of confidentiality, procedural flexibility, time efficiency and arbiter’s area of expertise conclude its benefit that litigation cannot offer. We believe that arbitration is and has been the best suitable option and we feel that it will stay as the most favourable option as the main approach of dispute resolution,” they say.

They also add that mediation is likely to rise in popularity in the future “especially in relation with dispute in the BRI’s related infrastructure project.” “This prediction comes from the understanding that mediation could provide a friendlier approach for dispute resolution for the contracting party without a potential of damaging the business relationship,” they say.

Murti informs Asian Legal Business that most cross-border businesses and transactions in Southeast Asia are typically carried out with arbitration as their dispute resolution mechanism, in part due to its international enforcement capability.

“The most famous arbitration-friendly countries being Singapore and the Hong Kong SAR due to its proximity to Southeast Asian region. Both countries are frequently the venue of choice for arbitration given their geographic convenience and the fact that each of them hosts one of the most prominent arbitration institutions in the world (SIAC and HKIAC), along with their respective world-class lists of arbitrators,” she says.

But looking forward, she also predicts there may be further developments in the arbitration scene in the future. “We believe the demand for arbitration will remain high in Southeast Asian countries, including because of the Belt and Road Initiatives enhancing the number, size, and variety of new cross-border projects and transactions. With more demand for arbitration in the market, certainly arbitration institutions will consistently update their arbitration rules, and enhance the quality of service, facility, and the standard of their arbitrators.” 

Eliasson agrees that well-drafted contracts in Asia “frequently identify arbitration as the preferred method of resolving infrastructure disputes.” “This is a sensible choice given the neutral forum that arbitration offers for resolving disputes as well as the comprehensive international framework that exists under the New York Convention for enforcing arbitral awards in 161 states, including most Belt and Road countries. It is also common to see parties agreeing to a “tiered approach” to dispute resolution, with negotiation, expert-determination or mediation as the initial form of dispute resolution followed by arbitration if the dispute has not been resolved. In a cross-border context, including in infrastructure projects, arbitration is preferable to relying on local courts, which can be unreliable and slow depending upon the particular jurisdiction.”

“Where a company’s involvement in an infrastructure project has been negatively impacted by a state or state-owned entity in the country where the infrastructure project is located, the Company may also be able to rely upon an investment treaty to initiate arbitration proceedings directly against the host state. Investment treaty arbitration can offer a powerful mechanism for obtaining redress in infrastructure projects.”

Situmorang partner at Parulian Situmorang & Partners weighs in, commenting that while arbitration regulation is relatively new in Southeast Asia, it has become quite a trend in dispute resolution in the market. “The parties they need to deeply discuss matters until they come to a dispute agreement,” he says, noting that the court process can be somewhat more restrictive.

“In a court setting in Indonesia, judges here usually have more than enough cases at hand and may quite a lot to handle and so many regulations to comprehend. For example, maybe in the morning a judge will be settling a case on family law, in the afternoon they’ll be handling civil or commercial litigation, then in the late afternoon, or sometimes evening, they’ll discuss and review the case on criminal proceedings,” Situmorang says.

He adds: “Therefore I am of the view that [arbitration is a preferable method] especially for commercial or infra-structure disputes, because you need someone that really knows the specific regulations, who has first-hand experience and deep understanding about the area being discussed.”

“For arbitrators, you don’t have to have a legal degree. You can have a ship-ping background, a tax background. When we have a dispute regarding a shipping issue, an arbitrator who has a deep knowledge of shipping can be chosen by the parties. Especially for high complexity kind of cases, I think arbitration is a good choice,” he says.

MORE IN THE OFFING

While there is much talk of preparing for the dangers of disputes, the reality is that given the long-term nature of many of the BRI projects, these aren’t always forthcoming. Sometimes challenges are buried further down the road, only to emerge years later.

“Infrastructure disputes typically emerge as projects near completion so, as increasing numbers of Belt and Road Initiative infrastructure projects move towards this stage over the coming years, we are likely to see more infrastructure disputes relating to Belt and Road projects,” predicts Eliasson, noting that because of the nature of some disputes, these may be resolved at a state-to-state level, as opposed to dispute resolution mechanisms in the underlying contracts. Choong echoes the belief that disputes are likely to increase over the next few years “as earlier projects are beginning to mature into disagreements and conflicts.” Additionally, such conflicts may grow as projects swell in scope. “As the scope of the BRI continues to expand, more parties from different cultures and legal systems with differing expectations are becoming more involved, and this is likely to lead to more disputes in the future,” Choong says.

But Murti takes a different stance, telling Asian Legal Business: “We believe the extent of disputes per infrastructure business will remain the same in the future, if not decrease.”

“Although there will be high demand for infrastructure projects in Southeast Asia because of the Belt and Road Initiative, it also means that there will inevitably be a higher number and value of tenders available in the market. In consequence, both companies and legal counsel will be exposed to dealing with infrastructure projects more often, increasing their experience in this area,” she says.

“From there, the trend of using formal dispute process will likely to decrease, as companies and legal counsel grow more familiar with infrastructure businesses and avoid dispute settlement processes by developing strong contracts and settling conflicts amicably. Nevertheless, our belief regarding the stagnant, if not decreasing, number of disputes per infrastructure business will most likely prevail only if companies hire experienced legal counsel expert in the infrastructure and construction field,” she warns.

 

To contact the editorial team, please email ALBEditor@thomsonreuters.com. 

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