Monthly Archives: March 2018

PPP

Public-Private Partnership Disputes in the Chinese courts

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A team of researchers from the Jiangsu Higher People’s Court #1 Civil Division recently published an article on difficult legal issues relating to public-private partnerships (literally government/social capital cooperation) (PPP) in the Journal of Law Application (the Journal) (法律适用), # 17, 2017.  The Journal is one of China’s core legal journals (among the most prestigious academic law journals).  The National Judges College is affiliated with the Supreme People’s Court (SPC).  

The data on which the researchers’ analysis was based was the results of a search of the official Supreme People’s Court (SPC) database (裁判文书网),  using the keywords  “BOT” and  “PPP”.   Their search (end date April 30, 2017) found 493 BOT-related decisions and 20 PPP-related decisions.  The article relates to both BOT and PPP projects and uses the term PPP to include both.

Data on PPP/BOT disputes

  1.  BOT/PPP disputes are increasing

    1. BOT cases
2013 2014 2015 2016
Concluded cases 21 115 107 183

From 2013 to 2016, BOT disputes increased 71%.

2. PPP cases: not large number currently but increasing yearly.

2015 2016
Cases# that been concluded 4 16

Wide range of industries are involved in PPP disputes

China’s official PPP projects include a large number of industries such as energy, transportation, water conservancy construction, etc (can be found on http://tzs.ndrc.gov.cn/zttp/PPPxmk/xmk/). PPP disputes have largely focused on heating, sewage treatment, road engineering, station project, etc.

Type of PPP cases 

BOT cases:

Type of cases Civil Cases Administrative Cases Criminal Cases
85.54% 2.7% 11.76%

Civil cases mainly include contract, property, tort and financial disputes, among which contract disputes account for 78.22%.

Type of the contract cases (78.22%) Construction Project dispute Heating contract Loan Lease Sales
21.61% 13.92% 13.19% 7.69% 7.33%

PPP cases:

Type of cases Civil Case Administrative Cases Criminal Cases
# 11 5 4

Most civil cases are construction project disputes.

 parties to PPP cases

PPP disputes involve multiple legal relationships and parties, including the government, private investors, the project company (SPV), financiers, guarantee companies, insurance companies, contractors, operators, raw material purchaser, etc. Also, with the implementation of the One Belt And One Road” strategy, disputes arising from overseas PPP projects have gradually emerged.

New issues are emerging

Because PPP is a newly-developing area, many problems are gradually emerging. New problems will continue to increase, including interpretation of the PPP contract terms, the application of the “changed circumstances” doctrine [under the Contract Law], the government’s repurchasing issue,  and the evaluation of project quality. In December 2016, National Development and Reform Commission (NDRC) and China Securities Regulatory Commission (CSRC) released Notice of the Ministry of Finance, the People’s Bank of China, and the China Securities Regulatory Commission on Issues concerning Regulating the Asset Securitization of Public-Private-Partnership Projects, which however, still cannot solve some key legal issues such as asset independence and bankruptcy isolation in terms of the insufficient SPV legislation.

Difficulties in hearing PPP cases

For a long time, the government has been used to the role of “administrator”, usually solving disputes through administrative mechanisms. It has not cared much about contracts in which it is on an equal footing with private entities. Facing PPP disputes, private entities may take irrational and non-legal means to protect their rights, resulting in further aggravated conflicts and sometimes mass incidents.

There are difficulties hearing PPP cases, considering the insufficient (PPP 立法供给不足), non-specific (没有专门的PPP法律和行政法规) and incoherent legislation (没有明确的法律规则参考). Also, courts need to consider many aspects such as the legal, economic and social impacts.

Legal risks in implementing PPP projects

Although the central and local governments are promoting PPP projects, there is virtually no related legislation. Although there are relatively few PPP disputes now, that will change as government continues to promote PPP.   Because legislation governing PPP projects is insufficient the compliance risk is inevitable.  Major legislation lacks special provisions regulating PPP:

Although the State Council has enacted guidelines on promoting PPP projects (Circular of the General Office of the State Council on Guiding Opinions on Promoting the Public-Private Partnership Mode in the Public Service Fields (关于在公共服务领域推广政府和社会资本合作模式指导意见)  they are only administrative regulations and are insufficient to protect the private sector. Meanwhile, there are conflicting policies from different national ministries and departments, which in the end not only affects the standing of PPPs and fairness, also causes high administrative costs and low work efficiency.  It is unclear what PPP is and the relationship between PPP projects and others, such concessions. Therefore there are many disagreements concerning whether a project should be considered a PPP project and what the rights of the various parties should be.

The competent authority & management mechanism for PPPs are  unclear

At present, China lacks a unified institution to govern PPP projects.  Although the state has designated the NDRC to take the lead on traditional basic infrastructure PPP projects and the Ministry of Finance (MOF) to take the lead on public services PPP projects, in reality there is crossover between the two types of projects and no clear line between them.  These projects involve  NDRC, MOF, and the authorities in charge of the relevant industry and in this situation with projects involving multiple approvals, there are no clear rules on the division of authority among authorities, and between the central and local authorities, the procedure for obtaining approvals, and whether approvals can be consolidated.

Legal infrastructure for PPP projects

PPP projects involve multiple legal fields such as tax, land, finance, insurance, and construction.  Because a coherent and detailed procedure is lacking for PPP projects, it will lead to legal risks afterwards such as whether PPP projects have tax breaks, whether the land used in a PPP project needs to be put out for bidding separately.

III. How the courts deal with PPP cases

General principles in hearing PPP cases:

  1. Balance strict application of law and promoting transactions; and
  2. Uphold the equal protection of property rights–balance the interests of the government and social capital (private sector), different parties’ interests, and the interests of the public.

Nature of PPP agreements

There are two schools of thought on the nature of PPP agreements, administrative v. civil agreements.

Validity of the PPP contract?

What if the parties argue that the PPP agreement is invalid since it may violate existing laws and administrative regulations?

  • Qualification for private sector (companies) to enter into a PPP contract
    • One view is that private sector must be qualified for construction, otherwise the PPP agreement will be invalid.
    • Another view is that private sector does not need construction qualifications, and the PPP is not invalid.
    • Authors’ view: we need to distinguish. If the PPP contract contains project construction, then the private sector shall have the corresponding construction qualification. If the contract does not contain such project construction, then the private sector does not necessarily need to have the construction qualification.
  • Problems in the bidding process
    • NDRC has released guidelines for PPP project operations – Notice of the National Development and Reform Commission on Issuing the Guiding Rules for Implementing Public-Private Partnership Projects in Traditional Infrastructure Fields (国家发展改革委关于印发《传统基础设施领域实施政府和社会资本合作项目工作导则》的通知), which provides that the private sector should be selected via relevant bidding process. Then what if the PPP contract which includes the construction project did not go through the bidding process, will that lead the invalidity of such contract?
    • Authors’ view: if the contract contains construction work, and such the contract is legally required to go through the tender process, then without such process, the PPP contract will be invalid.
  • land issues

Many PPP projects are connected with land use. What if the land was not subject to a tendering process? Will that invalidate the PPP agreement?

Authors’ view: this is controversial in practice. According to the regulation enacted by Ministry of Land and Resources 国土资源部办公厅关于印发《产业用地政策实施工作指引》的通知国土资源部办公厅关于印发《产业用地政策实施工作指引》的通知, if the PPP project concerns land use, then the process of bidding and the process of authorizing land use can be combined, therefore the courts can confirm the validity of the PPP agreement.

Enforcing government undertakings

Some local governments will make undertakings to provide certain benefits or rewards to the private sector participants. What is the legal effect of that commitment?

  • One view holds that the promise is an administrative promise and should be recognized as effective.
  • Another view is that the govern commitment is ineffective since it goes beyond the government’s powers.

Authors’ view: we need to distinguish different situations. If the government’s benefits or rewards are in violation of law, administrative regulations and mandatory regulations, such as in violation of tax laws or result in the loss of state-owned assets, then the undertaking is invalid. If the commitment does not violate mandatory laws or against the public interest, such commitment should be valid based on the principle of estoppel.

Issues related to PPP contracts

  1. Relationship between the PPP agreement and the construction contract
    • In PPP projects, the government signs the PPP project agreement with the private sector entity, and the SPV and the third party (which is designated or appointed by the private sector) signs the project construction contract. What is the relationship between these two contracts? When the PPP agreement is terminated, how do we deal with financial settlement under the construction contract?
      • One view is that in the construction contract is one part of the performance under the PPP agreement, therefore, the project construction contract is linked to the PPP agreement.
      • Another view is that the construction contract and the PPP contract have an actual connection but involve different legal relationships.
      • Authors’ view: it is necessary to see whether the PPP agreement has specifically agreed upon certain terms governing the construction contract. If not, then these two contracts shall be deemed to be independent of each other.
  2.  Bid bond issues
  • Generally, the government requires the private sector entity to provide a bond for its bid. The issue is whether the bid bond is governed by the arbitration agreement (in the main agreement).
  • One view holds that the bid bond is linked to the main contract and the arbitration clause applies to the bid bond.
  • Another view is that the indemnity obligation of the guarantor is primary and therefore not related to the main agreement, therefore the arbitration agreement is inapplicable.
  • Authors’ view: the issue of tender guarantee payment, it is related to the main contract, therefore it should be subject to the arbitration clause in the contract if there is any.

Project employer issues

  • Since it is the government and the private sector signed the PPP contract, and it is the project company and the contractor have signed the construction contract, then who is the project employer under the construction contract?
    • One view holds that the government and private sector entity are the project employers.
    • Another view is that the project company is the project employer.
    • Authors’ view: the PPP contract and construction contract are independent contracts, therefore under the construction contract, the project company should be recognized as the project employer.

 pledge of the interest in the PPP

Can a concessionaire’s rights be pledged? Considering the SPC’s guiding case No.53, the usufruct (benefits from the use rights) in a concession may be pledged and can be used as accounts receivable in the pledge registration

  • Authors’ view: the pledge should be recognized as effective under SPC’s guiding case No. 53.

Dispute settlement mechanism in PPP disputes

  • What if the parties agree to dispute resolution by arbitration or civil action in the PPP agreement?
    • Authors’ view: as discussed above, if the issue is governed under administrative law, then even if the parties agreed to arbitration or civil litigation in the PPP agreement, the agreement will not be binding and the parties must rely on administrative remedies. If the dispute is a pure contract issue, then the dispute resolution agreement between the parties shall be valid.
  • What if the parties agreed on jurisdiction?

Other Suggestions

  • Promote PPP legislation and create an the overall framework of PPP system: China should speed up the process of PPP legislation, which can learn from Legislative Guide on Privately Financed Infrastructure Projects enacted by United Nations Commission on International Trade Law, PPP Reference Guide enacted by the World Bank, PPP Handbook enacted by Asian Development Bank (ADB).
  • Clarify the PPP management mechanism and clarify the responsibilities of all parties.
  • Improve the supporting mechanisms for PPP projects.

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Many thanks to my Peking University School of Transnational Law research assistant Zhu Dianmeng (Grace) for her work on this.

foreign courts, foreign investment law, foreign-related cases, One belt one road

Update on China’s international commercial court

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Judge Gao Xiaoli

Among the many developments flagged in Supreme People’s Court (SPC) President Zhou Qiang’s 2018 report to the National People’s Congress is that the SPC will establish an international commercial tribunal (court)(最 高人民法院国际商事审判庭), as approved by the Central Leading Group for Comprehensively Deepening Reforms. The timing is unknown. The international commercial tribunal (this post will use the term “court”) as is understood clearly, must fit political and technical requirements. This blogpost will look at those, particularly the technical ones, as those are the ones that have escaped the attention of most commentators outside of China.

Background

Although many  articles have been published in the media, both in and out of China after the public announcement to the press about the international commercial court in January, 2018, most of them have little detail on the issues. Some contain uninformed statements, such as the one that quotes an insider at the China Council for the Promotion of International Trade mentioning the use for dispute resolution of “the common law of the United States and European countries” (send the insider back to law school please!).

In the past three months, Judge Gao Xiaoli, deputy head of the SPC’s #4 civil division (photo above), and at least one other person at the SPC has released some information about the court, all of which seems to have eluded international discussions. For those who are not aficionados of Chinese foreign-related dispute resolution, Judge Gao (who often appears at UNCITRAL or international arbitration related conferences or seminars) outside as well as inside mainland China, is a formidable presence in the courtroom. Thanks to the SPC’s streaming of court hearings, it is now possible to see that from any corner of the world.  She is also an impressive speaker. Judge Gao is representative of the judges engaged in technical legal work at the SPC, with a PhD in law from one of China’s leading law schools and experience studying abroad.

Political requirements

On the political requirements, there are at least two, both previously highlighted in this blog.  The more general one was highlighted one year ago–the establishment of the international commercial court relates to a sentence in the Fourth Plenum Decision:

Vigorously participate in the formulation of international norms, promote the handling of foreign-related economic and social affairs according to the law, strengthen our country’s discourse power and influence in international legal affairs, use legal methods to safeguard our country’s sovereignty, security, and development interests.

More specifically, it appears to be the civil and commercial counterpart to the efforts noted on this blog two years ago (concerning dispute resolution in maritime cases),  part of a push to move the locus of China-related dispute resolution from London and other centers in Europe (or elsewhere) to China, where Chinese parties will encounter a more familiar dispute resolution system.

The other political requirement relates to the need to serve major government strategies, the BRI/OBOR one in particular, discussed in this blogpost.  President Zhou Qiang’s 2018 NPC report, as his 2016 report (and presumably 2017 report) contain the phrase “provided service for the country’s major strategies.” As a central government institution, the SPC must do its part to support national major strategies. Since BRI/OBOR has been initiated, President Zhou Qiang’s report has mentioned  BRI/OBOR as one of those major strategies for which the SPC has provided service.

Technical requirements

Further background

The sources that previous commentators missed include the following:

In the press interview, Judge Gao reviews what the SPC has done so far in this area, including several developments previously highlighted on this blog:

  • SPC’s One Belt One Road (BRI/OBOR) policy document;
  • SPC’s OBOR/BRI model/typical cases (see above link and translations by the Stanford Guiding Cases project found here);
  • SPC’s judicial interpretation on demand guarantees, that blogpost explains that with so many Chinese companies focusing on infrastructure projects overseas, Chinese banks have issued billions of dollars in demand guarantees.

 Technical issues

The SPC is looking at three types of investment and trade disputes:

  • state-state disputes (for China, generally WTO);
  • investor-state disputes (ICSID and other institutions, generally using UNCITRAL rules (note that CIETAC and the Shenzhen Court of International Arbitration (SCIA) also have amended their rules to be able to take investor-state disputes, with SCIA using the UNCITRAL rules;
  • disputes between commercial parties.

Judge Gao mentioned that they at the SPC, too have noticed the worldwide trend of other jurisdictions establishing courts to hear investor-state disputes, citing Canada among them and that they are exploring whether the Chinese courts can do so as well.  However, she notes that when China acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), it made a commercial reservation, and the SPC judicial interpretation concerning the New York Convention excluded investor-state disputes, so that currently it is not possible to enforce investor-state awards through the New York Convention. Judge Gao says they are considering solutions to this issue.

Commercial disputes

Definition of OBOR/BRI disputes

Although none of the authors have mentioned this (nor have I, until now), one unrecognized issues in discussing OBOR/BRI disputes is a definitional one–what is a OBOR/BRI related dispute?  It seems that in court practice, the definition is broad, including cases between Chinese contractors and their demand guarantee issuing banks, as well as cross border cases involving Chinese and parties located in OBOR countries.  In my research (including a discrete inquiry with a knowledgeable person), a formal definition is lacking.

Judicial cooperation/enforcement issues

As this earlier blogpost mentioned, enforcement of foreign court judgments is on the SPC’s agenda.  As Judge Gao recognizes, there needs to be a structure for judgments of this international commercial court to be enforced outside of China.  She mentions (as has this blog), that China is actively participating in negotiations on the Hague Convention on the Recognition & Enforcement of Foreign Judgments, and is studying ratification of the Hague Convention on the Choice of Courts Agreements.  She flags also (as has this blog) that the SPC is drafting a judicial interpretation on the recognition and enforcement of foreign civil & commercial judgments.

Practice in other jurisdictions

Judge Gao mentions that the SPC is looking at the international commercial courts in several jurisdictions, including Dubai and Singapore (as mentioned in the earlier blogpost), but also Abu Dhabi, London’s Commercial Court (it appears that someone at the SPC has read this Financial Times article on foreign litigants there), and notes that the Netherlands, Germany, and Belgium are all establishing international commercial courts that use English.

Challenges for the Chinese courts

Judge Gao forthrightly flags a list of issues (my comments in italics) that the SPC faces in establishing an international commercial court. It is likely that she and her colleagues are aware of the additional issues raised as well.

  • judges; she notes that Dubai and Singapore have foreign judges on their international commercial courts, but currently China’s Judges’ Law and People’s Court Organizational Law (being amended) present obstacles to having foreign judges, and without them, the court will not be international and will not be internationally credible (literally, be internationally influential) (但是如果不引进外籍专业性人才参与国际商事法庭的建设，则缺乏国际性，缺乏影响力). My earlier blogpost mentioned the nationality issue. Would qualified foreign judges (or those from Hong Kong) be willing to join the international commercial court? Judge Gao does not mention that the group of Chinese judges qualified to hear these cases is not that large, and they are overloaded with cases, judicial interpretation/other guidance drafting, and other work. Could highly qualified Chinese lawyers be appointed to this court?  It is unclear, and relates to issues of how they would fit into the rigid structure of the judiciary, highlighted here.
  • choice of law; she mentions that parties have freedom concerning choice of law in China, so that would not be a problem.  However, relating to choice of court clauses, Professor Vivienne Bath’s research on parallel proceedings in China (previously mentioned on this blog) shows that Chinese courts do not recognize the validity of those clauses when the choice “lacks an actual connection with the dispute” because of provisions in the Civil Procedure Law.
  • procedure; she queries whether there can be some breakthroughs in civil procedure in this area.  Foreign lawyers are likely to query whether this could mean better discovery of documents. More importantly, what is not mentioned is that China’s failure to have acceded to the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents will also be a major obstacle for the international commercial court. Under current Civil Procedure legislation,  notarization and legalization of documents is often required. The first step is when a party files suit or when a foreign party responds. Additionally, in litigation, evidence from a foreign country often must be notarized and legalized. Notarization and legalization costs time and money and a great deal of effort. At an academic conference in 2017, experts from the institutions involved discussed how to proceed on this.
  • language; Judge Gao notes that the Civil Procedure Law puts obstacles in the way of the international commercial court hearing cases in English.  Note that the pool of Chinese judges able to hear cases in English is not large, and would even further require recruiting judges from outside China’s judicial system.
  • counsel; She mentions the issue of having foreign lawyers handle cases is also an obstacle for the international commercial court, because China’s Civil Procedure Law currently does not permit it.
  • transparency; Judge Gao notes that Chinese judicial transparency and informatization has made great strides, so should be useful to the international commercial court.  However, Judge Gao and her colleagues could usefully look at the type of information accessible to both the parties and general public (and the level of detail in judgments) in other international commercial courts.
  • enforcement; Judge Gao raises the issue of recognition and enforcement of judgments, discussed above.

Where does the SPC go from here?

The article by the post-doctoral student Liao Yuxi suggested that the SPC may want to request the NPC Standing Committee authorize it to suspend some of the problematic provisions of the Civil Procedure Law that Judge Gao flagged above, such as the use of language, and the qualification of judges.  However many of the other issues cannot be resolved so easily, such as international enforcement and the requirement of notarization and legalization of evidence.

As for when we can expect to see some rules relating to the international commercial court, and whether drafts will be circulated for public (or even soft consultation), those are all unclear.  What is clear is that many complicated legal issues face Judge Gao and her colleagues.