I’m honored to be speaking in a few days (remotely) in a webinar sponsored by the Pacific-Asian Legal Studies program of the University of Hawaii at Manoa’s William S. Richardson School of Law on how and why the Supreme People’s Court Serves the Belt & Road Initiative (sign up link is here).
The event will take place at 2 pm, 5 November, Hawaii time, which translates into 8 am on 6 November in the GMT +8 timezone (Hong Kong, mainland China, Singapore, etc.), 11 am in Sydney, and 8 pm on the US East Coast. The timing doesn’t work well for England (midnight) or Europe. I believe a recording will be available at a later date.
In academic and many professional discussions of Belt & Road Initiative (BRI) disputes, the focus is on disputes between the Chinese and foreign parties. Few mention disputes between two or more Chinese parties but linked with a BRI project. (Professor Vivienne Bath of the University of Sydney Law School is one of the few exceptions.) These are what I call “invisible BRI disputes,” because few in the academic world and a small group in the professional world have noticed them.
I mentioned these type of disputes during my keynote speech at the University of Pittsburgh School of Law and Asian Studies Center’s “Deals and Disputes: China, Hong Kong, and Commercial Law” webinar when I spoke about the role of the Supreme People’s Court (SPC) in developing “Chinese international commercial law” (as I defined the term).–as can be seen in the slide above.
Although I made inquiries with some authoritative persons in the world of Chinese arbitration and the judiciary, they were unable to give even a vague estimate of the number of these invisible BRI disputes, but all had the sense that they have been increasing and will continue to increase, both in arbitration and in the courts, as more projects undertaken by Chinese contractors overseas encounter unanticipated problems and enter into dispute settlement proceedings with one or more foreign counterparties and thereafter seek to claim their losses from their Chinese subcontractors (or sub-subcontractors) or suppliers or prevent their banker from paying out under a demand guarantee (or counter-guarantee).
This blogpost looks at three types of business risks leading to invisible disputes, as identified by the authors of the Engineering Contractors Book and others advising Chinese engineering contractors. I look forward to others taking this topic forward.
Invisible Dispute #1
The Engineering Contractors Book said of the risks of subcontracting to other Chinese companies: “illegal subcontracting and multilevel subcontracting has become one of the biggest risks to Chinese contractors nowadays…[T]he choice of subcontractor is very important, which will result in one honors all; one damns all.” The book gives this example of invisible dispute #1.
Company A is a large [Chinese] international contractor… Company A undertakes the general contracting, and completes sets of equipment, engineering consultation and engineering design, project management and engineering supervision, installation and debugging and technical services of various domestic industrial projects. A project in Country F in Southeast Asia was developed and executed by two subsidiaries of Company A: Company B and Company C. Company B is a trading company. This was the first time that it carried out foreign projects. Previously, Company B had no overseas project experience and personnel with relevant experience. Company C is an enterprise whose main business is project design, debugging and tests. In the selection of equipment suppliers, materials suppliers and other suppliers, Company B chose enterprises that had cooperated with Company A in other projects. Problems concerning these enterprises occurred during the installation, debugging and operation process, resulting in project delay, repeated procurement and increased costs. In the stage of commissioning and trial, Company C subcontracted the work to Company K, and Company K subcontracted to Company P, which was also a subcontractor of the employer. This subcontracting mode caused many problems, which led to project delay and triggered the employer’s claim.
According to a recent article in the Chinese press, about 70% of these disputes are heard in Chinese domestic arbitration. A legal adviser to a provincial-level state-owned engineering contractor wrote recently about several of such cases heard in the courts.
In correspondence, an arbitrator who has heard these cases commented:
subcontracting and multilevel subcontracting are common phenomena, especially overseas. When the contractor cannot finish on time, the employer looks to the local construction team….
these cases are troublesome. The problem is obtaining the crucial evidence, not because of any local restrictions, but because after projects go into operation, there are major changes to the site [of the construction project], so loss is difficult to determine. [In one case[ there were several boxes of peripheral and circumstantial evidence, in English, Arabic, and Chinese, but they did not form a chain of evidence.
Invisible Dispute #2
The authors of the Engineering Contractors Book wrote about demand guarantee risk. In their view, fraudulent claims by the employer (and beneficiary of a demand guarantee) in a construction project are a significant risk because some employers may make claims in bad faith; international legal harmonization on the issue of fraud in demand guarantees is insufficient. Invisible dispute #2 arises when an employer seeks to draw on the demand guarantee and the Chinese contractor files a claim against its bank, requesting the court to issue an injunction to stop payment under the demand guarantee on the basis of fraud. Sometimes the project owner’s overseas bank is added, involving demand guarantees given by a Chinese contractor operating overseas and its bank. One example was mentioned in an earlier blogpost and another example is found in the deal list of a leading Chinese disputes lawyer:
Represented Beijing xxxx International Engineering Technology Co., Ltd. in an overseas construction letter of guarantee dispute before the ….. High People’s Court (first instance) and the Supreme People’s Court (second instance)–
The hearing of cases involving demand guarantees (standby letters of credit) appears to be an important area in which Chinese style case law will supplement the principles in the Civil Code, its relevant judicial interpretation, and the SPC’s 2016 judicial interpretation on independent (demand) guarantees. At the end of last year (2020), the Shanghai Higher People’s Court issued a policy document on improving the hearing of foreign-related financial cases (上海法院服务保障进一步扩大金融业对外开放若干意见), one point of which calls for the courts to improve the hearing of demand guarantees. The policy document was accompanied by typical cases (典型案例), one of which was a demand guarantee case heard by the Shanghai Financial Court.
I expect two further authoritative decisions will harmonize how legal and finance professionals understand Chinese law related to demand guarantees. Those decisions will be made in two cases that the China International Commercial Court (CICC) has heard but has not yet decided. The cases involve demand guarantee (standby letter of credit) issues and the question of the standard for fraud and the issuance of an injunction. If the SPC takes a case as a CICC case, it means that the legal issue is considered important enough to require a panel of five Supreme People’s Court (SPC) judges to hear the case. The decisions will be soft precedents, ones that fill in a gap in statutory law and judicial interpretations.
Invisible Dispute #3
The authors of the Engineering Contractors Book wrote about supplier (often Chinese supplier) risk: “if contractors fail to enhance the selection and management of suppliers, they are likely to face difficulties during the project execution. In practice, there are many cases in which contractors suffer losses due to improper selection or poor management of suppliers…Some suppliers use various unreasonable means to guarantee their profits in the bidding and follow-up process, which will inevitably bring greater risks to contractors.” My comments here are limited to Chinese supplier risk.
One example that can be identified most easily is related to the construction of Justice House in Tbilisi, Georgia. Disputes over the quality of equipment and related issues ended up in litigation in the Sichuan Higher People’s Court.
It is understood that first and third type of disputes may be heard by Chinese arbitral tribunals or courts, depending on whether the contracts have arbitration clauses, while the demand guarantee cases are generally heard in the courts. Chinese legal professionals have commented that these cases are challenging for both arbitral tribunals and the courts to hear, particularly if much of the evidence is outside of China and especially if technical expertise is needed. Another issue raised by one of the authors cited is the choice (application) of law, as some jurisdictions may require that local law apply to any subcontracting, but Chinese courts tend to apply Chinese law.
Two recent articles in the Chinese professional legal press by a senior Chinese construction lawyer focused on a recent initiative to establish a qualification system for expert witnesses in construction engineering disputes. It is even more challenging for Chinese courts to hear disputes that may involve foreign technical expertise. Yet another issue relates to evidence formed abroad. A third issue, not mentioned in this blogpost, relates to the greater need for dispute adjudication boards in construction disputes heard in the Chinese courts. Both the China International and Economic and Trade Arbitration Commission (CIETAC) and the Beijing Arbitration Commission have such rules in place, although with different titles.
These invisible BRI disputes raise several of many areas of law that need further work as Chinese companies operate internationally but want to have related disputes heard at home, and China seeks to progress domestic and foreign-related legislation, or as the current slogan has it “筹推进国内法治和涉外法治.”
Many thanks to Sun Wei, partner with the Zhong Lun Law Firm, and some authoritative persons for sharing their insights. The author alone is responsible for the above views.