Legal services prepare for vital B&R role

Jon Lowe reports that experts believe the SAR can provide not just financing but all types of legal service for these ambitious projects - including arbitration.

The Belt and Road Initiative (B&R) unveiled in 2013 is "the greatest civil engineering project in human history, greater than Great Wall project and Marshall Europe reconstruction project", according to veteran Hong Kong commentator professor Song Sio-chong at the Research Center of Hong Kong and Macao Basic Law in Shenzhen University.

With massive infrastructure projects in more than 65 countries and regions, B&R relies heavily not just on the financial services of "super-connector" Hong Kong, but also on the city's legal services.

Gu Minkang - an expert on Chinese company law at the School of Law, City University of Hong Kong (CityU) - thinks B&R dispute resolution offers many opportunities for Hong Kong's homegrown law firms.

"I think that most Hong Kong law firms are capable of offering services with a particular focus on arbitration and mediation.

"I would encourage a favorable policy being formed in order to facilitate more legal service cooperation between Hong Kong and the Chinese mainland. This is also very important to implement the B&R initiative in the long run."

Charltons Law, a Hong Kong firm which focuses on corporate finance legal practices with offices in Shanghai, Beijing and Yangon, is ready to embrace the initiative.

Charltons is one of the organizers of this year's international forum on legal services for promoting implementation of the Belt and Road Initiative to be held in Chengdu, Sichuan province, on July 29 and 30.

The close ties with the mainland offered many opportunities for the city to capitalize on the B&R Initiative, a partner at Charltons said.

"Its fund-raising and financing capabilities, expertise in infrastructure development, and internationally recognized legal system mean Hong Kong can help build a bridge among mainland and other B&R countries and the rest of the world," said Clinton Morrow.

He sees Hong Kong as being fully able to provide all types of legal services for B&R projects, from financing to arbitration.

"As a part of China, Hong Kong operates under the 'one country, two systems' principle and has a legal system based on the common law.

"The rule of law is upheld by a judiciary that is widely recognized by the international community. Hong Kong also has first-class dispute resolution and arbitration capabilities and accordingly will play a key role in dispute resolution."

Major greenfield projects such as roads, ports, tunnels and bridges require a vast amount of finance - good news not only for lenders but also for law firms specializing in financing.

"I think the Belt and Road has now matured to a stage where the projects that have been identified by the governments have moved on to the implementation phase," said Boo Bee Chun, a partner at the Hong Kong and Chinese mainland offices of Baker McKenzie who specializes in mergers and acquisitions.

"In the last six months or so we have definitely received a lot more client requests for assistance from us in terms of greenfield projects in many developing countries - Latin America, Southeast Asia, and Central Asia. We do see some sort of mini-explosion of deals in these countries."

The firm has 77 regional offices in places as diverse as the Czech Republic, South Africa and Kazakhstan.

"Of course the Hong Kong/China team won't know Kazakh law as well as our colleagues in Almaty, but we've done enough deals to know what kind of approvals you need from the government, and we can always partner up with our local offices," said Tracy Wut, who specializes in mergers and acquisitions and foreign direct investments at Baker McKenzie.

Resolving disputes

Construction projects, of course, can be fraught with problems due to the many variables such as labor, design, weather and so on.

Hence there will be an increase in the number of arbitrations in contracts other than financing. A more interesting question is whether there will be financing-related arbitration.

"Belt and Road is at its heart a geopolitical initiative, so a lot of the financing contracts that are being entered into right now may not be the hard-nosed type of contract you will typically see between commercial parties.

"You will likely see some arbitrations coming out of the financing agreements. But in many cases ultimately, whether legal rights are strictly enforced and whether there will be arbitrations arising from the financing agreements will depend in large part on the political and broader economic climate as well," said Paul Teo, head of arbitration for Greater China at Baker McKenzie, an international law firm which has offices in Hong Kong.

With the FIDIC (Fdration Internationale des Ingnieurs-Conseils, or International Federation of Consulting Engineers) form of contract, a template contract often is used between employers and contractors on international construction projects, parties are required to enter into a multi-tiered process before ending up in arbitration.

Many disputes will be referred to a dispute adjudication board, a formal body made up of engineers written into all FIDIC contracts. It will look at claims on an ongoing basis, make technical evaluations, and try to resolve a lot of the issues.

For unresolved issues, the next step will be negotiations between senior executives of the (Chinese) construction company and their B&R clients. If this fails to resolve a dispute, it will be referred to formal mediation.

The really tricky disputes that cannot be sorted out by mediation will go to arbitration. "FIDIC contracts allow for this multi-tiered process to be engaged", said Teo.

Arbitration is both costly and can damage reputations. Thus, mediation is becoming ever more crucial in dispute resolution. It is an area in which HK is a pioneer, according to Francis Law Wai-hung, president of the non-profit Hong Kong Mediation Centre (HKMC), which is self-funding through training and mediation services and has another role as a charitable organization.

Consequently, it has received informal assistance from the government, such as forthcoming use of a building next to the city's High Court. "People used to think mediation was like a high-status middleman. But as time wore on we've found people in Hong Kong like mediation more and recognize mediators as independent professionals that can help them to resolve their disputes before they come to court. That is a very important thing, because they save money, time and pressure," Law said.

The HKMC has teamed up with mainland counterparts to form the Mainland-Hong Kong Joint Mediation Center, itself something of a B&R initiative, to create a new network for mediation among Asian, Arab and European countries and regions - with Hong Kong at the center.

It also seeks to strengthen enforcement of mediation agreements. "We are using a method which is collaboration between mediation and arbitration. We do the mediation agreement, and get the arbitration center to endorse it.

"After a settlement agreement has been signed, in the Hong Kong mediation center or in other centers in other countries if parties want, we can forward the agreement to the arbitration center in another B&R place - say Thailand or Spain - and then they can make an arbitration award," he said.

Mediators are drawn from various professions besides legal and receive training at various levels. "Mediation is the way forward for B&R," said Law, "because you cannot expect the legal system from other places to just accept yours. You cannot ask them to change their legal system just because Hong Kong is using the common law system."

Financing to completion

There's a nearly constant need for legal services across the entire timeline of any B&R project but it always begins with financing.

And, according to the Hong Kong Monetary Authority, 68 percent of foreign direct investments into the mainland and 62 percent of the mainland's outward direct investments in 2015 were made through Hong Kong.

"With Belt and Road projects, there will be different transactions entered into between different players at different stages of a project and project financing is invariably the first item on the agenda.

"They (projects and finance lawyers) will talk to the banks and assist the banks in lending to companies that are looking to build these projects," Teo said.

"The lending will be governed by the financing agreements and they will be followed by other agreements such as the construction agreements and facility usage agreements," he added.

The financing stage may also require the input of other legal jurisdictions and teams of experts, according to Boo from Baker Mckenzie.

"We recently helped a Chinese power company with its investment in over 60 wind farm plants around the world, and we had to work with local counsels in all those countries where the wind farm plants are located.

"We rely on local counsels for very specific local law advice, such as whether a wind farm plant has the necessary licenses for power generation in the local country.

"When it comes to assessing whether the assets are bankable and feasible, and whether they are attractive to international investors, that will be done by our team of expert project lawyers in China, Hong Kong and Singapore."

Once the financing arrangements have been completed, a project moves toward the nitty-gritty of actually building it.

This calls for a separate suite of contracts to be entered into. Then comes the actual construction and completion of the contract. Beyond that, there might be other sorts of post-completion agreements - for which the governing law can be different again depending on how parties bargain and negotiate.

"So from financing to construction and post-completion, there will be a series of different contracts, all with different wording, different governing law, and different parties coming in at different junctures," Teo summarized.

Contact the writer at jon.lowe@chinadailyhk.com

Participants of the inaugural Belt and Road Summit held in May 2016 walk at the Hong Kong Convention and Exhibition Centre. The summit drew over 2,000 movers and shakers from government and business to exchange ideas about how to tap a world of new opportunities. Provided to China Daily

(HK Edition 07/03/2017 page8)