The gigantic Belt and Road Initiative (BRI) has profound implications, and not just for the economies it will encompass. It will also transform legal systems, as participating countries work out how to ensure contracts to build huge infrastructure projects are implemented and completed on time and without dispute.
This feat could be as difficult to achieve as building any new bridge, port or rail link along the BRI’s vast network connecting Asia, Central and Western Europe and the Middle East. Although there is no official consensus, so far, 103 countries and international organizations have signed 118 cooperation agreements with the People’s Republic of China (PRC) under the framework of the BRI according to recent statistics released by the PRC’s National Development and Reform Commission.
It is critical to the success of regional economic initiatives, like BRI, to have in place an effective and trusted cross-border dispute resolution system that can work for all participating countries from diverse legal systems and geopolitical interests.
International commercial contracts involve parties from two or more countries sometimes with very different legal systems. Contracts can also vary and disputes can be complex, so parties need the comfort of knowing there will be a predictable process to resolve a disagreement and deliver an internationally enforceable outcome.
The alternative is to rely on local courts, which can be risky if they’re perceived as inefficient, lacking expertise, experience and precedent for commercial disputes. Foreign investors will likely price these risks into their contracts or avoid doing business in these countries altogether.
International arbitration is effective because it is built on trust, experience and data. Disputes are considered by an impartial tribunal. Decisions come in the form of an arbitral award enforceable in nearly 160 countries under the United Nations (UN) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention.
This convention provides the basic legal underpinning for international commercial arbitration. It is supported by implementing law based on the UN Commission on International Trade Law Model Law on International Commercial Arbitration, which has been adopted by 34 BRI countries.
Most countries participating in BRI are signatories to the New York Convention except for Iraq (though it recently announced it would join), Maldives, Timor-Leste, Turkmenistan and Yemen. Though most of the countries involved in BRI have put in place arbitration laws to implement the New York Convention, in many instances these laws need to be updated, modernized, and effectively implementated to ensure they can perform their intended function.
Research shows that investors are less concerned about potential domestic legal wrangles if the country has signed on to the New York Convention and has in place implementing arbitration law based on international standards.
For larger projects above $60 million, data shows that international commercial arbitration is a must to attract foreign investment. This is important for initiatives like BRI as most of its projects are large in scale.
To be sure, there has been progress in bringing clarity to dispute resolution under BRI especially for disputes with an Asian connection. Parties can structure their preferred dispute resolution, and can agree to arbitrate disputes in a neutral seat and under the auspices of internationally recognized arbitral institutions such as the Hong Kong International Arbitration Centre (HKIAC) or Singapore International Arbitration Centre.
Both institutions offer dispute resolution before neutral arbitrators with expertise and experience, providing parties with comfort that disputes will be handled fairly and impartially. HKIAC has extensive experience administering arbitrations involving parties from BRI countries, and has an advisory committee with expertise in sectors including finance, infrastructure, insurance, construction and maritime issues.
Nevertheless, BRI needs to fully embrace international arbitration by encouraging participating countries to put in place a legal framework and institutions that support international arbitration.
Remaining BRI countries that have not signed onto the New York Convention should do so as soon as possible. Those countries with existing but international arbitration laws that have not been updated nor properly implemented, should raise them to global standards.
This, of course, won’t happen overnight as countries need to modernize their existing laws and capacity building of the judiciary in the enforcement of foreign arbitral awards and lawyers as arbitration counsel and abitrators is required to ensure effective implementation of arbitration laws. Additionally, the private sector and state-owned enterprises, as users of international arbitration, need to be educated so they understand how arbitration works.
Furthermore, arbitral institutions need to continue to innovate so they can adjudicate complex multiparty disputes more common for large infrastructure projects, provide for efficient and cost effective resolution of disputes and ensure awards are enforceable in the PRC—given the large number of parties from the PRC involved in the BRI.
BRI promises to build hard physical infrastructure that can transform economies. It needs the right legal infrastructure to deliver that vision.