Dispute Avoidance and Risk Management In a Changing World: What Chinese Contractors Should Know

Chinese contractors have been forging an important and lucrative role in international construction in recent years, but face risks to their expansion plans, which are focused on winning work from the expanding Belt and Road Initiative (BRI). Tom Fu (Beijing) and James Morris (London) believe pragmatism and the astute use of dispute avoidance and dispute resolution techniques can help to minimise the effect of these risks.

Riding the wave of China's Belt and Road Initiative (BRI), the country’s contractors have risen to global prominence over the past decade. In 2018 alone, they captured almost a quarter of all international construction revenue¹. However, as the BRI expands its reach, they also face a growing number of risks.

Chinese contractors are now involved in a broad range of diverse projects in many different jurisdictions. The majority of these are in Asia, Africa and the Middle East, and range from traditional infrastructure projects to schemes in the real estate, technology, education and health sectors . In the first half of 2019, Chinese contractors signed contracts in these regions with a combined value of more than US$87 billion². They have also secured projects in Latin America, which only officially became part of the BRI in 2017, signing contracts worth more than US$6.7 billion³ in the energy, infrastructure and mining sectors in the first half of 2019, according to the China International Contractors’ Association, a trade body. A small, but growing, number of big-ticket projects is also under way, e.g., the Budapest-Belgrade railway⁴, or under discussion, such as the redevelopment of the Royal Albert Dock in East London⁵. 

This gives rise to certain challenges as the emphasis of the BRI begins to expand: At the Chinese Government’s second Belt and Road Forum held in April 2019, participant nations emphasised the need for inclusivity, transparency and a sustainable approach to BRI projects. This originated in part from the Chinese contractors themselves, who have come to recognise the need to:

• Develop more sustainable business operations;
• Attract higher levels of private capital and external participation in their supply chains; and
• Improve their bidding and operations in global markets⁶.

Entering and developing new markets in Europe and Latin America, managing a diverse and expanding portfolio of projects, and adopting new and complex business structures to increase sustainability and inclusivity inevitably leads to an increase in associated risks. These risks should be considered:

• Political Risks: In developing countries these may include:
  • unstable government structures;
  • policy changes;
  • international sanctions;
  • regime changes; and
  • terrorism, revolution or civil unrest.

  In developed countries, these may involve reputational damage (e.g. due to perceived environmental damage, or damage to the local way of life).

• Legal / Regulatory Risks: ranging from underdeveloped legal or regulatory systems, which may make it difficult to enforce contractual protections, through to stringent or complex regulatory systems that may be difficult to navigate.
• Project-Specific Risks: including the unavailability of labour, materials, plant or equipment, through ground and environmental conditions to the physical impossibility of completing the project. These may also involve inaccurate or incomplete tender and contractual documentation.
• Partnering/Business Risks: For example, the potential for cultural conflicts and misunderstandings which may arise as a result of partnering with foreign firms, and the risks associated with adopting new and complex structures to increase sustainability and inclusivity.

Once identified, many of the above risks should be efficiently allocated under the contract (usually to the party best placed to control or bear the risk). Contractors should carefully select reliable business partners who know the local market, thoroughly review tender and contract documents for projects and seek an intelligible and satisfactory explanation if any provisions are unclear.

Obtaining and maintaining adequate insurance for the project will often go a long way towards defusing any potential disputes at a later stage. Both insurance of the works (usually via a Contractors’ All Risks policy) and liability insurance (including public liability indemnity insurance and professional indemnity insurance) will be required. At the stage that policies are procured, it is essential to understand any exclusions and ensure any required extensions are in place.

Contractors should also carefully note their obligations as to material disclosure under the insurance policies, particularly any requirements to provide information or notices to the insurers. Failure to comply with these requirements will often prevent a claim on the insurance.

Contractors and their advisers should review the dispute resolution procedures, and consider including tiered mechanisms such as alternative dispute resolution procedures like dispute adjudication boards and mediation to allow for disputes to be resolved at an early stage. Arbitration will usually be the principal mode for settling disputes, as the host nation's courts may be too risky. This also allows for the involvement of arbitrators with appropriate technical expertise, flexibility of procedure, and, in many cases, New York Convention-assisted international enforcement .

During the project it is essential to keep full and up-to-date site records including communications, instructions and variations. This can go a long way towards preventing misunderstandings and disputes. Careful compliance with all contractual procedures, including serving notices on time and updating programmes, is also essential. In the event of a dispute arising, Chinese contractors should seek advice from reputable advisers immediately.

In addition to following dispute resolution procedures under the contract, Chinese contractors should consider whether there are any applicable bilateral investment treaties (BITs) or multilateral investment treaties (MITs) containing Investor State Dispute Settlement (ISDS) provisions. As of March 2020, China has 110 BITs⁷ and several MITs in force. Such treaties often contain substantive rights guaranteeing fair treatment of foreign investors which will often go beyond the rights of a project contract. Chinese contractors may be able to bring claims against host governments in certain circumstances.

As Chinese contractors engage in a diverse range of projects across the globe, both in traditional and new markets, they must grapple with a wide range of risks. By fully appraising themselves of these risks on a project-by-project basis, and adopting astute dispute avoidance and pragmatic dispute resolution procedures, they will be well positioned to fully grasp all the opportunities that the expanding BRI has to offer.