The role of mediation in the resolution of belt and road disputes

China's Belt and Road Initiative (BRI) has gained huge momentum of late, with governments, companies and lawyers keen to maximise the many opportunities it presents. The resolution of disputes arising from the BRI is no exception. The sheer complexity and scale of BRI projects is prompting a welcome review of dispute resolution processes, with a view to resolving BRI disputes more quickly and amicably, ideally in a confidential and enforcement-friendly environment. Recent developments suggest that the BRI presents an opportunity for less formal procedures, like mediation, to flourish and enter the mainstream. Indeed, three key BRI jurisdictions – China, Singapore and Hong Kong – have recently promoted mediation in the context of BRI disputes.

In September 2017, the Singapore International Mediation Centre (SIMC), and the China Council for the Promotion of International Trade China Chamber of International Commerce Mediation Center (CCOIC) agreed to cooperate on assisting businesses to resolve cross-border disputes arising out of the BRI. The two mediation centres will help: (a) Chinese companies investing in Singapore (33% of its investment in BRI countries); (b) Singapore companies investing in China (85% of the total inbound investment from BRI countries); and (c) companies investing in other markets under the BRI.

In tandem, Hong Kong has also signalled its willingness to embrace mediation as an intrinsic BRI dispute resolution tool. The Department of Justice appears keen to develop eBRAM.hk – an online dispute resolution tool tailored to big infrastructure projects under the BRI providing for secure online arbitration and mediation services. Other proposals discussed recently at the Hong Kong government's Belt and Road Summit include a bespoke BRI arbitral and mediation centre, as well as a harmonised dispute resolution clause for BRI disputes requiring mediation first, then arbitration.

The rate of investment under the BRI – for example, major projects like the US$13bn Malaysian East Coast Rail Link and a US$105m Thai rail contract have just been agreed – may simply outpace development and harmonisation of BRI dispute resolution provisions in underlying contracts. However, these recent statements and discussions in Singapore and Hong Kong represent a further demonstration of the growing popularity of mediation in Asia, and the central role it could play in years to come under the BRI.

The BRI and dispute resolution

The Belt and Road Initiative (BRI) is China's ambitious international development strategy across Asia, Europe and Africa, involving large-scale cross-border infrastructure investment. To date, over 60 countries are involved, linking Asia to Africa and Europe.

The size and nature of the BRI lends itself to potential disputes as Chinese companies encounter problems with their investments, in particular, as many BRI investments will involve developing economies with unfamiliar statutory and regulatory systems. Further, inherent political sensitivities will make the avoidance and effective resolution of BRI disputes essential.

China and Singapore endorse mediation for BRI disputes

Arbitration has many benefits as a tool for formal dispute resolution between businesses to resolve BRI disputes, such as flexibility, confidentiality and enforceability of formal awards. However, China and Singapore used the International Mediation Summit held in Hangzhou in September as an opportunity to support mediation as an alternative path to avoiding the need for formal dispute resolution proceedings.

Ms Ng Chai Ngee, SIMC Board Member noted that "As the BRI takes off and cross-border commercial transactions grow, there will also be a corresponding increase in disputes. Mediation provides an avenue for these disputes to be resolved quickly, cost efficiently and amicably, in a way that preserves relationships and is consistent with Asian values that both Singapore and China share. The SIMC already serves many Chinese companies, and has helped many Chinese companies with their dispute resolution needs. The MOU will allow the SIMC to reach out to even more Chinese parties and create new opportunities for Singapore".[1]

The MOU requires the SIMC and CCOIC to:

• cooperate in the promotion of international commercial mediation through joint lectures, conferences and seminars;
• promote each other’s mediators and mediation-related services; and
• recommend the use of mediation facilities at Maxwell Chambers in Singapore and the CCOIC building in Beijing, China.

This is assisted by the countries' agreement on 21 August 2017 to cooperate on legal and judicial matters.

Hong Kong tables bespoke BRI arbitral and mediation services

At the Hong Kong government's Belt and Road Summit on 11 September, the Secretary for Justice introduced the dispute resolution session. A number of proposals were discussed by panellists, including:

• eBRAM.hk. BRAM stands for 'Belt & Road Arbitration and Mediation' and involves the development of an internet-based mediation, arbitration and dispute resolution platform. Online Dispute Resolution (ODR) is becoming more widely embraced, and not just for small disputes. The tailoring of a private and secure online dispute resolution platform for the BRI certainly has huge potential. It would overcome the inherent issues posed where parties are located in numerous jurisdictions and the cost of physical hearings would be expensive and logistically difficult. However, parties will likely first have to overcome their fear of the unknown as ODR is a fairly new concept.
• the potential creation of a bespoke BRI arbitral tribunal and mediation centre in Hong Kong, with specialists trained to resolve – through mediation and/or arbitration - BRI disputes. Again, the possibility of 'hiving off' BRI disputes to a single centre is appealing, but would be logistically difficult, perhaps impossible, to establish and administer. In reality, parties may prefer to contract to resolve their disputes before 'known' forums.
• the use of a universal BRI dispute resolution clause entailing mediation first, then arbitration. This was first proposed in October 2016 by the International Academy of the Belt and Road in the Blue Book on the Dispute Resolution Mechanism for the Belt and Road. The Blue Book represents the joint efforts of a panel of academics and experts on dispute resolution, and put forward a proposed uniform dispute resolution mechanism adopting the principle of mediation first, and only if that fails do the parties engage in arbitration.

The case for mediation

Formal legal frameworks for conducting mediation exist in many countries, and it is readily embraced in China, where there is a cultural premium on consensus-driven dispute resolution. For background on ADR in Asia, including specifically in Hong Kong and Singapore, see our publications here and here. Institutional mediation services are provided by various centres across Asia.  However, mediation is still not as common in Asia as in other parts of the world. For example, in Europe (within the BRI), mediation is more widely embraced. Indeed, we may see a further uptick in mediation usage as the EU Parliament has just adopted a Resolution on the implementation of the EU Mediation Directive (2008/52/EC), containing recommendations aimed at further increasing the use of mediation in civil and commercial cross-border disputes throughout the EU.

Where mediation is less frequently deployed, as in Asia, this may be due to a limited understanding amongst commercial parties of what mediation actually is, why it works, and how and when best to use it. Given the (a) timelines; (b) costs; and (c) bespoke nature of BRI projects, mediation could be particularly useful given its:

Flexibility and informality: whilst many mediations follow a broadly standard template, the procedure is flexible and can be adapted to the needs of the parties in dispute.

Confidentiality: anything said or done or any documents created for the purpose of the mediation are "without prejudice" and, except in very limited circumstances, cannot be relied upon in subsequent litigation or arbitration.

Time and cost saving potential: most mediations can be set up within weeks; once agreement has been reached to mediate and appoint a mediator; relatively little further organisation and coordination is usually required. Most mediations last a day or less.

Range of potential outcomes: parties to mediation can agree to creative solutions beyond the powers of the courts or arbitral tribunals (which are generally limited to money damages, specific performance and injunctions). These might include the provision of services, payments in kind, apologies or any other business solution the parties can agree.

Business relationship preservation qualities: due to the conciliatory nature of the process. The focus is on the parties' overall interests as opposed to their legal rights. Business relationships, external commercial pressures, reputational issues or personal emotions can be taken into account.

Success rate: many mediations result in settlement, either on the mediation day or shortly afterwards. Even when mediations are "unsuccessful", in that a settlement is not achieved, the process allows parties to focus on the issues in dispute and consider the true economic costs and risks to them. It can also provide an opportunity to re-establish lines of communication which are often broken as the dispute escalates.

Enforcement: A mediated settlement agreement is a contract and can be enforced in court as such. There is in fact scant evidence that parties renege on a bargain struck at mediation. That said, some jurisdictions, including the EU and Singapore, have passed innovative legislation to provide greater enforceability of mediated settlement agreements (see our post here). Further, UNCITRAL is currently looking to develop a New York Convention-style instrument to ensure that mediated settlement agreements are enforceable worldwide in a manner similar to arbitral awards.

What role could the courts play in BRI disputes?

Much has been said about arbitration and mediation as preferred processes for the resolution of BRI disputes. Litigation before domestic courts across any one of the 60+ jurisdictions is far less attractive. Public trials applying unfamiliar laws under the spectre of enforcement issues further down the line have led many to doubt the role of litigation in BRI disputes. However, the Supreme People's Court (SPC) of China has recently taken important steps to 'internationalise' its domestic court offering. First, China relaxed its approach to the enforcement of foreign judgments and the SPC is now understood to be drafting a judicial interpretation on the recognition and enforcement of foreign civil and commercial judgments. Further, China has recently signed the Hague Convention on the Choice of Courts. This provides more certainty in cross-border litigation by allowing parties to choose the exclusive court in which any disputes arising under a commercial agreement will be resolved. Against this backdrop, the SPC now appears keen to establish a Chinese international court to hear BRI disputes. The SPC is understood to be looking to Singapore's International Commercial Court and Dubai's International Financial Centre (DIFC) as models for any Chinese international BRI court.

The success of any such court will be contingent on a number of key factors, perhaps most importantly the ability for international judges to sit on the court (this is inconsistent with current Chinese legislation). As with other proposed new forums discussed in this blog post, a Chinese international BRI court would be an unknown quantity. Having international judges would improve the sense of familiarity and credibility in the eyes of non-Chinese parties.

How a Chinese international court may impact the role of mediation in future BRI disputes adjudicated in China remains to be seen. Given mediation as an adjunct to court proceedings is common in China, and China is clearly keen to promote mediation to resolve BRI disputes, we may see a dispute resolution mechanism advanced by the SPC which incorporates mediation as part of any international BRI court process.

Comment

The commitments of China and Singapore in the MOU serve to highlight the benefits and availability of mediation for BRI disputes.  Parties involved in BRI investments should strongly consider adopting mediation as part of a multi-tiered dispute resolution framework to try, where possible, to resolve disputes amicably at an early stage and on their own terms. "The MOU serves as a further example of Singapore's commitment to being both a regional and global leader in dispute resolution.  With increasing BRI investments in South East Asia, the MOU is a welcome development for clients." said Alastair Henderson, Managing Partner of Herbert Smith Freehills' Singapore office. The success of the MOU is of course contingent on the activism of SIMC and CCOIC. Targeted promotion of mediation in the context of the BRI is required, involving targeted profile-raising and education in the right quarters.

Regarding Hong Kong, speaking at the recent Belt and Road Summit, Global Head of Disputes Justin D'Agostino noted that: "As the Belt and Road initiative gains pace, Asia will see a corresponding increase in cross-border investment and infrastructure disputes". "On projects of this scale, disputes are inevitable, but what we're seeing is more and more companies looking for ways to resolve disputes in a more efficient and cooperative way" .  Justin also explained that "Asia, in particular through Hong Kong and Singapore, has extensive connections with world-class arbitrators, mediators and legal professionals, giving companies the opportunity to effectively avoid and manage the legal risks arising from Belt and Road initiatives. "

China's very recent statement that it is considering establishing a Chinese international BRI court puts another potential process into the mix. Litigation may yet have a role to play in the resolution of BRI disputes. What seems clear, however, is that mediation could be deployed in the resolution of BRI disputes, whether arbitration or litigation is the ultimate preferred adjudicative process. This represents a huge opportunity.

For further information, please contact Alastair Henderson, Managing Partner – Southeast Asia, May Tai, Managing Partner, Greater China, Daniel Waldek, Senior Associate, Anita Phillips, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Herbert Smith Freehills is at the forefront of ADR developments globally. See our ADR hub for commentary on the growth of mediation in Asia and elsewhere, including our role in the recent Global Pound Conference. Our toolkit, "Improving Conflict Management: Enhance the way your organisation uses Alternative Dispute Resolution", is intended to help in-house counsel use mediation more effectively, thereby reducing their underlying disputes portfolios. Please contact Anita Phillips in the first instance if you have any questions regarding the toolkit or would like help in implementing it within your organisation.

[1]        Singapore Ministry of Law press release dated 19 September 2017.