Thirdly Edition 8

Thirdly Edition 8

INT ERNAT IONAL ARBI TRAT ION

CHINA I S RECOGNI S ING THE NEED TO ADAP T I T S APPROACH TO INT ERNAT IONAL BUS INESS , AND THE ENFOR CEMENT OF BUS INESS AGREEMENT S .

INTERNATIONAL ARBITRATION 1/3LY

MESSAGE FROM THE EDITOR 01

THI S I S SUE

MESS AGE FROM THE EDI TOR

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ANALYS I S A SI A C AN NO LONGER EXPECT TO EXPORT IT S WAY TO GROWTH

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Interview with Michael Every, Head of Financial Markets Research, Asia-Pacific, Rabobank and Peter Hirst, Co-Chair of International Arbitration at Clyde & Co

ME S S AGE FROM THE ED I T OR I’m delighted to present the eighth issue of the International Arbitration 1/3LY. In this issue we explore Asian investment into Latin America. Rich in mineral and hydrocarbon resources but recently afflicted by a collapse in commodity prices, corruption, and political scandals, Latin America is slowly starting to show signs of recovery. New regimes have expressed a commitment to structural and policy changes designed to stamp out corruption and entice foreign investors.

CHINESE WHISPERS

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Commentary from Ruth Stackpool-Moore, Head of Harbour Litigation Funding, Hong Kong and Richard Bell, Partner at Clyde & Co, Shanghai SPECI AL REPORT L AWS OF AT TRACTION – FORE IGN DIRECT INVES TMENT IN L ATIN AMERI C A

This goes some way to explaining the upswing in international arbitrationwhichwe are witnessing across Latin America. We have recently expanded our global arbitration offering with a newly launchedMiami office to further push our Latin American services. Arbitral institutions are alsomoving in to service this growing demand – the ICDR opened aMiami office directed at South American and Caribbean countries in 2015; and the ICC has indicated that it will soon open a facility in Brazil. In a directory towards the back of this issue, we provide a breakdown of arbitral institutions in different countries across Latin America. Elsewhere in the issue we outline our key advice for investing in the region. On behalf of Clyde&Co, I would like to expressmy gratitude toMichael Every, Ruth Stackpool-Moore and Andrew Fennell for sharing their expert opinions. I also wish to thankmy colleagues from the firm’s global arbitration group for their articles and analysis.

At the same time, China, India and the ASEAN region are all looking outward for cross-border trade and investment opportunities. In this issue,we interviewMichael Every, Head of Financial Markets Research, Asia-Pacific at Rabobank, who describes China’s desire to trade and investment in Latin American economies, particularly in infrastructure, in a quest to deal with its own slowing economy and dwindling exports. Last year China and Brazil agreed a series of trade and investment deals worth billions, including a USD 10 billion rail project. These new commercial and contractual relationships don’t always follow classic structures. We hear repeatedly from lawyers across our offices that parties to such agreements are finding they have to workmuch harder to protect their investments, particularly since Chinese entities and others are demonstrating increasing interest in joint ventures and active ownership of assets. In a special report, Shanghai based Clyde&Co partner Richard Bell and Ruth Stackpool-Moore, Head of Harbour Litigation Funding and former managing counsel at the Hong Kong International Arbitration Centre, advise on Chinese commercial attitudes to foreign direct investment and the resolution of disputes. We learn that Chinese entities are becomingmore receptive to arbitration and are beginning to use the systemmore as claimants.

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Ricardo Lewandowski, Partner at Clyde & Co

TECHNI CAL INVES TING IN L ATIN AMERI C A

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DRAF TING AN EFFECTI VE ARBITRATION

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CL AUSE : KE Y CONSIDERATIONS A BACKGROUND TO ARBITRATION IN L ATIN AMERI C A

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A ROAD WORTH TAK ING

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NEWS IN BRIEF PEOPLE MOVES MARKE T ACTI V IT Y NOTABLE C A SES

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FORTHCOMING E VENT S

RIC ARDO LEWANDOWSKI, PARTNER, CLYDE & CO

INTERNATIONAL ARBITRATION 1/3LY

AN INTERVIEW WITH MICHAEL EVERY 03

A S I A C A N NO LONGER E X PEC T T O E X POR T I T S WAY T O GROW TH EXPORT- LED ECONOMIES ARE S TRUGGL ING WI TH FALL ING DEMAND AND POL I T I C AL RES I S TANCE , SO WHERE DO THE OPPORTUNI T IES FOR FUTURE GROWTH L IE? WE SPE AK TO MI CHAEL E VERY, HE AD OF F INANCI AL MARKE T S RESE AR CH , A S I A - PACIF I C , AT RABOBANK , FOR HI S V IEW. WI TH COMMENTARY FROM PE T ER HIRS T, CO - CHA IR OF GLOBAL ARBI TRAT ION AT CLYDE & CO.

In the late 1800s and early 1900s, the USA attempted to replace the UK as the world’s principal financial centre. America had become an enormous net exporter, but the US dollar was not the dominant international currency that it is today. As a mammoth exporter, dollars relentlessly flowed back into the country. The US required a new plan. To boost dollar circulation, it became a major lender, pumping the USA currency into Europe, Latin America and other regions, helping to direct trade flows through New York at the expense of London and to solidify the USA’s global financial status. Today China is facing a similar test as it deals with a slowing economy and dwindling exports. Its new lending and investment programme has similar hallmarks to the USA’s previous efforts, as it seeks to internationalise its currency, the renminbi (RMB). China is using its huge trade surplus, despite the slowdown in exports, to become a global lender. Chinese banks have become dominant players, eating into the traditional domain of the international banks. As part of this initiative, it has launched its much-vaunted ‘One Belt, One Road’ (OBOR) programme, which is intended to provide a pivotal impetus in the renminbi’s emergence and the augmentation of China’s existing trading routes. OBOR will increase China’s lending to infrastructure projects around the world, especially along the old Silk Road trading route, and boost the use of Chinese goods such as steel and China’s own labour force. “With OBOR, you can’t help but see the parallels with the USA’s previous policy and see that it is about getting the renminbi internationalised. You can’t internationalise the currency if it keeps coming back,” comments Michael Every, Head of Financial Markets Research, Asia-Pacific, at Rabobank, indicating that an export-led economy doesn’t lend itself to developing a currency on the international stage. Like the US before it, China will hope that its lending programme and OBOR initiative has the desired effect but it will recognise that infrastructure projects can be uncertain ventures at the best of times. The US itself lost money during its own lending programme, in part due to World War I and the subsequent Great Depression. China may well have to face up to the fact that many infrastructure projects are not always financially successful, says Every. “Most important is to consider that few of these OBOR projects are necessarily going to be profitable for China – infrastructure on that scale rarely is. Is this really the best use of the country’s accumulated capital from years of running trade surpluses? I’d say it’s an open question.”

MICHAEL E VERY

PETER HIRST

INTERNATIONAL ARBITRATION 1/3LY

AN INTERVIEW WITH MICHAEL EVERY 05

POL I T I C AL RES I S TANCE The OBOR initiative is of course part of China’s effort to deal with a slowing domestic economy and recognises that the recent globalisation phenomenon is engendering distress in some quarters. Donald Trump, the future US President, has made some characteristically forceful statements about the nation’s trading relationship with states such as China. Earlier this year, Theresa May, the UK Prime Minister delayed a decision on whether to allow the China-backed Hinkley Point nuclear project to go ahead over concerns about the security implications of the Chinese investment. This political backdrop is likely to have an ongoing influence on cross-border trade and commercial transactions. In light of the collapse in global demand for commodities and other goods, which has impacted economies such as China, the environment is even more tense. “We’ve seen from the past how disruptive a sudden drop in exports is for these kind of externally-driven economies,” says Every. “Any slowdown in global trade growth hits them extremely hard. In a nutshell, Asia can no longer expect to export its way to growth off of the back of the Western middle class; domestic demand is going to have to become a much more important driver in Asia, and trade a larger one – relatively – in the West. Otherwise, risks rise of either another economic or political shock.” OBOR is likely to become a fundamental part of China’s efforts to see the RMB become more ubiquitous around the world, but Every expects China to maintain a much broader investment and lending strategy into developing economies as it seeks to ensure a steady supply of “key agricultural/food inputs”.

Last year, China and Brazil agreed a series of trade and investment deals worth billions, which included an emphasis on improving Brazil’s infrastructure, such as a USD 10 billion rail project. Earlier this year, Petroleo Brasileiro (Petrobras), Brazil’s flagship oil and gas company, received a USD 10 billion loan from China Development Bank, as China sought to insure its existing and future supplies of crude oil. Similar deals have been struck with other Latin American nations such as Venezuela, and trade between Brazil and China has ballooned from USD 6.5 billion in 2003 to USD 83.3 billion in 2012. Agreements of this nature are certainly welcome, particularly for nations like Brazil that are under fiscal pressure and have suffered a series of political and corruption scandals. But Every says that those dealing with China should be alert to its motivations so as to avoid disputes further down the line. “All recipient countries will be happy to get new roads and rail, but there can be strings attached.” With China essentially putting up the money, it will understandably hold the balance of power in negotiations and counterparties will need to stay alert to ensure they protect their key interests. INTRA - A S I A AND TRANS - CONT INENT INVES TMENT At another level, China has shown a willingness to invest in and to lend to developing economies that other nations have been reluctant to engage with. It is part of a growing trend for investment and trade to bypass the traditional money centres. China is one instance, but the rise of the ASEAN region and India in cross-border trade and investment is another example. These create new commercial and contractual relationships that don’t always follow classic structures. Parties to such agreements will typically have to work doubly hard to protect their interests.

CHINA HA S SHOWN A WILL INGNESS TO INVES T IN AND LEND TO DE VELOP ING ECONOMIES THAT OTHER NAT IONS HAVE BEEN RELUCTANT TO ENGAGE WI TH .

Image credit: nui7711 / Shutterstock.com

06 AN INTERVIEW WITH MICHAEL EVERY

INTERNATIONAL ARBITRATION 1/3LY

With infrastructure in the developing world still lagging far behind mature markets, the demand for further investment remains substantial and is expected to continue for several decades. While China’s OBOR initiative is thought to be a modern day evolution of its ancient silk trade routes, there is a clear necessity throughout Asia and the rest of the world to enhance trade links between regions and nations; tighter links between the ASEAN region and India is just one example. According to Peter Hirst, Co-Chair of International Arbitration at Clyde & Co, globalisation and state investment have led to the development and expansion of a system of legal and institutional protection designed to put foreign investors and host states on an equal footing. This includes protections for investors in international law and arbitration of investment disputes set out in multi-lateral and bilateral investment treaties, national investment laws and the investment agreements of the parties. This is an established yet developing area of law but there is no doubt that when arbitration disputes involve high stakes, economic and political upheaval can occur. Growth in newmarkets has advantages for investors and investees, but Every believes there are dangers on the horizon as imbalances between global demand and worldwide supply become even more acute. “The underlying backdrop is worrying. Asia has generally grown off the back of exports and that paradigm is coming to an end. You are seeing a backlash with some of the G20 nations saying that western consumers just want their jobs back. You also see China capturing more global trade at the expense of other Asian nations. There are certainly tensions where China makes everything.”

In a recent speech to the United Nations, Theresa May, Prime Minister of the United Kingdom, warned that increasing globalisation had resulted in “too many feeling left behind”. Every says this is just a case of history repeating itself, adding that, “in the long run, you always see a period of free trade breaking down in the end.” He believes this is classic mercantilism at work: “China wants to sell more than it buys. Mercantilismworks brilliantly for the mercantilist, but it’s terrible for everyone else.” China, though, is a sophisticated beast. Its relatively late appearance to the world stage – it joined the World Trade Organisation (WTO) in 2001 – belies a gifted cohort of native policy makers and economists. It has proven adept at shifting direction as soon as obstacles appear to block its path to global pre-eminence. While political antipathy towards its stance on trade and exports may be growing, China is a wealthy saviour for many developing economies and frontier markets that also want to be part of the globalisation phenomenon. Globalisation may be running into a sticky patch, but it has certainly not run its course.

PETER HIRST, CO-CHAIR GLOBAL ARBITRATION [email protected]

GLOBAL I S AT ION MAY BE RUNNING INTO A S T I CKY PATCH , BUT I T HA S CERTA INLY NOT RUN I T S COURSE .

INTERNATIONAL ARBITRATION 1/3LY

SPECIAL REPORT 09

L AWS OF AT TRACT ION

Deep beneath the surface of Latin America lies huge hidden wealth. The region is rich in mineral and hydrocarbon resources that provided the catalyst for a vast expansion in the continent’s major economies in the decade to 2014. Since then commodity prices have plummeted, bringing the economic boom to a sharp halt. But foreign direct investment into the region continues to flourish, especially from China. Argentina, in particular, provides a positive note in Latin America’s recently volatile story. A new pro-business and pro-investment government is bringing the nation in from the cold. It is no longer an international pariah. In Mexico, efforts to liberalise the economy, especially the oil and gas sector, have generated heated international interest. Colombia’s emergence as an economic power and its hefty investment in domestic infrastructure is another paragraph in a more positive narrative. Confidence is especially important following the collapse of commodity prices, political instability and currency volatility. Many of the region’s economies are dominated by the extractive industries, in particular oil and gas and minerals. A sharp collapse in the oil price from over USD 100 per barrel in 2014 to below USD 50 per barrel today has been a key driver pushing many countries into or towards recession, reducing GDP growth and contributing to rising inflation and currency depreciation. Other important industry sectors, such as agriculture, have experienced similar price falls. Understandably, the region has looked to foreign partners to help fund and operate projects that local state-controlled firms no longer have the resources to develop alone. CHINA ACT S A S THE REGIONAL S AV IOUR China has dominated investment in the region in recent years, pledging to invest over USD 250 billion in Latin America over a decade. China is pouring money, resources and labour into the region’s extractive industries and necessary infrastructure. As well as foreign direct investment, China is also lending more to the region. Chinese banks sent nearly USD 30 billion in loans to Latin American governments last year, more than double their investment a year earlier, with a further USD 35 billion of funding for infrastructure projects. Infrastructure and energy projects account for more than two-thirds of China’s total lending, and mining another 25 per cent. In the decade to 2014, Venezuela alone accounted for more than 50 per cent of all Chinese loans. Although that percentage is falling, Chinese funding has helped Venezuela’s besieged economy to stave off outright collapse with a series of oil-backed loans – totalling some USD 65 billion since 2007 – in which funding is repaid with oil exports.

SPECI AL REPORT

IN OUR SPECI AL REPORT WE ADDRESS HOW CORRUPT ION, POL I T I C AL SC ANDAL AND A COLL APSE IN COMMODI T Y PRI CES HAVE AFFL I CTED L AT IN AMERI C A . THERE ARE S IGNS OF RECOVERY, BUT WILL MARKE T L IBERAL I S AT ION BE ENOUGH TO ENT I CE INVES TORS?

RIC ARDO LEWANDOWSKI, PARTNER, CLYDE & CO,

INTERNATIONAL ARBITRATION 1/3LY

SPECIAL REPORT 11

ARGENT INA RETURNS TO THE INTERNAT IONAL FOLD Like Brazil, Argentina sits on huge, undeveloped energy reserves. The enormous Vaca Muerta shale gas fields in the south of the country have attracted great interest among international firms, but so far only a hardy few – including Chevron and Total – have dared to enter the market. The interventionist policies of former president Cristina Fernandez de Kirchner, and her predecessor and husband, Nestor Kirchner, scared many investors away with their rigid capital controls that prevented firms from repatriating profits, subsidies that distorted markets and policy interventions. Fernandez de Kirchner was unseated in late 2015 by business-friendly president Mauricio Macri, who is sweeping away decades of protectionist policies to open Argentina up for business. “Macri’s government is regaining lost credibility with global finance after years of open hostility under Kirchner,” Lewandowski says, pointing to Argentina’s record USD 16.5 billion bond sale in April. MEX I CO L IBERAL I SES I T S OIL AND GA S SECTOR In Mexico, too, the oil and gas sector is opening up as never before. Faced with a more than decade-long decline in its oil production, from3.4million barrels per day in 2004 to under 2.2million barrels per day today, President Pena Nieto has a strong mandate for reform. Energy is the mainstay of Mexico’s economy, accounting for 40 per cent of government revenue in 2014. Last year, a sweeping package of reforms dismantled the monopolies of the state-owned oil company Pemex and its counterpart in the power sector, CFE. A series of bidding rounds for oil and gas exploration and production contracts has been underway since July last year, in which foreign companies have been invited to take part. The first round of auctions will culminate in December with a sale of coveted deepwater blocks that is attracting the world’s major oil and gas firms. Along with the upstreammarket opening up, foreign companies will be able to enter Mexico’s fuel retail market, to import petrol and diesel and to open service stations.

Despite widespread fears about the state of Venezuela’s economy and the country’s possible default on its debt commitments, Beijing remains steadfast in its willingness to lend to the country. It has become one of China’s most important oil suppliers and resales of Venezuelan oil generate a healthy revenue stream. Brazil and Argentina are expected to be the biggest recipients of Chinese funding from2016. Argentina has ousted a longstanding nationalist and protectionist regime, clearing the way for an increase in foreign direct investment, and Brazil hopes to get back on track after a series of corruption scandals and the impeachment of former president Dilma Rousseff. “I believe that foreign direct investment and international lending will be unlocked in relation to both Argentina and Brazil following promises by both new regimes to implement drastic structural and policy changes,” says Ricardo Lewandowski, partner at Clyde & Co’s London and Miami offices. Rousseff’s removal may lead to an uptick of foreign direct investment in the oil and gas industry. The country is home to vast offshore oil and gas reserves located deep below the sea bed, in the so-called sub-salt layer. Until now, only the state-controlled national oil company, Petrobras, has been able to operate the sub-salt fields, with a minimum30 per cent stake in all exploration and production projects. Petrobras’ so-called ‘sole-operator provision’ is being debated in congress and could be repealed this year, opening up some of the world’s biggest and most challenging hydrocarbons reserves to foreign oil companies for the first time. Given the current state of the oil and gas industry and the small margins that are being generated by oil majors and others, it is not certain that foreign investment will flood in. China may yet again be Brazil’s saviour. Foreign investment may also be boosted as a result of a 2015 reform to Brazil’s Arbitration Act, which enables public entities to resolve disputes by way of arbitration, provided the dispute involves “disposable economic rights” and that the procedure is not confidential. “The amendment finally ended a debate in which arbitration involving public entities was not authorised unless provided for specifically by law. Investors and public entities now have the legal certainty that an arbitration agreement will be binding,” Lewandowski says.

VENEZUEL A HA S BECOME ONE OF CHINA’ S MOS T IMPORTANT OIL SUPPL IERS .

12 SPECIAL REPORT

INTERNATIONAL ARBITRATION 1/3LY

VENEZUEL A S TRUGGLES TO PERFORM The need for market liberalisation is evident across Latin America, including Venezuela where oil exports account for almost 100 per cent of government revenue, with the sector dominated by state-owned behemoth Petróleos de Venezuela (PDVSA). But years of economic crisis, underinvestment and poor policy-making have left Venezuela’s energy industry in tatters. Those foreign oil companies that entered the fray –many during the leadership of the late, charismatic president Hugo Chavez – have found their projects bogged down by regulation and poor domestic performance with PDVSA having a 50 per cent operating stake in all oil developments. Chevron, Total, Russia’s Rosneft, Statoil of Norway and Chinese firm CNPC all have joint ventures with PDVSA in Venezuela’s challenging Orinoco heavy oil belt. The foreign partners have long sought operational control over the ventures, which are deteriorating from a lack of maintenance. Investors are also concerned that Caracas can’t fulfil its financial commitment to the projects. Oil service companies such as Schlumberger, Halliburton and Baker Hughes have effectively withdrawn from Venezuela in recent months following a build-up of unpaid invoices. Annual inflation is now running at some 500 per cent and GDP plunged by 20 per cent in the second quarter of 2016.

Venezuela’s problems are emblematic of the volatile environment in Latin America where markets can thrive and then rapidly deteriorate. As a fully-fledged developing region it presents obvious risks to foreign investors, but many continue to be enticed by the potential rewards. As the region works through the collapse in commodity prices, corruption scandals and currency volatility, and with many nations looking to liberalise their economies and encourage foreign investment, there are reasons to be positive.

KE Y LEGAL CONS IDERAT IONS • Lower commodity prices are increasing pressure on margins, raising the potential for disputes, both with domestic governments and other industry participants. • Higher numbers of claims are likely as lower commodity prices result in more bankruptcies. Claims over renegotiation or early termination of contracts and non-payment are on the rise. • The present business climate is increasing the focus on contracts and contractual terms. Companies and governments are under pressure to negotiate the best possible terms. • Governments in less stable regimes may fail to honour, or may seek to renegotiate, contracts, especially in the event of a change of government. • A number of national governments have demonstrated a propensity for excessive intervention and even expropriation in certain markets. • Legislation in some emerging jurisdictions may be outdated and not fit for contemporary use. National courts may be under-resourced and decisions not effectively reported. • Foreign investors should seek neutral venues to resolve potential disputes as national courts may not have the same degree of impartiality as exists in other parts of the world. Some countries’ laws allow for substantive judicial review of arbitral decisions and fail to draw distinctions between domestic and international arbitration.

I BEL IE VE THAT FORE IGN DIRECT INVES TMENT AND INTERNAT IONAL LENDING WILL BE UNLOCKED IN REL AT ION TO BOTH ARGENT INA AND BRAZ IL FOLLOWING PROMI SES BY BOTH NEW REGIMES TO IMPLEMENT DRA S T I C S TRUCTURAL AND POL I CY CHANGES .

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INTERNATIONAL ARBITRATION 1/3LY

TECHNICAL 15

Making any investment requires consideration of a myriad of factors and it is difficult to generalise about making foreign investments. That said, there are common dispute themes that should be considered in all investments, including in both the ‘emerged’ and ‘emerging’ markets in Latin America. Investment in Latin America has grown dramatically even since the millennium and, by way of example, China’s investment alone into Latin America has grown almost twentyfold over the past 15 years. From a dispute resolution perspective preparations for the mechanism to resolve any dispute and the enforcement of any resulting judgment or award should start as soon as the project is conceived. WHO ARE YOU CONTRACT ING WI TH? It is important to understand the nature of the body you are contracting with. In many jurisdictions ‘the government’ is not a straight-forward concept and the authority of any ‘government entity’ needs to be considered and confirmed. Whoever the contracting parties are, but more so when linked to any government entity, the investor needs to be protected from any complicity in corruption, breaches of international law or human rights violations and to take into account security risks. It is important to think ‘beyond’ the investment and to protect both the investment and the investing party. Investments tend to be long-term projects and some change of government or leadership is likely. So far as possible, protections need to be put into the contract and, as appropriate, national legislation to protect the investment being made. Knowledge of your contracting party does not stop once the agreement has been reached – it is important to keep ‘an ear to the ground’ about political or legal changes that may be taking place in order to adapt and protect as necessary. Have in mind that not all political change is bad. By way of example, Brazil’s recent change to more business-friendly political leadership endorsing new investment opportunities in concession projects, infrastructure, logistics and labour reforms has buoyed investors. Similarly, peace negotiations in Colombia may open previously- closed doors and make investment cheaper due to reduced security, defence and logistics costs – with change, can come opportunity.

WHAT LEGAL S TRUCTURES ARE IN PL ACE? While an investor can put protections into a contract, it is important in any jurisdiction to understand the applicable domestic and international laws that may come into play. This is where advice from those with combined global and local experience becomes invaluable. Many jurisdictions will have local domestic laws aimed at attracting foreign direct investment (FDI). These will usually offer protections to an investor and protections for the investment. When considering such legislation, think forwards to how a dispute would be dealt with under that law – would any dispute be determined by a local court? Would that court be neutral as between the investor and the state? How would the dispute resolution provisions in the legislation interact with the contracts governing the investments? Are they compatible? While some laws do aim to attract foreign investment, investors should also have in mind laws that restrict investment, for example limitations on the amount of an asset that can be foreign-owned. Investors need to have a 360 degree view of the landscape they will be working in. There may also be bilateral (BIT), multilateral (MIT) treaties or other international agreements between the country of the party making the investment and the country receiving it. These treaties commonly provide protections for the investor in the form of guarantees of fair and equitable treatment and compensation in the case of expropriation. While BITs may have been negotiated, it is important to see that they have been signed and ratified. Brazil has a history as an objector to the international investment system but since 2015 has notably signed a flurry of new treaties. However, note that not all contain all of the investment protections we would advise an investor to seek as they may be more focussed on Brazil’s outward rather than foreign-inward investment. For example, Brazil’s new investment treaties signed in 2015, but still not in force, do not provide for investor-State arbitration clauses. Also consider the structure through which the investment is made and the country through which the investment is routed. In two cases concerning Venezuela the question of when the investor restructured through a Dutch company (i.e. before or after the dispute arose) became key to the ability to claim protection under the relevant BIT.

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PROTECT ION IN THE INVES TMENT CONTRACT While it may sound simple, it is imperative to document the basis on which the agreement has been reached. Any assurances from the country receiving the investment as to what they have or will do and what the investor can expect must be documented. Ideally these are all recorded in the contract but, failing that, contemporaneous notes, memos, recordings etc all come into play should a dispute arise. It is usual to provide for dispute resolution in a neutral forum. Parties will often provide for disputes to be determined by arbitration under the ICSID Rules which offer the protection of vast experience of investment disputes in neutral territories (always choose a seat that is a signatory to The Convention on the Recognition and Enforcement of Foreign Arbitral Awards the “New York Convention”) determined by a neutral tribunal. A resulting award will be enforceable under the New York Convention, provided it is made in a New York Convention state. There are 156 (soon to be 157) contracting states. It should be noted that arbitration under the ICSID regime does not benefit from the confidentiality applicable in commercial arbitration and the documents and awards are publicly available. In some instances this can act as leverage to encourage good investor-state behaviour as their actions against one another will be closely considered by those contemplating future investment. Investors should also consider making further provisions for specific investments including stabilisation clauses which ‘freeze’ the legal or regulatory regime (though may therefore be challenged for stifling the government’s ability to legislate) or ‘economic equilibrium’ clauses which instead aim to stabilise the economic return on the investment in the case of such legislative changes.

FUTURE FOR INVES T ING IN L AT IN AMERI C A As we said at the start, it is unwise and unfair to generalise about a region so varied as Latin America but it is clear to see that Latin America holds many opportunities for mutually-beneficial investments.

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INTERNATIONAL ARBITRATION 1/3LY

COMMENTARY FROM RUTH STACKPOOL-MOORE AND ANDREW FENNELL 19

CHINE SE WHI SPER S

When China hosted the G20 summit in Hangzhou this September, the preparation was meticulous. Buildings facing major roads were given fresh paint; ugly air conditioning units were disguised with false balconies; the streets were decked with blossoming flowers; and to improve the bird’s eye view, even some rooftops were painted. The usual grey skies made way for a ‘G20 blue’ – as some locals dubbed it – thanks to the closure of the city’s factories to clear the air. The vast sums spent on creating a perfect G20 setting show just howmuch China cares about how the world sees it. Yet frustratingly for the Chinese government, western news coverage failed to focus on the beauty of Hangzhou, or the projected strength of the Chinese state. Instead, in the UK at least, the news lens zoomed in on the latest controversy surrounding Chinese outward investment, this time a nuclear plant at Hinkley Point in Somerset. Prime Minister of the United Kingdom, TheresaMay had reportedly pressed pause on the deal due to national security concerns, but it is now going ahead with extra safeguards. Just a month or so before, there was a similar political storm in Germany, where Chancellor Angela Merkel came under fire over a Chinese firm’s buyout of German robotics company KUKA. In recent years, a vast amount of Chinese capital has flown outwards, into foreign investment projects. Much of this has followed the path of the historic ‘silk road’ trading route, under what China terms its ‘One Belt, One Road’ (OBOR) initiative. Its strategy has been to invest heavily in the 60 or so countries that together connect China to Central Asia, the Middle East, Africa and Europe, via both land and sea. Chinese foreign investment initially began with construction and infrastructure projects, in which contractors owned by the Chinese government built power plants, refineries, airports, and road and rail lines in other countries. But with OBOR, the scope of projects has widened, to include industries such as real estate development, manufacturing, technology and e-commerce. Richard Bell, a dispute resolution partner in the Shanghai office of Clyde & Co with expertise in disputes arising from cross-border transactions, explains: “Through the OBOR initiative, the Chinese government has encouraged Chinese companies to invest more in these new sectors, and not just as passive investors. We are seeing increasing interest on the part of Chinese companies in joint ventures and active ownership of assets.

CHINA I S BECOMING MORE ARBI TRAT ION FRIENDLY AND MORE AWARE OF THE NEED TO PL AY BY THE RULES WHEN I T COMES TO INTERNAT IONAL TRADE .

A S CHINA’ S INFLUENCE S TRE TCHES ACROSS THE GLOBE , I T S BUS INESSES ARE BECOMING MORE CO - OPERAT I VE IN RESOLV ING DI SPUT ES .

R U T H S TA C K P OOL- MOOR E

RICHARD BELL

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CHINESE WHISPERS 21

“Chinese companies want to diversify. They want yield and they want to acquire new technologies and ways of doing business. While that is admirable, it is our experience that the more active the investment, the more likely it is that there will be disputes. I regularly deal with cases where a joint venture has come undone because the parties were at cross purposes due to cultural differences or conflicting commercial objectives.” THE ECONOMI C BACKDROP Since the 1990s, the Chinese economy has seen astonishing growth – which analysts trace back to 1978, when the Communist Party decided to adopt capitalist market principles, starting in the agricultural sector. But in the past two years, the fire breathing dragon has been getting short of puff. Growth has slowed, and in 2015 the Chinese economy expanded by only 6.9 per cent – the slowest rate for 25 years. The International Monetary Fund predicts 6.6 per cent growth this year, falling below 6 per cent in 2018. As the world’s second biggest economy after the US, a severe Chinese slowdown would send tremors – and potentially financial earthquakes – across the globe. But this is not the expected outcome. Andrew Fennell of Fitch Ratings, for example, who has been assessing China’s predicted outlook for the next two years, suggests that a “hard landing” for the Chinese economy is “unlikely”. But he adds: “China faces an inevitable structural adjustment that will last for years to come, and is likely to see growth settle well below the 6.5 per cent that many expect by the end of the decade.” Part of the reason for China’s slowing growth lies in its current attempts to re- balance itself, moving from an economy driven by exports and investment, to one in which consumption and services are the main drivers. Some of its big challenges include high levels of corporate debt, relatively low productivity compared to rival countries – partly due to the high number of state-owned enterprises, which are not as productive as the private sector – and serious overcapacity in the iron ore, steel and coal-mining sectors.

The ‘OBOR’ project recognises that stimulating growth elsewhere in the world will benefit China, by creating a demand not only for its steel, but also the goods it produces. It also increases China’s ‘soft power’, and with foreign governments vying for its capital, it arguably lessens the West’s determination to challenge China over difficult issues such as human rights. E A S TERN PROMI SES With this surge in outward investment, doing business with Chinese companies will become increasingly common. But when it is a Chinese company sitting across the table, there is one issue in particular at the forefront of a general counsel’s mind: What happens if the Chinese party breaches the contract? Bell recommends that, if signing a deal with a Chinese company that has assets in multiple jurisdictions, it is a good idea to include a dispute resolution clause that provides for international arbitration. This is because it should be possible to enforce the arbitration award against assets in a wide range of jurisdictions. But if the Chinese company only has assets in China, then arbitration before CIETAC, China’s most widely used arbitration centre, is probably the next best option. Protecting intellectual property (IP) rights is another key issue for general counsel, Bell adds. “Where a Chinese company has infringed IP rights by manufacturing and selling goods in China using the other party’s IP, it can be very difficult to bring this to a halt,” he warns. “While this risk cannot be completely eliminated, it can be minimised by getting advice from a lawyer familiar with IP law in China before the contract is signed.” If a breach of contract does indeed occur, and recourse to arbitration is needed, what can be expected from a Chinese counterparty? Ruth Stackpool-Moore, head of Harbour Litigation Funding in Hong Kong and former managing counsel at the Hong Kong International Arbitration Centre, explains that Chinese companies have recently begun to change their attitude towards arbitration.

CHINESE COMPANIES HAVE RECENT LY BEGUN TO CHANGE THE IR AT T I TUDE TOWARDS ARBI TRAT ION.

Image credit: r.nagy / Shutterstock.com

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FOR CING THE I SSUE Once an arbitral award has been made against a Chinese company, this will not necessarily be the end of the issue – as it may fail to honour the award. If seeking to enforce the award against assets held in China, the first step will be to take the matter to the local court where the party is located, but Chinese local courts do not have a flawless record in the enforcement process. On a positive note, China has now introduced a special reporting system – which represents a big step forward in international arbitration awards. A local court no longer has the power to refuse to enforce an international arbitration award; if it wishes to do so, it must instead refer the case up to the intermediate court above it, eliminating home court advantage. If the intermediate court also wants to refuse enforcement, the matter is referred up again, to the Supreme Court – the only body with the actual authority to refuse enforcement of an international arbitration award. But while this referral system is a big improvement, it is let down by practical reality. The bureaucratic journey from local enforcement to the Supreme Court is painfully slow, taking around two years – plenty of time for the Chinese party in question to have dissipated the assets. Despite the challenges, as investment deals between China and the rest of the world become more common, China is recognising the need to adapt its approach to international business, and the enforcement of business agreements. As Bell says, “Frommy observations, China is becoming more arbitration friendly and more aware of the need to play by the rules when it comes to international trade. “While it still has a way to go, it is heading in the right direction.”

She says, “Typically, the Chinese party would tend to be the respondent [having a claim brought against it]. Proportionately, they are still represented more as respondents, but they are now using the systemmore as claimants as well – and so are becoming more respectful of the process. They are realising that they may wish to use it themselves.” If the Chinese company in question is a large, government-owned entity, it will often be familiar with arbitration. But for smaller Chinese companies that may be arbitrating for the first time, there are a few things to be aware of. Bell explains that Chinese companies are often reluctant to call senior managers as witnesses, and will send more junior employees to give evidence on their behalf. There can also be problems in obtaining discovery of documents from a Chinese party, as companies often have no policy on retaining documents or saving electronic >Page 1 Page 2 Page 3 Page 4-5 Page 6-7 Page 8-9 Page 10-11 Page 12-13 Page 14-15 Page 16-17 Page 18-19 Page 20-21 Page 22-23 Page 24-25 Page 26-27 Page 28-29 Page 30-31 Page 32-33 Page 34-35 Page 36-37 Page 38-39 Page 40-41 Page 42-43 Page 44-45 Page 46 Page 47 Page 48

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