Legal and regulatory issues are the risks most often associated with the Belt and Road Initiative (BRI), according to a recent CMS survey.
In the first videocast of our BRI series, CMS partners discuss the nature of these risks, how they can be avoided and what to do when a disagreement becomes a dispute.
Click below to watch the videocast.
The nature of BRI means that investors are often working in jurisdictions they do not know well. Risks may arise through their unfamiliarity with the local legal system and ways of doing business. Investors can easily make incorrect assumptions that may halt or delay a project. Non-compliance with local laws may also strain working relationships with their local partners.
Having the right local partners is a key aspect of risk mitigation. Selecting partners requires proper due diligence, which might not be easy in some places. But it is important to ascertain, for example, whether a prospective partner has unduly close ties with the government, or with advisers suspected of corruption. Involving local experts to help investigate such questions is key.
It is also important to understand the expectations and priorities of the authorities. In some negotiations there will be things the investor does not value highly but which are greatly valued by the counterparty government. Compromising on such points may help a project succeed.
Investors should also consider the network of investment treaty protection along the Belt and Road. If you are investing into a foreign jurisdiction, you should know whether that country has a treaty with your home jurisdiction, giving your investment protection under international law.
Resolving differences and disagreements
Disputes stem from disagreements, which can occur anywhere but may be more likely in certain situations. For example, investors often grapple with difficulties in JV agreements, especially if they involve unfamiliar partners with different priorities.
Sometimes events such as changes in law or material government actions can cause disagreement between an investor and the host government, particularly as force majeure protection is not always as robust as investors would wish.
This can often be worked out in an amicable way, but investors should nevertheless understand their legal rights, in order to frame and guide the way they negotiate.
It is quite common for problems to arise over compliance with local environmental legislation, not least because environmental laws (and expectations) can change very rapidly. Investors need to be adaptable, and to be able to seek compromises with the host government if new legislation affects their projects.
When disagreements become disputes
Sometimes disputes cannot be avoided. So it is hugely important to have in place, from the start, a contract that provides for an appropriate dispute resolution mechanism. Otherwise, any dispute could end up in the local courts, which may make it difficult to bring a claim.
Businesses should include a solid international arbitration clause in their international investment agreements, providing for a neutral forum and a professional arbitral institution. That offers a reliable and efficient way to resolve any dispute, as well as a result that is enforceable in a host jurisdiction under the New York Convention.
Investors sometimes see mediation as an alternative. But the result of a mediation is not likely to be enforceable. It is safer for investors, especially in large projects, to put proper arbitration clauses in place.