One Belt, One Road: Legal finance and the rise in dispute resolution
China’s One Belt, One Road (OBOR) initiative is a mammoth undertaking of construction and infrastructure projects spanning across at least 60 countries. Launched by President Xi Jinping in 2013 and then elevated to official policy enshrined in the Communist Party’s constitution, the initiative envisions a spend of US$1.3 trillion by 2027 on railways, roads, ports and power grids.
OBOR is a combination of two complementary proposals: A 21st-century Silk Road economic belt that passes through Central Asia and connects two of the world’s largest economies, China and Europe, and a maritime Silk Road that connects Europe and China via Southeast Asia, South Asia, the Middle East and East Africa. Less economically developed countries across these regions, where trillions of dollars’ worth of infrastructure is sorely needed, welcome the initiative as China’s money and expertise could be a big help in spreading wealth and prosperity.
The potential for large-scale international arbitration
Disputes are an inevitable outcome of so many high-value projects covering an area of the globe with more than half the world’s population, and a range of disparate jurisdictions and legal regimes comprising common law, civil law, Islamic law and hybrid systems. Further, these disputes will likely involve convoluted cross-border elements, with all the complex legal factors this entails.
Indeed, significant disputes have already arisen. In 2015, the Sri Lankan government suspended work on Sri Lanka’s US$1.4 billion Colombo Port City OBOR project. Work has only recently resumed after the China Communication Construction Company (CCCC) dropped its claim against the Sri Lankan government for US$143 million in return for additional land for the project.
Although the OBOR initiative is led by the PRC government, PRC law is unlikely to be the governing law in most OBOR legal documents. Further, many of the core risks giving rise to dispute are inherently political, and thus disputes between Chinese state-owned entities (SOEs) and OBOR counterparties are best removed from any local court systems.
Arbitration, as a neutral dispute resolution forum, is inherently desirable for such situations: Arbitral awards are much easier to enforce cross-border and can be readily enforced in the majority of OBOR countries. When administered properly, arbitration can also be much faster and cost-effective than court litigation and allows parties more choice in the adjudicative process.
The anticipated rise in OBOR related disputes is also leading to competitive positioning by potential fora for OBOR dispute resolution, including the International Chamber of Commerce (ICC), Singapore International Arbitration Centre (SIAC) and Hong Kong International Arbitration Commerce (HKIAC).
Navigating the legal costs involved
There is no doubt that the potential for OBOR related disputes is vast—and consequently, OBOR disputes will undoubtedly pose extraordinary cost and risk burdens for the parties involved.
Costs of arbitration are skyrocketing, particularly for the type of high-stakes construction disputes that are likely to dominate the OBOR dispute landscape. On top of the damage to business outcomes that underlying disputes may present, parties can easily spend millions on legal fees, expenses and technical experts and consultants, if and when those disputes progress through arbitration. This can have a significant impact on the bottom line, with millions of dollars siphoned off for legal costs, not to mention the inability to account for the asset value of the potential claim or asset in dispute. According to the Financial Times, such disputes require an average of 14 months and US$43M to resolve on a global basis—and US$84M in Asia. According to the World Bank, the average time for resolving a commercial dispute through OBOR participating countries is nearly 20 months.
Parties could be facing a very long and expensive road to recovery particularly due to the complex multi-jurisdictional nature of these claims.
The role of legal finance—and Burford
Clearly, parties pursuing OBOR claims will face extraordinary legal costs and risks—and thus there is a clear role for legal finance, which enables claimants to shift risk to a third party.
In its simplest form, legal finance leverages the asset value of arbitration claims to secure financing either for the arbitration itself or for other business purposes. Financing is typically provided on a non-recourse basis, meaning that the financier assumes the entirety of the risk associated with loss and only recoups its investment and a return in the event of a successful outcome.
In the OBOR context, legal finance shifts the high cost and risk of pursuing a claim that is likely to take almost two years to resolve off corporate balance sheets, unlocking the value of the claim and associated assets.
Entities with OBOR-related claims will welcome the cost- and risk-shifting that legal finance enables, and the potential to finance such claims will certainly be of interest to the range of different providers in the legal finance market. However, claimants and their counsel should be careful to diligence potential finance partners as they would any other finance provider, and to select a partner best suited to meet their specific needs.
Particularly for arbitration matters of the scale of OBOR projects, clients must be confident that if capital is required at some point in the future, that capital will be available to them at that time.
Burford Capital is the world’s largest provider of litigation finance, with a market cap of US$5 billion. As a London Stock Exchange traded company, it has its own permanent capital which can be drawn on as and when needed. Burford not only has access to ample capital reserves but also offers significant experience and expertise in financing and enforcing claims involving multiple jurisdictions in complex and high-stakes international disputes. With a team of over 100 and more than 50 lawyers on staff in Singapore, Australia, continental Europe, the UK and the US, it has the deepest bench in legal finance. The resulting benefit to OBOR claimants and counsel is timely and precise responses to requests for financing and the ability to add value beyond capital.
