The “One Belt, One Road” initiative, also known as the “New Silk Road”, is a project to expand infrastructure and international trade routes under China’s leadership, initiated in 2013 by China’s President Xi Jinping.
The dimensions of this ambitious plan are put into context by the following World Bank background information: About one-third of global trade falls under this category, and more than 70 countries worldwide have signed agreements with China within the framework of the new Silk Road. These countries account for 30 percent of the world’s gross domestic product, over 60 percent of the world’s population and more than 75 percent of known global energy reserves. It is estimated that the New Silk Road will create 180,000 new jobs worldwide.
Such a large project always presents the participants with great challenges, especially if there is no common denominator such as cultural similarities or shared geopolitical interests. Incorporating the various interests and building consensus will always be difficult for those involved. This makes it all the more important for participating companies to have a clear framework defined by contracts in which projects can be implemented.
What must be considered when drawing up contracts?
Chinese partners prefer flexible contracts, additionally, applicable legislation often leaves room for interpretation. Oral commitments are common in practice, e.g. when it comes to speeding up administrative procedures. Like any oral agreement, these are practically non-binding and unenforceable. The contractual relationship should, therefore, be structured in such a way that there are no problems even without such oral promises. Commitments that can be decisive for the success or failure of a project should always be recorded in writing. In addition, contract reviews by the Chinese side can take a long time and delay the realization of a project.
In the case of agreements between a Chinese contracting party and another jurisdiction, the applicable law is freely selectable. If both contracting parties are Chinese, Chinese law shall apply. This also applies if a contracting party is a Chinese Wholly Foreign Owned Enterprise (WFOE) with more than 50% foreign ownership.
There are currently no plans for a more general regulatory framework for the initiative, such as multilateral trade agreements or a written agreement that would apply to all countries participating in the One Belt, One Road Initiative. Even the participation of governments in economic transactions by companies does not guarantee stability and reliability: this company can go bankrupt like any other.
Joint Venture contracts
Even though the pressure on joint ventures has been reduced in many areas, joint ventures continue to be an important form of investment in China. Joint ventures offer foreign companies many opportunities, but they also present many challenges. In particular, there are four areas that need to be considered when drawing up a joint venture agreement:
- The right to intellectual property
- Compliance with trade restrictions
- Data protection agreements
- Rules for the settlement of disputes
Intellectual property rights
China has, by international standards, good laws for the protection of intellectual property – here much has been improved in recent years, at least on paper. However, the enforcement of these rights is inadequate. In addition, there are still legal regulations that offer a great deal of scope for interpretation in favor of Chinese interests. For example, the new Foreign Investment Act promises that “no administrative department or its employees […] shall seek to transfer technologies by administrative means”. In the same text, however, potential restrictions on these guarantees are listed, e.g. if China’s national security is affected.
Another possible problem is non-compliance with international trade restrictions or sanctions. Sensitive fines but also damage to a company’s reputation can be the result. For this reason, contractual agreements should be made in which compliance with US, European or other trade restrictions and sanctions is expressly agreed. In addition to the trade restrictions of the European Union, it is particularly important to keep an eye on the relevant restrictions of various US authorities, e.g. decrees of the American Office of Foreign Assets Control, the US State Department and the US trade authority. Proof of compliance should be the responsibility of the Chinese partner.
Where work is done, there are data streams. As soon as data flows from or into the EU, the very strict rules of the European General Data Protection Rules (GDPR) apply. This determines how the data is to be processed, how long it can be kept and who has access to it. It is irrelevant whether such contracts are concluded on the basis of Chinese law, and are therefore fundamentally subject to the jurisdiction of China – the rules of the GDPR cannot be avoided, they continue to apply. And the penalties can be immense: Up to 20 million euros or in the case of a company up to 4% of the total annual turnover worldwide.
In China, too, there is criminal responsibility for the handling of data, and here too high fines can be imposed. Therefore, as a contractual partner who is held responsible, it is essential that these things are regulated contractually. It is advisable for both contracting parties to undertake to comply with data protection regulations in the EU (in particular the GDPR) and China (in particular the China Cyber Security Law).
About one-third of all joint ventures sooner or later have to deal with internal legal disputes. China’s Supreme Court has announced the creation of two international courts to deal exclusively with disputes relating to New Silk Road projects.
- The court in Shenzhen will decide on maritime matters (Road).
- The court in Xi’an will have jurisdiction over cases related to the Silk Road on the mainland (Belt).
However, it will be several years before these courts are actually established. Until then, it is best to aim for settlements or arbitration in the event of a dispute. Although this could be more expensive in the form of court costs and compensation, it has the following advantages:
- Time: Court hearings are always time-consuming. Waiting times until the judgment is pronounced can be years.
- Recognition: Compensations decided by an arbitral tribunal have more chances of being recognized internationally. They are nevertheless connected with bureaucratic expenditure.
- Confidentiality: In contrast to courts, arbitral tribunals do not publish their decisions.
The choice of location can also be crucial. If the non-Chinese party is the beneficiary of the award, a Chinese arbitral tribunal has advantages. This simplifies the enforcement of the award in China.
Information opportunities for interested companies
The “One Belt, One Road” conference in Beijing from 25 to 27 April 2019 in Beijing provided the framework for an Austrian economic mission to China and a conference hosted by the Austrian Chamber of Foreign Trade (WKÖ). More than 50 Austrian companies discussed “Third Market Cooperation along the New Silk Road” in a conference in Beijing on Saturday, April 27.
This article is based on Richard Hoffmann’s presentation at this event. Ecovis Beijing advises international clients on business start-ups and investments in China. We support internationally active SMEs with services in the areas of legal advice, tax advice, accounting, and auditing.
Richard Hoffmann is a partner at Ecovis Beijing. He obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining Ecovis. In addition to being a member of the board of Ecovis International, he is Supervisor for the China business of several respected German companies. Richard shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: email@example.com
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