Settlement of BOT Investment Contract Disputes in China

Author: Xiaoliang Jiang      Translator: Ting Fei

Abstract
That paper starts talking of the imperfect of Chinese laws on the BOT Investment Contract. Then through analyzing the conflict between BOT investment and Chinese laws, it suggests arbitration as a way to settle BOT contract disputes to protect investors’ reasonable rights and interests. It also clarifies the author’s view that how to express the Arbitration Contract in a BOT Contract.

Key words
BOT [Built-Operate-Transfer] dispute settlement arbitration agreement

Introduction
BOT [Built-Operate-Transfer] means the government grants investment enterprises operational concessionaire within a period of time, permits them to construct and administrate certain public infrastructures by financing, and authorize them to pay off loans, reclaim investment and make a profit through charging from users or selling products. At the expiration of concessionaire period, the infrastructure shall be transferred to the government without any expense. In such a legal relation, one subject is local government, and the other is investment enterprises. Their mutual rights and obligations relations are established by signing BOT Investment Contracts. The investment, construction and operation of the BOT projects are constituted by a series of contracts, in which the BOT Investment Contract plays a vital role as the backbone, while the dispute settlement clause of BOT Investment Contracts yet is one of the necessary parts in the contracts.

1. Chinese regulations on BOT investment
So far, China hasn’t got the special legislation relating to BOT. The main documentations to regulate BOT investment are as below:
1) “Circulating the Relevant Issues on Absorbing Foreign Investment through BOT Projects” ,(“BOT Circulation” for short) stipulated by the Ministry of Foreign Trade and Economy Cooperation, 1995;
2) “Circulating the Project of Experimentally Transacting Foreign Investment Concessionaire”, (“United Circulation” for short) unitedly stipulated by the State Planning Council, Power Ministry and the Ministry of Communications, 1995;
3) “Circulating the Matters Concerned Project Financing of Domestic Institutions”, stipulated by the State Administration of Foreign Exchange, 1995;
4) “Administration Measures for external project financing”, jointly stipulated by the State Planning Council and the State Administration of Foreign Exchange, early 1997;
5) “Administration Measures for Concessionary Operation of Municipal Public Utilities”, stipulated by the Ministry of Construction, Feb 24th, 2004.

The above provisions compose the rudiment of China’s BOT laws, and, to some extent, act as a guide in the operation of China’s BOT projects. However, at present, the law to regulate BOT mode is still not perfect, and the relatively sound legal weather in favor of the BOT projects hasn’t been formed yet.

2．Conflicts between International BOT Investment Contracts and current Chinese Laws
1) conflicts with Constitution
BOT Contract is a concession agreement between government and investment enterprises. According to the 1st paragraph of article 18, in China’s Constitution, “The People's Republic of China permits foreign enterprises, other foreign economic organizations and individual foreigners to invest in China and to enter into various forms of economic cooperation with Chinese enterprises and other Chinese economic organizations in accordance with the law of the People's Republic of China”, the Chinese subject has been limited to “enterprises or other Chinese economic organizations”, and the status of the BOT Contract, one of whose parties shall be government, has yet not been confirmed in the legal system of Chinese foreign investment.

2) conflicts with Law Foreign Investment Enterprises
Project Company is the one to operate BOT project, and also the main object regulated by law. Among varies tasks, financing is the most pivotal. Generally speaking, the proportion between owned capital and funded debt of a project company, ranges from 1 to 9, to 4 to 6, which is much lower than that of common stock debt proportion.
However, in China, article 3 of “Interim Provision on the Proportion between Registered Capital and Total Investment of the Chinese-Foreign Joint Venture”, separately specializes 4 exceptions, ranging from 7 to 10, to 1 to 3, so it is obvious that, in China, the characteristic of a partial higher stock debt proportion of the BOT mode shall not be applied to the above provisions. If a project company is set up under such standard, it will, with no doubt, become an obstacle when the investor settles investment capital through borrowing.

3) conflicts with Guarantee Law
Article 8 of “Guarantee Law of the People’s Republic of China” stipulates that, “state organs shall not be guarantors”. While in the BOT investment contracts, government often provides operation period guarantee, project service guarantee, non-competition guarantee, foreign exchange and outward guarantee, etc.
A certain perspective suggests that, the government’s guarantee in the BOT mode is a promise to the investor, showing the host government’s willing to afford the responsibility established in the BOT Project Concession Contracts, in order to ensure the prosperous process and the transfer of the BOT project, and it is different from that stipulated in the Chinese Guarantee Law. In the BOT mode, when concluding a concession contract with the project investor, the guarantee given by the host government for that project is actually the cost of taking back project facilities without compensation at the expiration of the concession period, instead of providing commercial credit for the implementing of the main contract in the guarantee relation. Therefore, provisions regarding common guarantee shall not be applied to the government guarantee in the BOT Contracts. This perspective yet hasn’t got accepted by Chinese legislative or judicial organs.

4) conflicts with other Chinese laws

3. Analysis on dispute settlement
There’re mainly 3 Dispute settlement modes, consultation, arbitration and lawsuit. Some believes, the BOT Investment Contract which is a domestic contract, in accordance with the Closest Connection Principal of Conflict Rules, shall not be decided by foreign but domestic courts or arbitration organs. Here, author has different opinions. Reasons:
Disputes of International BOT Investment Contracts are transnational. Article 18 of “Convention Establishing the Multilateral Investment Guarantee Agency (Seoul Convention)”, stipulates that, the host country shall accept that the investment guarantee agencies of investment states are entitled to exert subrogation right on debtor. Because of the establishment of the Multilateral Investment Guarantee Agency (MIGA), in accordance with this Convention, private investors’ right of claim rises into that of international organs. Article 42 of “Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention)” stipulates that the International Rules shall be applied to investment dispute settlement between citizens home and abroad. And the Convention also makes clear stipulation on the award effect of arbitration centre towards the disputes that, the award given by Arbitration Centre shall be the final award abided by both parties, and not be oppugned in contracting countries’ courts. China joined the above two Conventions respectively on Apr.30th, 1988, and Jul.1st, 1992, without any reservation.
The rights and obligations of local government and the investment enterprises are equal when concluding BOT Investment Contracts. From talk to performing, both parties go through in the way of equal negotiation. As a result, the status of both parties involved in the settlement of a BOT investment dispute is equal. If arbitration is chosen as the way to settle disputes, each party shall enjoy coequal rights, perform relevant obligations, and be bound by award. The host country shall not accept the theory of “Public Order Reserve” as excuse to exclude the force of award. As one party of the dispute, if the contracting government doesn’t perform the award, then it disobeys the obligation of abiding by the conventions.
Whereas the Conflicts between International BOT Investment Contracts and Chinese laws, in order to avoid the predicament of Chinese courts and Arbitration Committees when applying laws, the author suggests contracting parties choose a third-party Arbitration Committee to settle the BOT contract disputes.

4. Choose of Arbitration Committee
As BOT investment projects concern many complicated legal relations, to avoid the uncertainty of the award, contract parties often choose committee arbitration, instead of ad hoc arbitration, to settle disputes. For China’s BOT investment projects, these Arbitration Committees can usually be chosen:
1) Singapore International Arbitration Centre, SIAC
Address: City Hall, 3 St Andrew's Road, Singapore 178958
Tel: +65-6334 1277 Fax: +65-6334 2942 (Case Management)
E-mail: sinarb@siac.org.sg Website: www.siac.org.sg

2) International Centre for Settlement of Investment Disputes, ICSID
Address: 1818 H Street, N.W., Washington D.C., 20433 U.S.A.
Tel: (202) 458-1534 Fax: (202) 522-2615
Website: www.worldbank.org/icsid/

3) ICC International Court of Arbitration
Address: 38 cours Albert 1er, 75008 Paris, France
Tel: +33 1 49 53 28 28 Fax: +33 1 49 53 29 33
E-mail: arb@iccwbo.org Website: www.iccwbo.org

4) Arbitration Institute of the Stockholm Chamber of Commerce
Address: P. O. Box 16050, SE-103 21 Stockholm, Sweden
Tel: +46 8 555 100 50 Fax: +46 8 566 316 50
Website: www.sccinstitute.com/uk/home/

Author suggests choosing Singapore International Arbitration Centre (SIAC), as the Arbitration Committee for BOT project disputes. Reasons:
1) Convenient traffic, just a few hours’ flight;
2) Arbitration language can be Chinese ,English or both;
3) Lower charge than that of others;
4) Arbitrators coming from all around the world and various industries for disputes parties to choose.

5. Arbitration Clause Model
1) Consultation
Any dispute arising out of or in connection with the contract (including but not limited to any issues regarding its existence, validity or termination, etc), shall, upon the written request of any party, be settled through friendly consultation between the Parties, or the dispute can be directly referred to and resolved by arbitration at the request of any party.

2) Submitting arbitration
Any party is entitled to submit the dispute to the Singapore International Arbitration Centre (SIAC), and the dispute shall be finally resolved in Singapore in accordance with the rules in force. After a contract is concluded, if its rules have been amended by the Arbitration Centre, then the arbitration shall be conducted in accordance with the latest amended rules passed and authorized by the centre, which together with the rules in force are deemed to be a part of this clause. The arbitration shall be conducted in, and the award shall be rendered in, both Chinese and English.

3) Composition of the Arbitral Tribunal
The two Parties shall submit documents and evidence as required by the Arbitration Rules and the Arbitral Tribunal. There shall be three arbitrators. The applicant and the respondent shall respectively select one arbitrator within 30 days after giving or receiving the demand for arbitration. Such arbitrators shall be selected from the SIAC panels of arbitrators. The SIAC shall select a chief arbitrator from its panels who shall not have Chinese or the investors’ country’s nationality. If any Parties do not appoint an arbitrator within 30 days after the selection of the first arbitrator, such appointment shall be made by the SIAC.

4) Force of award
The award shall be final and bound upon the Parties, and shall be the sole and exclusive remedy between the Parties regarding any disputes, claims, counterclaims, etc. submitted to the Arbitral Tribunal.

5) Performing of the contract
This Contract and the rights and obligations (except the ones related to the dispute issues) of both Parties shall be fully performed pending the award in any arbitration proceeding hereunder.

6) Enforcement of the award
The Parties shall guarantee a full-scale and punctual abidance and enforcement of all the procedural decisions (including but not limited to any interim preserve measures), or any award rendered by the Arbitral Tribunal.
Any arbitration award shall be enforced in accordance with the provisions of the 1958 “Convention on theRecognition and Enforcement of Foreign Arbitration Awards” of the United Nations to which China is a signatory.
7) Waiving the right of immunity
The Parties announce and guarantee that: this Contract is a commercial agreement, not a public or governmental act, so each of the parties waives the right of claiming immunity from lawsuit with respect to itself or any of its assets on the grounds of sovereignty or otherwise under any law or in any jurisdiction. Each of the Parties is restricted by civil and commercial law with respect to its obligations of the Contract, and the concluding and performance of this Contract by such Party constitutes private and commercial action but not the government’s public action. Each of the Parties irrevocably represents, warrants and contents that this Contract is a commercial activity, not the government’s public activity. No Parties are entitled to claim immunity from legal proceedings for itself or any of its assets on the grounds of sovereignty or otherwise under any law or in any jurisdiction where an action may be brought for the enforcement of any of the obligations arising under or relating to this Contract. If any of the Parties or any of their assets has or hereafter may acquire any right to immunity from offset, legal procedure, detainment prior to judgment, other detainment or execution of judgment on the grounds of sovereignty or otherwise, such Party hereby irrevocably waives such rights to immunity in respect of its obligations arising under or relating to this Contract.

Conclusion
As there’re no correlative laws in China to definitely regulate the BOT Investment Contracts, the uncertain factors should be fully considered from all aspects, and the relevant BOT cases can be studied when concluding a BOT Investment Contract, in order to avoid unnecessary investment disputes. The more exhaustive and comprehensive the arbitration clause in the BOT Investment Contracts is, the better for the disputes to be favorably settled.

[ Author ]
Jiang Xiaoliang, English name: Bright Jon, Brighten Law Firm, Partner,
Specialty: Investment Law, Corporate Law, Contract Law
Address: No.30, South People Road, Taicang, Suzhou 215400 China
Tel: 086-512-56696902 Fax: 0512-53516040
colaw@188.com  www.colaw.cn