The Use of Litigation Finance in Disputes along China’s Belt and Road
China’s Belt and Road Initiative (the “BRI”) is one of the largest and most historic initiatives of its kind in the world today. The BRI seeks to rebuild and expand China’s ancient Silk Road through a modern day, global network of large-scale infrastructure projects across international borders. It involves a multitude of stakeholders – countries from across the globe, financial institutions, multilateral organisations and private companies drawn from sectors such as infrastructure, energy and transportation, among others.
In any initiative of this magnitude, disputes are inevitable; and for the BRI, international disputes are inevitable. For these types of cross-border and multiple stakeholder disputes, international arbitration is arguably the most suitable and efficient means of dispute resolution. Innovations in international dispute resolution such as litigation or disputes finance are becoming critical elements in international arbitration. Indeed, among other advantages, litigation finance enables access to justice and makes possible the prosecution of meritorious claims by parties who might otherwise not have the resources to secure their rights through formal proceedings. Parties involved in BRI-related disputes should therefore consider litigation finance as an additional tool not only in their dispute resolution arsenal, but also as an important element of their risk mitigation and corporate management strategies – all of which are vital considerations in complex projects arising out of the BRI.
What is the BRI?
In 2013, Chinese President Xi Jinping – in a speech drawing heavily upon over 2,000 years of history that saw China build and grow old trade routes between East and West Asia with Europe – announced the BRI, envisioned as the most ambitious infrastructure programme in history. President Xi himself best summarised the aspirations behind the initiative: “China will actively promote international co-operation through the [BRI]. In doing so, we hope to achieve policy, infrastructure, trade, financial, and people-to-people connectivity and thus build a new platform for international co-operation to create new drivers of shared development.”
As a modern-day equivalent of China’s Silk Road, an ancient network of trade arteries through which commerce flowed, the BRI is composed of the land-based “Silk Road Economic Belt”, linking China, Central Asia, Russia, and Europe; China with the Persian Gulf and the Mediterranean Sea; and China with Southeast Asia, South Asia, and the Indian Ocean. Complementing that Belt is the “21st Century Maritime Silk Road”, which will stretch from China’s East Coast to Europe. The BRI aims to develop six economic corridors from China to Eurasia; and seeks to link China’s maritime domain with Western China and the Eurasian heartland.
Together, the modern Chinese Belt and Road aim not only to re-establish and fortify China’s ties with its ancient trading partners but also to develop new markets for outbound Chinese investment. The BRI’s reach now includes projects in the Middle East, Africa, and even South America. Indeed, the BRI has been extended beyond the original reaches of the ancient Silk Road and reflects China’s aim to project its economic and political prowess even further than ever.
The BRI is sweeping in geographic scope and monumental in the enormity of its ambitions. BRI-participating economies contribute more than one-third of global GDP and represent over 62% of the world’s population. Governments as well as other members of the international community have taken notice. According to China’s top economic planning agency, the National Development and Reform Commission, by the end of 2020, China had signed BRI cooperation deals with 138 countries and 30 international organisations addressing a wide range of areas, including transportation infrastructure development, joint set-up of industrial parks, establishment of sister-city networks, trade and investment promotion, financial cooperation and joint collaboration in regional programmes.
When built, the BRI will consist of an unparalleled transcontinental network of bridges, highways, airports, ports, roads, railroads, pipelines, hydropower projects, airports and various other infrastructure that will cross 70 or more international borders. Examples of these include landmark projects such as the USD 5.29 billion Jakarta Bandung high-speed railway in Indonesia (75% funded by the China Development Bank), the 22.5-kilometre second Penang Bridge in Malaysia, the longest crosssea bridge in Southeast Asia (funded through a USD 800 million loan from China Exim Bank), and the 720MW Karot Hydropower Project of Pakistan (in part financed by the Chinese sovereign State fund, the Silk Road Fund).
The Oxford Business Group estimated that, as of January 2020, over 2,900 BRI-linked projects at a cost of USD 3.87 trillion were planned or under way. It is estimated that USD 5 trillion will be invested in BRI projects, consisting mostly of these types of large-scale infrastructure projects.
Implementing an initiative of this magnitude requires equally tremendous amounts of financing. With this in mind, China established the USD 40 billion Silk Road Fund in December 2014 and the Asian Infrastructure Development Bank (a China-led multilateral financial institution) which, together with China’s three government policy banks, as well as other State-owned banks are and will be providing the backbone of financing for BRI projects.
The BRI is ripe ground for cross-border disputes
Because of the mammoth scale of the initiative, the BRI will require the involvement of a complex patchwork of stakeholders, including national governments (as well as their agencies, instrumentalities, and regulators), foreign investors, shareholders and joint venture partners, EPC contractors, project companies and even off-takers. Many, if not most, of these parties will be Chinese, specifically State-owned enterprises, and Chinese financial institutions, as well as the Asian Infrastructure Investment Bank.
However, if it is to succeed, China cannot embark on this initiative alone, and it will have to rely on the participation of corporations and partners from many other countries along the Belt and Road, and even beyond.
Due to the cross-border nature of BRI projects, these projects are particularly vulnerable to political risk, or the possibility that political forces or events, whether occurring in a host country or resulting from changes in the international environment, will disrupt an entity’s operations. Political risk can come in many incarnations, including, for example, the global spread of a pandemic, and in most instances precipitate contractual breaches and ultimately, disputes. This is more apparent where a BRI project is in a frontier market beset by government instability, weak (or non-existent) regulation, undeveloped laws or legal systems, or poor security. It is estimated that China has pledged USD 690 billion in investments and construction contracts for 44 countries that are either not rated or do not have investment-grade ratings from Fitch Ratings, Moody’s, or Standard & Poor’s. This makes BRI projects susceptible to disputes fostered by political risk.
BRI projects are not just susceptible to political risk, but like the rest of the world, they are subject to international events beyond any State’s control. From 2020 and thereafter, the world was ravaged by the COVID-19 pandemic and BRI projects were not immune. According to China’s Foreign Ministry, by mid-2020, approximately 20% of all BRI projects were “seriously affected”, with 40% “adversely affected”, and 30–40% “somewhat affected”. From the litany of ways in which projects have been impacted, the pandemic has disrupted supply lines, negatively affected manpower and called into question financial models and economic bargains that form the basis of many contracts, to name a few examples. Without a doubt, BRI-related disputes have arisen, and will continue to arise, from this global pandemic.
But even setting aside this economic and public health crisis of a lifetime, the nature of the infrastructure projects which form the backbone of the BRI also make them ripe ground for disputes. These projects are, on the whole, gigantic infrastructure projects which typically require not just one, but several contractors, resulting in a constellation of separate but related contracts, each with a different set of counterparties, including EPC contractors, financiers, joint venture partners, designers, insurance providers and operators. An additional facet of the congested team sheet is that such participants will frequently come from different jurisdictions. Thus, BRI-related disputes are likely to be multi-party disputes involving the laws of multiple jurisdictions under potentially multiple, but related contracts. These types of disputes are complex and involve challenging choice of law and choice of forum questions, including, among others, questions on foreign law.
As an example of these complex disputes, in early 2021, Jordan and its State-owned National Electric Power Company commenced an international arbitration against Attarat, a company awarded a USD 2.1 billion contract to build a power station and mine as part of the BRI. State-owned Sinosure of China extended a USD 1.6 billion debt facility for the project as part of the BRI, while China’s Guangdong Yudean Group also owns a 45% stake in Attarat. The central dispute arose out of the power purchase agreement for the project.
Looking further back to August 2019, an ICC tribunal issued an award in favour of the Roads Committee of the Kazakh Ministry of Industry against an Italian-Kazakh joint venture in a USD 32 million dispute arising out of delays in the construction of the “Western Europe– Western China International Transit Corridor”, a 193-kilometre motorway between Almaty in Kazakhstan and Khorgos in China.
BRI-related disputes are inevitable. These disputes will be international in scope, will usually be high value and will be complex.
International arbitration is a suitable means for resolving BRI-related disputes
There is no single forum designated for the resolution of BRI-related disputes. As in every contractual relationship, party autonomy is paramount, and it is up to the parties to decide how and where to resolve their disputes. However, international arbitration is arguably best suited for BRI-related disputes given that the vast majority are likely to be cross-border in nature, notwithstanding the availability of litigation in domestic courts. This would appear to be the case even considering recent innovations in the domestic court mode of dispute resolution in the PRC.
In June 2018, the Supreme People’s Court of China established the First International Commercial Court in Shenzhen and the Second International Commercial Court in Xi’an (collectively known as the “CICC”) to provide judicial support for the resolution of disputes arising out of the BRI. The CICC is viewed as China’s attempt to reorientate BRI dispute resolution to China from proceedings overseas given that many Chinese companies, especially State-owned companies, are involved in BRI projects. That China focus is evident in the CICC’s structure. While the CICC is seated with justices who are required to be familiar with international treaty law, they must be capable of speaking in Mandarin Chinese, which is the only language of the proceedings before the CICC. All the justices must also be Chinese nationals, unlike the international commercial courts in Dubai and Singapore which have foreign judges on their rosters. Moreover, only Chinese-qualified lawyers are allowed to appear before China’s international commercial courts thus – in contrast with most arbitral disputes – reducing disputing participants’ free choice as to whom they want to represent them, which is usually a crucial consideration for any party involved in formal proceedings. The China-centric focus of these courts may dissuade foreign parties from submitting their disputes to these fora, especially where the counterparties themselves are Chinese.
Even so, China too recognises that international arbitration will have a major role to play in resolving BRI-related disputes.
In November 2019, China hosted the Belt and Road Arbitration Institutions Roundtable Forum with the China International Economic and Trade Arbitration Commission (“CIETAC”), the primary arbitral institution in China, together with eight other arbitral institutions. During the forum, over 40 arbitration institutions in China and from abroad signed the Beijing Joint Declaration of the Belt and Road Arbitration Institutions to promote arbitration as a means of dispute resolution for disputes arising out of the initiative.
Indeed, major arbitral institutions have recognised the potential role that they and international arbitration will play in the resolution of BRI-related disputes and have spent the last few years jockeying for position to encourage parties to use their services by including their model arbitration agreements in their contracts. Even more, in 2017, CIETAC promulgated new rules for the resolution of investment disputes and opened a “Silk Road Arbitration Centre” in Xi’an, one of the major trading hubs along the ancient Silk Road. In 2018, the Hong Kong International Arbitration Centre (the “HKIAC”) embarked on efforts to promote Hong Kong and the HKIAC as a hub for resolving disputes arising out of the initiative, including by partnering with a leading Russian arbitral institution approved by the Russian government to administer international cases. Similarly, in the same year, the International Chamber of Commerce (the “ICC”) also established a committee for the promotion of arbitration for BRI disputes. The Singapore International Arbitration Centre (the “SIAC”) has also expanded its ties to and expertise in China, having opened a representative office in the Shanghai Free Trade Zone in 2016, and signing agreements with CIETAC, the Xi’an Arbitration Commission, the Shanghai International Arbitration Centre, the Shenzhen Court of International Arbitration and the Peking Law School.
This focus by international arbitral institutions on the BRI as a potential pipeline for disputes arguably reflects trends and preferences in international legal practice. In the 2021 Queen Mary International Arbitration Survey (the “Queen Mary Survey”), international arbitration was the preferred method for resolving cross-border disputes (of which there would be many in the BRI context) for 90% of survey respondents, either on a stand-alone basis (31%) or in conjunction with alternative dispute resolution (59%).
In deciding where to arbitrate, respondents in that survey also cited enforceability of arbitral awards as a major concern. Parties in cross-border disputes, such as those arising out of the BRI, would likely have to address enforcement of either court judgments or arbitral awards.
For arbitral awards, successful parties will have the New York Convention on their side, with only five countries out of the original 65 countries targeted by the BRI having not ratified the New York Convention, an international treaty governing the recognition and enforcement of arbitral awards.
What is the role of litigation finance in BRI-related disputes?
As the global economy recovers from the effects of the COVID-19 pandemic, corporate activity will continue to be dampened and there will be unabated pressure on companies and in-house legal departments to manage legal costs effectively. This will of course include the normally significant costs associated with prosecuting or defending claims arising out of their projects. BRI projects have not been spared from the pandemic. According to China’s Foreign Ministry, by the summer of 2020, as much as 60% of BRI projects had been impacted by the pandemic. Contracting parties which have not made sufficient or any provision in their legal budgets for the costs of resolving their disputes will face some tough decisions about whether to pursue those disputes or give up on their entitlements. Most will be forced to consider other solutions. This is particularly the case where budgets are prepared on a project basis, at the outset of the project and at a time when disputes may be far from the minds of the front-end negotiators and those responsible for determining and setting project costings. Using external capital by way of litigation finance is one obvious solution when such a scenario arises.
What is litigation finance?
Litigation finance, or disputes finance, can be an invaluable tool to assist companies to pursue litigation in this pandemic climate. But even outside the COVID-19 context, companies should view litigation finance as a means of managing their litigation risk and cashflow, including for disputes involving the BRI.
But what is litigation finance? Litigation finance, also known as disputes finance, legal finance or third-party funding, is the use of external capital of an otherwise disinterested third party for payment of the costs incurred in a dispute by (normally but not always) a plaintiff or claimant. The types of costs which can be covered include legal fees, experts’ fees, arbitral tribunal fees and other disbursements. In return for advancing those costs, the funder will seek repayment of its investment plus a return, with such sums taken from the proceeds of the successful action. Crucially, the funder only receives repayment and its return once a recovery is made by way of settlement, payment of a judgment sum by the opponent or enforcement. Winning is not enough to trigger the funded party’s liability to the funder. The funding is provided on a non-recourse basis, meaning that if the claim is unsuccessful or no recovery is made after winning an arbitration or court case, the funded client has no obligation to the funder.
Viewed in another way, litigation finance is a means of investing in a company’s contingent assets – in this case legal claims – and then working to profit from those claims either through settlement or final adjudication, whilst ensuring that the funded client comes out with the lion’s share of the recovery. The return on investment required by the funder is usually a multiple of the funding advanced, a percentage of the recovered damages, or a combination of both.
What are the forms of litigation finance?
There are various methods of litigation finance that may be of use to parties involved in BRI projects when disputes arise.
First, parties may seek single case funding, which is the most common form of litigation financing used by parties in disputes. This type of funding remains the backbone of the litigation finance industry and involves singular investments in one-off cases. The client’s need for external finance may arise out of necessity or they may make a conscious choice to use external capital to pursue their legal claims. There are various reasons why a corporate may make such a conscious choice, but they usually include a desire to push the risk of not succeeding onto another party (i.e., the funder) or a desire to spend their own balance sheet resources on their core (and usually revenue generating) business. The cases that are most likely to attract outside financing on a single case basis are generally high value and involve an opposing party that has the resources to pay or is insured.
Second, parties may seek financing for a portfolio of disputes where a litigation funder provides financial resources for a number of disputes involving a party, often involving different opponents. Through that portfolio, the risk of a binary outcome in a single-funded case is removed and the funder’s risk is spread across a whole book of disputes. The investment is cross-collateralised across the proceeds of all or any of the cases.
Portfolio financing may be particularly suitable for construction disputes or infrastructure companies of the type that would be part of the BRI. Companies involved in the BRI are likely to undertake obligations and risks across numerous projects under similar contractual arrangements. Financing can thus be secured by funding a group of disputes, and not just for the most winnable cases. This allows financing to be deployed even for claims which might not otherwise be funded on a stand-alone basis, including smaller claims and defence cases where the funded client is not the plaintiff or claimant. For example, an EPC contractor in a number of BRI projects may seek litigation financing for a portfolio of disputes involving different counterparties in multiple and even unrelated contracts (even possibly, in cases where the EPC contractor is a respondent and not a claimant). Funders will also consider including within a portfolio of financed cases matters for which there is no monetary outcome, such as a dispute in which the funded party is seeking declaratory relief as well as other disputes which the client may be involved in elsewhere, beyond those touching the BRI. Funders like LCM are highly experienced in working with clients to put together economically viable portfolios and providing solutions which assist such clients with the entirety of their book of disputes.
Beyond single case funding and portfolio financing, litigation finance can also be deployed in other contexts or stages of disputes, such as, for example, disbursement finance (where the client pays their legal fees – or their lawyers agree to act on risk on a contingency basis – and uses financing to pay for all out-of-pocket expenses in bringing a case to trial promptly without adverse effects to cashflow), security for costs (where a client needs to satisfy an order for security of costs), or judgment enforcement funding (where a client has prevailed in the underlying litigation or arbitration and seeks to enforce a court judgment or arbitral award against an opponent who has not made payment willingly after losing).
Certain funders will also consider providing monetisation against awards, judgments or contingent and unresolved claims by extending working capital on a non-recourse basis to the funded client. The client can use the capital for its business and repayment of the sum plus the funders return will only occur when the fruits of the contingent assets are realised.
Why should parties consider litigation finance?
There are a number of compelling reasons why companies should consider using litigation finance for their disputes, including BRI-related disputes.
First, litigation finance is a risk mitigation tool which shifts some or all of the risk of an unsuccessful outcome in the dispute onto the litigation funder. As noted, the funder only recovers its investment if the claimant is paid any damages (winning the dispute is not enough; actual payment or recovery of damages is critical).
Second, litigation finance removes the costs set aside for disputes from the company’s balance sheet. Litigation is one of those costs that companies regularly pay for in cash. Litigation finance frees up that cash and empowers companies to deploy their own resources for other purposes including for use on the company’s core business. There are various other positive accounting benefits associated with using an external source of capital to finance a company’s disputes, including some which relate to improving the valuation of the underlying business, but which are beyond the scope of this chapter.
Third, litigation finance also promotes access to justice because it allows parties which – but for the external capital – would not have the financial ability to pursue otherwise meritorious claims.
In which jurisdictions relevant to BRI-related disputes can parties use litigation finance?
While litigation finance began in Australia and has gained currency in jurisdictions such as England and Wales and the United States, Singapore and Hong Kong have also liberalised their legal systems to allow for the use of litigation finance for specified categories of disputes. Case law in both jurisdictions has also made it clear that funders can support liquidators appointed to insolvent companies to pursue claims for the benefit of the creditors of the insolvent estate.
Singapore amended its regulatory framework in March 2017 to permit litigation finance (provided by qualified funders) in international arbitrations and related proceedings (including related mediation, enforcement, or other court proceedings) – moving away from a regime where funding was previously prohibited on public policy grounds. Hong Kong followed suit with a 2017 announcement and subsequently amended its laws, with the changes coming into force in 2019. In those amendments, Hong Kong declared that litigation funding is allowed in domestic and international arbitration, including before emergency arbitrators and in related court proceedings. In June 2021, Singapore further extended its funding framework by confirming that domestic arbitration and cases commenced in the Singapore International Commercial Court (the “SICC”) may be supported by third-party funding.
Singapore and Hong Kong are considered as the major arbitration hubs in Asia and, in the Queen Mary Survey, were cited as the top two preferred seats for international arbitration (together with London). Singapore and Hong Kong are home to some of the leading international arbitral institutions in the region, the HKIAC in Hong Kong, and in Singapore, the SIAC, and the Permanent Court of Arbitration. The ICC International Court of Arbitration has operations in both jurisdictions. These arbitral institutions are – because of their expertise and location – suitable for the types of complex international disputes that may arise out of BRI projects, including disputes that involve States, State entities, and international organisations. As noted, cases commenced in the SICC may be funded since June 2021 and it is expected that some BRI disputes may play out in that forum.
Beyond Hong Kong and Singapore, it is generally accepted that arbitration and litigation in India may be funded and there is no prohibition on third-party funding in China. Most other countries along the Belt and Road, as well as other countries where BRI wrangles may be resolved, do not expressly permit or prohibit the use of litigation finance. Funders generally take a broad view when faced with a case which meets their funding criteria but which is to be heard in a jurisdiction where the position on funding is not clearly provided for in statute or case law and will do what they can to assist with ensuring the financing can proceed.
How does a litigation funder determine which cases to finance?
In determining whether a case is suitable for litigation funding, funders like LCM weigh up several factors. The underlying merits of the case are clearly very important but the commerciality around the proposed investment is also given significant scrutiny (i.e., whether it makes commercial sense for the funder to make the investment given the expected return, time frame for recovering that return and the ability to make a recovery in the event that the funded client prevails in its case(s)).
In assessing the merits of a case, funders typically look at whether the case is supported by clear legal principles. Cases which are based on novel legal arguments or theories that are heavily litigated are likely unsuitable for funding because of their inherent unpredictability in outcome and thus a greater risk of losing.
In connection with the strength of a party’s legal arguments, funders must also look at whether the claims are supported by sufficient documentary evidence. Claims that are highly dependent on oral testimony are riskier because witness testimony can be unpredictable and dependent on factors that can be beyond a party’s control.
Funders also look at the recoverability of any potential damages award, because after all, funders will only recoup their investment if the client is paid. An assessment of recoverability entails determining whether the respondent or defendant has sufficient assets to meet an award in the amount sought, the location of those assets and the law governing enforcement in those relevant jurisdictions.
Finally, funders also need comfort that the legal team handling the case has the necessary experience to litigate the claims to victory. This is because once a case is funded, the lawyers in conjunction with the client remain in control. Even with a funder’s investment, the claim remains the claimant’s and the funder’s involvement is passive (unless the client wishes for the funder to bring to bear its experience in litigating high-value international disputes as an integrated part of the strategic team).
China’s BRI is an historic and truly global infrastructure programme which, if successful, has immense potential to connect and contribute to the development of countries along the Belt and Road. But much like in any economic expansion or project of this magnitude, disputes are inevitable. Those disputes will likely have a cross-border nature because the BRI itself crosses international borders, involves various international players and, indeed, touches upon significant swathes of the world. An international initiative such as the BRI will lead to international disputes.
For well-resourced clients, those for whom budgets do not extend to the disputes which follow or interrupt their BRI projects and parties who have been pushed to the brink of impecuniosity by the actions of their contractual counterparties, litigation finance should be given serious consideration as an additional tool in their dispute resolution arsenal. The various financial products offered by funders allow the pursuit of meritorious claims even where the company has limited means to do so. It also shifts the risk of the dispute to the litigation funder. Moreover, it frees up capital so that companies can deploy their resources to further advance their core business and revenue generating activity, or, as in the case of many companies during these unprecedented times, to recover and rebuild their business.