Belt and Road Interview Series: Don Lewis on BRI's Legal Framework

Can you tell us about your background and move to specialize in Chinese law, what fascinates you about Chinese law?
 

Don Lewis: I would say I specialize in both Chinese law and international economic law – a useful combination for BRI. I began my formal study of Chinese law at the University of London in 1980 – about a year after the promulgation of the first five Chinese legal codes in 1979. I was among the first cohort of US Fulbright law professors to China in the mid-1980s. I then transitioned to Hong Kong and was a law professor at The University of Hong Kong Faculty of Law where I taught Chinese law and international economic law subjects for 23 years – before returning to my home state of California where I have taught at Stanford Law School and the University of San Francisco – most recently on China’s Belt and Road Initiative. I am currently teaching a Belt and Road law course at the China University of Political Science and Law (CUPL) for their international summer term. 

I am fascinated by Chinese law because it is culturally and ideologically distinctive and autonomous from other major legal systems – despite being ostensibly a Civil Law system. It seeks its own path. Legal transplants have been selective, eclectic, and for the most part, supportive of Chinese socio-economic values and aspirations. China refreshingly embraces its own traditions, including administrative and informal approaches to societal governance – which are very different from the West.      
 

What makes the Chinese legal system different from systems in other countries, especially for businesses that want to operate in China? 
 

Don Lewis: China is characterized distinctively by a high degree of administrative governance that has been reinforced and extended by socialism – in other words, the important role of the neo-Confucian paternalistic State. Politics remains in command – not economics or finance. The legal system operates within – not outside of – this milieu. As a result, socialist rule of law is quite different from Western notions. Chinese law is characterized by a degree of legal instrumentalism – where law is just one of several governance tools available to the State and society. This presents opportunities for the exercise of administrative and judicial discretion in the application and interpretation of the law. Chinese law consists of a wide range of normative legal documents, many of which are administrative rules and regulations – these tend to be more important for foreign business than general laws or statutes or judicial cases. Unlike Common Law systems, cases do not have precedential value – there is no doctrine of stare decisis. That is to say, cases are not generally legally binding – although the Supreme People’s Court has in recent years published so-called “model” or “guiding” cases. 

At the same time, China has rapidly developed a conducive legal and regulatory environment for foreign business and FDI. This has been a primary theme of the Chinese legal system for decades – where there are clear legal incentives attached to “foreign-related” business activities. The FDI regime has also undergone substantial liberalization – with the opening up of many economic sectors to foreign business – as result of WTO accession and via the recent adoption of the National Treatment + Negative List approach – not to mention the proliferation of Wholly Foreign-Owned Enterprises. The Chinese legal system also embraces Globalization. Chinese laws and regulations are by and large WTO-compliant and China is a strong proponent of the WTO rules-based multilateral system. In fact, China is the new champion of Globalization – as evidenced by the Belt and Road Initiative.   

How should someone who is not a legal expert imagine what the legal framework for BRI looks like? What is meant by your term, the “BRI Architecture”? What is the Cyber/Digital Silk Road and what opportunities does it portend for foreign business? 
 

Don Lewis: The BRI Architecture is both a legal and a political framework. At its highest level, it includes China’s Strategic Partnerships and BRI MoUs; China’s Bilateral Free Trade Agreements (FTAs); China’s Bilateral Investment Treaties (BITs); and China’s involvement in Eurasia and Africa Mega-Regional Trade Agreements or RTAs – such as RCEP and the SCO. There is great deal of international law adhering in these arrangements – which in fact governs foreign business BRI trade and investment. The BRI Architecture is even more extensive as China has adopted multiple international trade instruments and conventions, such as the WTO Agreements and UNCITRAL Model Laws and UN Conventions relevant to BRI business activities. Examples include: the UN Convention on Contracts for the International Sales of Goods (CISG) and the WTO Trade Facilitation Agreement. As a result, many legal aspects of BRI trade and investment are already in place. What will be interesting to see is how Chinese law, culture, and ideology modify or reformulate such Western-inspired international rules. 
The Cyber/Digital Silk Road – constitutes the Third Silk Road – complementing the New Silk Road Economic Belt and 21st Century Maritime Silk Road. Arguably, it’s the most important of the three Silk Roads: creating the digital and communications infrastructure for the other Roads – which should produce much deeper global Connectivity. There are many strands to the Cyber Silk Road. 

Key sectors and industries include: trade facilitation, including “Single Windows,” e-logistics, e-commerce, cloud computing, artificial Intelligence (AI), fintech – including blockchain, and the Internet of things. There is already an emerging international legal framework for the Cyber/Digital Silk Road predicated on, among others, the UNCITRAL Model Laws on E-Commerce, E-Signatures, and very recently, E-Transferable Records. China has put in place national legislation implementing the Model Laws on E-Commerce and E-Signatures. 

China’s BRI will have an immense impact on cross border investments and the economic outlook along Eurasia and beyond. What consequences will BRI bring for the world of arbitration - and dispute resolution generally? 
 

Don Lewis: The world of international arbitration and international dispute settlement generally are likely to be shaken to their very foundations. This is already happening. There will be a major shift to China and Asia and away from the U.S. and Europe. This paradigm shift will impact commercial arbitration – and investment arbitration or investor-State dispute settlement (ISDS) even more so. In the fall of 2017, CIETAC issued its first-ever investment arbitration rules – which are not simply a regurgitation of the UNCITRAL Rules. The Shenzhen Court of International Arbitration has also issued its own investment arbitration rules – based on the UNCITRAL Rules. Likewise, the Hong Kong International Arbitration Centre (HKIAC) has adopted Procedures that are specially designed to handle BRI investor-State disputes. But this is not all – by any means. For the last two years, I have advocated the creation of a comprehensive BRI Dispute Resolution Mechanism – covering, among others, all BRI trade and investment disputes. A very important part of this Mechanism has just been unveiled by the Supreme People’s Court – which I believe is your next question.    

Recently we heard that China plans two international courts to resolve business and investment cross-border disputes related to the BRI - one in Shenzhen and one in Xi’an. What is the reasoning behind this move and how will the two courts operate - will they differ from how the AIIB plans to handle investment disputes? 
 

Don Lewis: This is the main feature of the BRI Dispute Resolution Mechanism – a BRI development of the first magnitude. In late June, the Supreme People’s Court announced the inauguration of two China International Commercial Courts (CICC) – one in Xian to handle Silk Road Economic Belt commercial disputes and the second in Shenzhen for Maritime Silk Road disputes. The Fourth Civil Division of the Supreme People’s Court in Beijing will supervise the work of the two international commercial courts. There is now a website for the International Commercial Courts. An international commercial expert committee will be established which will contribute to the resolution of BRI disputes heard by the International Commercial Courts.  
In terms of the subject matter jurisdiction of these new Courts, it is clear that they will handle BRI international commercial and maritime mediation and adjudication. What is unclear, but appears likely, is that these Courts will also endeavor to handle BRI investor-State disputes arising under China’s BITs. They may also handle state-to-state trade disputes arising under China’s FTAs and pursuant to RTA dispute settlement mechanisms. These would be earth-shaking developments – which could lead to the new Courts (along with CIETAC) displacing ICSID investor-state arbitration, while in the trade field diverting a large number of state-to-state trade disputes away from WTO Dispute Settlement in Geneva. 

There are, however, a few snags. First, investor-State disputes are normally handled by arbitration organizations – not the courts. The reason is enforcement – only arbitral awards can be enforced via the New York Convention, court judgments cannot. Second, when China joined the New York Convention in 1987, the Chinese government lodged the so-called “commercial reservation” – excluding investor-State disputes from recognition and enforcement in the People’s Courts. This was followed by a Supreme Court Notice to similar effect. There would have to be a withdrawal of the “commercial reservation” for this all to move forward – but that should not be difficult – and is likely to occur in the near future. Non-ICSID international investment awards, such as those rendered by the PCA, are typically enforced via the New York Convention. 
I should mention that the development of the BRI Dispute Resolution Mechanism is just getting underway – but is being organized in a comprehensive way – according to the principle of “joint construction and sharing” and seeks to bring into play all of China's judicial, arbitration and mediation agencies. Alongside the Commercial Courts, the China Council for the Promotion of International Trade (CCPIT) is establishing a “Belt and Road International Dispute Management Center,” which will coordinate the development of BRI-related international arbitration.