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Chinese investors in the Middle East are becoming increasingly risk-averse, but can law firms seize this opportunity to bring about a change in their PRC clients’ business culture? Matthew Townsend analyzes the potential opportunity for ALB.

Half a kilometer from Abu Dhabi’s coast, a Chinese restaurant is making waves. The eatery, popular among expats and locals alike for its authentic sweet and sour chicken, is located in Al Reem Island, a business and residential project.

Al Reem, like many construction hubs in the Middle East, is home to a modern Chinese worker village. The restaurant, established by a Malaysian Chinese company, serves paying customers, but it mainly functions as a canteen for Chinese engineers and labourers employed by one of a trio of local developers. Staff live, sleep and eat together, in a Chinese language environment, enjoying familiar brands like Kangshifu instant noodle.

A golden opportunity

Chinese investment in the Middle East is expected to increase fast in the coming years, making the Al Reem phenomenon ever more pervasive. Investors are looking to the infrastructure, construction, telecommunications and oil and gas industries where Chinese contractors are already active. However, while the appetite for the region is undiminished, the political and economic shocks of 2011 have clearly taken their toll on investor confidence. Linda Yang, a senior partner at Yingke, notes that clients considering operating in the Arab region are increasingly wary.

However, this atmosphere – a cocktail of enthusiasm and trepidation – may provide legal advisers with a golden opportunity. International law firms have long bemoaned what they see as a lack of legal risk-awareness among some Chinese clients. Lawyers argue that clients do not always appreciate the business need for comprehensive legal planning when implementing large-scale projects. Now the conditions may be right for law firms to drive change in their clients’ business cultures.

Railroaded

The main hurdle for lawyers, aiming to change hearts and minds in this way, has traditionally been the fact that Chinese contractors have had little or no first-hand experience of the value of legal risk-analysis, something which is notoriously difficult to quantify. Now, however, anyone seeking to demonstrate the consequences of inadequate legal risk-planning need look no further than the Mecca light rail project awarded to China Railway Construction Company (CRCC) in 2009.

The benighted scheme, originally valued at $1.8 billion, saw contract term changes and delays as CRCC struggled to complete the 11 mile (18 kilometre) project. CRCC were reportedly held to a tight schedule of 20 months for the first stage of construction, a target that, according to Chinese press reports, was inappropriate for the site, even if it could potentially have been achieved in China. CRCC was also hampered by the Saudi restriction on non-Muslim workers entering Mecca, reputedly a particular problem when it came to sourcing appropriate engineers and other skilled workers.

For Ashley Howlett, a construction partner at Jones Day, the Mecca railway fiasco illustrates the insufficient emphasis currently placed by some Chinese contractors on legal risk. He notes that awareness of concepts such as turnkey design and construction responsibility, design development liability, and liquidated damages are still evolving among many state and private companies. CRCC took extreme measures to complete the high-speed rail project on time, including flying hundreds of extra personnel to the site. Nevertheless, the company is now on the hook for a reported $630 million in liquidated damages.

Little Kunming?

While the Mecca debacle may serve to concentrate client’s minds and prompt a revolution in legal risk, some observers are sceptical. A partner at a global firm suggests that there exists a certain amount of inward-looking among contractors’ managers and leadership, which obstructs them from attaining international standards. He argues that this ‘little Kunming’ mentality, a name invoking the balmy town in China’s Southwest from which many workers hail, both prevents Chinese contractors reaching their potential and stores up problems in the future.

Certainly outfits in the Al Reem model, while technically sophisticated and highly competitive, can still struggle to follow contracts and understand expectations in markets shaped by their established international rivals.

However, not all observers think the prospects are so gloomy. Brenda Horrigan, a Partner at Salans with a practice focused on emerging market disputes, believes that Chinese contractors are on a learning curve similar to that faced by their counterparts in other emerging markets. PRC companies face many of the same challenges in entering the global marketplace as do contractors from Russia, Poland and other new economies, she argues. Similarly, Chinese entities are mastering the challenges at varying levels, depending in part on their size and degree of international exposure.

With risk comes opportunity

Should international law firms succeed in inducing a cultural shift in their Chinese clients, the strategic rewards for those who do so effectively may well be large. The firms best placed to take advantage are likely to be international outfits able to leverage a network of offices in the region. Chinese lawyers are regularly found on flights to Africa where another Chinese investment boom is taking place. However, they rarely rub shoulders in the Arab world with their international counterparts.

PRC firms are expanding internationally, but their locations of choice appear to be the United States and Western Europe. They have not yet developed substantial cross-border expertise servicing transport, construction, infrastructure and oil and gas projects, which make up the significant proportion Chinese activity in the region. Yang notes that, while Yingke has some experience in the Gulf, most recently helping structure a mining investment by a Chinese company in Oman, she refers complex matters to one of her firm’s Western or Middle Eastern partners.

Recent years have seen a small but noticeable trend of gulf-based outfits seeking Chinese-speaking legal counsels. It is unclear whether this will develop into a pattern but, if it does, one thing is for sure: the new recruits will have no difficulty locating authentic Chinese cuisine in their new home.

Matthew Townsend is co-founder of the China Britain Law Institute (CBLI) and a UK qualified solicitor based in Beijing. His practice focuses on international arbitration and dispute resolution in a number of sectors including energy and construction.