How to Turn the Tide in a Foreign-Related Construction Arbitration Where the Governing Law Was Not Agreed?

2026/10/14

I. The Dilemma in the Case: A Contract That Might Be Invalid

A certain design institute (hereinafter referred to as the "Chinese Design Institute") and a certain construction company (hereinafter referred to as the "Chinese Contractor") entered into a subcontract for a project in a certain African country. The contract provided that: the Chinese Design Institute would nominally be responsible for coordination with the employer, while the actual construction would be carried out entirely by the Chinese Contractor; payment of the project price would be conditional upon the Chinese Design Institute first receiving payment from the employer; and disputes would be submitted to a certain Chinese arbitration institution for arbitration, but no governing law was agreed.

Subsequently, the Chinese Contractor misappropriated the advance payment and delayed the construction period, forcing the Chinese Design Institute to take over the site and complete the remaining works. The Chinese Design Institute commenced arbitration, seeking return of the project price and compensation for losses.

The case faced two major difficulties:

Difficulty One: Which country's law applies? The place of the project and the place of contract performance were in a certain African country. Under the judicial interpretation in force at the time, construction project contracts were in principle governed by the law of the place where the project was located. If that country's law were applied, it would be difficult to ascertain and the outcome uncertain, placing the Chinese Design Institute at a serious disadvantage.

Difficulty Two: Was the contract valid? The contract was in name a subcontract but in substance a transfer of the entire project, and under Article 28 of the Construction Law it would very likely be held invalid. If invalid, the Chinese Design Institute's claims for the project price and damages would lose their contractual basis.

II. The Path to Breaking Through: The Closest Connection Principle + The Principle of Freedom of Contract

As to the governing law, counsel argued from three dimensions that Chinese law should apply: first, from the perspective of the "quantity and quality" of the connecting factors, both parties were Chinese legal persons, and both the place of negotiation and the place of signing were in China; the essence of the contract was the mutual agreement of the parties, and the parties' locations and the place of contracting were more important; second, from the perspective of the difficulty of ascertainment, the law of that country was difficult to ascertain, and applying Chinese law was more economical and feasible; third, from the perspective of the parties' reasonable expectations, the choice of a Chinese arbitration institution could give rise to the inference that they were inwardly inclined to apply Chinese law. The arbitral tribunal ultimately adopted this position.

As to the validity of the contract, counsel stepped away from the single-minded inquiry into "whether the Construction Law was violated" and instead emphasized: the contractual terms were freely agreed by both parties, with a balance of interests and fairness and justice; neither party asserted that the contract was invalid, and both acknowledged its contents; and the contract concerned only the rights and obligations of the parties and infringed neither the public interest nor the rights and interests of third parties. The arbitral tribunal ultimately held the contract valid and upheld most of the Chinese Design Institute's claims.

III. Counsel's Observations and Recommendations

First, expressly agree on the governing law. The closest connection principle confers on the adjudicator a relatively broad discretion, and the legislation has not laid down specific operable rules, so the outcome is uncertain. It is recommended that in foreign-related contracts, the parties agree not only on the arbitration institution and the seat of arbitration, but also expressly on the governing law.

Second, the line of argument where no governing law has been agreed. One may argue comprehensively and in depth that a certain country's law should apply from three dimensions: the "quantity and quality" of the connecting factors, the difficulty of ascertaining the applicable law, and the parties' true intention and reasonable expectations.

Third, arbitration strategy where the validity of the contract is unfavourable. Litigation places greater emphasis on legal provisions and court control, whereas arbitration places greater emphasis on respecting the parties' agreement. If a contractual term is unfavourable to one's own side under the law, one may rely on the principle of freedom of contract to argue before the arbitral tribunal the fairness and justice of the contract, emphasize that no public interest or third-party rights and interests have been infringed, and, in conjunction with industry practice and the project background, persuade the arbitral tribunal to render a fair and reasonable award.

Fourth, the role of specialist counsel is crucial. Foreign-related construction project arbitration is often major and complex, involving multiple legal issues such as the determination of the governing law, the determination of the validity of the contract, and the calculation of the project price. Counsel must have a comprehensive understanding of international engineering legal knowledge and a profound grasp of the differences in the value orientations of adjudication in litigation and arbitration in order to formulate the optimal strategy under unfavourable facts and secure the greatest rights and interests for the client.