China Watch – A foreign lawyer’s view from the inside

As the London Olympics gets into full swing, Robert Lewis reflects on the work that went in to making Beijing 2008 a success

With the whole world basking in the spirit of the London Olympic Games, I thought it might be timely to share some reflections on the 2008 Beijing Olympics based on my prior work on the Bird’s Nest and Water Cube venue projects. In addition to the more obvious differences between London and Beijing as Olympic host cities, the management of some of the legal aspects of the ramp up to the Beijing Olympics also illustrates how things in the legal profession tend to work (or not work) in China – and how the tender process for the main venue for the Beijing Olympics almost fell apart in a most dramatic manner.

But first of all, hats off to the London organising committee for gamely putting on a good show for the opening ceremony. In 2008 I spoke with Peter Vidmar, the former US Olympic gold medalist gymnast who attended the Beijing opening ceremony as a media commentator. He was seated next to a member of the London organising committee who sat in awe as the Beijing opening ceremony unfolded and wondered aloud: “How are we ever going to top this?” I think we all wondered the same thing, particularly in the initial pastoral scenes, but things started to look up considerably during the driving energy of the industrial revolution segment, when it appeared that the West End had moved temporarily to the East End for this musical theatre stage production on a global scale.

I suspect our friends in China (and in the Obama administration) were particularly pleased to see the tribute to socialised medicine, even if they wondered at the immediate segue into the nightmare scenes complete with the monster baby figure occupying centre stage. While the laobaixing (ordinary folks) in China may have missed some of the other British cultural references, the prominent role of Mr Bean, the UK’s most iconic cultural ambassador, had to be quite reassuring to the Chinese masses. However, I suspect that people in China and elsewhere (particularly Al Gore) perhaps were more than a bit surprised to learn that a Brit invented the world-wide web! I am waiting for President Obama to exclaim: “Tim Berners-Lee, you didn’t build that.” But I googled Tim Berners-Lee and confirmed it – if it’s on the internet it has to be true.

While London worried about rain, Beijing worried about air pollution. When the Beijing ‘haze’ failed to abate for the first week of the 2008 games, many feared that the head meteorologist in Beijing would be shipped off to hard labour. London has had a very public hiccup with its security preparations, while Beijing was pretty much in full lock-down mode (no surprise there). London seemed not to need digital enhancement of the fireworks or an over-dubbing of the voice of the child soloist to pull off its opening ceremony, so London scores points for authenticity even if the quality of the various segments was inconsistent. But that’s just my opinion.

Of course, the legal work for the Olympics tends to be well out of the spotlight and takes place well in advance of the games themselves. That does not stop the PR machinery of the top law firms from cranking out press releases about their support roles for the games. One magic circle firm aggressively trumpeted its role as international legal counsel to the Beijing government in the early preparatory stages. Based on its press releases, one might have surmised that this was a near-exclusive role. The truth was quite different.

For example, my good friend Steve Toronto, who was then at Morrison & Foerster but is now general counsel for NBA China, was lead international legal counsel to the Beijing organising committee during the entire preparatory period. He reported no sightings of the vaunted magic circle firm over the several years of his pre-Olympics work.

In my two-plus years working on the Bird’s Nest and Water Cube venue projects, I only saw the magic circle firm in question once – at a ceremonial function late in the process with no substantive role. But I did hear about it: when I was pitching for the international legal counsel role for the lead Beijing government investor in the Olympic stadium the project leader for the client went out of his way to complain about the work this magic circle firm had done and reported that it had created a very negative impression with the entire Beijing government. This probably explains why we never saw it after that in a substantive role. In some cases it may be a badge of honour to have a Chinese client complain about the quality of legal services that they are not sufficiently sophisticated enough to assess properly, but it does seem a bit unbecoming for the publicity machine of this firm to have continued to crank out glowing reports on its “key role” advising on the Beijing Olympics for another year or more when it clearly was on the outside looking in by that point.

The only time I saw a lawyer from this magic circle firm on an Olympics-related matter was at the banquet to mark the end of the bid evaluation process for the Bird’s Nest and Water Cube projects – he came, he ate, he departed. It was during the Sars panic, so the entire bid evaluation team had been moved to a location on Hainan Island because it was deemed to be a Sars-free zone. We had been sequestered in a hotel in China’s tropical resort area for two weeks, happy to leave behind the ubiquitous thermometers and hand sanitisers in all office buildings in Beijing that were designed to detect and protect against the dreaded Sars virus. As a practical matter, the panic was more of a threat than the virus itself, but that’s a story for another day.

The bids for the national aquatic centre venue included design proposals as well as undertakings with respect to financing, construction and operation, while the Bird’s Nest design had been decided earlier in a separate public vote, so these bids covered only financing, construction and operation. As a result, we were able to see all of the proposed designs for the Olympics aquatic centre. The Water Cube design was clearly the early and easy favourite and was deemed to complement the Bird’s Nest design the best. The only concern was whether it was feasible from an engineering perspective. Of course, no one solicited views on any of these points from the legal team, and the legal aspects of the Olympics aquatic centre bid process presented no drama.

It was a very different story with the bids for the Bird’s Nest project. Bidders not only had to present proposals for the engineering and construction of a third-party Bird’s Nest design on which they had had no input, but they also had to bring a substantial percentage of the financing as well as a plan for post-Olympics operation on a public-private concession basis. Because the Beijing government wanted this to be a true international tender, it provided that the successful bidder was to form a Sino-foreign joint venture company with the government investment entity (our client) as the project company. This meant that there was to be actual cash investment from foreign sources. All this was set in stone when we were brought into the project.

It was apparent from the beginning that there was no business case for post-Olympics operation of these venues that would provide a pay-back for such cross-border financing. EPC (engineer, procure, construct) contractors typically want to get paid and not be the bankers for a project, and foreign lenders were generally backing away from project finance in China even for projects with more sustainable cash flows. As a result, many prospective bidders took a pass. This posed another challenge since the applicable tender rules required a minimum of three bidders to move forward, but there were only two consortia that were actively planning to bid. A third consortium had to be persuaded to submit what was obviously a phantom bid presented only to remain in the good graces of the Beijing government by saving the tender process.

When we opened the bids, we were quickly able to set aside the phantom bid as being generally non-compliant. Upon initial evaluation of the remaining two bids, it was obvious that each took a completely different tact. One bid was 100 per cent compliant in every respect, including on some commercial and legal points that could reasonably be considered to be somewhat over-reaching and objectively objectionable. On the other hand, the other bid response proposed detailed and extensive revisions to almost every term and condition – they obviously didn’t get the memo that this was a competitive bid.

In the process of completing the bid evaluation forms it was obvious that the 100 per cent compliant bid had the edge by virtue of the fact that it was 100 per cent compliant. But the bid was so clean that it created some suspicions: was this simply a ploy to get in the door first and then renegotiate later? And there was one more critical concern. The bid, as required, specified the name of the funding party that was to bring the cash investment on behalf of the consortium, but the designated funding party was an unknown entity and it was not clear that it had the ability to provide the required financing as committed in the bid documents. Remarkably, the tender documents (which, I hasten to add, were prepared without our input) did not require proof of financial capacity, only an unsupported affirmation, which was in fact provided. So there was no issue of technical non-compliance, only a very real question of substantive ability to comply.

We passed on our comments on to our client, which, as the lead domestic investor, was participating in but not running the tender, and the accountants/financial advisors, who shared our concerns and communicated them to the government officials running the tender. In the end, the consortium with the 100 per cent compliant bid was awarded the project, so we assumed that someone had looked into the issue and the designated funding party’s credit worthiness had checked out.

We all returned to Beijing and moved into the contract finalisation stage, which was to be a mere finality. This is when the real drama began. As the members of the winning consortium filed into the room, the consortium head beamed, flushed with the knowledge that they had successfully secured the right to build the most iconic structure for the 2008 Olympics. (As an aside, it should be noted that while the Bird’s Nest has predictably become a rather large and expensive white elephant following the Olympics, it remains a source of national pride in China and has become an important and potent symbol of modern China, so the swelling pride of the leader of the winning consortium was not misplaced in that respect.)

Trailing the head of the consortium was the usual entourage of a dozen or so team members, including one fellow who looked conspicuously out of place. He was Chinese but clearly not local Chinese, at least not from a typical major Chinese state-owned company. His slicked-back hair, cheap foreign-looking suit and odd swagger all seemed to scream out liumang (a two-bit gangster or hooligan). We wondered if he had mistaken the government office building in which we were meeting for a karaoke bar and wandered in by mistake. A buzz rippled up and down our side of the table – who was this oddball?

It didn’t take long to discover that our mysterious gentleman was no other than the proprietor of the funding party of the winning consortium, and all of the red flags that had been raised – and apparently ignored – in the bid evaluation stage about the insufficient evidence of credit-worthiness were hoisted anew with greater urgency. He looked more like a loan shark than a financier for a project requiring the investment of several hundred million US dollars, and he was clearly in way over his head.

He employed all the standard tricks of the well-worn ‘bob and weave’ technique of the karaoke class of Chinese private investors to try to buy time and change the deal terms, but he was stuck – he had signed an iron-clad authorisation in favour of the consortium head to submit the bid that was fully legally binding on him, and the consortium head had affirmed full compliance with all deal terms without exception. Each time he repudiated yet another of the terms of the bid, accompanied by some unconvincing bluster, he dug himself an even deeper hole, and the face of the leader of the winning consortium turned increasingly pale. Each evasive manoeuvre was greeted with another round of head-shaking and whispers of “liumang” on our side of the table.

The government officials running the tender process were in a very unhappy position. They were also stuck. The other bidders had already been informed that they had lost, but now the winning bidder was clearly unqualified – and unpalatable. The highest-profile venue project for the 2008 Olympics was in danger of being held hostage by a Chinese hustler right out of central casting.

What to do? The Beijing officials responsible for the project could not allow the tender process to fail as that would be professional suicide and a ticket to a low-level posting in a remote location in a poor province. But one reading of the applicable public tender rules suggested that the only way to dump the current winning consortium was to blow up the entire tender process and start over. There was no provision in the rules for revoking the prior notices of contract award to the winning consortium and rejection of the losing bidders and opting now at this stage to default to bidder number two.

Not surprisingly, this was not a legal interpretation that was acceptable to the officials running the process, so they sent their local legal counsel back to reconsider. The wonderful thing about Chinese law is that since the final arbiter of legal interpretation and application is the government, it is almost always possible to find a way to massage the legal analysis to achieve the intended result, and this case was no exception. We all knew what the result had to be, and unremarkably the lawyers were able to find a rationale to support the position as instructed.

So in the end Chinese pragmatism won out again, as it always does. The original winning bidder, with its facially 100 per cent compliant bid, was shown the exit and the number two bidder, with its scores of non-compliant responses, was ushered in. No one threatened legal action as the rules do not provide clear recourse for losing bidders in the case of a deviation from the rules of the tender, and in any event it would be commercial suicide and a fast track to the black list for a losing bidder to challenge the process. Of course, the number two bidder as the new winning consortium was told to withdraw all of its non-compliant responses and after several seconds of careful deliberation the head of the new winning consortium readily agreed.

Crisis averted, China style. The rest is history, as they say.

Best wishes to London for a successful – and drama-free – Olympics!

Robert Lewis is international managing partner at Zhong Lun Law Firm, based in Beijing