Close scrutiny of Hong Kong’s arbitration scene reveals that many of the fears swirling around the city’s future as a dispute resolution centre are unfounded
As a globally renowned dispute resolution centre, Hong Kong has inevitably attracted some unfavourable press over the last year and a half. The China-US trade war, anti-government protests and, most recently, the introduction of the national security law (NSL) have dominated headlines, leading some to question the city’s ability to remain a safe and neutral arbitration seat.
Hong Kong, home to many of the world’s leading arbitral bodies, is frequently reported to be losing out to Singapore because of recent political events, with international companies understood to be seeking a more stable venue for their arbitration cases.
Foreign investors are seemingly concerned that the NSL will unduly influence arbitrators in cases involving mainland Chinese companies, driving them to give outsized consideration to Chinese interests. The argument appears to be that the NSL criminalises collusion with foreign forces and, if the law were broadly interpreted, then it could be applied to cases involving strategic mainland Chinese investors. Such concerns, however, do not always match reality.
While Hong Kong’s reputation has undoubtedly taken a knock, with international companies less than enthused by the city’s prolonged period of turbulence, suggestions that it could lose its standing as a trusted arbitration centre fail to stand up to a reasoned analysis of market conditions.
The city is not just home to a deep pool of highly skilled legal talent but it also boasts an independent judiciary and an internationally respected legal system built on years of long-established precedents. Moreover, the city serves as a gateway to investment in mainland China, with Beijing having committed to making Hong Kong the epicentre of dispute resolutions relating to both the multi-billion-dollar Belt and Road Initiative (BRI) as well as the Greater Bay Area (GBA) development.
Investor sentiment
Greater investor unease has been reported as both the result of last year’s anti-government protests as well as this year’s introduction of the NSL. The law was introduced at the end of June in response to prolonged pro-democracy demonstrations in the city, which frequently become violent and destructive.
Reuters, for example, reported in December 2019 that protests had paralysed parts of the city and had forced firms to relocate their arbitration hearings to Singapore. In July, Bloomberg said international investors were looking to relocate their arbitration cases owing to concerns stemming from the NSL.
Conventus Law surveyed 59 key stakeholders within Hong Kong’s business and legal communities in an anonymous survey, found that respondents were evenly split over whether events over the last year and a half had changed investor sentiment on Hong Kong.
The new [NSL] legislation targets four specific and serious crimes, and the risk of interference in Hong Kong’s arbitration process is very low,” he said. “The reality is that the HKIAC has handled over 10,500 cases and we’ve not seen any government intervention.
Joe Liu, the deputy secretary-general of HKIAC, said events might have given rise to the international perception that the city was less stable politically. However, he argued that international companies with “sophisticated” legal teams should be able to differentiate between the legal, financial and political realities on the ground. He also pointed out that during six months of protests in 2019, HKIAC held approximately 70 hearings in Central Hong Kong that proceeded without interruption.
He said: “Hong Kong is already the largest IPO market, and it’s only getting bigger as US antagonism towards Chinese companies motivates them to relist here. Mainland China has a vested interest in Hong Kong succeeding as an international arbitration centre.”
Conventus Law’s survey found that 62% of those surveyed believed the city’s appeal as an arbitration centre for commercial disputes was untarnished, while almost two-thirds of participants said Hong Kong would remain their arbitration centre of choice for future contracts.
Questioning the narrative
Liu questioned the reliability of reports that Hong Kong was losing out to Singapore, noting that he could find no evidence of a significant capital or case flight from the city. He added the Monetary Authority of Singapore confirmed in July that it had no seen any significant flow of money or business activity from Hong Kong to Singapore.
“The new [NSL] legislation targets four specific and serious crimes, and the risk of interference in Hong Kong’s arbitration process is very low,” he said. “The reality is that the HKIAC has handled over 10,500 cases and we’ve not seen any government intervention.”
Alice To, a Hong Kong-based independent arbitrator, echoed this sentiment. She said the city’s arbitration community had become accustomed to having its integrity and neutrality repeatedly questioned in the years following the 1997 handover, despite there being no evidence to support the allegations.
She said: “The city’s closer ties to China have regularly unnerved investors and observers, even if this doesn’t always make sense. The NSL’s criminal focus means that it will have very little impact on commercial arbitration cases, with individuals broadly unaffected.”
Although some investors both at home and abroad had been rattled by the chain of events over the last 18 months, which has seen the US and China trade sanctions over the NSL’s implementation, there are those who remain upbeat about the future.
To said there was a growing sense among her network of business, finance and legal contacts that the NSL would lead to greater stability and improve arbitration prospects. She said: “Hong Kong is still neutral, is still seen as the place to be and will remain the place to be for at least the next five years.”
Andrew Rigden Green, Stephenson Harwood’s head of international arbitration Greater China, also believes Hong Kong will continue to remain one of the leading international arbitration centres.
Hong Kong is still neutral, is still seen as the place to be and will remain the place to be for at least the next five years.
He said: “The HKIAC has a robust set of rules and secretariat, and it continually strives to make sure that its rules are at the forefront of international arbitration practice. The List and Panel of HKIAC arbitrators is global and diverse.”
State of play
Hong Kong has consistently ranked in the global top five preferred destinations for arbitration, as determined by Queen Mary University of London’s international arbitration survey. The city has built a solid reputation for independence and transparency and has been striving to attract an ever-greater number of cases over the last decade.
The Hong Kong government reformed the city’s arbitration laws in June 2011, unifying its domestic and international arbitration legislative regimes under the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on International Commercial Arbitration. The reform ensures that foreign law firms do not face any restrictions in engaging in and advising on arbitration in Hong Kong.
For example, parties can select arbitrators with neutral nationalities and, to help simplify the process during the COVID-19 pandemic, the Hong Kong government launched a pilot programme in June that enables eligible non-residents from around 170 countries and territories who are involved in arbitration proceedings to enter the city without any visa.
Rigden Green highlighted the fact that Hong Kong had no legal restrictions on who could be chosen as arbitrator. The HKIAC, meanwhile, has mechanisms in place allowing for arbitrators to be challenged and possibly removed.
“The legal framework supporting institutional and ad-hoc arbitration is robust and in line with international law, adopting the UNCITRAL Model Law with optional additions such as the right of appeal drawing from the English model,” Rigden Green said.
The city has implemented several amendments to the arbitration ordinance in recent years, all aimed at maintaining the city’s relevance amidst increasing competition. The last amendment introduced provisions relating to third-party funding (TPF) of arbitration and mediation in February 2019, bringing it in line with other global leaders in the dispute resolution space.
The legal framework supporting institutional and ad-hoc arbitration is robust and in line with international law, adopting the UNCITRAL Model Law with optional additions such as the right of appeal drawing from the English model
Underwriting the city’s reputation for arbitration excellence is that fact that it is home to both a multinational and independent judiciary as well as a clutch of globally respected arbitration bodies.
Trusted institutions
Rigden Green argued that Hong Kong’s judiciary was not only robust and independent but also one of the most internationally diverse given its inclusion of judges from other common law jurisdictions.
He said: “Under the Basic Law only the Chief Justice of the Court of Final Appeal and the chief judge of the High Court are required to be Chinese citizens. Of the 23 judges in the highest court, 15 are from overseas.
“The Chief Executive has confirmed that foreign judges will not be excluded even from hearing cases on the NSL. Hong Kong’s judiciary is one of the most internationally representative judiciaries in the world.”
Rigden Green added: “Hong Kong is a common law system which applies precedent from across the common law world. This means that decisions cannot stray quickly or far from international norms.”
In terms of arbitration bodies other than the HKIAC, the city also hosts divisions of the International Chamber of Commerce’s (ICC) International Court of Arbitration, the China International Economic and Trade Arbitration Commission (CIETAC), the China Maritime Arbitration Commission (CMAC) and the Taipei-headquartered China Arbitration Association (CAA).
The city’s long-entrenched arbitration mechanisms favour impartiality, with the HKIAC itself placing emphasis on arbitrators’ “strict moral and ethical obligations to act fairly and impartially”.
A question of confidence
Peter Burnett, a senior managing director at Standard Chartered Bank in Hong Kong, was bullish over the city’s prospects as both a finance and dispute resolution capital. He said: “There is little evidence to suggest that investors have lost faith in Hong Kong or its institutions.”
The executive, who is also chairman of the British Chamber of Commerce in Hong Kong, argued that investor confidence remained very high based on the robustness of the tried and tested institutions in Hong Kong and pointed to the city’s buoyant IPO and bond markets, the strength of the Hong Kong dollar and the abundance of fiscal and exchange reserves.
Burnett said: “Hong Kong is also one of the few jurisdictions across Asia-Pacific where a plaintiff can sue the government and win based on the merits of the case. The process is very equitable.”
Brad Wang, deputy secretary general of CIETAC’s Hong Kong division, said the city served as an “important bridge” between US and mainland Chinese interest. He said: “The city is one of a kind, with multi-layered and multi-lingual legal practitioners capable of understanding the corporate cultures of both Chinese and US companies.”
He added that the city served a function that could not be replicated anywhere else in the world, not even in mainland China, and as such Hong Kong would continue to be a preferred seat of arbitration.
The city serves not only as a familiar landing pad for foreign investors, offering a legal system based upon English common law, but also a launching pad for Chinese companies.
Bridging the divide
Hong Kong accounted for 54.1% of mainland China’s capital inflow in 2018 and 55.5% of its foreign direct investment (FDI) outflow.
Chinese firms have come to dominate the city’s financial landscape, relying on Hong Kong as a convenient means of accessing foreign capital. The city enjoys a comfortable edge over its biggest mainland rival Shanghai, thanks to the latter’s strict financial controls. And the trend of Chinese and foreign money flowing through Hong Kong is only going to accelerate as the Beijing government ramps up development of its GBA and BRI programmes.
Hong Kong is also one of the few jurisdictions across Asia-Pacific where a plaintiff can sue the government and win based on the merits of the case. The process is very equitable.
Peter Burnett, Senior Managing Director at Standard Chartered Bank
The former will see Hong Kong become more closely integrated with Macau and nine Pearl River Delta cities, forging a megalopolis to rival the US’ Silicon Valley and the Tokyo Bay area. It not only will more deeply integrate a population of around 70 million, driving demand for investment in construction related projects, but will also creating cross-border investment opportunities in the robust Southern China economy.
The BRI, meanwhile, is the culmination of various international trade development strategies formed towards the end of the last century. The BRI seeks to build roads, railways and ports connecting economies that represent more than one-third of the global GDP. Some estimates have suggested overall investment in BRI could reach $1.2-1.3 trillion by 2027, though the pandemic’s economic impact will inevitably cool some investor ardour.
China needs foreign investors to help fulfil both of these incredibly ambitious projects and is counting on Hong Kong to act as the arbitration centre of choice for future GBA and BRI related disputes. The city already handles a significant amount of cases involving a mainland Chinese party, with the HKIAC reporting that 35.7% of its caseload in 2019 involve such disputes. The centre added that 7-15% of the these typically involves state-owned Chinese parties.
Deepening the case for foreign players to hold arbitration in Hong Kong, however, is the fact that mainland China has instituted a reciprocal arrangement with the city that allows cross-border applications for the preservation of assets, evidence and conduct.
Arbitration appeal
In October 2019, the Chinese Supreme People’s Court (SPC) entered into a reciprocal arrangement with Hong Kong’s Department of Justice (DOJ) allowing courts from both jurisdictions to award interim measures in support of eligible arbitrations administered in the other territory. Hong Kong is in a unique position, being the only territory in the world that benefits from such support from the mainland Chinese courts.
Since the arrangement came into force in October 2019, HKIAAC has processed 31 applications made to the mainland Chinese courts for interim measures. The HKIAC is aware of 18 decisions by Chinese courts so far, with 17 of those granting the application and one rejecting. The total value of assets preserved by the 17 decisions amounted to around US$1.3 billion.
Beyond the mainland, awards made in Hong Kong can be enforced in more than 160 countries under the New York Convention.
Underscoring Hong Kong’s lasting appeal as a centre for international dispute resolution, the Baltic International Maritime Council (BIMCO) on September 21 adopted its new consolidated Law and Arbitration Clause 2020 which selects Hong Kong as the named arbitration venue.
The city is one of a kind, with multi-layered and multi-lingual legal practitioners capable of understanding the corporate cultures of both Chinese and US companies.
Rigden Green said: “Hong Kong remains important in the fabric of the international and Chinese legal systems. The central government has designated Hong Kong as the principal arbitration centre within the GBA, which gives confidence to business owners and investors that Hong Kong will remain a stable and dependable place to resolve disputes.”
These are undoubtedly uncertain times for Hong Kong, mainland China and the wider world as a whole. Months of uncertainty has done little to help Hong Kong’s image among investors and it is understandable that some would find their confidence in the city’s prospects shaken. However, caution should not give way to alarm, when the fundamentals underwriting the city remain firm.
Stephenson Harwood’s head of international arbitration Greater China, Andrew Rigden Green, shared his view that Hong Kong would continue to remain one of the leading international arbitration centres.
The HKIAC has a robust set of rules and secretariat, and it continually strives to make sure that its rules are at the forefront of international arbitration practice. The List and Panel of HKIAC arbitrators is global and diverse.
The legal framework supporting institutional and ad-hoc arbitration is robust and in line with international law, adopting the UNCITRAL Model Law with optional additions such as the right of appeal drawing from the English model.
This article was written by Andrew Kemp for Conventus Law in association with Stephenson Harwood
For further information on arbitration in Hong Kong, please contact:
Andrew Rigden Green, Head of International Arbitration, Greater China, Stephenson Harwood
andrew.rigdengreen@shlegal.com
