Multinationals turn away from Hong Kong for dispute resolution

Lawyers say growing uncertainty over city's legal environment worries clients

Lawyers say companies are increasingly hesitant to choose Hong Kong as a location for arbitration due to concerns over the legal and political environment in the city.

HONG KONG -- Concerns over the rule of law are threatening Hong Kong's ambitions to become a hub for corporate arbitration, according to lawyers, stoking the appeal of regional rival Singapore for many multinationals.

The Chinese city still handles hundreds of arbitration cases each year. However, companies drafting new contracts are increasingly choosing places other than Hong Kong as the location for arbitration, a dozen lawyers and corporate advisers in Hong Kong, Singapore and London told Nikkei Asia.

Cross-border commercial contracts must specify a location for handling arbitration cases should they arise. Judicial independence and whether arbitral awards are readily enforceable are key factors in making that selection.

A lawyer working with Japanese manufacturing companies establishing joint ventures in China said his clients have started to exclude Hong Kong as a seat of arbitration in contract negotiations, citing possible bias.

"After 2020, when the national security law was enacted, many Japanese companies think that Hong Kong may not be a neutral place to arbitrate, so they go to Singapore," he said.

Another lawyer with clients in the financial services industry said he has seen Western companies dismiss the Chinese city as an option in negotiations.

"The perception is that Hong Kong's judiciary is now part of China, so Hong Kong is often rejected by foreign companies when writing up arbitration contracts," the lawyer said.

Hong Kong retained its common law system and independent judiciary when Britain returned the city to Chinese rule in 1997. The rule of law became a cornerstone of its reputation as an international financial and business hub.

The Hong Kong International Arbitration Centre (HKIAC) has consistently placed high in global rankings, with advantages that include stronger integration with China and the ability to enforce interim measures on the mainland.

But concerns over the rule of law grew after Beijing imposed a sweeping national security law in mid-2020, which in effect allowed the government intervene in national security judgments handed down by the courts.

Many lawyers have since fled Hong Kong. The number of registered foreign lawyers dropped 14% in three years, while Britain withdrew its top sitting judges from the city's Court of Final Appeal in March last year.

Steve Vickers, who offers China-related political risk mitigation services for international clients, said his customers had explored switching the arbitration clause in their contracts to Singapore from Hong Kong.

The Hong Kong Department of Justice and the HKIAC said the city's judiciary remains independent and Hong Kong is a neutral venue for international arbitration.

"HKIAC has not seen a decline in the choice of Hong Kong as a seat of arbitration or in the use of HKIAC as an arbitral institution," Mariel Dimsey, secretary-general of HKIAC, wrote in an email.

A DOJ spokesperson said Hong Kong's government is confident that judges will carry out their judicial duties "independently and fearlessly."

Still, the national security law is "part of the basket of concerns" for European and U.S. clients doing business with a Chinese counterpart, said Lawrence Teh, global co-head of the international arbitration group at law firm Dentons.

"For the Americans, that is a principal consideration. They simply don't want to arbitrate in mainland China or in Hong Kong. For the other parties, maybe from Europe or other parts of the West, they may have that feeling as well, [although] maybe to a lesser degree," Teh said.

Hong Kong remained third globally, after London and Singapore, as the preferred location for arbitration in a 2021 survey by the School of International Arbitration at Queen Mary University of London and law firm White & Case.

Several lawyers said sentiment can lag behind the statistics, as arbitration cases often arise from contracts drafted several years ago.

Hong Kong last year handled 344 arbitration cases, valued at $5.5 billion, up from 277 cases in 2021.

Meanwhile, the Singapore International Arbitration Centre in 2022 dealt with 357 cases, valued at $5.61 billion, compared with 469 cases in 2021.

New case filings in the first three months of 2023, however, came to 332 for the SIAC, a historical high for the first quarter. The HKIAC did not provide quarterly figures.

Fraught U.S.-China relations have also contributed to some companies shying away from Hong Kong.

Vickers, the political and risk consultant, said some U.S. and European financial services firms were "uncomfortable with the optics of awarding a contract out of China or Hong Kong."

"This situation is therefore a sign that decoupling is actually beginning to bite, at least in some fields."