By: Isha Jadhav, Junior Staffer

Many United States (“U.S.”) and Western companies are relocating out of Hong Kong, a long-revered hub for financial institutions. The question at hand is whether this so-called “exodus” impacts the scope of commercial arbitration within Hong Kong. Hong Kong has been a popular arbitral seat for many years partially because of its unique status as a Special Administrative Region (“SAR”) of the People’s Republic of China (“PRC”). However, the PRC’s enactment of national security measures in Hong Kong and worsening relations between the U.S. and the PRC in recent years have caused concern for many multinational corporations. These factors have impacted corporations’ decisions regarding where they do business, who they do business with, and where they choose to arbitrate.

Hong Kong has long been an attractive arbitral seat, known for its modern and accessible arbitration laws and its courts’ pro-arbitration approach to dispute resolution. Hong Kong law allows for a broader definition of a valid arbitration agreement. Hong Kong’s Arbitration Ordinance (“AO”) does not adopt Article 1 of the UNCITRAL Model Law on International Commercial Arbitration, which traditionally limits the scope to arbitrate commercial disputes.

Along with its broad definition of arbitration, Hong Kong Courts have reciprocal agreements with fifteen countries for the recognition and enforcement of court judgments. This means that foreign judgments, based on events outside of Hong Kong’s jurisdiction, are directly recognized and enforced in any of the fifteen countries in which Hong Kong has reciprocal agreements under the Foreign Judgments Ordinance, and vice versa. Foreign judgment are also enforced outside of the fifteen reciprocal countries via common law. Additionally, common law decisions from Hong Kong are enforced in jurisdictions with civil law. Because of such flexibility of enforcement across the globe, Hong Kong has long been a popular seat for arbitration for international commercial disputes.

Hong Kong has several key arbitral institutions which have boosted its popularity over time. One of these institutions is the Hong Kong International Arbitration Centre (“HKIAC”), which is consistently ranked one of the top four arbitration facilities worldwide by the International Arbitration Survey by Queen Mary, University of London and White & Case. The HKIAC has updated arbitration rules that limit delays and costs arising out of arbitral procedures. Hong Kong also houses the Chinese International Economic and Trade Arbitration Commission (“CIETAC”), the leading international arbitration institution of the PRC. While CIETAC maintains a headquarters in Beijing, it maintains a seat in Hong Kong, which remains its only seat outside of the mainland.

The United Kingdom returned Hong Kong to the PRC in 1997 after possessing the territory for 156 years. Since then, the region has held the title of Special Administrative Region (“SAR”) and continues to maintain its common law system under the “one country, two systems” approach. However, the PRC’s tight national security restrictions and deteriorating relationship with the U.S. influence how corporations view conducting business in Hong Kong.

During the COVID-19 global pandemic, Beijing enacted its zero-COVID policies in June 2020, which created conflicts with the PRC’s foreign relationships. At the time, Hong Kong had one of the longest quarantine periods for inbound travelers of around three weeks. Flight bans were not lifted until 2022, making it exceedingly difficult for foreign corporations to continue operating in Hong Kong.

In the wake of 2019 protests in Hong Kong against the controversial extradition bill, the PRC imposed the National Security Law to safeguard national security interests in Hong Kong. The National Security Law imposed risks to Hong Kong’s currency, challenged compliance, threatened judicial independence, limited access to accurate information, and compromised data security. These consequences of the National Security Law concerned the corporate world as national security measures escalated the restrictions on government and public actions, redrawing the lines between national security and commercial activity.

Political tensions between the U.S. and the PRC have also affected the way corporations conduct business in Hong Kong. Both the Trump and Biden administrations in the U.S. have placed pressure on U.S.-based corporations to reevaluate their business practices with the PRC and have placed multiple sanctions on the PRC. Corporations need to satisfy U.S. imposed sanctions on the PRC while also adhering to strict national security laws of the PRC. This position has increased overall compliance costs and imposed institutional obstacles for many corporations seeking to do business or arbitrate in Hong Kong. Many Western corporations also fear that the Hong Kong dollar could be pegged to the Chinese Yuan, a more rigid currency, due to Beijing’s influence. If the Hong Kong dollar is pegged to the Chinese Yuan, Hong Kong risks losing the free flow of capital, which would make it more expensive to borrow and more difficult to speculate for multinational corporations.

Both the Hong Kong Department of Justice and the HKIAC claim to remain independent and neutral on international arbitration. However, these assurances cannot overcome the perception of some individuals in the corporate sphere that Hong Kong’s judiciary mirrors the PRC’s.

Isha Jadhav

As doubts about Hong Kong’s neutrality as an arbitral seat increase, many corporations have decided to move to another well-known financial hub of Asia: Singapore.

Many factors make Singapore an attractive arbitral seat and a formidable alternative to Hong Kong. Like Hong Kong, Singapore maintains an arbitration-friendly legal jurisdiction, with pro-arbitration courts and strong support from its government. Singapore also hosts several reputable arbitral institutions established within the state that operate much like the arbitral institutions in Hong Kong such as the Singapore International Commercial Court (“SICC”) and the Singapore International Arbitration Centre (“SIAC”). Singapore maintains a common law system, but unlike Hong Kong, it is an independent state that does not share the burdens imposed by an overarching government. Most notably, Singapore enjoys an excellent geopolitical location at the crossroads of several major economies, making it one of the most accessible jurisdictions for arbitration in Asia.

Both the Hong Kong Department of Justice and the HKIAC claim to remain independent and neutral on international arbitration. However, these assurances cannot overcome the perception of some individuals in the corporate sphere that Hong Kong’s judiciary mirrors the PRC’s. Tighter security measures implemented by the PRC throughout the region have caused multinational corporations to suffer from institutional obstacles and regulatory burdens. Hong Kong is clearly seeing a departure of foreign businesses; the question remains whether these departures will affect the scope of arbitration based on truth or mere perception.

According to White & Case, in 2021, Hong Kong was the third most preferred place for international arbitration. However, many lawyers have mentioned that statistics may not be a fair projection of sentiments shared amongst corporations because many arbitration cases often arise out of contracts formed many years prior. The government of Hong Kong has put out statements claiming that the Hong Kong National Security Law does not affect Hong Kong as an arbitral seat. Despite Hong Kong’s assurances, it is very possible that in the coming years, Hong Kong could see a decline in arbitration.