The National Security Law and Dispute Resolution in Hong Kong: Back to Basics

FOREWORD

The national security law[i] (the “NSL”) was, and continues to be, the subject of much controversy both domestically and internationally. There is a perception in the post-NSL landscape that Hong Kong may no longer be an independent hub for dispute resolution. It is most unfortunate that regardless of the reality, this perception has already started to manifest itself with users considering writing Hong Kong out of international commercial contracts.[ii] If this trend continues unabated, Hong Kong’s reputation as the premier dispute resolution hub in Asia could suffer an existential crisis.It is not the aim of this article to comment upon, or “take sides” in, the controversy surrounding the NSL. Rather, this article seeks to provide an objective view on how the NSL may impact Hong Kong’s status as a premier hub for dispute resolution. The conclusion is that whilst it is still early days, the NSL in reality, is not expected to interfere with commercial contracts. However, in the vein of “perception is more important than reality[iii], it is imperative that the concerns surrounding the NSL should be addressed as a matter of priority.

BACKGROUND

To determine whether the NSL (by virtue of being part of Hong Kong law) would impact commercial contracts governed by Hong Kong law and/or seated in Hong Kong, one must examine the purpose of the legislation and the circumstances in which it was enacted.

Article 23 of the Basic Law (“Article 23”) requires the Hong Kong Government to enact laws relating to national security on its own accord. It provides in relevant part, that Hong Kong “shall enact laws on its own to prohibit any act of treason, secession, sedition, subversion against the Central People's Government”, and further amongst others, prohibits the establishment of ties with foreign political bodies. As such, the reality is that from 1st July 1997 at the latest, a national security law in Hong Kong was always on the agenda. It was always a question of when, not if, such a law would be enacted. The genesis to the NSL is described below.

In late 2002, a failed attempt had been made by the Hong Kong Government to introduce a national security law in Hong Kong.[iv] The bill was vehemently opposed and shelved indefinitely. In autumn 2014, there were the “Occupy Central” protests. Then, the mid-2019 demonstrations surrounding the now-withdrawn anti-extradition bill turned violent and caused disruption and instability in Hong Kong. The prospect of an exodus of foreign capital from Hong Kong in light of the deteriorating law and order situation reignited the importance and urgency of national security legislation. The NSL was passed by the Standing Committee of the National People’s Congress (“NPCSC”), and was listed in Annex III to the Basic Law, and came into effect on 30 June 2020[v]. The fact that the enactment of the NSL was driven by the NPCSC (instead of the Hong Kong Government as per the wording of Article 23), without public consultation in Hong Kong as to its content before its enactment, raised serious concerns both domestically and internationally. 

PERCEPTION PROBLEM

Some common perceptions of the NSL’s impact on Hong Kong’s status as a dispute resolution centre can be summarised as follows:

  1. Risk of interference by the PRC Government in Hong Kong’s affairs: There is a concern that the manner in which the NSL was enacted (i.e. by the NPCSC instead of the Hong Kong Government) has opened the door for the PRC to apply other PRC laws into Hong Kong law. This perception may reduce the attractiveness and appeal for international commercial parties to choose Hong Kong law (chosen by foreign parties for its neutrality and being a part of the common law) in their commercial contracts. In addition, the unprecedented manner of the enactment of the NSL has been perceived by the international business community as a threat to Hong Kong’s ‘high degree of autonomy’ under the ‘one country, two systems’ regime.  
  2. Risk of legislation being misused: The NSL criminalises secession, subversion, terrorist activities and collusion with a foreign country. The wording for these offences is broad.[vi] For instance, “subversion” is defined as overthrowing or undermining the basic system of the PRC.[vii] The lack of clarity in the definition of such offences and whether these offences could and would be used in the realm of international commercial contracts against foreign parties that have disputes with Chinese individuals and/or State-owned entities (“SOEs”), has created the perception of potential misuse of the legislation to commercial contracts.  

In the absence of clear wording of the offences and the lack of certainty on the implementation of the NSL vis-à-vis commercial contracts, the perception of its misuse could impact the attractiveness and appeal of Hong Kong as governing law, seat and venue of an arbitration clause in an international commercial contract.

  1. Risk of undermining judicial independence: The enactment of the NSL by the NPCSC has created the perception that the legislation may affect the independence and impartiality of the Hong Kong judiciary. For instance, the NSL confers power on Hong Kong’s Chief Executive to designate judges to hear national security cases,[viii] and the NPCSC with the power to interpret the law.[ix]

Independence of Hong Kong’s judiciary has been one of the key reasons for Hong Kong’s success as a premier dispute resolution hub. In this regard, of particular comfort to foreign parties is the presence of foreign judges on the Hong Kong Court of Final Appeal.The independence of Hong Kong’s judiciary will be of critical importance to its success as an international financial centre and as a leading dispute resolution hub. The perception that the NSL has undermined the independence of the Hong Kong judiciary may potentially impact the global competitiveness of Hong Kong in the coming years.

In response to the furore surrounding the NSL, including the above concerns, the Hong Kong Government issued clarifications and various assurances by press release and by responding to questions from the public.[x]These will not be explored below.

DISCUSSION

Against the backdrop in which the NSL was enacted, it would be a facile and baseless proposition to suggest that the NSL was contemplated to target commercial transactions. Rather, it was enacted to address the deteriorating law and order situation in the wake of the recent demonstrations with the aim of restoring stability in Hong Kong.

‘Back to basics’

With all the commotion surrounding the NSL, it is easy to forget the ‘basics’ which made Hong Kong the leading dispute resolution that it is today. It is pertinent to remind ourselves that much of what makes Hong Kong a preferred arbitral seat for international disputes, and contributed to its growing popularity over the past decade, remains alive in spite of the NSL. To do so first requires revisiting several basic considerations in a party’s choice of arbitral seat.

The key considerations when choosing an arbitral seat have been succinctly articulated by Lord Hoffman[xi] as follows: “the choice [of arbitral seat] is likely to depend upon a combination of geographical convenience for the parties, ready access to good legal services and a local legal system which can be relied upon to be impartial and exercise unobtrusive supervision over the arbitration, intervening only when things have gone badly wrong”.[xii] Lord Hoffman went on to say that “[t]here are not many places in the world which can satisfy all of these requirements”, but Hong Kong is one of them.[xiii] Hong Kong is also in a “unique amphibious position in relation to China, being part of the territory of the People’s Republic of China but equipped with good legal services and an excellent court system”.[xiv] It possesses “a simple and accessible arbitration law, which will assure parties that their chosen method of dispute resolution will remain in their hands but be supported when necessary”.[xv]

Various international arbitral experts have also offered praise for Hong Kong’s strengths as an arbitral seat. Neil Kaplan CBE QC SBS remarked that: “Hong Kong has always ticked all the boxes in the “user-friendly” check list...In less than 30 years the Hong Kong Arbitration Ordinance has …[become] one of the most up-to-date arbitration statutes in the world”.[xvi] Robert JC Dean remarked that: “Together with an independent judiciary and a strong commitment to the rule of law, these characteristics have allowed Hong Kong to become one of the most important global centres for international dispute resolution”.[xvii]

The above sentiments were echoed by the former Chief Justice Geoffrey Ma: “Hong Kong is a leading centre for arbitration and other forms of dispute resolution in the commercial world”. This is the case because of the existence of the rule of law, which “can be gauged by the existence of laws that respect the dignity and rights of all persons - individual, collective, and corporate”, “the equal application of such laws by a truly independent judiciary”, and “the quality of those who are responsible for the administration of justice”.[xviii]

Following the NSL’s enactment, the aforementioned have been re-reiterated by both of Hong Kong’s professional associations for legal professionals. The Law Society of Hong Kong remarked that: “The factors contributing to Hong Kong’s popularity [as a seat for international arbitration] include…the presence in Hong Kong of world-class legal professionals,… high-quality arbitration services, …[and] adoption of a modern and user-friendly arbitration law….There has been no change to these factors”.[xix] The Bar Association remarked that: “The HKSAR is and continues to thrive as one of the world’s most important financial centres with a global reputation for both cross-border deal-making and international dispute resolution”.[xx] With regard to statistical evidence, the Secretary for Justice noted that “the number of arbitration cases handled in Hong Kong last year actually increased, with 318 new cases, the highest number since 2009”.[xxi] Following the introduction of the NSL, “the HKIAC received 182 new cases, an increase of 39 per cent from the same period in 2019”.[xxii]

Notwithstanding the positives, the wording of the NSL is broad, and there is concern that its scope remains susceptible to flexible application. The potential unsettling effect of this flexibility cannot be ignored. In this regard, it must always be borne in mind that the NSL was enacted to restore stability, to enable rather than disable commercial life both domestically and internationally in relation to Hong Kong. As a matter of common sense, it would not be conducive to this notion of stability if the NSL were used to target bona fide commercial transactions, or be used to confer an unfair advantage upon SOEs. Under current circumstances, the reality may well be that commercial contracts seated in Hong Kong and /or governed by Hong Kong law would remain unaffected by the NSL.

Basic rights under the Basic Law

In addition to the above, regard must also be had to basic rights which have been granted under the Basic Law. The enactment of the NSL does not render the existence of such rights obsolete. First, the Basic Law expressly provides that the judiciary “shall exercise judicial powers independently, free from any interference”.[xxiii] Further, the Basic Law expressly provides that, amongst other things, the “the common law” and “rules of equity” as previously in force before the Handover “shall be maintained” after the Handover.[xxiv]

Secondly, the Basic Law expressly permits judges and other members of the judiciary to be recruited from other common law jurisdictions on the basis of their judicial and professional qualities.[xxv] This arrangement remains a unique feature of Hong Kong’s legal system. At present, no less than 14 overseas Non-Permanent Judges sit on the Court of Final Appeal, including current[xxvi] and former UK Supreme Court judges, a former Chief Justice of Canada, and a former Chief Justice of the High Court of Australia.[xxvii] This arrangement continues to allow common law legal giants to offer independent scrutiny, and impress upon Hong Kong the common law traditions that our jurisdiction prides itself upon.

Thirdly, the Basic Law expressly permits lawyers from outside Hong Kong to be employed in Hong Kong and practise in the region.[xxviii] Foreign advocates are regularly briefed on a pro hac vice[xxix] basis to prosecute and defend cases in Hong Kong to great effect. The rationale of doing so is to ensure that the very high standards of the Hong Kong Bar and its independence can be maintained. This holds true even in the context of the NSL. It would thus be wrong for foreign politicians to criticise this arrangement without appreciating its underlying rationale. In particular, the comments of The Right Honourable Dominic Raab MP, the UK’s current Foreign Secretary[xxx] concerning whether it continues to be appropriate for British judges to sit as non-permanent judges on the Hong Kong Court of Final Appeal[xxxi] are ill-considered and unhelpful to maintaining “one country, two systems” and the rule of law in Hong Kong. And the Foreign Secretary’s comments regarding the pro hac admission of David Perry QC to prosecute nine activists, including the media proprietor Jimmy Lai, arising from demonstrations in August 2019, calling Perry QC a “mercenary” were equally ill-considered and unhelpful.[xxxii]

Finally, the Basic Law expressly provides that the ICCPR[xxxiii], ICESCR[xxxiv] and international labour conventions as applied to Hong Kong “shall remain in force” and be implemented through the laws of Hong Kong.[xxxv] The human rights and freedoms as contained in the aforementioned conventions, as enjoyed in other common law jurisdictions, are upheld and remain binding in Hong Kong.

The NSL and the Basic Law

The NSL encapsulates the aforementioned concepts by in part, providing that “[t]he rights and freedoms” enjoyed by Hong Kong residents under the Basic Law, ICCPR and ICESCR “shall be protected in accordance with the law”.[xxxvi] In other words, the NSL specifically requires the rights and freedoms under the Basic Law to be taken into account and enforced by the Hong Kong Government. The Hong Kong courts are therefore obliged to give effect to these matters in their administration of justice.

Most importantly, the work of the Hong Kong courts remains transparent and its judgments are open to the public. The only way of testing the legal system in Hong Kong and whether the judiciary is truly independent would be to apply empirical and objective criteria, that is, from the reasoning contained in the court judgments.

PARTING WORDS

The answer to whether perception reflects the reality would lie in the reasoning of judgments in the NSL cases. Thus far, perception belies reality.[xxxvii] Based on the courts’ reasoning in future NSL cases, time will tell as to whether this will continue to hold true.

Most importantly, as perception is greater than reality, it is critical for the Hong Kong Government to effectively address the perception problem of Hong Kong in the post-NSL landscape. For Hong Kong to survive as a premier dispute resolution hub, addressing the perception problem with concrete action is the need of the hour.

 

[i]Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region

[ii]Companies consider writing Hong Kong out of legal contracts”, Financial Times, 31 January 2021

[iii] Ivanka Trump, “The Trump Card: Playing to Win in Work and Life”, Touchstone, Simon & Schuster, New York, 2009

[iv]Proposals to Implement Article 23 of the Basic Law” and “National Security (Legislative Provisions) Bill 2003

[v]The Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region gazetted and takes immediate effect”, 30 June 2020

[vi] See in particular, Articles 20, 22, 24 and 29 of the NSL

[vii] Article 22, NSL

[viii] Article 44, NSL

[ix] Article 65, NSL

[x] E.g. “Q&As on legislation for the HKSAR to safeguard national security” produced by the HKSAR Government in June 2020; see also press releases on the DoJ website (https://www.doj.gov.hk/en/community_engagement/press/index.html), and SJ’s Blog e.g. “Correctly Understanding the National Security Legislation from the Perspective of the Constitutional Order”, SJ’s Blog, 26 May 2020

[xi] The Right Honourable the Lord Hoffmann, GBS, a Non-Permanent Judge of the Hong Kong Court of Final Appeal since 1998.

[xii] The Hong Kong Arbitration Ordinance: Commentary and Annotations, 1st Ed., Choong & Weeramantry, Foreword by Lord Leonard Hoffman, April 2011

[xiii] Ibid.

[xiv] Ibid.

[xv] Ibid.

[xvi] Ibid, Foreword by Neil Kaplan CBE QC SBS, April 2011

[xvii]Arbitration in Hong Kong - A Practical Guide”, 4th Ed., Ma & Brock,  Foreword by Robert J.C. Dean, Partner at BLG, 2017

[xviii]A Guide to the HKIAC Arbitration Rules”, Moser & Bao, Foreword by Geoffrey Ma, Chief Justice of the Court of Final Appeal of the Hong Kong Special Administrative Region (as he then was), November 2016

[xix] “Statement on Hong Kong as a Legal and Dispute Resolution Service Hub by The Law Society of Hong Kong”, 8 February 2021

[xx]Statement of Hong Kong Bar Association (“HKBA”) on Hong Kong Special Administrative Region (“HKSAR”) as a Centre for Dispute Resolution”, 17 February 2021

[xxi]Letter: Hong Kong’s role as a hub for arbitration is growing”, Financial Times, 10 February 2021

[xxii] Ibid.

[xxiii] Article 85, Basic Law

[xxiv] Article 8, Basic Law

[xxv] Article 92, Basic Law

[xxvi] E.g. the current President of the Supreme Court, the Right Honourable the Lord Reed of Allermuir is such a non-permanent

[xxviii] Article 94, Basic Law

[xxix] "for this occasion" or "for this event"

[xxx] Secretary of State for Foreign, Commonwealth and Development Affairs,

[xxxi] The UK Foreign, Commonwealth, and Development Office’s six-monthly report on Hong Kong covering the period of January 2020-June 2020, dated 23rd November 2020

[xxxii]Dominic Raab calls QC acting for Hong Kong government ‘mercenary’”, The Guardian, 17 January 2021

[xxxiii] International Covenant on Civil and Political Rights

[xxxiv] International Covenant on Economic, Social and Cultural Rights

[xxxv] Article 39, Basic Law

[xxxvi] Article 4, NSL

[xxxvii] From an analysis of the court’s reasoning in the CFA judgment HKSAR v Lai Chee Ying (黎智英) [2021] HKCFA 3, it is clear that the Court of Final Appeal has operated with transparency, independence, and in accordance with common law methods and principles in the context of the NSL

Chair of International Disputes and Arbitration Practice and Regional Head of Asia Litigation Practice, O’Melveny