The Strong Foundations on which Hong Kong’s Status as a Leading Seat of International Arbitration Rests Remain Intact

INTRODUCTION

The National Security Law (“NSL”) has generated debate in certain quarters as to Hong Kong’s future as a seat of international arbitration. Any such debate should not lose sight of the fact that Hong Kong’s status as the premier seat of international arbitration in Asia, and a leading seat internationally, rests on strong foundations built over several decades that are not easily undone. These foundations include sophisticated arbitration legislation, interpreted and applied by a strong and independent judiciary, premier arbitral institutions, a large pool of arbitration professionals and a commitment to innovation. Such foundations remain unaffected by the NSL. There is therefore every reason to believe that Hong Kong will remain a leading seat of international arbitration for decades to come.

FOUNDATIONS

For a jurisdiction to gain the recognition and status required to become a leading “arbitration hub” is a gradual process. Significant early milestones for the evolution of Hong Kong’s status as the premier seat of arbitration in Asia, and a top five seat globally, was the establishment in 1985 of the Hong Kong International Arbitration Centre (HKIAC) by a group of leading businesspeople and professionals in an effort to meet the growing need for dispute resolution services in Asia, and the adoption of the 1985 UNCITRAL Model Law on International Commercial Arbitration (the Model Law) in 1989. The foundations that have subsequently been built over more than 35 years, are not impacted by the NSL.

First, arbitrating parties in Hong Kong benefit from the Arbitration Ordinance (Cap. 609), which is one of the most modern and sophisticated arbitration laws in the world. The Arbitration Ordinance, which came into effect in 2011, introduced the updated 2006 UNCITRAL Model Law for both domestic and international arbitrations seated in Hong Kong, and has been regularly updated thereafter to reflect international best practice and user demands. Innovative provisions have been introduced to address enforcement of emergency arbitrator relief, arbitrability of intellectual property disputes, and third-party funding. A recent Consultation Paper from the Law Reform Commission of Hong Kong proposes further reforms to allow arbitrating parties to use conditional fee and damages-based agreements, which would provide additional flexibility in respect of funding arbitrations in Hong Kong.

Even more important than the Arbitration Ordinance itself, however, is the significant body of case law interpreting it that has emerged over the years. Hong Kong has long benefited from the decisions of a specialist list of judges of the Court of First Instance dealing with arbitration matters. There is no other common law jurisdiction with such a rich body of case law interpreting the UNCITRAL Model Law. This ensures predictability and contributes to Hong Kong’s position as one of the leading Model Law jurisdictions globally. Something which is reflected in the frequent citations of Hong Kong case law in the UNCITRAL 2012 Digest of Case Law on the Model Law (https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/unc…).

Judicial independence has long been a cornerstone of Hong Kong. The Court of Final Appeal, Hong Kong’s highest court, is comprised of the Chief Justice, seven Hong Kong permanent and non-permanent judges (“NPJs”), and 14 overseas NPJs. The overseas NPJs are among the most eminent judges of other common law, commonwealth jurisdictions, and include Lord Hoffman, Lord Collins, and Lord Neuberger among others.

Hong Kong’s independent arbitration institutions are another cornerstone of Hong Kong’s arbitration reputation. With more than 35 years under its belt, the HKIAC is the oldest arbitration institution in Asia, with a proven track-record. Further, HKIAC’s decision-making bodies, such as its Council and Appointments and Proceedings Committees, are comprised of a diverse group of international and local dispute resolution and industry experts and are subject to transparent governance structures. Hong Kong also benefits from a branch of the Secretariat of the ICC International Court of Arbitration, which was established in 2008, and a sub-commission of CIETAC, the CIETAC Hong Kong Arbitration Centre, that opened in 2012.

Another key factor that has contributed to Hong Kong’s status as a global hub for arbitration is its reputation for innovation. The HKIAC’s rapid response to the COVID-19 pandemic exemplifies this. Within weeks of the onset of the pandemic, the HKIAC released detailed Guidelines on the conduct of virtual hearings and adopted wholesale changes to its operations to support virtual hearings. With the help of its multi-faceted online capabilities, the HKIAC has administered 80 virtual hearings in 2020.

Finally, while it is obvious to arbitration practitioners, other commentators should not forget that it is arbitrators that determine the outcome of arbitrations. Arbitrators are appointed by the parties or an arbitral institution like HKIAC. In many cases, arbitral tribunals comprise three members, with the co-arbitrators appointed by the parties and the presiding arbitrator chosen by the co-arbitrators, parties or an institution chosen by the parties. It is the quality of the arbitrators that will play the most important role in the quality of any arbitration, regardless of where in the world it is seated. Hong Kong has a very deep pool of highly experienced local and international arbitrators, with leading arbitrators from around the world frequently serving as arbitrators in Hong Kong seated arbitrations.

UNIQUE ADVANTAGES FOR ARBITRATIONS INVOLVING MAINLAND CHINESE ENTITIES AND INTERESTS

While these foundations make Hong Kong well suited as a seat of arbitration for disputes involving companies and assets from any jurisdiction, Hong Kong offers unique advantages as a seat for arbitrations involving Mainland Chinese entities and interests.

With the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and the Hong Kong SAR (“Interim Measure Arrangement”) that came into force on 1 October 2019, courts in the Mainland can now be approached for interim measures by parties to arbitrations seated in Hong Kong before the Award has been issued. Hong Kong is the only seat of arbitration outside the Mainland where arbitrations enjoy this support from courts in the Mainland. Thus, this Arrangement is a gamechanger for arbitrations involving parties and assets from the Mainland. The availability of interim relief from both courts and arbitral tribunals is of significant strategic value to parties. Since the Interim Measures Arrangement has come into effect, the HKIAC has processed 37 applications made to Mainland courts seeking to preserve evidence and assets worth over US$1.9 billion.

With regards to enforcement, Hong Kong Awards can also be readily enforced in the Mainland due to the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and HKSAR. On 27 November 2020, this enforcement regime was further strengthened when the Supreme People’s Court of China and the Hong Kong Department of Justice signed the Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR (“Supplemental Arrangement”). Under the Supplemental Arrangement, parties whose arbitrations are seated in Hong Kong or the Mainland can now apply simultaneously to enforce their awards in courts in Hong Kong and the Mainland. These parties can also seek preservation measures in courts in the Mainland and Hong Kong after an award is rendered. This robust enforcement regime has meant that only three HKIAC awards have been refused enforcement by Courts in the Mainland in the last twenty-two years (Why Hong Kong will continue to be a leading arbitral centre, Global Arbitration Review, 9 September 2020).

Finally, the HKIAC and other arbitral institutions in Hong Kong are highly experienced when it comes to disputes involving Mainland parties. For instance, close to 300 Mainland parties arbitrated at the HKIAC in 2017 and 2018 alone. Further, one third of the cases HKIAC handled in 2017 involved a Mainland party along with a party from a Belt and Road Initiative jurisdiction. In addition, many arbitrators based in Hong Kong have extensive experience of disputes involving Mainland parties.

It is for these reasons that Hong Kong has long had the largest market share of Mainland-related disputes among all the major seats of arbitration. Indeed, any business – or lawyer advising a business – should think very carefully before choosing a seat other than Hong Kong for an arbitration clause with a Mainland Party given the above-discussed advantages.

NATIONAL SECURITY LAW

The NSL, a criminal code, should have no impact on the conduct of arbitration in Hong Kong. In particular, there is presently no reason for international companies entering into contracts with Chinese State-Owed Entities (SOEs) or privately-owned Chinese companies to start relying on alternative seats.

First, the unique advantages offered by Hong Kong for arbitrations involving Mainland Chinese entities and interests that are discussed in the previous section of this article remains unchanged. So does the arbitration infrastructure that over the years have built Hong Kong’s status as one of the leading seats of arbitration globally.

Second, when Chinese SOEs have appeared as parties in arbitration-related court proceedings in Hong Kong, the courts have treated these SOEs just like any other party. The decision by the Hong Kong Court of Appeal in Shandong Hongri Acron Chemical Joint Stock Company Limited v. Petrochina International (Hong Kong) Corporation Limited is illustrative in this regard. In this case, the Hong Kong Court of Appeal enforced an award against a leading Chinese SOE. Likewise, in the case of TNB Fuel Services SDN BHD v. China National Coal Group Corporation, the Hong Kong Court of Instance ruled that a Chinese SOE could not assert the defence of crown immunity in an action for execution of an arbitral award against its assets. These decisions confirm that arbitral awards, as a matter of course, are enforced in Hong Kong against mainland companies and SOEs.

Indeed, there has been no evidence that Hong Kong is in decline as an arbitral seat. On the contrary, case numbers are rising. In 2020, the HKIAC received 318 arbitration filings, which is the highest in over a decade. 86% of the administered arbitrations involved international parties, hailing from 45 different jurisdictions. 99.4% of all arbitrations commenced in 2020 were seated in Hong Kong. The total amount in dispute was HK$68.8 billion (approximately US$8.8 billion) – a record high since HKIAC began to publish such information in 2011.

There is of course lag time between clause drafting and case filing which means that any real trends affecting a seat can only be detected some years down the line. There is, however, anecdotal evidence that Hong Kong continues to be selected in a wide range of agreements, including long-term contracts and commercial and corporate agreements and documents, including in relation to the important private-equity industry. There are also examples of U.S. technology companies recently adopting internal guidelines to use Hong Kong as the seat of arbitration for all contracts with Mainland Chinese companies due the broad arbitrability of IP-related disputes in Hong Kong as well as the entry into effect of the Interim Measure Arrangement. This was recently echoed in a debate by a prominent European in-house counsel from a large global corporation who stated that he was not aware of any requests to ‘exclude’ Hong Kong from arbitration clauses on account of the NSL.

FIERCE COMPETITION AMONG ARBITRAL SEATS

While the NSL should not pose a threat to arbitration in Hong Kong, competition among jurisdictions for arbitral work in Asia nevertheless remains fierce as a Sub-committee of the Law Reform Commission of Hong Kong recently acknowledged in recommending that Hong Kong reform its law to allow conditional fee and damages based agreements.

Singapore is a well-established seat while other jurisdictions are making significant efforts to establish themselves. This cannot be done over-night, since foundations take years to establish, but Hong Kong should nevertheless not be complacent.

Hong Kong’s strong foundations as a seat of arbitration will ensure that Hong Kong remains a top choice for arbitrations not only in Asia, but across the globe.

Partner, Shearman & Sterling

Nils Eliasson is a partner in Shearman & Sterling’s International Arbitration Group based in Hong Kong. He is also a member of the HKIAC Council, the Chairman of the HKIAC Proceedings Committee, and the Chairman of the HKIAC Rules Revision Committee.