Major international companies that are making deals in Asia are considering excluding Hong Kong from legal contracts over concerns that China’s tightening grip could impact the rule of law in the territory, according to interviews with business advisers from the region.
Senior lawyers at 10 major law firms in Hong Kong, Tokyo and Singapore told the Financial Times they have seen an increase in the number of inquiries from clients, mostly based in the United States and Japan, on the opportunity exclude Hong Kong from applicable law and arbitration clauses when doing business in the financial center or entering into joint ventures with Chinese and Asian counterparties.
“I have answered this question four times this year,” said the head of a US law firm in Hong Kong, citing calls with large clients in technology, pharmaceuticals and consumer products. “It’s a live problem. All sectors are asking the question and doing an assessment. “
The managing partner of another US law firm in Hong Kong, which has worked in the territory for nearly a decade, said, “We now get a lot of questions from companies about this; this has never happened before in my time. We have large private equity clients who never cared about arbitration clauses that come to us with the simple question of “ is it safe to leave Hong Kong as a seat? [of arbitration]? ”
“For Japanese clients who have always had concerns about arbitration in China, questions are increasingly raised in Hong Kong,” said Yoshimasa Furuta, senior partner at Anderson, Mori & Tomotsune, one of the four large Japanese law firms. “We now have Japanese companies asking us directly if we think it is safe to use Hong Kong as a seat of arbitration.”
He added that clients who draft contracts “especially over a 10 to 20 year horizon” are increasingly thinking of alternative jurisdictions like Singapore for their arbitration.
An “applicable law” clause allows companies entering into a contract to agree on the laws of the country that will govern how they conduct their business. An arbitration agreement obliges the parties to resolve any future dispute in an arbitration center in a particular jurisdiction. The parties to a contract can choose any applicable law or center of arbitration.
“With some of our clients, particularly high net worth Japanese clients, there is now a strong tendency not to have Hong Kong as the governing law or seat of arbitration,” said the senior partner of a large firm of ‘lawyers from the former British colony.
He said negative attention to Hong Kong justice, such as an announcement by Britain shoot his judges out of the territory’s highest court, as well as enhanced marketing by rival arbitration centers, “had twisted Hong Kong to look like an unfavorable jurisdiction” for trade disputes.
Hong Kong’s legal and judicial system has come under pressure since Beijing tightened its control over the territory by imposing a national security law last year to quell anti-government protests. Arrests of pro-democracy activists, opposition politicians and reporters have raised questions about whether Hong Kong’s legal system could be compromised. In September, Australian judge James Spigelman resigned from the Hong Kong Court of Final Appeals for unspecified security law reasons. This decision sparked a renewed debate on judicial independence.
Several of the lawyers interviewed dismissed their concerns. A number of lawyers said they had advised clients to consider “exempting” Hong Kong from contracts of remaining loyal to the territory. They cited benefits, including an enforcement agreement between Hong Kong and mainland China that means awards made by their respective arbitral centers will stand.
“Everyone does the assessment but we are often [saying] not to deviate from Hong Kong, especially on shorter contracts, ”a litigator said. However, if a customer were to sign an infrastructure contract that could last for decades, “then he has to think about the situation in Hong Kong at that time.”
For international companies and financial institutions Operating in the territory, the city’s legal system has served as a guarantee that they can execute contracts against Chinese state-owned enterprises and companies linked to mainland officials. In mainland China, the justice system is subordinate to the ruling Communist Party, and its 92 million members are often above the law.
In 2019, the Singapore International Arbitration Center received 479 new cases, a record for the center. The Hong Kong International Arbitration Center held 503 cases that year, less than the previous two years but above 2016 levels. The number of contracts switching to the use of the Singapore Arbitration Center n ‘will no longer appear in the statistics for several years. But security fears during protests in Hong Kong in 2019 had already prompted some companies to move arbitration hearings out of the city.
A Japanese lawyer said: “What has happened now is that the past 18 months have accelerated the trend towards Singapore, perhaps dramatically.”
Additional reporting by Stefania Palma and Mercedes Ruehl in Singapore