• Bloomberg

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International companies are increasingly avoiding Hong Kong as a jurisdiction for settling disputes through arbitration, one of the clearest signs yet that China’s tightening grip on the financial hub has eroded trust in its legal system.

Businesses are instead choosing rival hubs like Singapore, Paris and London, according to interviews with arbitration lawyers, a shift that has accelerated since the Chinese government bypassed Hong Kong’s legislature to impose a sweeping national security law.

Lawyers say the new legislation has raised doubts about the independence of Hong Kong arbitrators, who are now subject to a vaguely worded statute carrying potential life sentences for crimes including subversion of state power and collusion with foreign forces. Of particular concern is the potential impact on contract disputes with Chinese companies, according to Khelvin Xu, a partner at Rajah & Tann Singapore LLP who specializes in international arbitration and commercial litigation.

“Parties to contracts are questioning whether Hong Kong remains a neutral and effective seat of arbitration,” said Robert Rhoda, a partner at Dentons Hong Kong LLP.

Hong Kong’s Common Law system and highly regarded stable of legal professionals have long underpinned its appeal as a financial hub. But some worry the city is becoming a less safe place to do business as China’s Communist Party plays a more assertive role in Hong Kong affairs.

The security law is one reason why Wu Gang, who runs a Canada-based fintech company, has been opting for alternative jurisdictions including Singapore when drafting arbitration clauses in contracts with counterparties in Asia. He also cited Hong Kong’s near shutdown at times last year because of anti-government protests.

“The social unrest and changes in law have prompted us to think twice,” Wu said.

Before this year, Hong Kong was one of the world’s leading arbitration centers. The city handled at least 308 disputes involving $4.7 billion in 2019, according to figures from the Hong Kong International Arbitration Centre.

Companies use arbitration as an alternative to litigation in courts, agreeing to designate an independent third party to resolve their disagreements in private.

Hong Kong’s appeal as an arbitration hub may have diminished this year, but it still offers advantages over rivals, according to Rhoda. For one, it’s the only place outside mainland China where parties to arbitration can obtain interim relief from Chinese courts preventing companies from liquidating assets.

Hong Kong arbitrators also still have strong business incentives to remain independent, according to Ronald Sum, council member of the Hong Kong International Arbitration Centre.

That hasn’t stopped some companies from seeking alternatives. Singapore, which has already been moving ahead of Hong Kong as an arbitration hub in recent years, is well positioned to win business from those who view Hong Kong as increasingly part of mainland China, according to Rajah & Tann’s Xu.

“Will companies reconsider choosing Hong Kong as their place of arbitration? Definitely,” said Thomas Kendra, a Paris-based partner at Hogan Lovells. “I would say that the first place that could benefit would be Singapore.”

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