In THE beginning
“In China, negotiations begin after we have signed the contract”.
– A lawyer, said this about 2 years ago.
China went ahead with imposing the The Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region infamously known as the Hong Kong National Security Law (NSL) on June 30, 2020. The impact on businesses has started with trickle of companies moving out of Hong Kong. The standing committee of China’s legislature reserves the right to interpret the law, –
- Beijing has the final say over how it is implemented, rather than the city’s courts.
The NSL is interpreted to have several clashes with Hong Kong’s Basic Law. Several legal questions to be confronted. We are attempting to answer the ones on Arbitration- the impact NSL is likely to have on arbitral awards, what could be the fate of international arbitration in Honk Kong for commercial contracts and conflict resolution. and other related disputes.
I. THE NEW WAY- NATIONAL SECURITY LAW
Very quickly, according to the law the implementation of the NSL might look as follows,
- The responsibility for enforcing NSL is with a Special Council formed by Hong Kong officials and led by the city’s Chief Executive, who is selected by a committee of pro-Beijing members, also to designate judges who can preside over National-Security cases;
- Special Council’s work is confidential, with decisions not subject to judicial reviews;
- Special unit within the local police force will handle National-Security cases, and can hire personnel from outside of Hong Kong [Which is the outside of Hong Kong, here, looks every place other than mainland];
- Police will have the usual powers in criminal investigations and special powers to put suspects under secret surveillance with authorization from the city’s Chief Executive;
- Without adequate checks and balances, it allow police officers to conduct searches without a warrant under Exceptional Circumstances [Exceptional Circumstances is not specifically defined.]
For the legal side of the business, reduced powers of Hong Kong’s courts, justice being served administartively is likely cast a shadow on how dispute resolution is viewed.
II. FROM THE OUTSIDE- NSL AND THE WORLD
Hong Kong, the bridge between China and the rest of the world.With a promise to uphold “One Country Two Systems” from China, UK government handed over Hong Kong to China in 1997 to last until 2047 under the Sino-British Joint Declaration. China was unabe to honour this beyond 23 years.
Along with this goes, freedom of judiciary- Under Hong Kong’s British-style legal system, the judiciary is meant to be independent from government and judges aren’t politically appointed. With the judges to preside over NSL cases being appointed by the Chief Executive appointed by pro-Beijing committee members, little is left to legal discretion and judicial independence.
Historically, investors have had more faith in Hong Kong’s legal and governance system compared to China. The Chinese legal system is subservient to the Communist Party of China. China, has always known to use situations to favour it and does not spare Hong Kong either. It uses the favourable status of Hong Kong to export its good to the rest of the world, while the western businesses use Hong Kong as a gateway to invest in Chinese companies. It was almost like each could tolerate the other only because they met through Hong Kong.
Albiet, with the imposition of the NSL, all that Hong Kong had earned for itself over the past two decades, is likely to disintegrate.
Hong Kong & Arbitration:
How it is likely to impact, “arbitration in Hong Kong” and arbitration of international commercial disputes? Very loosely, arbitration is a method to resolve disputes- in private as an alternative to doing it in the Courts.
- On the conflict resolution/ arbitration front, due to judicial neutrality, in which courts are insulated from politics, Hong Kong gained popularity as a seat of arbitration for international businesses and consistently ranked amongst the most preferred arbitral seats in the world. In addition, Hong Kong had a well-regarded judiciary, arbitration friendly laws and arbitration centres.
- Ever since the Arbitration Ordinance (“Cap 609”) came into force in June 2011, Hong Kong has boasted of extremelyuser friendly arbitration procedure. The Arbitration Ordinance adopts Articles from the UNCITRAL Model Lawwith specific mention on what parts are applicable to Hong Kong and where they are abridged.
- It gets interesting to note that greater court intervention is allowed under the Hong Kong Arbitration Ordinance (“Cap 609”), which, coming from fairly neutral & well regarded judiciary, would be extremely welcome.
Flip: With imposition of NSL (significantly an opaque legislation), the intervention of courts is likely in the hands of mainland. (See section I, above) for reasons. However, the Hong Kong Arbitration Ordinance (“Cap 609”), states that the courts can not intervene other than on grounds provided in the Ordinance.
[NSL is drafted in a wide and vague language and differs significantly from legislation in Hong Kong under the system established during British colonial rule. It is likely to make it difficult for Hong Kong to win international arbitration business, even for commercial disputes with few political implications.]
- Another interesting aspect is, Hong Kong is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Award by virtue of China’s accession. This enables, an awrd obtained in Hong Kong, be enforced in other countries, which are signatories to it.
Flip: With all the sanctions USA is considering and the way world is re-orienting to the changing dynamics of trade- what can we hope for while enforcing, either an award obtained in Hong Kong or obtained in any other part for implementation in Hong Kong.
- Since 1997, awards sacitoned in Hong Kong were treated as domestic awards for enforcement in mainland China. In 1999 effective February 2020, an Agreement for mutual recognition and enforcement of arbitration award between Hong Kong and Mainland was executed. As per Supreme People’s Court of China, the grounds on which enforcement of such an award can be refused, are limited to – contrary to social and public interest of Mainland. With NSL, add national security to the grounds- essentially, ground for state immunity getting enlarged.
Flip: The NSL is likely to cause an indirect impact on how enforceability of arbitral awards, also, it does cast a doubt on the quality of awards likely to be received under Hong Kong arbitration. Now, will these be classified as, succession, subversion, terrorism and collusion with the foreign or external force?
The use of “foreign and external force” clearly points to foreign countries/ other nations. This is indicative of the far reaching effects the NSL is going to have, the trade it is ging to impact, the conflicts it wil leave unresolved, the production it will impact, the contracts it will fail to execute.
III. WHEN IS IT A CRIME?
For the uninitiated-
- The legislative Council of Hong Kong is responsible for framing and amending Hong Kong laws. The Council has 70 seats, out of which 35 seats are directly elected by the public, the other 30 seats are elected by smaller groups representing special interests, primary business, banking and trade (these sectors are largely pro-Beijing) and five district councillors are elected by the public for the rest of the seats.
- On June 30, 2020, due to China’s concern over anti-China pro-democracy movements in Hong Kong, the legislative Council of Hong Kong enacted the Hong Kong National Security Law under Article 23 of the Basic Law, 1997. Article 23 essentially, empowers the government of Hong Kong (parliament run by pro-democracy and Chinese Govenrment supporters) with the authority to enact its national security laws.
The NSL has identified 4 major crimes and criminalises these-
- succession, subversion, terrorism and collusion with the foreign or external force.
With some alarming provisions around life imprisonment and trial of suspects in mainland China, the fear against protection of fundamental civil rights of residents of Hong Kong, is a real one.
It is anticipated and feared that this means-
- Companies can be fined, license or business permits revoked once convicted under the law, with financial institutions and technology companies being at a greater risk of either not conforming with the US sanctions or violating the NSL;
- People or organisations “imposing sanctions or blockade, or engaging in other hostile activities” against Hong Kong or Mainland China, could face penalties;
- Hong Kong’s chief executive, directly answerable to China is empowered to appoint judges to hear national security cases;
- China has authority over the interpretation of the new law;
- Certain trials to be held behind closed doors;
- The laws have extra-territorial outreach to be overviewed by Beijng as opposed to independent courts.
Cleverly, the NSL desists from defining ‘National Security’ leaving interpretational freedom at the hands of Chinese government. Strategically, the criminal provisions given under law are widely defined to include a large number of offences.
IV. WHAT WILL CHANGE, OR HAS IT ALREADY?- CRITICAL ANALYSIS
Is it real or notional risk?
1. Judicial Independence
The drastic change has led to experts questioning the integrity and independence of the Court in Hong Kong. “One country, two systems” principle, which safeguarded the independence of Courts in Hong Kong, seems substantially eroded.[1] Safegaurding the integrity of the courts is simply becoming harder as Biejing has shown firm move towards negating judicial independence. Additionally, a decrease in Hong Kong’s score in judicial independence[2] in the World Economic Forum’s 2019 Competitive Index, is pointing towards the anticipated outcome of this move.
Often judges from foreign jurisdictions were invited to serve in Hong Kong, the NSL gives the power of appointing judges in cases involving National Security, to Hong Kong’s Chief Executive. (See section I, above) With this, one might see the foreign judges being blocked from handling the matters involving issues of national security. The opaque and vague legislation, chooses not to define these aspects conclusively. This increasingly places the powers in hands of Beijing. How is this going to be interpreted with use of words like “foreign” and “external powers”, is not known yet.
The reciprocal agreement between China and Hong Kong for mutual recognition and enforcement of Arbitral award, Hong Kong was a favoured seat for arbitration for agreements involving Chinese parties. Under the reciprocal arrangement the Chinese Courts were empowered to recognise and enforce interim measures passed in support of the institutional arbitrations seated in Hong Kong.[3] Does the NSL impact this?
2. Trade War Between the United States and China
Being viewed as a neutral, Hong Kong was perceived as a good seat for arbitration by the American companies. With United States removing preferential trade status of Hong Kong, it is likely to be caught in cross fire of the trade war between China and America.
HSBC, CathayPacific and even Ant (working towards a lisiting at the HK stock exchange) have shown their solidarity towards the NSL and some have even taken the support a step forward and got their staff to sign statements in support of the legislation. As per a survey conducted by the American Chamber of Commerce around 83 % of its members were concerned by the New Security law enacted in Hong Kong.[4]
In terms of legal remedies, buisinesses are thinking whether, trials will be presided over by impartial judges or ones hand-picked by Beijing; would the law be used to persecute political critics of Beijing; and what is going to be the application of law.
Is Hong Kong a viable gateway to enter the vast market of China? How does one reduce impact on their valuation in the long term, assess reputational damage? Though, not a majority, but companies have started gravitating towards neutral countries like South Korea and Singapore for seat of arbitration in their agreements.
3. Problems Faced by Arbitrators and Parties in China
China does not offer a particularly platued topography, when it comes to doing business or litgating. The censorship of internet in the mainland territory, arbitrators or the parties to the agreement face problems in obtaining a visa for China, if the Chinese Communist Party decides to interfere in the same.[5] CCP is likely empowered to manoeuvre some control over such situations. Arbitral seats governed in socialist laws are not preferred by international parties.[6]
In addition, commercial disputes which have Hong Kong as a seat for arbitration, are likely trapped or face, modification. Such changes, if initiated, are going to result in costs.
4. Political Interference and detention
Political interference discourages parties to chose a certain jurisdiction as the seat of the arbitration.
HSBC, Standard Charter and Cathay Pacific issued a statement backing the new security law imposed on Hong Kong.[7] Whatever, be the motivation for companies to show such solidarity towards imposition of NSL, it does point towards the leverage Chinese authorities could have to influence businesses who chose to stay in Hong Kong or resolve conflict through legal options in Hong Kong.[8]
Detention of two Canadians in China shortly after the arrest of the Huawei’s Chief Financial Officer, Meng Wanzhou in Canada on request from the United States, is indicative of the extent of pressure China is willing to exert, even potentially take it to mixing business and legal outcomes. NSL brings individuals and companies outside of Hong Kong, regardless of location and nationality, under the scope of the law. extraterritorial reach is “the extremely troubling aspect of the law.”
The office for safeguarding National Security is allowed to “exercise jurisdiction” in Hong Kong under three circumstances-
- a case is “complex” due to foreign involvement;
- a situation so serious that Hong Kong authorities cannot effectively enforce the security law, and
- a “major and imminent threat to national security” has emerged.
Unfortunately, the NSL does not specify the circumstances under which the clause could be invoked but the trial of such special cases would be by mainland Chinese judges and prosecutors. In event of conflict between existing laws and NSL, the NSL is to prevail.
Given a law which is selectively opaque, becomes a cause for a lot of concern in dispensing with justice. Stable faith in conflict resolution will be hard to come by.
5. Independence of Arbitrators
The independence and impartiality of an arbitrator towards the parties of the dispute is a fundamental principle of international arbitration. The Arbitrators in Hong Kong would now be subjected to the vaguely worded statute under which they could be given a life sentence for crimes like subversion of state power and collusion with foreign forces, irrespective of their nationality. This raises doubts over the independence and impartiality of these arbitrators, especially in matters involving Chinese companies.[9]
But many believe, Hong Kong still enjoys advantages as a venue for arbitration in cases involving Chinese companies. There is, now, a reciprocal arrangement under which Chinese courts are empowered to issue interim measures in aid of institutional arbitrations seated in Hong Kong, including the preservation of assets on the mainland
It is anticipated that an increasing number of businesses embroiled in international commercial disputes will seek arbitration either in Singapore or even in mainland China due to advantages concerning costs and procedure. But many strongly believe Hong Kong remains way ahead of even Singapore, Bangkok, Tokyo, Seoul, Taipei in ease of doing business.
6. Comparative International Relations with other States
States such as the United Kingdom, United States of America, Canada, Australia, New Zealand, etc. have revoked their extradition treaties with Hong Kong and are taking further steps to review their relationship. The diminishing autonomy of Hong Kong makes for a cause for concern. The concern being- “Hong Kong’s criminal justice is independent of China.
President Trump has signed a bill which approves of sanctions against financial institutions doing business with those who will appear to be doing business with entities eroding Hong Kong’s autonomy. Hong Kong’s NSL, outlaws receiving “instructions, control, funding or other kinds of support from a foreign country” to impose sanctions against Hong Kong or China.
There are two main concerns at play here, Human Rights; and Trade and Commerce. These countries The United Kingdom, Canada and Australia have offered support to the citizens of Hong Kong by giving them citizenship or a chance to apply for residency in their countries.[10] This move has not settled well with mainland.
7. Extra- Territorial Application
With applicability on non-permanent residents and foreign nationals, the territorial control of China through NSL places question on fair trial for some who have already experienced being detained or arrested among the citizens of other countries.
Will such trials be held in mainland?
8. Businesses in Hong Kong
While companies like HSBC and Cathapacific have shown solidarity and made an attempt to instill faith amoung businesses in Hong Kong, there are a substantial number of businesses in Hong Kong which feel exposed to the vagaries of the NSL. The opaque NSL with clunky provisions of penalties, fines, revocation of licences and business permits including possibility of imprisonment sends out one message, globally- Do business with China, the China way only!
News and tech businesses are particularly vulnerable, as it places them in a position of having to chose being true to their profession or the NSL, lest it ‘endangers the national security’.
Though Hong Kong was not particulary cheap, the average cost of arbitration at the Hong Kong International Arbitration Centre (HKIAC) is USD 111,045, the average cost of arbitration at the Singapore International Arbitration Centre (SIAC) is USD 80,337. To this adding the price of non-conformity, a fine of around USD 13,000 and potential six months in prison for the representatives of the infringing publishers.[11] News agencies have already started movement towards Singapore, out of Hong Kong.
V. WHATEVER WILL BE WILL BE
New Seat for Arbitration
With successful imposition of the NSL, China, has Hong Kong locked in a fierce competition with Singapore to attract arbitration cases to settle international commercial disputes. Singapore, South Korea even Taiwan are the likely wins as preferred seat of arbitration. The Courts in Singapore follow the rule of law and hold a neutral position concerning China.[12]
For all the neutrality, Hong Kong held, the average duration of arbitration at HKIAC is around 16 months. Whereas the average duration of arbitration proceeding at SIAC is around 13 months[13], though it might be a tade bit more expensive..
As Jonathan Sumption, former English Supreme Court judge, puts it in Trials of the State:
“It is a vice of lawyers that they think and talk about law as if it was a self-contained subject, something to be examined like a laboratory specimen in a test-tube. But law does not occupy a world of its own. It is part of a larger system of public decision-making. The rest is politics: the politics of ministers and legislators, of political parties, of media and pressure groups and of the wider electorate.”
Disclaimer: This Note is for general information only and not intended for solicitation. Please do not treat this as a legal advice of any sort. Views contained in this, are personal with interpretive value of the author and teams assisting the author. Readers are encouraged not to rely solely on these contents before making any decision.
[1] Natsuko Segawa, Security Law Threatens Hong Kong’s Arbitration and Trade Hub Status, Nikkei Asian Review, https://asia.nikkei.com/Economy/Security-law-threatens-Hong-Kong-s-arbitration-and-trade-hub-status
[2] World Economic Forum’s 2019 Competitive Index http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf
[3] Peter Yuen, Helen H. Shi, Damien McDonald, Ola Boltenko, Matthew Townsend, Hong Kong and Mainland China agree upon Bilateral Agreement Regarding Interium Measures for Arbitration, Kluwer Arbitration, http://arbitrationblog.kluwerarbitration.com/2019/04/02/hong-kong-and-mainland-china-agree-upon-bilateral-arrangement-regarding-interim-measures-for-arbitration/?doing_wp_cron=1595403312.0969669818878173828125
[4] S Alison Tudor & Chad Bray, What HSBC and Cathay Pacific’s bow to Beijing on Hong Kong National Security Law Tells Investors about Management in Political Crises, South China Morning Post, https://www.scmp.com/business/companies/article/3088056/what-hsbc-and-cathay-pacifics-bow-beijing-hong-kong-national
[5] Caroline Simpson, Hong Kong’s National Security Law has Left Lawyers Uneasy, Law 360, https://www.law360.com/articles/1281358/hong-kong-s-national-security-law-has-left-lawyers-uneasy
[6] Gary L. Benton, Whispered Conversations Hong Kong v Singapore, Kluwer Arbitration, http://arbitrationblog.kluwerarbitration.com/2019/01/02/whispered-conversation-hong-kong-v-singapore/?doing_wp_cron=1595418724.3977930545806884765625
[7] Sumeet Chatterjee & Lawrence White, HSBC and StanChart back China Security Law for Hong Kong, Reuters, https://www.reuters.com/article/hongkong-protests-hsbc-hldg/update-5-hsbc-and-stanchart-back-china-security-law-for-hong-kong-idUSL8N2DG42K
[8]S Alison Tudor & Chad Bray, What HSBC and Cathay Pacific’s bow to Beijing on Hong Kong National Security Law Tells Investors about Management in Political Crises, South China Morning Post, https://www.scmp.com/business/companies/article/3088056/what-hsbc-and-cathay-pacifics-bow-beijing-hong-kong-national
[9] https://www.bloombergquint.com/onweb/hong-kong-is-losing-to-singapore-as-a-venue-for-arbitration
[10] https://edition.cnn.com/2020/07/09/asia/australia-hong-kong-extradition-intl-hnk/index.html
[11] https://www.bloombergquint.com/technology/tech-firms-begin-to-abandon-hong-kong-because-of-security-law
[12] Anna Zhang, Hong Kong’s Shaky Standing as a Financial Centre is Giving Rise to Singapore, Law.com, https://www.law.com/americanlawyer/2020/06/30/hong-kongs-shaky-standing-as-a-financial-center-is-giving-rise-to-singapore-405-61343/
[13] Wei Ming Tan, Shriram Jayakumar & Jolyn Khoo, Costs and Duration: A Comparison of HKIAC, LCIA, SCC and SIAC, Singapore International Arbitration Blog, https://singaporeinternationalarbitration.com/2018/03/13/costs-and-duration-a-comparison-of-the-hkiac-lcia-scc-and-siac-studies/