Paris, 11 April 2019

Welcome and keynote remarks

Sarah Grimmer, Secretary General of HKIAC, opened the conference highlighting the high proportion of Chinese state-owned entities (SOEs) in HKIAC practice. Of the approximately 250 to 300 arbitrations handled by HKIAC annually, 40% typically involve mainland Chinese parties, of which roughly 10 to 15% are SOEs.1 HKIAC administered cases with Chinese SEOs involved the following sectors (in order of importance): maritime, trade, corporate, and (equally) construction, banking and finance, and professional services.

Alexis Mourre, President of the ICC Court of Arbitration, cited the presence of an ICC case management team in Hong Kong since 2008, as well as the establishment in 2018 of the ICC Belt & Road Commission, as evidence of the importance of Hong Kong and China to ICC practice, as well as to dispute resolution globally.

Teresa Cheng, Secretary of Justice of the HKSAR, gave the keynote address. She described Hong Kong as ‘Asia’s World City’2 and home to many Chinese SOEs. One milestone in Hong Kong’s relationship with Chinese SOEs was the first listing of a Chinese SOE, Tsingtao Beer, on the Hong Kong Stock Exchange in 1993.

In addition to the economic importance of Hong Kong and its business-friendly environment, Ms. Cheng stressed Hong Kong’s independent common law legal system. Hong Kong has a unique feature whereby esteemed judges from other common-law jurisdictions sit as non-permanent judges on its highest court, and courts at all levels enjoy a global reputation for judicial independence.3 Also noted were Hong Kong’s arbitration law based on the 2006 UNCITRAL Model Law, as well as cutting edge legislation allowing for third-party funding as well the arbitrability of intellectual property disputes.4

Hong Kong enjoys a privileged position within the framework of China’s ‘One Country, Two Systems’ policy. A prominent example is the April 2019 arrangement, announced only a week prior to the conference, in which the People’s Supreme Court of China will enforce interim measures made by arbitral tribunals seated in Hong Kong, where the arbitration is administered by an arbitral institution established or headquartered in Hong Kong with its principal place of management located in Hong Kong.5

Understanding and doing business with Chinese SOEs

The first panel addressed Chinese SOEs and their relationship with the Chinese state. The panel was composed of moderator Jane Willems (Independent Arbitrator and Associate Professor at Tsinghua Law School, Beijing), Adrian Lai (Barrister at De Voeux Chambers, Hong Kong), Cathy Liu (General Counsel at COFCO International, Geneva; Alternate Member, ICC International Court of Arbitration) and Mariana Zhong (National Partner, Dechert LLP, Beijing).

Discussion centred on understanding Chinese SOEs – commercial enterprises operating in many different sectors where the Chinese government is a part or sole shareholder. Although SOEs are not legally defined under PRC law, Chinese SOEs are monitored by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), an institution directly under the management of the PRC State Council which performs supervisory responsibilities as mandated from time to time by the Central Committee of the Chinese Communist Party.6 With respect to centrally administered SOEs, SASAC plays a supervisory role which includes appointing and removing management, as well as promulgating regulations. SASAC may also monitor arbitrations involving Chinese SOEs where SASAC has certified the amount in dispute to be at least USD 7 million.

Mr Lai focused on the difference between Chinese state institutions, which cannot sell assets without state approval, and Chinese SOEs, which enjoy operational autonomy. Mr Lai highlighted the consistent position of the Chinese government in speeches and statements over the past 20 years that SOEs are independent entities. Such legal characterization of Chinese SOEs as non-state actors has found recent approval in the 2017 Hong Kong court decision TNB Fuel Services SDN BHD v. China National Coal Group Corporation.7 The court found that an arbitration award could be enforced against a Chinese SOE since it was not a state entity, relying in part on the PRC’s statement that:

According to the relevant legal regulations of our country, a state-owned enterprise is an independent legal entity, which carries out activities of production and operation on its own, independently assumes legal liabilities, and there is no special legal person status or legal interests superior to other enterprises…save for extremely extraordinary circumstances where the conduct was performed on behalf of the state via appropriate authorization, etc., the state-owned enterprises of our country when carrying out commercial activities shall not be deemed as a part of the Central Government, and shall not be deemed as a body performing functions on behalf of the Central Government.8

Drawing on her experience working for COFCO, a Chinese SOE involved in agri-business and real estate with some USD 69 billion in annual revenue, Ms. Liu confirmed that indeed Chinese SOEs in practice have no privileges and act as other market players do. For instance, although COFCO has had a role in state policies such as ensuring food security for China, it has operated with notable transparency since participating in the global market in the 1990s, has increasingly opened up to private capital, and has achieved a personnel structure that is almost entirely market-based.

Ms Zhong, a Chinese disputes practitioner from the Mainland, discussed some of the special considerations necessary when dealing with Chinese SOEs, including understanding the various layers of decision making. Preserving harmony in relations with SOEs is an important consideration, and it was noted that the introduction into the relationship of a lawyer’s demand letter could jeopardize the relationship.

Questions from the floor enquired into what might constitute the ‘extraordinary circumstances’ alluded to in the TNB Fuel Services case by which a Chinese SOE would become a state actor. Participants also sought clarification on the legal and cultural background of the lawyers who typically preside over transactions involving Chinese SOEs.

The panel noted that they were unaware of an instance in which a Chinese SOE had been found to be acting as the Chinese state. Although a particular Chinese legal culture is not typically imposed on foreign counterparties, dispute resolution clauses with Chinese SOEs often specify Asian venues, and Chinese speaking lawyers frequently take the lead in negotiations even when foreign parties are involved. The panel painted an overall picture of Chinese SOEs as comparable to Chinese privately owned enterprises.

Dispute resolution involving Chinese SOEs

The second panel discussed features particular to disputes involving Chinese SOEs. The panel was composed of moderator Peter Thorp (International Arbitrator, Paris), Peter Yuen (Partner, Fangda Partners, Hong Kong), Michelle Li (Partner, Herbert Smith Freehills, Shanghai), and Yas Banifatemi (Partner, Shearman & Sterling, Paris).

Ms Li discussed counsel’s relationship with Chinese SOEs as clients or counterparties in disputes. She explained that it was important to understand any non-monetary objectives Chinese SOEs might have. With respect to investments abroad, Chinese SOEs choose what Ms Li described as the world’s major business ‘hubs’ closest to where the investment is located as dispute resolution venues. Venues in the host country are to be avoided, while arbitration seated in China is sometimes a deal-breaker.

Mr Yuen noted that it would be unfair to generalize disputes with Chinese SOEs and explained that there was nothing cynical or ‘evil’ about Chinese SOEs – they had no nefarious hidden agenda other than acting as profit-driven commercial entities. Particular concerns to Chinese SOEs, such as protection of state secrets, could be overcome through methods like selective disclosure. Mr Thorp echoed Mr Yuen’s comments, noting that the general perception of Chinese SOEs has changed from even ten years ago.

Ms Banifatemi discussed the Broches test, the functional test formulated in 1972 by Aron Broches, the first Secretary-General of ICSID: for the purposes of the ICSID Convention, a state-owned company may still qualify as a non-state claimant or respondent ‘unless it is acting as an agent for the government or is discharging an essentially governmental function’.

Ms Banifatemi described the application of the Broches test in the ICSID case Ceskoslovenska Obchodini Banka, A.S. v. The Slovak Republic,9 and its subsequent application in the ICSID case Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen (which cited Ceskoslovenska), where a Chinese SOE had been found by an ICSID tribunal not to be acting as a state entity.10 She also touched upon China Heilongjiang International Economic & Technical Cooperative Corp. v. Mongolia, a UNCITRAL case at the PCA in which she acted as arbitrator that also addressed whether an SOE was an agent of the state.11

Ms Banifatemi presented a detailed world map of Chinese Bilateral Investment Treaties she had compiled showing their evolution over time. While earlier BITs generally provided limited protection to expropriation, later treaties tended to offer broad protection under fair and equitable treatment, and more recent treaties have adopted what might be called a balanced approach.

The conference left participants with the impression that resolving disputes with Chinese SOEs may be as varied as the Chinese SOE’s themselves and that there is a need for continued dialogue in light of the increased involvement of state-owned entities in the growing Belt & Road Initiative and other cross-border commercial and investment activity.

https://www.info.gov.hk/gia/general/201904/02/P2019040200782.htm; https://hkiac.eventbank.com/event/breaking-news-prc-courts-offer-interim-measures-for-hong-kong-arbitration-13139/


1
HKIAC publishes yearly statistics available at https://www.hkiac.org/about-us/statistics.

2
https://www.brandhk.gov.hk/html/en/

3
https://www.legalhub.gov.hk/eng/hkls.html

4
https://www.doj.gov.hk/eng/public/arbitration.html

5
The April 2019 arrangement will be confirmed at a later date, along with a list of qualifying arbitral institutions.

6
See http://en.sasac.gov.cn/2018/07/17/c_7.htm for SASAC’s own description of its functions.

7
TNB Fuel Services SDN BHD v. China National Coal Group Corporation [2017] HKCFI 1016; [2017] 3 HKC 588; HCCT 23/2015 (8 June 2017) available at http://www.hklii.hk/eng/hk/cases/hkcfi/2017/1016.html.

8
Ibid, at 14.

9
https://www.italaw.com/cases/238

10
https://www.italaw.com/cases/5904

11
Award 30 June 2017, not public, https://www.italaw.com/cases/279.