In a period of great uncertainty for globalization, where markets compete and industries can readily locate themselves, a new struggle is now underway across the emerging markets of the global East. Which city should host and preside over arbitration proceedings, when clashes between corporations play out, when states quarrel with investors, and when businesses fall out with their backers?
For decades, Hong Kong has retained a prime position with its Hong Kong International Arbitration Center (HKIAC), founded in 1985. Since then, HKIAC has handled over 9,000 arbitration cases in a trade that has brought the jurisdiction prestige, offered its legal industry an endless boon, and done much to cement Hong Kong’s role as the primary financial center of the eastern hemisphere.
In recent years though, some are questioning the continuing independence of Hong Kong’s domestic judiciary. Although the domestic system is theoretically insulated from HKIAC, the perceived interference from Beijing is spooking investors, and putting the city’s primacy as an arbitration forum into doubt, rightly or wrongly. Sensing an opening, other emerging markets centers are seeking to capitalize and maneuver themselves into more prominent positions. Three cities – Dubai in the United Arab Emirates, Nur-Sultan in Kazakhstan and the city-state of Singapore – stand ready to compete.
The struggle with any arbitration center is to reconcile unimpeachable internal processes with a local legal system which is more often than not prejudiced toward the country’s economic elite. Dubai, for example, faced difficulties after 2004, when its Supreme Court overturned a decision by the newly founded arbitration court set up by the Dubai International Financial Center (DIFC). The original decision by the DIFC court, which used English common law as its basis, had seen the state-owned Dubai Aviation Corporation ordered to pay $25 million to American engineering firm Bechtel. Local Emirati judges then rejected the validity of the ruling on technical grounds, invalidating its enforcement. The uproar was a disaster for the reputation of the fledgling DIFC.
In 2008, the Dubai International Finance Center then partnered with the respected London Court of International Arbitration to form a new arbitration forum — known as DIFC-LCIA. Over the years, DIFC-LCIA has continued to be accused of lacking impartiality, despite a host of British and other expert judges and arbitrators being involved to try and erase these concerns.
Nur-Sultan, the capital of Kazakhstan, faces many of the same challenges around its Astana International Finance Center (AIFC), launched in 2018 – now employing many of the same British consultants who had helped set up the DIFC-LCIA a decade earlier. As in Dubai, the Kazakh authorities seek to distinguish the AIFC clearly from a domestic court system which is not always positively viewed by outside investors, and show that when the government itself is in court, it respects the decisions made. This is unfortunately not always the case.
More than $6 billion of state assets have been frozen in several European jurisdictions as a result of Kazakhstan’s refusal to execute a Swedish arbitration court decision delivered under the Energy Charter Treaty. The dispute, known as Tristangate (from the company Tristan Oil that was forcibly nationalized in 2010, and, as emphasized by the Swedish, American and other courts, illegally so) is seen by many as proof that the Kazakh authorities are not fully committed to the international rule of law and that the AIFC might be doomed to failure.
The remaining city angling to take on Hong Kong’s crown is Singapore. Like Dubai, the small city-state is extremely well integrated into the global financial scene, and is a hub for a number of key industries for arbitration, notably in the maritime sector. Although broadly following a national governance model like those in Dubai or Kazakhstan — concentrated around an elite — Singapore maintains a highly professionalized and independent judiciary.
An arbitration center rarely sits in a vacuum. The host government’s attitude toward international law needs to be taken into account, alongside the quality and future independence of its domestic judiciary, and willingness to deliver enforcement on decisions – even if it negatively affects the host government. Hong Kong and Singapore have done well in attracting international arbitrations precisely because they have understood that a neutral arbitration setting is no replacement for a neutral wider court system (London has been successful for much the same reason).
Emerging markets toying with the idea of developing their own arbitration forums should consider those factors all the more carefully. Asian cities should see a great opportunity to take market share from Hong Kong’s current positioning – and with their 9,000 cases to date there is a substantial prize. This can only be achieved with consideration for what goes on within the arbitration courts, as well as what occurs outside them.
Joël Ruet is an economist with the CNRS (France) and chairman of The Bridge Tank, a G-20-affiliated think tank.