HKIAC - is not a sanctions-neutral dispute resolution body

The Hong Kong International Arbitration Centre ("HKIAC") is one of the most reputable independent non-profit organizations in the Asian region, providing services in the field of international commercial arbitration.

After the events of 2022, HKIAC has become particularly popular among Western companies that have decided to leave the Russian market. In its recent decision, the Arbitration Court of St. Petersburg expressed doubts about the impartiality of HKIAC.

Background:

Starting from May 28, 2022, the German company Linde GmbH ("Linde") unilaterally terminated its obligations under the EPC contract for the construction of a gas processing plant in the Leningrad region ("Contract") with reference to EU sectoral sanctions. Despite the arbitration clause designating HKIAC as the place of arbitration, OAO "Ruskhimalyans" ("RusKhimAlliance"), the client under the Contract, filed a claim with the Arbitration Court of St. Petersburg, seeking compensation for damages amounting to 972 million euros and 7.6 billion rubles, as well as interest for the use of third-party funds amounting to 13.5 million euros and 117.5 million rubles.

Justification of the claim by RusChemAlliance:

Due to the sectoral sanctions imposed by the EU against RusChemAlliance, this dispute should be considered by the Russian Arbitration Court in accordance with Article 248.1 of the Russian Civil Procedure Code. It is not possible to rely on a fair and impartial resolution of the dispute in HKIAC for the following reasons:

• During the dispute resolution process, HKIAC will be bound by EU sanction regulations.
• HKIAC, due to the political and legal peculiarities of Hong Kong, is significantly influenced by unfriendly countries.
• Linde will be placed in a preferential reputational position compared to RusChemAlliance.
• RusChemAlliance will not be able to attract proper representation due to reputational and financial reasons.

Decision of the Arbitration Court of St. Petersburg:

The Arbitration Court of St. Petersburg has accepted the claim for consideration in accordance with Part 4 of Article 248.1 of the Russian Civil Procedure Code and ruled that the dispute cannot be fairly and impartially resolved in HKIAC. In particular, the court referred to the fact that HKIAC is influenced by unfriendly countries such as the United Kingdom and the EU, as the legal system of Hong Kong is based on the Anglo-Saxon legal system, and British and European judges play an important role in the Hong Kong judicial system as part of the highest appellate court of Hong Kong.

The court also noted that the proceedings in Hong Kong and the proceedings in Russia have "different grounds and subjects," and therefore one proceeding is not a basis for the suspension of the other.

As mentioned before, HKIAC has been popular for various disputes involving the withdrawal of foreign companies from Russia. The absence of sanctions from Hong Kong had given many the confidence that HKIAC is a sanction-neutral body for dispute resolution. However, with its decision, the Arbitration Court of St. Petersburg has indicated that this is not the case.

See the Decision of the Arbitration Court of St. Petersburg and the Leningrad Region dated June 8, 2023, in case No. A56-129797/2022.

Nadmitov, Ivanov & Partners Law Firm advises on sanctions and countersanctions, represents clients before international commercial arbitrations.