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Concerns About Contracts in Hong Kong After June 30, 1997

Spring 1997

China has become a major party in world trade, especially with the United States. The current debate over linking trade and human rights notwithstanding, China has become an important site for the production of industrial and consumer goods destined for export to the U.S. At the same time, China’s growing economy continues to be a focus for U.S. exports and foreign joint ventures. Prior to and concurrent with their ventures in China, many American businesses have developed significant trade relationships in Hong Kong based on a desire to trade with an economy and under business conditions not present in China. Thus, the impending transfer of control of Hong Kong from Great Britain to China may warrant reexamination of current and future contracts with governmental and private parties in Hong Kong.

ONE COUNTRY — TWO SYSTEMS

A little less than 100 years ago, Great Britain entered into a "treaty" with the Government of China permitting it to lease, for 99 years, the vast majority of the land and water areas we know as the colony of Hong Kong. At midnight on June 30, 1997, the lease will end, and Hong Kong and the "New Territories" will be returned to the current Chinese government - The People’s Republic of China ["China"]. [Macao, a Portuguese colony near Hong Kong will return to the control of China in 1999.] The transfer of ownership will have profound political and economic effects on the people of Hong Kong. In addition, it will markedly change the nature of business dealings by foreigners with the Hong Kong government and private parties in Hong Kong. The business climate will shift from the relatively laissez-faire nature of colonial Hong Kong to a new, powerful, and stratified bureaucracy to be installed for the supervision of the new Hong Kong Special Administrative Region ("HKSAR").

China has signaled numerous changes that may significantly effect the legal status of parties trading in the new Hong Kong. In 1984, Great Britain and China entered into a Joint Declaration determining the status and operation of Hong Kong following its return to China. Among other things, China agreed in the Joint Declaration to maintain Hong Kong as a quasi-independent entity ("one country - two systems") for at least 50 years after its return to Chinese control and to establish a set of principles for the operation of Hong Kong to be known as the "Basic Law." In 1990, the Basic Law was established. In the Basic Law, China committed to a policy that the HKSAR will have "independent" executive, legislative and judicial power. Despite this commitment, China already has orchestrated the placement of its representatives in the executive and legislative branches of the HKSAR. Clearly, the values and policies of China will be significant in the operation of post-colonial Hong Kong. Further, although the 1984 Joint Declaration specified that the HKSAR courts are to be independent and possess a power of final adjudication (a High Court for the resolution of litigation within the HKSAR already has been established), it is unclear what relationship will develop between Chinese legal institutions and the HKSAR as well as the degree to which the values and goals of Chinese law will operate in the HKSAR. Therefore, despite China’s commitments under the Joint Declaration and the Basic Law, the rocky road of diplomatic and trade relations between western countries (particularly Great Britain and the United States) and China may set the stage for serious legal problems for businesses trading in post colonial Hong Kong.

China has become a major party in world trade, especially with the United States. The current debate over linking trade and human rights notwithstanding, China has become an important site for the production of industrial and consumer goods destined for export to the U.S. At the same time, China’s growing economy continues to be a focus for U.S. exports and foreign joint ventures. Prior to and concurrent with their ventures in China, many American businesses have developed significant trade relationships in Hong Kong based on a desire to trade with an economy and under business conditions not present in China. Thus, the impending transfer of control of Hong Kong from Great Britain to China may warrant reexamination of current and future contracts with governmental and private parties in Hong Kong.

ONE COUNTRY — TWO SYSTEMS

A little less than 100 years ago, Great Britain entered into a "treaty" with the Government of China permitting it to lease, for 99 years, the vast majority of the land and water areas we know as the colony of Hong Kong. At midnight on June 30, 1997, the lease will end, and Hong Kong and the "New Territories" will be returned to the current Chinese government - The People’s Republic of China ["China"]. [Macao, a Portuguese colony near Hong Kong will return to the control of China in 1999.] The transfer of ownership will have profound political and economic effects on the people of Hong Kong. In addition, it will markedly change the nature of business dealings by foreigners with the Hong Kong government and private parties in Hong Kong. The business climate will shift from the relatively laissez-faire nature of colonial Hong Kong to a new, powerful, and stratified bureaucracy to be installed for the supervision of the new Hong Kong Special Administrative Region ("HKSAR").

China has signaled numerous changes that may significantly effect the legal status of parties trading in the new Hong Kong. In 1984, Great Britain and China entered into a Joint Declaration determining the status and operation of Hong Kong following its return to China. Among other things, China agreed in the Joint Declaration to maintain Hong Kong as a quasi-independent entity ("one country - two systems") for at least 50 years after its return to Chinese control and to establish a set of principles for the operation of Hong Kong to be known as the "Basic Law." In 1990, the Basic Law was established. In the Basic Law, China committed to a policy that the HKSAR will have "independent" executive, legislative and judicial power. Despite this commitment, China already has orchestrated the placement of its representatives in the executive and legislative branches of the HKSAR. Clearly, the values and policies of China will be significant in the operation of post-colonial Hong Kong. Further, although the 1984 Joint Declaration specified that the HKSAR courts are to be independent and possess a power of final adjudication (a High Court for the resolution of litigation within the HKSAR already has been established), it is unclear what relationship will develop between Chinese legal institutions and the HKSAR as well as the degree to which the values and goals of Chinese law will operate in the HKSAR. Therefore, despite China’s commitments under the Joint Declaration and the Basic Law, the rocky road of diplomatic and trade relations between western countries (particularly Great Britain and the United States) and China may set the stage for serious legal problems for businesses trading in post colonial Hong Kong.

EFFECT ON CONTRACTUAL RELATIONS

Both public and private contractual relationships may be affected by the transfer of power over Hong Kong to China. First, the Chinese government has given inconsistent signals as to the legal standards to be applied after June 30 in honoring existing government contracts between the current Hong Kong government and foreign private parties. Despite China’s agreement in the Joint Declaration and Basic Law that it would follow the pre-existing law of Hong Kong, the Chinese government repeatedly has declared that upon the return of Hong Kong to China it has the right to terminate "unjust" and "unfair" contracts between foreign private parties and the Hong Kong colonial government. Although some of China’s statements limiting the application of "colonial law" to pre-existing contracts entered into by the Government of Hong Kong were made in the context of the airport and seaport disputes with Governor Chris Patten (the last British Governor of Hong Kong), many China experts remain concerned about China’s plans after June 30. Therefore, it is important to ascertain whether existing contracts with the Hong Kong government will be continued and under what conditions. While avoiding renegotiation of the terms and conditions of the contracts is advisable, foreign parties must contemplate the effect the change of government will have on contracts currently in force as well as those contracts contemplating fulfillment in the future.

Second, agreements between foreigners and private parties in Hong Kong may also be subject to a reconsideration of their terms. Historically, because the Hong Kong government has followed a relatively laissez-faire policy in transnational private dealings, foreigners have rarely considered the effect of government policy on their business relationships. Although very little has been said about "private - private" agreements, changes may be coming both directly and indirectly for existing and particularly future agreements between private parties in the HKSAR. Especially noteworthy are China’s references to its intent to apply the Basic Law as long as it ensures "justice" and "fairness." Thus, although China has a need for a stable business climate in Hong Kong, as exhibited in its recent pledge in conjunction with the Bank of Japan that they will act to keep the Hong Kong dollar stable after June 30, within the last several weeks, it also thwarted a new Hong Kong stock issue for political reasons through pressure on a leading Hong Kong investment banking concern. Further, China’s views of the Basic Law, its clear control over the New Hong Kong Parliament and Hong Kong’s executive branch, its desire to redistribute economic wealth and work throughout Greater China (despite Annex 1 to the Declaration which provides that China’s socialist system and socialist policies will not be practiced in the HKSAR for fifty years after 1997), and China’s need for hard currency, may lead it to redirect new contracts away from private parties within the HKSAR to sources within China. This practice may be utilized particularly if China continues to experience difficulties in joining the World Trade Organization.

Clearly, the existing Hong Kong contractual and commercial law, as well as the dispute resolution mechanisms (courts and arbitration), may be subject after June 30 to significant changes in practice, if not in written law, that may warrant reexamination of current and future contracts with parties in Hong Kong. Contractual solutions such as choice of foreign or international commercial law and the selection of foreign courts or international arbitration may provide greater security and stability. Parties currently trading in Hong Kong or contemplating business arrangements there should consider carefully the shifts in law that may significantly affect those arrangements.

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