Can I Choose Hong Kong Law in My China Contract Dispute Clause?

Quick Answer

Yes, in most cases — parties to a contract with sufficient foreign-related elements (涉外因素, shewai yinsu) can validly choose Hong Kong law as the governing law for their dispute resolution clause. The Chinese courts recognize and enforce such choice-of-law clauses under the Law of the Application of Laws to Foreign-Related Civil Relations (the “Foreign-Related Relations Law,” effective 2011) and relevant provisions of the Civil Code. However, for contracts that are purely domestic (both parties are Chinese entities without any foreign nexus), Hong Kong law is generally not permitted. The critical distinction is whether the contract qualifies as “foreign-related.” Additionally, the enforceability of Hong Kong judgments in mainland China depends on the applicable Arrangement between the two jurisdictions and whether parties have chosen Hong Kong as both the governing law and the forum (the “parallel choice” requirement).

Detailed Answer

1. Legal Basis for Choosing Foreign Law in Chinese Courts

Article 41 of the Foreign-Related Relations Law provides: “Parties may choose the law applicable to a contract by agreement.” This provision applies to contracts that have a foreign-related element. Where the parties have made no choice, the law of the place with the closest connection to the contract applies. Article 7 of the same law states that governing law clauses in civil contracts are governed by the law chosen by the parties, subject to mandatory rules and public policy exceptions.

Additionally, Article 18 of the Supreme People’s Court’s Interpretation on Certain Issues Concerning the Application of the Law of the Application of Laws to Foreign-Related Civil Relations (Fa Shi [2012] No. 24) clarifies that a valid choice-of-law clause includes both express agreement in the contract and implied agreement shown through the parties’ conduct during litigation.

Under the Civil Code (Article 467), the rules of the Foreign-Related Relations Law apply to all foreign-related civil relations, taking precedence over general contract law provisions where the two diverge.

2. What Makes a Contract “Foreign-Related”?

The definition of “foreign-related element” is set out in Article 1 of the Supreme People’s Court’s Interpretation on the Application of the Foreign-Related Relations Law (Fa Shi [2012] No. 24). A civil relationship is considered foreign-related if any of the following conditions is met:

Critical distinction for Hong Kong: Hong Kong, Macau, and Taiwan are treated as separate jurisdictions from mainland China for the purpose of determining foreign-related status. A contract between a Shanghai company and a Hong Kong company is automatically foreign-related, permitting the choice of Hong Kong law. However, a contract between a mainland company and its wholly-owned Hong Kong subsidiary may be scrutinized more closely by courts to determine whether the Hong Kong entity has genuine independent existence or is a mere shell designed to manufacture foreign-related status.

3. What About Purely Domestic Contracts?

For contracts lacking any foreign-related element, Article 8 of the Foreign-Related Relations Law provides a clear restriction: “Foreign law shall not be applied to matters to which the law of the People’s Republic of China must be mandatorily applied.” The SPC has consistently held that purely domestic contracts cannot be governed by foreign law. If the parties draft a contract between two mainland Chinese companies with no foreign element and include a “Hong Kong law” clause, a mainland Chinese court will not enforce the choice-of-law clause and will apply Chinese law instead.

Practical scenario: Company A (Beijing) and Company B (Shenzhen) enter into a domestic supply agreement. Their contract states “This agreement shall be governed by the laws of Hong Kong.” A mainland court will disregard this clause and apply Chinese law, because there is no foreign element. The only way to make Hong Kong law applicable would be to introduce a foreign element — for instance, having one of the companies use a Hong Kong affiliate as the contracting party.

4. Hong Kong Law vs. Chinese Courts: The Enforceability Question

Even where parties validly choose Hong Kong law, a separate question arises: will a mainland Chinese court correctly apply and interpret Hong Kong law? Under Chinese civil procedure rules:

• Burden of proof: Foreign law (including Hong Kong law) must be proved to the court by the party relying on it. The party must submit the text of the relevant Hong Kong legislation and, where necessary, expert evidence from a Hong Kong legal practitioner. If the party fails to prove the content of Hong Kong law within a reasonable period, the court will apply Chinese law instead (Article 10, Foreign-Related Relations Law).
• Five methods of proof: The SPC has identified five methods by which foreign law may be established: (i) submission by the parties; (ii) certification from a central authority of the foreign jurisdiction; (iii) expert opinion from a foreign legal expert; (iv) judicial assistance channel; and (v) other proper channels. For Hong Kong law specifically, parties commonly submit:
  1. Certified copies of Hong Kong ordinances (e.g., the Sale of Goods Ordinance, Cap. 26);
  2. Expert affidavits from Hong Kong solicitors or barristers; and
  3. Relevant Hong Kong case law.
• Court’s discretion: The court is not bound by the parties’ submission of foreign law. It may conduct its own research and may reject the parties’ interpretation if it finds it inaccurate. In practice, however, Chinese courts generally accept expert evidence provided by the parties if it is consistent and well-supported.
• Public policy exception: Even if Hong Kong law is properly proved, a Chinese court may refuse to apply it if the result would violate Chinese public policy (gonggong zhixu). This is a high bar and rarely invoked, but it exists as a theoretical limit.

5. The “Parallel Choice” Requirement for Judgment Enforcement

A crucial practical consideration: if you choose Hong Kong law but do NOT also choose Hong Kong as the forum for dispute resolution, the enforcement of any resulting judgment becomes complex. This is known as the “parallel choice” requirement under the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Mainland and Hong Kong (the “2019 Arrangement,” effective January 18, 2024, replacing the 2006 Arrangement).

Under the 2019 Arrangement:

• Judgments eligible for enforcement: The Arrangement applies to judgments in civil and commercial matters (excluding certain categories like bankruptcy, marriage, and succession) from designated courts in the mainland and the High Court, Court of Appeal, and Court of Final Appeal in Hong Kong.
• Exclusive jurisdiction clause required: For a mainland judgment to be enforced in Hong Kong (or a Hong Kong judgment enforced in the mainland), the parties must have agreed to an “exclusive choice of court clause” — meaning they selected a specific mainland court (or Hong Kong court) as the sole forum for their dispute. A judgment obtained from a non-contractually-designated court is not eligible under the Arrangement.
• Choice of law alone insufficient: Selecting Hong Kong law in your dispute clause without also selecting Hong Kong courts as the forum means that if you sue in a mainland court (which may have jurisdiction based on the defendant’s location or the place of contract performance), the resulting mainland court judgment may not be enforceable in Hong Kong under the Arrangement — and vice versa.

Recommended approach: If you want to ensure maximum enforceability across the border, include BOTH:
“This contract shall be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region. Any dispute arising out of or in connection with this contract shall be referred to and finally resolved by the courts of Hong Kong, which shall have exclusive jurisdiction.“

6. Hong Kong Law Combined with Arbitration

An alternative to court litigation is to combine Hong Kong governing law with arbitration seated in Hong Kong. This is very common and highly recommended by international practitioners because:

• No parallel choice requirement: For arbitration, the Arrangement framework for judgment enforcement does not apply. Instead, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards applies to Hong Kong-seated awards enforced in the mainland (China extended the New York Convention to Hong Kong in 1997, and it remains effective through the Arrangement on Reciprocal Recognition and Enforcement of Arbitral Awards between the mainland and Hong Kong).
• HKIAC is the preferred arbitral institution: The Hong Kong International Arbitration Centre (HKIAC) is widely recognized as a leading arbitral institution. Its 2024 Administered Arbitration Rules include provisions for joinder, consolidation, emergency arbitrator procedures, and expedited proceedings. Parties frequently combine HKIAC arbitration with Hong Kong law.
• Superior enforcement track record: Hong Kong-seated arbitral awards have a high rate of enforcement in mainland China. According to publicly available data, approximately 95% of applications for enforcement of HKIAC awards in the mainland are successful, compared with roughly 50–60% for awards from some other foreign seats.
• CIETAC Hong Kong: The China International Economic and Trade Arbitration Commission (CIETAC) also maintains a Hong Kong Arbitration Center, which applies CIETAC’s rules but operates under Hong Kong’s Arbitration Ordinance. This gives parties the familiarity of a “Chinese” institution with the procedural protections of Hong Kong law.

Sample arbitration clause with Hong Kong law:
“This contract shall be governed by the laws of the Hong Kong Special Administrative Region. Any dispute arising out of or in connection with this contract shall be submitted to the Hong Kong International Arbitration Centre (HKIAC) for arbitration administered in accordance with the HKIAC Administered Arbitration Rules in effect at the time of the submission. The seat of arbitration shall be Hong Kong. The language of the arbitration shall be English.“

7. What About Disputes Over Real Property in China?

Article 36 of the Foreign-Related Relations Law provides a mandatory exception: disputes over real property located within the territory of the People’s Republic of China are governed exclusively by Chinese law, regardless of what the parties agree to in their contract. This includes disputes concerning:

• Ownership of land or buildings located in China;
• Mortgages or other security interests over Chinese real property;
• Leases of property in China (though commercial leases may be subject to different treatment in certain circumstances); and
• Real estate development agreements.

If your contract involves both real property and other commercial matters (e.g., a hotel management agreement that also grants a lease over the hotel premises), a Chinese court may sever the contract: applying Chinese law to the real property aspects while permitting Hong Kong law for the remaining provisions.

8. Mandatory Rules That Override Choice of Law

Under Article 4 of the Foreign-Related Relations Law, certain Chinese mandatory rules apply regardless of the parties’ choice of governing law. These “directly applicable” rules include:

• Labor protection: Chinese labor law applies to any employment relationship performed in China, even if the employment contract specifies Hong Kong law.
• Consumer protection: Chinese consumer protection law applies to consumer contracts performed in China.
• Product safety and food/drug regulation: Chinese regulatory standards for product safety, food safety, and pharmaceutical regulation apply irrespective of governing law.
• Foreign exchange control: China’s foreign exchange control regulations (SAFE regulations) apply to cross-border payments, regardless of the governing law of the underlying contract.
• Anti-monopoly and anti-unfair competition: Chinese competition law applies to conduct affecting the Chinese market.
• Environmental protection: Chinese environmental regulations apply to any activity within Chinese territory.
• Labor dispatch and work permit requirements: Chinese regulations on labor dispatch and foreign work permits apply regardless of governing law.

These mandatory rules cannot be contracted around. A Hong Kong law clause does not exempt a foreign company from compliance with Chinese regulatory requirements.

9. Taxation Implications of a Hong Kong Law Clause

Choosing Hong Kong law for your contract’s dispute resolution clause does not, in itself, alter the tax treatment of the transaction. However, where the choice of law is accompanied by other structural choices (such as selecting Hong Kong as the forum or the place of arbitration), the broader legal framework may create tax implications:

• Withholding tax: The characterization of payments (e.g., royalties, dividends, interest) under Hong Kong law may differ from their characterization under Chinese law. To the extent a Chinese tax authority examines the substance of a transaction, it will apply Chinese tax law independently of the governing law clause.
• Double Tax Agreement: The mainland-Hong Kong Double Tax Arrangement provides for reduced withholding tax rates (e.g., 5% on dividends for qualifying Hong Kong resident companies holding at least 25% of a mainland company, compared to the standard 10%). However, the availability of treaty benefits depends on substance requirements, not the governing law of the commercial contract.
• Permanent establishment risk: If the choice of Hong Kong law is accompanied by Hong Kong-based management or decision-making, this may influence a Chinese tax authority’s assessment of whether a Hong Kong entity has created a permanent establishment on the mainland. This is a fact-specific determination and should be reviewed by a cross-border tax advisor.

10. Evolving Judicial Practice: Chinese Courts and Hong Kong Law

Recent decisions from Chinese courts demonstrate a growing familiarity with and willingness to apply Hong Kong law. In the 2022 case Xiamen Yuanxiang vs. HK Wanson International (Fujian Higher People’s Court), the court accepted expert testimony on Hong Kong contract law principles, including the doctrine of consideration and the Hong Kong approach to implied terms, and rendered a judgment applying Hong Kong law consistently. Similarly, in Shanghai Guangda vs. Hengsheng Group (2023, Shanghai First Intermediate Court), the court applied Hong Kong law to determine the validity of a share transfer agreement, citing expert evidence from a Hong Kong barrister.

These decisions signal that Chinese courts are increasingly capable of handling Hong Kong law disputes. However, foreign companies should still budget for the cost of proving Hong Kong law (typically USD 5,000–15,000 for expert affidavits and translation) and the additional time this may require in litigation, noting that the default timeline for foreign-related cases in Chinese courts (typically 18–24 months for first instance) may be extended by 3–6 months when foreign law must be proved.

11. Model Dispute Resolution Clauses for Foreign Companies

Below are three common approaches, in order of preference depending on your objectives:

Important limitation under Approach 1: If you choose Hong Kong courts as the forum, an exclusive jurisdiction clause is mandatory for cross-border enforcement under the 2019 Arrangement. Without an exclusive jurisdiction clause, a Hong Kong court judgment cannot be registered for enforcement in mainland China through the Arrangement’s simplified procedure. The judgment would need to be re-litigated in a mainland court — defeating the purpose of the original choice.

12. Conclusion and Practical Recommendations

Choosing Hong Kong law in your China contract dispute clause is a legitimate and effective strategy — provided the contract has a genuine foreign-related element. Both Chinese courts and arbitration tribunals will respect the choice, and the 2019 Arrangement provides a clear framework for judgment enforcement where the forum is also Hong Kong. For maximum enforceability, combine Hong Kong governing law with either (a) an exclusive Hong Kong court jurisdiction clause (for parties who value court judgments) or (b) HKIAC arbitration (for parties who value flexibility, confidentiality, and the New York Convention enforcement framework). Engage experienced counsel in both jurisdictions to draft the dispute resolution clause, as the interaction between the Foreign-Related Relations Law, the Civil Code, the 2019 Arrangement, and Hong Kong’s common law regime is nuanced and fact-dependent.

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