Arbitration is the preferred method of dispute resolution for foreign investors in China. For a variety of reasons, foreign parties also prefer to arbitrate outside China.

However, the first question confronting any party wishing to arbitrate China-related disputes outside China is does Chinese law permit the parties to do so? The answer, at least for now, is a qualified Yes.

Mainland Chinese law permits the parties to a “foreign-related” contract to choose their method of resolving disputes. “Foreign-related” cases are those involving at least one foreign party or, if they are both Chinese parties, cases where either the facts establishing the legal relationship between the parties occurred in a foreign country or the subject matter in dispute is in a foreign country.

This seems straightforward enough. However, foreign investors investing in China through China-incorporated subsidiaries sometimes do not realise that disputes involving these subsidiaries on the one hand, and pure Chinese domestic entities on the other, are “domestic” disputes, meaning that the parties must resolve their disputes within China, at least if they want their awards to be enforceable there.

But what about arbitrating in Hong Kong? Is Hong Kong arbitration “foreign” or “domestic” for this purpose? Since July 1997, Hong Kong has been part of China and therefore arbitrations in Hong Kong ought not to be regarded as “foreign” arbitrations.

How the Chinese courts will deal with applications to enforce such awards remains unclear, althoughI am not aware of any courts in China having refused to enforce a Hong Kong award on this basis.

What is true, however, is that an increasing number of “domestic” contracts under Chinese law (where both parties are Chinese domestic entities) are providing for arbitration in Hong Kong.

For example, the Hong Kong International Arbitration Centre (HKIAC) was involved in 394 cases during 2006. Of those, 18 involved pure mainland parties whose arbitration clause specified Hong Kong as the place of arbitration.

This compares with 15 cases in 2005, 20 in 2004, 14 in 2003, 13 in 2002, seven in 2001 and five in 2000.

The trend contrasts with that of the Stockholm Chamber of Commerce, the traditional choice for conducting China-related disputes, where the number of China-related cases has fallen – from 15 in 2002 to five in 2006.

So why is Hong Kong gaining ground as a centre for arbitration for mainland contracts, even though its precise status is uncertain under mainland law?

One important factor is that Hong Kong has arbitration legislation that reflects best international arbitral practice. Hong Kong and Beijing have also agreed on a mechanism to allow reciprocal enforcement of arbitral awards.

However, most practitioners would agree that the territory’s real advantage over Stockholm – and other European venues – is the perception that its arbitrators are more culturally attuned to mainland business practice, together with the advantage of relatively close proximity to the Chinese parties.

There is also a readily available pool of qualified arbitration practitioners and counsel who are culturally sensitive to the needs of Chinese clients. Hong Kong has established specialist arbitration judges, and this, coupled with the pro-arbitration attitude of the courts, will ensure greater certainty and better judicial decisions that help facilitate the arbitration process.

Given these advantages, there is every reason to believe that Hong Kong will continue to see an increasing number of China-related arbitrations.

The writer is a partner in Freshfields Bruckhaus Deringer’s Hong Kong office