Why an HKD 83 Million "Loan" Was Held to Fall Within Arbitration: The Jurisdictional Trap in Cross-Border Construction Disputes
2026/10/14
An HKD 83 million payment—supported by
a loan agreement, bearing interest, and with a standalone repayment mechanism.
The company confidently commenced proceedings in the Mainland courts, only to
be told, "This is not for us to hear," and that the dispute could
only be resolved by arbitration in Hong Kong.
This was not the court shirking its
responsibility, but a classic example of "piercing-style review."
I. Does Calling It a "Loan"
Necessarily Make It a Loan?
In a cross-border construction project,
funds passed between the main contractor and the subcontractor in the course of
performance. The subcontractor claimed that this was an independent loan,
evidenced by a loan agreement setting out interest and repayment terms. The
main contractor, however, took the position that the funds were in substance an
advance payment for the works and should therefore be subject to the Hong Kong
arbitration clause in the subcontract.
The court ultimately sided with the
main contractor.
The reasoning was clear: in determining
the nature of a payment, one must look not merely at its label, but at where it
came from, why it was paid, and whether it is directly connected to the
underlying contract. So long as the funds arose in the course of contract
performance and were used to address construction funding difficulties and to
keep the project moving forward, even if a separate loan agreement was signed,
interest was stipulated, and a repayment mechanism was agreed, the dispute may
still be characterised as a dispute deriving from the construction contract and
thus fall within the scope of the original arbitration clause.
II. The Real Risk: You Think You Have
Changed Lanes, But You Are Still in the Same Place.
Many construction enterprises labour
under a misconception: that by signing a separate "loan agreement"
outside the main contract, they can circumvent the arbitration clause in the
main contract and litigate in a different forum.
The answer given by this case is
straightforward: that route is blocked.
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If the purpose of the funds, the source
of repayment, and the payment background remain closely tied to performance of
the works, the court is very likely to find that the "loan" is
dependent on the underlying construction contract. In that event, not only may
the jurisdictional challenge fail, but the enterprise will also have to bear
the legal fees, travel expenses, and time costs of cross-border arbitration,
which may amount to 10%–20% of the amount in dispute.
III. Where Do the Mainland Courts and
Hong Kong Arbitration Differ?
Mainland courts tend towards
"piercing-style review": they first examine the relationship between
the funds and the underlying contract before deciding on jurisdiction. Hong
Kong arbitration, by contrast, places greater emphasis on party autonomy; so
long as the arbitration clause is valid, the matter will generally proceed in
accordance with the agreement.
In addition, there are marked
differences between the two jurisdictions in areas such as the admission of
evidence and the threshold for initiating cost assessment. Hong Kong
arbitration is more receptive to overseas evidence and its procedure is more flexible;
Mainland arbitration, meanwhile, is increasingly cautious about initiating
construction cost assessment, emphasising necessity and feasibility.
IV. Lawyers' Recommendations: Three
Firewalls for Cross-Border Construction Contracts
First, segregate the funding
arrangements.
Funds passing outside the underlying contract should be documented under a
separate loan contract, expressly stating that it is independent of the
construction subcontract, and providing for a separate dispute resolution
clause.
Second, segregate the payment route.
The purpose of the loan and the flow of funds should not be directly linked to
construction progress or to emergency payments for workers' wages, so as to
avoid characterisation as an advance payment for the works.
Third, anticipate the dispute
resolution mechanism.
At the contract negotiation stage, it must be made clear: litigation or
arbitration? Mainland courts or Hong Kong arbitration? Do not wait until a
dispute has arisen before contesting jurisdiction.
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V. The Role of Lawyers: Do Not Wait
Until You Are Struck Out on Jurisdiction Before Seeking Professional Support
Cross-border construction disputes
often span contract law, construction law, arbitration law, and the rules of
evidence. An unclear contractual provision may result in the entire dispute
resolution pathway being overturned. The value of a lawyer lies not only in
post-dispute representation, but also in designing the contract structure,
reviewing payment documents, and anticipating jurisdictional risks in advance.
The lesson of HKD 83 million tells us
this: in cross-border construction, what ultimately determines the outcome is
often not how well drafted the loan agreement is, but whether the relationship
between the funds and the contract has been clearly segregated in advance.
Do not let a "loan agreement"
take you back to the arbitration tribunal you were trying to escape.