Hong Kong’s New Arbitration Law Improves China Dispute Resolution

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Aug. 23 – Hong Kong has recently introduced a new aspect to its well-regarded arbitration laws, and has enacted the new Arbitration Ordinance, which came into effect on June 1, 2011. This legislation, based on the widely-used United Nations Commission on International Trade Law (UNCITRAL, or the Model Law), further underlines Hong Kong’s pro-arbitration stance and is an important tool when dealing with cross border cases that affect mainland China partners. Its stated intention is to facilitate the “fair and speedy” resolution of disputes, providing for maximum party autonomy and minimal court intervention.

Compared to the previous Arbitration Ordinance – Chapter 341 of the Laws of Hong Kong, the new Arbitration Ordinance cleared out the distinction between domestic and international arbitration and provides a unitary regime based on the UNCITRAL. In the meantime, in order to suit Hong Kong’s local requirements, a number of modifications and additions are also introduced to the internationally recognized arbitration framework. This approach aligns Hong Kong’s arbitration regime more closely to international practice.

The New Arbitration Ordinance has a similar structure with the Model Law, following the same order of articles and referring to each provision regarding its application or non-application. The framework that is more “internationalized” makes arbitration practices easier for arbitrators, especially those from outside Hong Kong more familiar with the Model Law.

Opt-in provisions
Providing a unified regime, the New Arbitration Ordinance still includes optional provisions in Schedule 2 for parties that wish to preserve features of the domestic regime. According to Schedule 2, parties can opt-in to some or all of the provisions governing domestic arbitrations under Chapter 341 Arbitration Ordinance. Since the addition of opt-in provisions was primarily a result of lobbying by the construction industry, it will likely be utilized by parties in the construction sector most of the time, but may also appeal to some other sectors.

The opt-in provisions include arbitration by a sole arbitrator in the absence of agreement, consolidation of arbitration, the decision of preliminary questions of law by the court, the challenging of an arbitral award on the grounds of serious irregularity and appeals on questions of law. For an arbitration agreement that stipulates itself to be treated as a “domestic arbitration,” Schedule 2 provisions will automatically apply for six years from June 1, 2011, according to the transitional arrangements.

Construction contracts
A “Construction Contract” in the new Ordinance – with its definition in line with the one in Section 2 (1) of the Construction Industry Council Ordinance – means a contract between an employer and a contractor under which the contractor carries out construction operations but does not include a contract of employment. In the case of construction contracts only, the Schedule 2 provisions will be deemed to apply to sub-contracts (of any tier) where the main contract results in an automatic opt-in to Schedule 2 except in the following cases:

  • If there is no arbitration agreement in the sub-contract;
  • If the parties agree or the arbitration agreement provides that the automatic opt-in provisions do not apply;
  • If the arbitration agreement provides that any of the provisions in Schedule 2 does or does not apply;
  • If the sub-contractor is not based in Hong Kong;
  • If a substantial part of the sub-contracted work is to be performed outside Hong Kong.

Interim measures
Another welcomed addition in the new Arbitration Ordinance is the adoption of the interim measures under the Model Law framework. The New Arbitration Ordinance expressly empowers arbitral tribunals to grant an array of interim measures including injunctive relief, to maintain or restore the status quo, to prevent harm or prejudice to the arbitral process, to preserve assets, and to preserve evidence. In addition, arbitral tribunals are empowered to order the provision of security for costs and direct the discovery of documents or delivery of interrogatories.

Arbitral awards enforcement
The enforcement provisions in the new Ordinance did not adopt those under the UN framework but have remained similar to the ones under Chapter 341. According to related provisions, awards – whether made in or outside Hong Kong – are enforceable with the leave of the court in the same manner as a judgment of the court. The provisions regarding the enforcement of New York Convention awards are retained, and those related to rewards from mainland China are improved. For example, subject to certain limitations, awards rendered in Mainland China may not be enforced in Hong Kong if an application for enforcement is also outstanding on the Mainland (Section 93 of the Ordinance). The enforcement in Hong Kong of non-New York Convention awards is also covered.

Taxation of costs
The new Arbitration Ordinance allows arbitral proceeding costs – which are payable on any award basis of the Hong Kong Court – to be taxed if parties have agreed on this. On taxation by the court, the arbitral tribunal must make an additional award of costs reflecting the result of such taxation. A decision of the court on taxation is not subject to appeal.

The new Arbitration Ordinance also stipulates that parties have the obligations to keep information relating to arbitral proceedings or awards confidential. Proceedings are not to be heard in open court, unless any party applies for a hearing in open court or the court is satisfied with proceedings of some particular cases in open court.

Power of arbitrators to act as mediators
If all parties consent in writing, an arbitrator may also act as a mediator after arbitration proceedings have started. The arbitration proceedings must be stayed if an arbitrator acts as a mediator. All parties should be aware that in case confidential information is obtained by an arbitrator acting as mediator and the mediation fails, the arbitrator must disclose as much of that information as the arbitrator considers is material to the arbitral proceedings.

To summarize, the New Arbitration Ordinance will have a significant impact on arbitration practices in Hong Kong. The introduction of the UN Model Law brings Hong Kong’s arbitration regime closer to international norms, while the opt-in provisions retains the domestic regime to be applied in specific types of arbitration cases, such as ones related to China, where ad-hoc arbitration is not allowed. The Hong Kong Court’s power to intervene in domestic arbitrations will be further limited, and it is critical for arbitrators to draft and review arbitration agreements following legal standards to ensure that they achieve the intended result.

Hong Kong has long had an established arbitration institution, including the Hong Kong International Arbitration Center (HKIAC) which has facilities open to all parties regardless of the rules under which they choose to arbitrate. Various international arbitration institutions are also represented, including the ICC International Court of Arbitration. The new Ordinance strengthens Hong Kong’s development as an international arbitration center, and specifically for dealing with cases involving China disputes in addition to the rest of Asia.

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