Introduction
The much-anticipated Hong Kong Arbitration Ordinance (Cap.609) (the "Ordinance") came into effect on 1 June 2011. This new piece of legislation furthers Hong Kong's status as being a prime seat for international arbitration in the region by providing a clear and straightforward legislative framework based on the internationally recognized UNCITRAL Model Law ("Model Law").
While most provisions in the Ordinance will follow the articles from the Model Law, there will be minor changes and omissions to reflect the local environment. Importantly, the distinction between domestic and international arbitrations will be abolished, and all arbitrations in Hong Kong will be governed by a unitary regime based on the Model Law.
This article will highlight and discuss the key features of the Ordinance as well as their practical implications for parties involved in Hong Kong arbitrations.
Key Features Of The New Arbitration Ordinance
Drafting Arbitration Clauses in Commercial Contracts
The effect that the new Ordinance has on drafting arbitration clauses is minimal. Since the Ordinance provides a unitary regime, drafters do not have to expressly state whether the arbitration is domestic or international in the arbitration agreement. However, doing so will have practical implications as certain "opt-in" provisions that are tailored to domestic arbitrations (as discussed below) may automatically apply during the transition period of 6 years from 1 June 2011. Parties may "opt-in" to these provisions either by expressly stating in the arbitration agreement that they wish to "opt-in" or by stating in the arbitration agreement that the arbitration is to be a "domestic arbitration."1Drafters must understand the parties' intentions regarding these "opt-in" provisions and take note of the above when drafting the arbitration agreement to avoid accidentally including or excluding the "opt-in" provisions.
Transitional Arrangements
To ensure a smooth transition from the old Arbitration Ordinance, Schedule 3 of the Ordinance includes various "savings and transitional provisions." In general, the old Arbitration Ordinance applies to all arbitrations that have already been commenced under it before the commencement of the new Ordinance. Similarly, appointments of arbitrators under the old Arbitration Ordinance prior to 1 June 2011 will continue to have effect after the commencement of the new Ordinance. Further, settlement agreements that have been entered into under section 2C of the old Ordinance before the commencement of the new Ordinance will continue to be enforced in accordance with the old Arbitration Ordinance.
Schedule 2 of the new Ordinance provides "opt-in" provisions that enable parties to domestic arbitrations (i.e., arbitrations that involve Hong Kong parties dealing with disputes arising out of a Hong Kong transaction or project) to adopt certain provisions from the old Arbitration Ordinance that applied only to domestic arbitrations such as:
i) disputes to be submitted to a sole arbitrator only;
ii) consolidation of arbitrations;
iii) decisions by the court on a preliminary question of law;
iv) challenges to an award for serious irregularity; and
v) appeals against an arbitral award on a question of law.
To "opt-in" to the above provisions, (i) parties can agree to do so under section 99 of the Ordinance, or (ii) the provisions may automatically apply to "domestic arbitration" agreements entered into before or within six years after 1 June 2011 pursuant to section 100 of the Ordinance. Despite the automatic application mechanism in section 100, section 102 allows parties to expressly opt-out of the Schedule 2 provisions. Section 101 of the Ordinance extends the automatic "opt-in" mechanism to Hong Kong construction subcontracts.
Confidentiality
Perhaps one of the most prominent attractions of the Ordinance is its express provisions dealing with confidentiality in arbitral proceedings as Hong Kong is one of the few jurisdictions that incorporate such provisions.2
Section 16 of the Ordinance makes a significant departure from the old Arbitration Ordinance and provides that the court hearings relating to arbitral proceedings are to be conducted in closed court. Section 17 provides restrictions for reporting such proceedings, and Section 18 of the Ordinance expressly prohibits parties from disclosing any information relating to the arbitral proceedings or the award unless the parties agree.3
Composition of Arbitral Tribunal
Section 23 of the Ordinance adopts part of article 10 of the Model Law whereby parties are free to determine the number of arbitrators. In terms of the default number of arbitrators, the Ordinance deviates from the Model Law position of three and provides that, where parties fail to agree on the number of arbitrators, the number of arbitrators shall be either one or three as decided by the Hong Kong International Arbitration Centre ("HKIAC"). Under the old Arbitration Ordinance, this position only applied to international arbitrations; however, section 23 of the Ordinance applies this default position to all arbitrations.
Equal Treatment
Parties in either domestic or international arbitrations will enjoy the fundamental rights of equality, independence and impartiality of the tribunal, fairness, and due process pursuant to section 46, which adopts article 18 of the Model Law. Under article 18, a party is to have a "full" opportunity to present its case. However, under section 46 of the Ordinance, a party is to have a "reasonable" opportunity to present its case. This minor change should assist arbitrators in preventing parties from deploying tactics designed to delay arbitrations such as making unhelpful discovery requests or calling unnecessary factual/ expert witnesses.
Peremptory Orders
To help maintain the effectiveness and efficiency of the arbitral process, the Ordinance has incorporated new provisions that give the tribunal powers to make peremptory orders for compliance with procedural orders as well as powers to deal with parties who fail to comply with such order. Specifically, if a party fails to comply with any order or direction from the arbitral tribunal, section 53(3) empowers the arbitral tribunal to make a peremptory order for compliance within a specified time. If the defaulting party fails to comply with the peremptory order, section 53(4) allows the tribunal to:
i) direct that the party is not entitled to rely on any allegation or material that was the subject matter of the peremptory order;
ii) draw any adverse inferences that the circumstances may justify from the non-compliance;
iii) make an award on the basis of any materials that have been properly provided to the arbitral tribunal; or
iv) make any order that the arbitral tribunal thinks fit as to the payment of the costs of the arbitration incurred in consequence of the non-compliance.
Limited Court Interference
The Ordinance contains provisions that vest many powers to the tribunal as well as limit the rights of courts to hear matters arising from arbitral proceedings.
Section 35 of the Ordinance adopts article 17 of the Model Law and empowers the tribunal to order interim measures - such as orders to preserve assets/evidence or to maintain/restore the status quo - as well as to grant injunctions. Pursuant to section 37 of the Ordinance, Hong Kong arbitral tribunals can also grant preliminary orders to prevent parties from frustrating any interim measure.
Of particular significance, the Hong Kong court may, on application, grant interim measures and/or orders in relation to arbitrations that have commenced or will commence outside of Hong Kong.
Section 108 and section 2 of Schedule 4 in the Ordinance effectively limit the court's interference in arbitral proceedings by removing the jurisdiction of the Court of Appeal to hear appeals on judgments made by the Court of First Instance regarding arbitral proceedings.
Enforcement
With regard to enforcement of arbitral awards, the Ordinance is much more localized and departs from the Model Law. In general, arbitral awards are enforceable in the same manner as a court judgment, but leave of the court is required (section 84). Separate provisions are provided to distinguish between the enforcement of awards under the New York Convention (section 87), Mainland awards (section 92), and non-convention and non-Mainland awards (section 85). Evidentiary materials to be provided for enforcement are generally the same for all three categories of awards. As such, parties seeking to enforce an award should be prepared to produce an original or certified copy of the award and a copy of the arbitration agreement.
When seeking to enforce a Mainland award, one should take careful note that such an award cannot be enforced in Hong Kong if an application has been made in Mainland China for enforcement of the award (section 93(1)). Enforcement of the Mainland award in Hong Kong can only commence if the award has not been fully satisfied through the Mainland enforcement proceedings (section 93(2)).
In terms of enforcing a non-convention and non-Mainland award (i.e., an award made in Taiwan) one should note that the court may refuse to enforce the award if it considers it just to do so.
Arb-Med
The Ordinance expressly provides that if the parties give their consent, an arbitrator can stay existing arbitral proceedings and act as a mediator for the parties. Alternatively, and subject to the agreement of the parties, a mediator may subsequently act as an arbitrator if a settlement cannot be reached by the parties. These processes are known respectively as Arb-Med and Med-Arb. Although they are not frequently used in Hong Kong, they are quite common in the PRC. As such, these processes cannot be ignored, and when parties face Arb-Med or Med-Arb proceedings, they should be aware of the risks involved.
In a recent case4regarding the enforcement of a Mainland Arb-Med award in Hong Kong, the Hong Kong courts refused to give an order for enforcement as the judge believed that, given the way in which the Arb-Med proceedings were conducted, the award was tainted with apparent bias. This case warns us that awards may be set aside on grounds of public policy if the conduct of the tribunal in the Arb-Med proceedings gives rise to apparent bias.
Another issue to be aware of is if parties fail to reach a settlement agreement during the mediation, then the arbitral process will resume with the mediator resuming the role of arbitrator. The mediator/arbitrator is required by the Ordinance to disclose all material confidential information that he/she obtained from the parties during the mediation. Although this serves to give some protection to the arbitrator and the parties against claims of bias and breach of natural justice, such an act of disclosure may very well cause the parties to withhold information during the mediation, which in turn may hinder the mediation process.
Conclusion
The Hong Kong Arbitration Ordinance has gone through a major but positive overhaul. By being more user-friendly, flexible, and definitive in responding to market needs, the new Ordinance should assist Hong Kong in maintaining its place as one of the preferred jurisdictions for international arbitration.
1By stating in the arbitration agreement that the arbitration is to be "domestic," the "opt-in" provisions will automatically apply.
2Other jurisdictions that have expressed provisions for confidentiality are New Zealand, Australia, Scotland, and Spain.
3This is subject to exceptions regarding disclosure to professional advisors or disclosure required by law. Also, in Mainland China, there are no provisions in the Arbitration Law or the CIETAC arbitration rules restricting the publication of awards. However under CIETAC, the usual practice is to provide redacted and edited reports on cases selected by the Cases Edition Committee.
4Gao Haiyan v Keeneye Holdings Ltd [2011] HKEC 514. Also see Jones Day Commentary "The Real Risk of Bias in 'Chinese Style' Arbitrations" (May 2011).
Published September 1, 2011.
