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Focus: Arbitration – March 2008

Arbitration reforms in Hong Kong

In brief: The Hong Kong Department of Justice recently released its consultation paper and draft legislation for reforming Hong Kong's arbitration law.  This development heralds the end of a long process of arbitration reform in the Territory that will ultimately see the unification of Hong Kong's different regimes for 'domestic' and 'international' arbitration.  Partner Simon McConnell (view CV) and Lawyer Kieran Humphrey discuss the background and likely impact of these reforms. 

How does it affect you?

  • The reforms to the Arbitration Ordinance are expected to be operational by mid-2008. It will effectively unify the different regimes that apply for 'international' and 'domestic' arbitration in Hong Kong.
  • The new rules are based on the UNCITRAL Model Law and will effectively replicate the regime in place for 'international' arbitration. However, parties will still be able to use the current rules governing 'domestic' arbitration by expressly providing for this in their arbitration agreements.
  • Those parties with existing 'domestic' arbitration agreements (or arbitration clauses in existing contracts) will not be affected by the reforms, as the current rules will automatically apply to these agreements for up to six years after the reforms are enacted.
  • The reforms are intended to simplify Hong Kong's arbitration regime and make it more familiar to foreign parties and practitioners.
Background to the reforms

The Arbitration Ordinance (Cap. 341) currently governs all forms of arbitration in Hong Kong. It effectively creates a dual system that imposes different rules for so-called 'international'  and 'domestic' arbitration. While international arbitration is regulated by rules based on the UNCITRAL Model Law, domestic disputes must be arbitrated under a separate regime that is derived from long-standing UK law. Over the past decade, Hong Kong's regulators have sought to progressively unify these two systems with the intention of abolishing the domestic regime. The proposed reforms represent the end of this process and will create a unified system based almost entirely on the Model Law. Submissions on the draft legislation can be made until 30 April 2008. The legislation is expected to be formally enacted in mid-2008.

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Nature of the reforms

The proposed legislation effectively codifies the articles of the Model Law, which are widely recognised as the 'standard' rules for commercial arbitration. As a result, it remains very similar to the current laws regulating international arbitration. The draft provisions emphasise the primacy of the arbitrator and are directed at ensuring the quick and efficient resolution of disputes. As a result, they give almost absolute power to the arbitral tribunal to deal with all matters that might arise prior to, and during, the proceedings. This includes the authority to rule on any question of law or procedure and to make binding orders to enforce its decisions without judicial oversight.

While the bulk of the draft legislation is not substantially different to the current regime governing domestic arbitration in Hong Kong, it does significantly alter the potential for judicial review of arbitral proceedings. Under the existing rules for domestic arbitration, courts can make a variety of preliminary orders in relation to domestic arbitration and may review any determination of law that is made by an arbitral tribunal. However, unless the parties expressly agree otherwise, the proposed legislation no longer permits courts to exercise many of these powers. For instance, it does not allow judicial review of questions of fact or law that arise during an arbitration.  As a consequence, an award can only be set aside under the proposed system in the limited circumstances where it is made under an invalid agreement or if it was contrary to the terms of an agreement or prevailing public policy. The only other notable functions that courts (specifically the Court of First Instance of the High Court of Hong Kong) will be able to perform include hearing challenges to a tribunal's jurisdiction, making interim orders before proceedings have commenced and assisting the tribunal with gathering evidence. 

Importantly, the draft legislation has made many of the current features of domestic arbitration 'opt-in' provisions, so that parties can continue to utilise them under the new system.  These 'opt-in' provisions will automatically apply to any arbitration clauses that currently refer to domestic arbitration (such as standard form construction contracts). This allows those parties more familiar with the existing domestic regime to continue using this system. Similarly, it enables all parties (whether local or foreign) to take advantage of the forms of judicial review currently applicable to domestic arbitration.

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Key provisions of the draft legislation

Many of the important aspects of the new arbitration regime will be familiar to Hong Kong lawyers or arbitration practitioners.  In most part, the provisions of the draft legislation use the exact words of the Articles of the Model Law or adopt existing Sections from the current Ordinance. The significant features of the new regime can be summarised as follows:

  • All arbitral proceedings must be held in open court.  However, an arbitral tribunal can order that a matter is heard privately if it considers it appropriate.
  • Parties can agree on the number of arbitrators to be appointed to hear their dispute.
  • Arbitration agreements are binding on the parties and a court must refer a dispute to arbitration if such an agreement applies. The only exception is for disputes that involve an employment contract. In such instances, the court has the discretion to ignore any arbitration clauses in the contract and allow the matter to proceed to litigation.
  • An arbitrator can also act as a mediator in the same proceedings with the consent of all parties. This provides scope for mediation to be attempted to resolve the dispute before arbitration takes place.
  • An arbitral tribunal can rule on its own jurisdiction if it is challenged. A party to the arbitration then has 30 days to appeal such a decision to the court.
  • Parties may agree on the procedures to follow prior to and during the arbitration proceedings.
  • The court can make interim orders in relation to any arbitral proceedings governed by Hong Kong law regardless of whether they are held in Hong Kong or overseas. This provision is intended to apply to situations where the arbitral tribunal has not been established and is unable to make such determinations itself.
  • An arbitral tribunal is empowered to make a variety of interim, preliminary and final orders including awards of damages, binding costs orders and interest on costs. These powers are comparable to those typically exercised by courts hearing commercial litigation cases.
  • The current statutory rules for the enforcement of orders or directions made by an Arbitral Tribunal will continue to apply. The only change is that parties must obtain the court's leave to enforce an arbitral order made in foreign proceedings. To do so, they must demonstrate that the order could have been granted if the hearing had taken place in Hong Kong. It does not matter that a court in the relevant jurisdiction cannot enforce similar orders made in Hong Kong proceedings.
  • The court is not permitted to review any errors of fact or law involved in the orders or awards made by arbitral tribunals. Such orders would generally be final and binding on the parties.
  • All provisions that exist for domestic arbitrations can be retained by the parties as 'opt-in' provisions. If an existing arbitration agreement (or any future agreement made within six years of the reforms) refers to domestic arbitration, these 'opt-in' provisions will automatically apply. This ensures that any existing or new pro forma arbitration agreements that utilise the domestic regime will not need to be amended after the draft legislation is enacted.

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Likely consequences of the reforms

The adoption of a unitary Model Law system is likely to have many positive effects for arbitration in Hong Kong. First and foremost of these is that it will avoid the often complicated issue of which regime governs a particular dispute. The reforms also reduce the potential for judicial review of arbitral decisions, which will help to ensure that arbitration continues to be a fast and cost-effective means of dispute resolution. Significantly, this outcome appears to have been achieved without sacrificing party autonomy, as the legislation allows judicial safeguards or other mechanisms from the existing Ordinance to be built in to the process. Finally, the adoption of the internationally accepted Model Law for all forms of arbitration should make it more accessible to foreign business and their lawyers. 

This can only assist the continued growth of arbitration in Hong Kong and enhance its reputation as the leading centre for dispute resolution in Asia.

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