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Focus: Hong Kong's new Arbitration Ordinance

27 July 2011

In brief: The new Arbitration Ordinance simplifies Hong Kong's arbitration law, unifying the different regimes for 'domestic' and 'international' arbitration. This should strengthen its status as a leading jurisdiction for international dispute resolution. Partner Simon McConnell and Senior Associate Kieran Humphrey discuss the key changes.

How does it affect you?

  • The Arbitration Ordinance (Cap. 609), which came into force on 1 June 2011, unifies the different regimes that previously applied to 'international' and 'domestic' arbitration in Hong Kong.
  • Based on the UNCITRAL Model Law, it simplifies the 'domestic' arbitration regime and should help to limit judicial appeals of arbitral decisions.
  • A duty of confidentiality now applies to information relating to an arbitration. Any judicial appeal regarding an arbitration must also be heard in closed court, unless the court rules otherwise.
  • Parties will still be able to use the rules governing 'domestic' arbitration, by expressly providing for this in their arbitration agreements.
  • Any arbitration commenced before 1 June 2011 will be governed by the previous Arbitration Ordinance (Cap. 341). Similarly, those parties with existing 'domestic' arbitration agreements (or arbitration clauses in existing contracts) will not be affected by the new Ordinance, as the previous rules will automatically apply to these agreements for a further six years.

Background and nature of the reforms

The previous Arbitration Ordinance created a dual system that imposed different rules for so-called 'international' and 'domestic' arbitration. While the 'international' arbitration law followed the UNCITRAL Model Law, the 'domestic' regime was derived from long-standing UK law.

The new Ordinance effectively codifies the articles of the Model Law, which are widely recognised as the 'standard' rules for commercial arbitration. As a result, it imposes a regime that is very similar to the previous laws regulating international arbitration in Hong Kong. The new Ordinance emphasises the arbitrator's primacy, and is directed at ensuring the quick and efficient resolution of disputes. It gives almost absolute power to the arbitral tribunal to deal with all matters that might arise before, 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 new Ordinance is not substantially different from the previous regime, it does significantly alter the potential for judicial review of arbitral proceedings. Under the existing rules for domestic arbitration, the court could make a variety of preliminary orders in relation to domestic arbitration and review any determination of law made by an arbitral tribunal. However, unless the parties expressly agree otherwise, the new Ordinance no longer permits the court to exercise many of these powers. For instance, it does not allow judicial review of questions of fact or law that arise during arbitration. As a consequence, an award can only be set aside under the proposed system in the limited circumstances of it having been 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 new Ordinance has made many of the current features of domestic arbitration 'opt-in' provisions, so that parties can continue to utilise them. These 'opt-in' provisions will automatically apply to any arbitration clauses that currently refer to 'domestic' arbitration. This allows those parties more familiar with the domestic regime to continue using these rules. Similarly, it enables all parties (whether local or foreign) to take advantage of the forms of judicial review currently applicable to domestic arbitration.

Overview of the key features

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

Enforcement of arbitration agreement
  • 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 arbitral tribunal can rule on its own jurisdiction to hear a particular matter under the arbitration agreement. A party to the arbitration then has 30 days to appeal such a decision to the court.
Appointment of arbitral tribunal
  • Parties can agree on the number of arbitrators to be appointed to hear their dispute.
  • An arbitrator can also act as a mediator in the same proceedings, with the consent of all parties. However, if an arbitrator acts as mediator, they will be obliged to disclose to the parties any material information obtained during the mediation for the purposes of the arbitration.
  • If a third party is required to appoint an arbitrator but fails to do so, a party to the arbitration may request the Hong Kong International Arbitration Centre to appoint the arbitrator, to prevent any deadlock or delay.
Procedural rules
  • It is prohibited to disclose information relating to an arbitral proceedings or any arbitration award. Similarly, any judicial proceedings regarding an arbitration must be heard in a closed court, unless the court determines otherwise.
  • Parties may agree on the procedures to follow before and during the arbitration proceedings.
Powers of the arbitral tribunal and scope of judicial review
  • 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.
  • In certain circumstances, 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.
  • 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.
  • The previous rules for the enforcement of an award or order made by an arbitral tribunal will continue to apply. The only significant change is that parties must obtain the court's leave to enforce a foreign arbitral award or order. To do so, they must demonstrate that the award / 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 awards / orders made in Hong Kong proceedings. That is, there is no reciprocity requirement for the enforcement of foreign awards / orders. However, the new Ordinance does distinguish between awards / orders made in New York convention countries or the PRC and those made in other countries.
Maintenance of 'domestic' arbitration regime – 'opt-in' rules
  • All the provisions that previously applied to domestic arbitrations can be retained by the parties as 'opt-in' provisions. These opt-in provisions are set out in Schedule 2 of the new Ordinance.
  • If an existing arbitration agreement (or any future agreement made within six years of the commencement of the new Ordinance) refers to domestic arbitration, the opt-in provisions will automatically apply. This ensures that any existing or new pro forma arbitration agreements that utilise the domestic regime do not need to be amended.
  • The opt-in provisions will automatically apply to sub-contracts of any 'construction contracts' (ie – as defined by Section 2(1) of the Construction Industry Council Ordinance (Cap. 587)). However, parties can specifically exclude the opt-in provisions in either the main contract or sub-contract. In addition, the automatic opt-in provisions will not apply to such a sub-contract if it does not include an arbitration agreement, the sub-contractor is not resident in Hong Kong or the sub-contracted work is to be performed outside Hong Kong.

The likely effect of the new Ordinance

The adoption of the new Ordinance will simplify Hong Kong's arbitration law and ensure that most arbitral proceedings are conducted according to the Model Law. This will avoid the often complicated issue of which regime governs a particular dispute. It is also likely to make foreign parties and practitioners more comfortable with Hong Kong's arbitration rules. As a consequence, the new Ordinance should reinforce Hong Kong's position as a leading jurisdiction for international dispute resolution.

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 opt-in provisions allow aspects of the previous Ordinance to be built into the process. This flexibility will suit local Hong Kong parties that have traditionally utilised the domestic arbitration rules to resolve disputes (eg the construction industry). As such, the new Ordinance ensures that the Model Law is now the default set of rules for Hong Kong arbitration but allows parties to continue using aspects of the previous regime, if that suits.

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