Hong Kong

Arbitration is not new to Hong Kong. Hong Kong's first Arbitration Ordinance (No. 6 of 1844) was passed on 20 March 1844,¹ not as an alternative to litigation but because there was no civil litigation system in place in the former British colony at the time. Today, as Hong Kong moves even further towards a service-oriented economy, arbitration as well as other legal services play an ever-increasing role and arbitration continues to be the preferred choice of dispute resolution in Hong Kong for international commercial disputes.

Indeed, the Hong Kong International Arbitration Centre (HKIAC), which was established in 1985, is now one of the major players on the international arbitration stage, attracting business from all over the world and in particular from the People's Republic of China and the rest of the Asia-Pacific region. The HKIAC is active in finding ways to promote arbitration in Hong Kong and regularly hosts arbitration conferences in Hong Kong.

The HKIAC also supports the Vis Moot (East), which takes place in Hong Kong. The Vis Moot (East) is a sister moot to the well-known Willem C Vis International Commercial Arbitration Moot that takes place in Vienna each year. The purpose of both moots is to foster the study of international commercial law and arbitration for resolution of international business disputes.

Hong Kong's legal system and sources of arbitration law

In 1997, British rule ended in Hong Kong and control of the territory was returned to the People's Republic of China. Under the Joint Declaration,² however, Hong Kong is guaranteed a high degree of autonomy from the PRC for 50 years as a Special Administrative Region (SAR) of the People's Republic of China under the principle of 'one country, two systems'. Thus, Hong Kong continues to use a common law legal system based closely on English law and will do so until at least 2047.

The principal statute governing arbitration in Hong Kong is the Arbitration Ordinance (Chapter 341).³ The Ordinance provides for two distinct regimes:

- the domestic regime, which is based largely on the English Arbitration Acts 1950, 1975, 1979 and 1996; and
- the international regime which, since 1990, has been based on the UNCITRAL Model Law (the Fifth Schedule to the Ordinance).

Article 1(3) of the Model Law sets out the criteria for deciding when an arbitration will be considered international. Arbitrations which do not satisfy these criteria are regarded as domestic arbitrations.⁴ Parties can, however, opt into either regime: parties to a domestic agreement may, after a dispute has arisen, agree in writing to have the dispute arbitrated as an international arbitration;⁵ and parties to an international arbitration agreement may agree in writing before (ie, this can be stipulated in the underlying arbitration clause or agreement) or after a dispute has arisen to have the arbitration conducted under the domestic regime.⁶

The main focus of this review is upon international arbitration. The significant difference between the two regimes is that the domestic regime provides the Hong Kong courts with additional powers to intervene in and assist with the arbitration process which are not available under the international regime. By contrast the international regime, based as it is on the Model Law, follows the principle that the Hong Kong courts should support, but not interfere with, the arbitration process.

Hong Kong is a common law jurisdiction. As such, court case authorities from Hong Kong and other common-law jurisdictions (and in particular England) will have persuasive authority before the arbitral tribunals in Hong Kong.⁷

Proposed reforms

In 1998, the Hong Kong Institute of Arbitrators (HKIArb)⁸ established the committee on Hong Kong Arbitration Law in co-operation with HKIAC (HK committee). The HK Committee was established with the support of the Secretary for Justice to consider further and to take forward proposed reforms identified in 1996 by an earlier HKIAC committee. The HK committee published its report on 30 April 2003. Its primary recommendations were:

¥. to abolish the distinction between domestic and international arbitrations and to establish a unitary regime for arbitration law in Hong Kong;

- the Model Law should continue to be scheduled to the Ordinance and to have the force of law in Hong Kong subject only to necessary amendments; and
- the Ordinance should follow the order and chapter headings of the Model Law, and the Model Law and additional provisions should be set out in the main body of the Ordinance, to make it as user friendly as possible.

In addition, the HK committee recommended that the parties should still be able to agree to 'opt in' to provisions similar to those which are part of the current domestic regime. These provisions are section 6B (consolidation of arbitrations by the court), section 23A (obtaining the court's opinion on a preliminary point of law, which the HK committee has recommended should be replaced by a provision similar to section 45 of the English Arbitration Act 1996, which covers the same point), and section 23 (relating to an appeal on a point of law arising under an arbitration award).⁹
These suggested reforms can only serve to reinforce Hong Kong's appeal as a venue for international arbitration. In the words of Hong Kong's Chief Executive Donald Tsang: 'By updating our legal mechanism, we will add to Hong Kong's appeal as a prime jurisdiction for arbitration.' A consultation paper entitled 'Reform of the Law of Arbitration in Hong Kong and Draft Arbitration Bill' was published in December 2007, inviting comment by 30 April 2008. Now that the public consultation process is complete, it is expected that the process for implementing the new Arbitration Ordinance will begin shortly.

Features of Hong Kong arbitration

Hong Kong courts

Support

As stated above, the Model Law is based upon the principle that the local courts should support, but not interfere with, the arbitration process. The Hong Kong judiciary fully supports this policy and takes a robust approach in its interpretation of the Ordinance and enforcement of arbitration agreements and arbitration awards. By contrast, the current domestic regime provides the courts with a number of additional powers to supervise and assist the arbitration proceedings, some of which have been set out above.

Specialist list

Hong Kong also benefits from a specialist 'construction and arbitration list'. All matters concerning arbitration are set down in this list, presided over by one judge who is a specialist in the field of arbitration (and construction). As such, parties who bring arbitration issues before a Hong Kong court can be confident that they will be resolved in a manner which is consistent, and in accordance, with international arbitration practice and procedure.

Interim measures

Both the Hong Kong courts and the arbitration tribunal have powers under the Ordinance to grant interim relief in respect of Hong Kong arbitration proceedings. The courts have power to grant interim relief notwithstanding that the tribunal has similar powers, but the courts are more likely to decline to exercise their powers when the arbitration proceedings have already commenced, on the basis that it would then be more appropriate for the application for interim relief to be dealt with by the tribunal itself.

The Hong Kong courts also have jurisdiction to grant interim measures of protection in aid of foreign arbitration proceedings.

Jurisdiction currently derives from the Ordinance or from the court's inherent jurisdiction. The leading authority on this point is the decision of the Court of Appeal in The Lady Muriel [1995] 2 HKC 320. Following this case, where the applicant has not obtained the approval of the foreign tribunal to make the application, the Hong Kong court will only grant the relief if the applicant can show that justice dictates that the relief should be granted to prevent serious and irreparable damage to the position of the applicant in the arbitration.

As part of the civil justice reforms being introduced in Hong Kong in April 2009, section 2GC of the Ordinance has been amended to provide specifically that the Hong Kong courts do have the power to grant interim relief in aid of arbitration proceedings outside Hong Kong (as well as in aid of arbitrations taking place in Hong Kong). New subsection (1A) of section 2GC adds the proviso, however, that the Hong Kong courts will only grant an interim measure in support of arbitration proceedings outside Hong Kong if those proceedings are capable of giving rise to an arbitral award (interim or final) which may be enforced in Hong Kong.10

Kompetenz-Kompetenz

The principle of Kompetenz-Kompetenz applies in both domestic and international arbitrations in Hong Kong.¹¹ This means that an arbitral tribunal may rule on its own jurisdiction, including on any objections with respect to the existence or validity of the arbitration agreement.

Representation

Parties to an arbitration in Hong Kong can be represented by anyone they choose. The Hong Kong immigration department will provide work visas to non-Hong Kong residents wishing to come to Hong Kong to represent a party in a Hong Kong arbitration, although a local sponsor or employer (for example, a partner in the instructing Hong Kong law firm, as appropriate) will usually be required as a matter of formality.

Interest

The tribunal is given power under the Ordinance to award compound as well as simple interest on any award from such dates and at such rates as it considers appropriate for any period ending not later than the date of payment.¹² Where claims are of a commercial nature, the general rule is that the commercial lending rate prevailing in Hong Kong (relating to the currency of the claim) plus 1 per cent should be the interest rate applied on an award of damages.

Arbitration institutions

The primary arbitration institution in Hong Kong is the HKIAC. Although it has been funded by both the Hong Kong business community and the Hong Kong government, it is independent of both and financially self-sufficient. The HKIAC has adopted the UNCITRAL Arbitration Rules as one set of suggested rules for international arbitrations and has drafted its own Domestic Arbitration Rules for domestic arbitrations (although the HKIAC will administer arbitrations for parties who have chosen the arbitral rules of other institutions to govern the reference).

The HKIAC also issued new Administered Arbitration Rules, which took effect from 1 September 2008. These Rules, which apply to both domestic and international arbitration in Hong Kong, should serve to ensure Hong Kong's popularity as a venue for PRC-related arbitration providing as they do for a 'light touch' administered arbitration, with economical administration charges. This addresses the requirement under PRC arbitration law that arbitrations must be administered and not ad hoc.

The HKIAC is often selected by parties to act as the appointing authority for an arbitration with its seat in Hong Kong. The HKIAC has also been designated in the Ordinance as the default appointing authority where the parties have not agreed, or are unable to agree, on the method for appointing arbitrators, or any agreed mechanism has broken down. This function was previously exercised by the Hong Kong courts. The HKIAC has an extensive panel of international and local arbitrators. Parties remain free, however, to appoint an arbitrator or arbitrators of their own choosing (subject only to restrictions relating to an arbitrator's independence and impartiality),¹³ in the same way as they can appoint legal representatives of their own choice (see 'Representation' above). The HKIAC will respect any nationality restrictions agreed by the parties in their arbitration agreement and the new Administered Arbitration Rules also contain nationality restrictions.

The Ordinance also gives the HKIAC the power to decide whether an arbitral tribunal should consist of one or three arbitrators in an international arbitration where the parties are unable to agree on the number.

The HKIAC is a popular choice of arbitration venue for parties to international commercial contracts, currently ranking only behind CIETAC (China), American Arbitration Association (AAA) and the International Chamber of Commerce (ICC) in terms of the number of arbitration cases heard. In 2007 it had 448 cases, of which 183 were classified as construction cases, 103 as general commercial cases and 27 as shipping cases.

Many arbitrations have also had their seat in Hong Kong and been administered by, and in accordance with, the rules of the London Court of International Arbitration, the AAA and, particularly, the ICC. On 12 March 2008, the ICC announced that it would be opening a branch of the Secretariat of the Court in Hong Kong with a case management team to administer cases in the region under the ICC Rules of Arbitration.

Other institutions in Hong Kong include the HKIArb and the East-Asia Branch of the Chartered Institute of Arbitrators, which covers the People's Republic of China, Thailand, Vietnam, the Philippines, Korea, Singapore and Indonesia.

Hong Kong and the People's Republic of China

As a result of its relationship with, and proximity to, the mainland,¹⁴ Hong Kong (and usually the HKIAC) is often selected as an arbitration venue for PRC-related arbitration. For example, of the 394 cases which were referred to the HKIAC in 2006, approximately one-third involved parties from the mainland.

Since its handover back to the People's Republic of China in 1997, Hong Kong has been uniquely placed as the People's Republic of China's window to the world and, for the rest of the world, the gateway to the People's Republic of China. It enjoys close economic ties with the mainland: according to statistics provided by the Hong Kong Trade Development Council, Hong Kong is the largest source of overseas direct investment in the mainland. By the end of 2007, among all the overseas-funded projects registered in the mainland, 45.2 per cent were tied to Hong Kong interests. Similarly, the mainland is one of the leading sources of inward investment in Hong Kong. According to Hong Kong's Census and Statistics Department, the total of the mainland's direct investment in Hong Kong was just over HK$2 trillion (US$260 billion) at the end of 2006 (up from HK$1.3 trillion at the end of 2005), accounting for 35.1 per cent of Hong Kong's inward direct investment and, as of December 2007, 439 mainland companies were listed in Hong Kong (up from 367 as of December 2006), with total market capitalisation of US$1,544 billion. In 2007, Hong Kong was also the mainland's third largest trading partner (after Japan and the United States), accounting for 9 per cent of its total external trade, and the mainland has been Hong Kong's largest trading partner since 1985.

The official languages of Hong Kong are Chinese (Cantonese) and English. Hong Kong also shares a written language with all Chinese parties (with Mandarin (Putonghua) being taught in most schools and spoken more and more) and a cultural background with the mainland. For all these reasons, mainland parties are comfortable arbitrating in Hong Kong (where their contract counterpart wishes to choose a neutral venue outside the People's Republic of China).

By the same token, Hong Kong is a popular choice for western parties: from a legal perspective — Hong Kong has retained its well-respected common-law legal system even after the handover — and from a commercial perspective Ð Hong Kong is the international financial and commercial capital of Asia and a jurisdiction where parties can work in English (in any court proceedings as well as in the arbitration proceedings). Moreover, Hong Kong is well connected to all Asia-Pacific countries and benefits from an excellent infrastructure, including a good transport system, good accommodation and telecommunications, and one of the most efficient airports in the world: Chep Lap Kok, capable of handling 35 million passengers each year and serviced by the Airport Express, bringing travellers to and from the airport swiftly and with ease.

Enforcement

Prior to 1 July 1997, Hong Kong was a member of the New York Convention by virtue of the United Kingdom's accession on its behalf. After the handover, the People's Republic of China extended its own membership of the Convention to Hong Kong (the People's Republic of China having acceded to the Convention on 22 January 1987). Thus, after the handover, arbitration awards have continued to be enforced in Hong Kong under the Convention. The Hong Kong courts are pro-enforcement and have an excellent record in enforcing foreign arbitration awards in accordance with the Convention. Their approach, depending on the particular circumstances of the case in question and where appropriate, is to enforce the award even if the respondent manages to make out one of the limited grounds under the Ordinance¹⁵ enabling the court to refuse leave to enforce (in respect of which the courts retain a residual discretion).

One such ground is the 'public policy' ground, that is, where the recognition or enforcement of the award would be contrary to the public policy of Hong Kong. The Court of Final Appeal considered the meaning of public policy in a 1999 case and held that the expression meant 'contrary to the fundamental conceptions of morality and justice of Hong Kong', and should be narrowly construed and applied. However, the Court of Final Appeal emphasised in that case: 'A failure to raise the public policy ground in proceedings to set aside an award cannot operate to preclude a party from resisting on that ground enforcement of the award in the enforcing court in another jurisdiction, because each jurisdiction has its own public policy.' Non-Convention awards can be enforced in Hong Kong in a similar manner.¹⁶

In respect of the People's Republic of China, it was identified that after the handover, the Convention no longer applied to the enforcement of mainland awards in Hong Kong and vice versa, on the basis that the Convention only applies to the enforcement of awards between two different contracting states (whereas Hong Kong is a SAR of the People's Republic of China). To overcome this difficulty, the vice president of the People's Republic of China Supreme People's Court and the Hong Kong secretary for justice signed a memorandum of understanding on the 'Arrangement between the Mainland and the Hong Kong SAR on the Mutual Enforcement of Arbitral Awards' in 1999, which came into force in both the mainland and Hong Kong in early 2000. Under this arrangement, a mainland award can be enforced in Hong Kong and a Hong Kong award can be enforced in the People's Republic of China on terms more or less the same as those that would apply to an application to enforce a Convention award. Its implementation resolved two years of uncertainty following the handover and served to re-establish Hong Kong as the pre-eminent jurisdiction in which to conduct People's Republic of China-related arbitrations. The Hong Kong courts have continued to enforce People's Republic of China awards under the arrangement.

The PRC—HKSAR Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters (Judgment Arrangement)

On 14 July 2006 the vice president of the PRC Supreme People's Court and the Hong Kong secretary for justice signed the Judgment Arrangement, providing for the enforcement of People's Republic of China judgments in Hong Kong and vice versa. The Judgment Arrangement came into force on 1 August 2008: via the Mainland Judgments (Reciprocal Enforcement) Ordinance in Hong Kong, and a Supreme People's Court Judicial Interpretation (Fa Shi [2008] No. 9) on the mainland. Broadly speaking, the Judgment Arrangement applies only where:

-. an enforceable final judgment is given on or after 1 August 2008 by one of the Hong Kong courts, or a designated mainland court;¹⁷
- the judgment has been given pursuant to an exclusive jurisdiction agreement entered into on or after 1 August 2008, giving exclusive jurisdiction to the Hong Kong courts or a designated mainland court as appropriate, and
- the judgment orders the payment of a sum of money under a civil or commercial contract.

A detailed discussion of the Judgment Arrangement is outside the scope of this review and it remains to be seen how the Judgment Arrangement will work in practice. It should, however, in appropriate circumstances, provide a practical alternative forum to arbitration, namely litigation in Hong Kong, for disputes involving the People's Republic of China and Hong Kong interests, and where there are assets on the mainland against which enforcement may need to be made.

***

For all the above reasons, Hong Kong is and should remain a popular choice for parties wishing to arbitrate their disputes in the Asia-Pacific region, benefiting as it does from its highly regarded common-law system, supportive courts, multilingualism and excellent infrastructure and, in respect of People's Republic of China-related contracts, its proximity to, and relationship with, the People's Republic of China.

Notes
1. Less than a year after the former colony was formally established on 26 June 1843.
2. The Sino-British Joint Declaration, formally known as the Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People's Republic of China on the Question of Hong Kong, was signed on 19 December 1984 in Beijing.
3. As amended by the Arbitration (Amendment) Ordinance 1996, the Law Reform (Miscellaneous Provisions and Minor Amendments) Ordinance 1997, the Arbitration (Amendment) Ordinance 2000 and the Arbitration (Amendment) (No. 2) Ordinance.
4. S 2(1) Ordinance.
5. Ss 2L and 34B Ordinance.
6. Ss 2M and 34A (2) Ordinance.
7. In the same way as they would before the Hong Kong courts (noting that decisions of higher English courts are no longer of 'binding' authority post-handover).
8. The HKIArb was set up in September 1996 by a group of Hong Kong professionals; it is funded by annual membership fees and is financially independent.
9. Both powers under sections 23 and 23A of the Ordinance can currently be excluded by an exclusion agreement in writing once the arbitral proceedings have commenced or, as the case may be, a question of law arises.
10. S 11 of the Civil Justice (Miscellaneous Amendments) Ordinance which will come into force on 2 April 2009.
11. This is the effect of article 16 of the Model Law which applies to domestic arbitrations by virtue of Section 13B of the Ordinance.
12. Ss 2GH and 2GI of the Ordinance.
13. In respect of domestic arbitrations, the Ordinance refers only to impartiality: S 2GA; although in practice there may be little distinction between the two. The UNCITRAL Rules and the arbitration rules of most major institutions, including the recently published HKIAC Administered Arbitration Rules, also require arbitrators to be both 'independent' and 'impartial'.
14. It is considered politically correct to refer to the People's Republic of China as the mainland in the context of dealings between Hong Kong and the mainland.
15. Set out in S 44 of the Ordinance which replicates, with minor modifications, article V of the Convention.
16. The grounds for refusing enforcement of a non-Convention award are set in article 36 of the Model Law and are the same as the grounds set out in section 44 of the Ordinance.
17. (the Supreme People's Court, a Higher People's Court, an Intermediate People's Court or a recognised Basic People's Court; an initial list of recognised Basic People's Courts is set out in the Annex to the Judgment Arrangement).