International Arbitration 2021

Last Updated August 17, 2021

Hong Kong

Law and Practice

Authors



Stephenson Harwood is a law firm with over 1,100 people worldwide, including more than 180 partners. The firm's headquarters are in London, with eight offices across Asia, Europe and the Middle East. The international arbitration team advises and represents clients at all stages of the arbitration process, from drafting valid and effective arbitration agreements, to representing corporates or individuals in arbitration proceedings, to enforcement (or resisting enforcement) of arbitration awards in courts around the world. The firm's key service sectors include banking and finance, construction, projects and infrastructure, government and state entities, international trade, marine, mining and metals, oil and gas, power and renewables, and shareholders.

International arbitration is a popular method of resolving disputes in Hong Kong SAR. Both domestic and international parties frequently chose to use international arbitration in Hong Kong. For domestic parties in the construction and shipping industries international arbitration is almost the exclusive dispute resolution method, and arbitration is gaining popularity in other types of dispute in particular shareholders' disputes. International arbitration is often chosen by domestic parties in transactions and investment with cross-border elements, such as when Mainland Chinese parties or international parties are involved. International arbitration related Hong Kong court proceedings (eg, court ordered interim measures and enforcement of foreign arbitral awards) frequently arise. 

While COVID-19 has limited the appetite for conducting face to face hearings, remote hearings with the aid of technology have been embraced by many participants and institutions in Hong Kong.

Other procedures in the arbitration proceedings such as exchange of pleadings/evidence, etc, can be done by email. 

According to the statistics of Hong Kong International Arbitration Centre (HKIAC), the number of arbitrations administered by it in 2020 increased in particular sectors; maritime (4.2%); professional services (4.3%) when compared to the statistics in 2019. On the other hand, arbitrations in respect of international trade/sale of goods has dropped by 7.3%. It is unclear if these changes were due to COVID-19. 

The HKIAC is one of the most frequently used institutions for international arbitration in Hong Kong. Under the Hong Kong Arbitration Ordinance (the "AO"), HKIAC is the designated statutory body for appointment of arbitrators in the event that the parties fail to reach an agreement on the appointment or number of arbitrators.

There is no new arbitral institution established in 2020-2021. Although the Hong Kong Maritime Arbitrators' Group has been conducting arbitrations in Hong Kong since 2000, in 2019 it became a recognised institution with administered arbitration rules and recognised under the arrangement between Hong Kong and Mainland China as having the power to order interim measures be taken in Mainland China.

Court of First Instance of the High Court (the "Court") is the designated court under the AO to hear disputes related to arbitrations, domestic and international alike.

The AO is the main legalisation applies in Hong Kong which is based on the UNCITRAL Model Law as amended on 7 July 2006 but there are additional provisions applicable to Hong Kong context relating to consolidation and confidentiality and other optional provisions adoptable by agreement relating to consolidation and appeal on a point of law or serious irregularity.  Such additional provisions are not normally available under the Model Law.

The Limitation Ordinance (LO) is also applicable in relation to time limits to issue proceedings.

Following the signing of the Supplemental Arrangement concerning mutual enforcement of Arbitral Awards between Hong Kong and Mainland China (the "Supplemental Arrangement") on 27 November 2020, the following aspects of the Arrangement have been amended:

  • the procedures for recognition and enforcement of arbitral awards are equally applicable in Hong Kong and Mainland China; and
  • the courts may grant interim measures either before or after applications for enforcements of an arbitral awards are made.

On 19 May 2021, Arbitration (Amendment) Ordinance 2021 came into effect to further give effect of other aspects of the Supplemental Arrangement:

  • all arbitral awards made in Mainland China will be enforceable in Hong Kong; and
  • concurrent applications can be made to both the courts of Mainland China and Hong Kong to enforce an arbitral award.

An arbitration award can be enforced as a court judgment with leave of the Court (Section 84 of the AO). The party seeking to enforce an arbitration award can make an application to the Court for recognition and enforcement of an award by way of originating summons with supporting affidavit/affirmation and a draft order.

In addition, the following documents must be submitted to the Court (Section 85 of the AO):

  • the authenticated original award or a certified copy of it;
  • the original arbitration agreement or a certified copy of it; and
  • if the award is not in Chinese/English, a Chinese/English translation of the award certified by an official or sworn translator or by a diplomatic or consular agent.

An award shall state the reasons upon which it is based unless agreed by the parties or if the award is on agreed terms (see Section 67 of the AO).

The following matters cannot be resolved by arbitration:

  • criminal matters;
  • competition disputes;
  • divorce proceedings; and
  • action in rem against vessels.

The above list is non-exhaustive.

Unlike in mainland China, for example, the issue of patent validity remains an administrative matter that cannot be submitted to arbitration; in Hong Kong SAR, all types of Intellectual Property Rights (IPRs) disputes, including those relating to the subsistence, scope, ownership, validity and infringement of IPRs, are arbitrable (see Sections 103C and 103D of the AO).

If the parties agree that the governing law of the arbitration agreement (ie, the "seat") is Hong Kong law, the Court will uphold the parties' bargain or intention to give effect to the arbitration agreement/clause wherever possible.

The Court generally take a pro-enforcement approach to enforce valid arbitration agreements so long as they are in writing (Section19 of the AO), are made by parties with capacity and their consent, and are certain to be enforceable. Pursuant to Section20 of the AO, the Court shall decline to exercise jurisdiction over disputes where such an arbitration agreement exists.

An arbitration clause is considered to be valid and enforceable even if the rest of the contract is void or voidable as arbitration clause is a separate agreement under Hong Kong law which survives the termination of the main agreement. Further, in the event that there are any disputes of the existence of a putative contract, such disputes are also subject to arbitration if there is a valid arbitration clause.

The parties are free to select arbitrators at will subject to the arbitration agreement.

If the parties have not agreed on a procedure for appointing the arbitrators or if the parties fail to agree on the number of arbitrators (Sections 13 and 14 of the AO), then HKIAC will decide on both issues.

There is no default procedure for the appointment of arbitrators in multi-party arbitrations.

Pursuant to Section 26 of the AO, a party may challenge the appointment of an arbitrator by applying to the Court within a period of 15 days after it becomes aware that the constitution of the arbitral tribunal gives rise to justifiable doubts as to the arbitrators' impartiality or independence, or if they do not possess qualifications agreed to by the parties.

There are some limitations on the Court to intervene. The Court may remove an arbitrator if and only if they have failed to comply with the duties in Section 46 of the AO that an arbitrator must:

  • treat the parties equally;
  • be independent;
  • act fairly and impartially towards the parties, giving them a reasonable opportunity to present their case and to deal with their opponent's case; and
  • use procedures that are appropriate to the particular case and avoid unnecessary delay or expense.

See 4.3 Court Intervention.

See 4.3 Court Intervention.

See 3.2 Arbitrability.

The arbitral tribunal may rule on its own jurisdiction (Section 34 of the AO).

Under Section 34 of the AO, the decisions of arbitral tribunals on their own jurisdiction is not subject to appeal but the said decisions are subject to review by the Court.

The Court will determine the jurisdictional issue on a prima facie basis as it is generally reluctant to usurp the function of arbitral tribunals.

The same logic and approach will be adopted by Court to situation where the arbitral tribunals make negative rulings on jurisdiction.

If arbitral tribunals decide on the jurisdictional issues at the outset of the proceedings as a preliminary question, the time limit is 30 days from the date the party receives the notice of the tribunal’s decision. 

If arbitral tribunals decide on the jurisdictional issues in the form of an award, the application to the Court to set aside the award must be made within three months from the date the party receives the award.

Hong Kong adheres to the de novo standard of judicial review for questions of admissibility and jurisdiction.

The Court will make an order of a stay of court proceedings.

If a third party has the right to enforce the contract and is bound by an arbitration agreement by virtue of the Contracts (Rights of Third Parties) Ordinance, then they will be treated as a party to the arbitration agreement. In X v ZPRC [2020] HKCFI 631, the Court held that there are situations where arbitration clause is sufficiently widely drafted that it can also bind third parties.

Under Section 35 of the AO, an arbitral tribunal can grant the following interim measures which are of binding effects:

  • maintain or restore the status quo pending determination of the dispute;
  • take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice the arbitral process itself;
  • provide a means or preserving assets out of which a subsequent award may be satisfied; or
  • preserve evidence that may be relevant and material to the resolution of the dispute.

The Court can grant interim reliefs in arbitral proceedings usually in emergencies such as there is risk of destruction of documents or dissipation of assets before the tribunal has formed or when a tribunal's order is not complied with.

Under Section 45 of the AO, the Court can grant an interim measure in aid of foreign seated arbitrations on the basis that the foreign seated arbitrations are capable of giving rise to an arbitral award (whether interim or final) that may be enforced in Hong Kong. The Court may decline to grant interim measures if the interim measure sought is currently the subject of arbitral proceedings and the Court considers it more appropriate for the interim measure sought to be dealt with by the arbitral tribunal.

Appointments of emergency arbitrators may be made. For instance, it can be made under Schedule 4 of the HKIAC Rules. The awards of emergency arbitrators are binding and enforceable with the leave of the Court (Section 22B of the AO).

Hong Kong law allows an arbitral tribunal to order security for costs.

The AO is based on the UNCITRAL Model Law with a number of specific provisions (such as provisions on consolidation and confidentiality) as well as optional provisions (such as provisions on consolidation and permit appeal on a point of law or serious irregularity) applicable to the Hong Kong context.

Under Section 49 of the AO, unless there is any agreement by the parties, arbitration must be commenced by notice in writing for the dispute to be referred to arbitration.

The LO applies in relation to time limits to issue proceedings. For example, there is a limitation period of six years from the date of breach for contractual claims and also a limitation period of six years from the date on which damage suffered by the claimants for tortious claims.

Under Sections 56-59 of the AO, unless agreed by the parties, the arbitrators have the power to make orders in respect of:

  • security for costs;
  • discovery of documents or delivery of interrogatories;
  • directing evidence to be given by affidavit; or
  • inspection, photographing, preservation, custody, detention or sale of property by a party to the arbitral proceedings or an expert; or
  • samples taking, observations making, or experiments conducting.

The arbitrators can also grant interim measures, make directions as to costs and awards as well as extend time for arbitral proceedings, etc.

Conversely, arbitrators have the duty to ensure that their acts done or omitted to be done are not dishonest (Sections 104 of the AO). 

There are no particular requirements for legal representatives in Hong Kong.

It is by agreement between the parties to the arbitral proceedings. The parties can agree on the procedures such as the rules of the designated arbitration institutions. The arbitral tribunal will also take a role to oversee the whole process.

Except the rules governing privilege, arbitral tribunals are not bound by the strict rules of evidence. The parties can agree among themselves the applicable rules.

See 7.3 Powers and Duties of Arbitrators.

Arbitral proceedings are confidential in Hong Kong. Unless agreed by the parties, any information in connection with the arbitral proceedings or an award shall not be published, disclosed or communicated except the publication, disclosure or communication is relating to legal proceedings before a court in Hong Kong or outside Hong Kong to protect or pursue a legal right or interest of the party or enforce or challenge an award.

Publication, disclosure or communication is also allowable to parties’ professional advisers or any governmental or regulatory bodies, courts or tribunals under the law.

There are some requirements under Section 67 of the AO that the award shall:

  • in writing and signed by the arbitrator or arbitrators;
  • state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given;
  • state its date and the place of arbitration; and
  • delivered to each party after the award is made and signed by the arbitrator or arbitrators.

Unless agreed by the parties, an arbitral tribunal has the power to make an award at any time (Section 72 of the AO).

Unless agreed by parties, an arbitral tribunal can award any remedy or relief that could have been ordered by the Court if the dispute had been the subject of civil proceedings in the Court (Section 70 of the AO).

Only costs that are reasonable are recoverable (Section 74 of the AO). Generally, costs follow the event, unless agreed by the parties or limited by the applicable rules.

The arbitral tribunal can also award interest unless agreed by the parties or limited by the applicable rules. It has the discretion to decide on the rates, rests and dates of interest but no later than date of payment. Post-award interest may be awarded at judgment rate (Section 80 of the AO). The current judgment rate (1 July 2021) in Hong Kong is 8% per annum.

Parties have the ability to appeal on the grounds of serious irregularity and/or a question of law if they have opted in to Schedule 2 of the AO. Further the parties will be able to challenge an arbitration award on the procedural grounds under Section 81 of AO.

The appeal is done by filing and serving an originating summons but in practice it is quite difficult to succeed as the courts in Hong Kong are quite reluctant to usurp the functions of arbitral tribunals by intervening the awards made.

The parties can limit the scope of appeal or challenge of an award on ground of serious irregularity or on a question of law by excluding such right expressly in the arbitration agreement (Section 99 of the AO).

Hong Kong adheres to the de novo standard of judicial review of the merits of a case.

Hong Kong is treated as a Contracting State to the 1958 New York Convention with two reservations as the PRC – the reciprocity reservation and commercial reservation.

An arbitration award is enforceable in the same manner as a judgment of the court with leave of the Court (Section 84 of the Ordinance). For procedures, see 3.1 Enforceability.

The courts in Hong Kong take a pro-enforcement approach. It has exercised discretion to enforce an arbitral award which has been set aside by a foreign court (Dana Shipping and Trading SA v Sino Channel Asia Ltd [2016] 4 HKLRD 345).

States enjoy absolute immunity in Hong Kong. The immunity can be relied on as a defence of state or sovereign immunity during enforcement even if the state has taken part in an arbitration expect it can show that the state has waived its immunity expressly and unequivocally both in respect of immunity from suit and immunity of its property from execution (DR Congo v FG Hemisphere Associates LLC [2012] HKCFA 2). It is important to note that an agreement to arbitrate is not sufficient to constitute a waiver of immunity but the Court of Appeal in the said decision suggests that the position may be different if the state is a signatory to the New York Convention.

The courts in Hong Kong generally take a pro-enforcement approach. At the same time, it also takes a consecutive approach toward the public policy ground to deal with the awards obtained by fraud or oppressive manner. In Z v Y [2018] HKCFI 2342, the Court held that the enforcement of the award was contrary to public policy and refused to recognise it on the basis that the sale contracts giving rise to the guarantee were illegal and the guarantee was void and invalid under both the PRC and Hong Kong law.

There is no class action in Hong Kong.

Counsel are bound by the rules of professional conduct of their professional bodies (eg, the Law Society of Hong Kong or the Hong Kong Bar Council) of the jurisdiction in which they are qualified.

For arbitrators, see 7.3 Powers of Duties of Arbitrators.

The AO was amended in 2019 to allow third parties who have no interest recognised by law in arbitral proceedings (except the funding agreement) to fund.

The identity of third-party funders must be disclosed.

Schedule 2 of the AO (if applicable) states that the Court has power to order consolidation of arbitral proceedings. The HKIAC Rules also provides the joining of third parties.

See 5.7 Third Parties.

Stephenson Harwood

18/F United Centre
95 Queensway
Hong Kong

+852 2868 0789

+852 2868 1504

Info.hk@shlegal.com www.arbitrationhub.com
Author Business Card

Trends and Developments


Authors



Stephenson Harwood is a law firm with over 1,100 people worldwide, including more than 180 partners. The firm's headquarters are in London, with eight offices across Asia, Europe and the Middle East. The international arbitration team advises and represents clients at all stages of the arbitration process, from drafting valid and effective arbitration agreements, to representing corporates or individuals in arbitration proceedings, to enforcement (or resisting enforcement) of arbitration awards in courts around the world. The firm's key service sectors include banking and finance, construction, projects and infrastructure, government and state entities, international trade, marine, mining and metals, oil and gas, power and renewables, and shareholders.

The Enduring Popularity of International Arbitration in Hong Kong

International arbitration remains one of most popular methods of dispute resolution in Hong Kong SAR. According to the annual statistics of the Hong Kong International Arbitration Centre last year, the number of arbitration filings set new records – the highest number over the last decade.

The court continues to and develop the law in line with recognised international principles. While the court shows robust support of arbitration and enforcement of arbitral awards, it is also mindful to uphold the parties' bargain and avoid overly relying on the presumption of “one-stop adjudication”.

International Principles

One of the most important decisions is C v D [2021] HKCU 2823. In this case, the court considered whether a condition precedent to arbitration proceedings was a question of jurisdiction or admissibility before an arbitral tribunal. The fundamental differences are that if the question is one of jurisdiction, it is required to examine whether an arbitral tribunal has been conferred power to arbitrate the matter by the agreement between the parties. Conversely, the question of admissibility is one of whether the claim is one that can be brought before the tribunal.

This was the first time the court considered and analysed the position of academic scholars as well as jurisprudence from other common-law jurisdictions in respect of the issue of the compliance/non-compliance with conditions precedent to arbitration.

Following the approach adopted by other judiciaries in other common-law jurisdictions, the court took the view that even though the parties intended to be bound by the condition precedent, the non-compliance was not a bar for the parties to seek recourse from the arbitral tribunal as it was a question of admissibility but not jurisdiction. It follows that it was within the tribunal's power and jurisdiction to decide the issue of non-compliance as it sees fit. The court should not interfere in the process.

In this case, although condition precedent had not been satisfied, it was held that arbitration should and shall be the way to resolve the dispute as it fell within the scope of arbitration agreement.

This is an important decision as the court clearly distinguished the issues of jurisdiction and admissibility in the context of the compliance with conditions precedent to arbitration.

Pro-arbitration Approach

The court remains fiercely protective of arbitration. In G v S [2021] HKCU 2493, the court made it clear that it would not readily intervene in the enforcement of an award if the mischief complained of ought to be decided and resolved according to the dispute resolution mechanism contained in the agreement. G sought to enforce a CIETAC award which contained an order for specific performance in Hong Kong by way of a court enforcement order. S applied to set aside the enforcement order on the basis that the order for specific performance was contrary to public policy as it precluded S from relying on its lawful right to terminate the agreement, compelling it to perform its obligations.

The court rejected S's argument as the award did not prohibit S from relying on new grounds to terminate the agreement. Such new grounds should (and in fact were being) dealt with by way of a separate arbitration.

Pro-enforcement Approach

Security for costs

In Hong Kong, an arbitral award is enforced by way of court's enforcement order. In essence, if the successful party in arbitral proceedings intends to force the unsuccessful party to comply with the arbitral award (eg, make payment), it needs to apply to court to make an enforcement order. The unsuccessful party has two options:

  • comply with the enforcement order; or
  • apply to set aside the enforcement order.

If the unsuccessful party pursues the second option above, the successful party can make an application to the court to request the unsuccessful party to pay a sum to the court as security for costs.  In the event that the unsuccessful party fails in their application to set aside the enforcement order, it needs to bear the legal costs of the other side and if it refuses to do so, the security for costs can be used to cover the legal costs incurred by the successful party.

The issues of enforcement order and security for costs were considered in W v AW [2021] HKCFI 1707. Specifically, it was held that if the award was manifestly valid, the court should either grant immediate enforcement order or make an order for substantial security.

Public policy and severability

The court is generally reluctant to usurp the power and rulings of arbitral tribunals. In G v S [2021] HKCU 2493, the court was very circumspect in setting aside an enforcement order on the grounds of public policy. In this case, the court held that as the plaintiff was not prevented from exercising its lawful rights under the agreement, it was not at odds with public policy and so the court would not refuse to enforce the arbitration award.

It also held that if there were parts of an arbitral award which were defective, the other unaffected parts were severable or could be carved out to be enforceable on their own. (Section 84 of the Arbitration Ordinance and applying the decision in JJ Agro Industries (P) Ltd v Texuna International Ltd [1992] 2 HKLR 391.

Protection of the Role of Arbitrators

In Fenn Kar Bak Lily v So Shiu Tsung Thomas [2021] HKCU 2835, the court set out the applicable legal principles in relation to the exercising its power to restrain the arbitrator from acting. In a nutshell, the standard for the court to do so is very high in that it must be satisfied beyond reasonable doubt that arbitrator should not continue to act. This case concerns the complaint by the plaintiff that the arbitrator acted in bad faith and in conflict of interest.

Bad faith

If the arbitrator was said to be acted in bad faith, the court will need to look into the details of the merits of the complaint and will exercise greatest care to examine the conduct of the arbitrator with reference to the parties’ actions and responses.

Conflict of interest

If the arbitrator was said to be acted in conflict of interest with his other capacity, the court will consider the merits of the complaint on the basis of a fair-minded and informed observer with the relevant background and facts to decide whether there is any conflict of interest or any real possibility that the arbitrator is biased in continuing to handle the arbitration. The mere fact that the party to the arbitration proceedings has issued a writ against the arbitrator outside the arbitration was considered to be insufficient to give rise of concern of conflict of interest.

Support of the Parties' Bargain

The presumption of “one-stop adjudication” has long been used to determine whether a dispute arising out of or in connection with the agreement falls within the scope of an arbitration clause. It is a strong presumption that commercial parties intend all disputes arising out of their relationship to be resolved in the same forum unless there are clear wording to the contrary.

However, it should be wary of over-reliance on such a presumption particularly when parties enter into multiple agreements governing different aspects of their relationship. The decision in X v Y [2020] HKCU 3886 shows that court would consider each and single agreement separately and would uphold the parties' bargain in different agreements. When there are conflicting clauses of forums in different commercial agreements, a broad and purposive construction shall be adopted to determine the parties’ intention regarding the dispute resolution mechanism to deal with each dispute. The proper test in ascertaining the parties’ intention as to how their disputes should be resolved is to:

  • identify the nature of the claim; and
  • identify the agreement which has the closest connection with such dispute and claim (applying Trust Risk Group SpA v AmTrust Europe Ltd [2017] 1 CLC 456).

This approach was applied in CAPITAL WEALTH HOLDINGS LTD (資富控股有限公司) AND OTHERS v 南通嘉禾科技投资开发有限公司 [2021] HKCU 533. In this case, the court considered that the presumption of “one-stop adjudication” was insufficient to displace the broad and purposive construction of the parties' careful selection of a palette of dispute resolution clauses in the agreement. This case was related to disputes arose out of joint venture agreements and a loan agreement. Although the loans arose in the context of the joint venture, they were not connected to the joint venture agreements.

It previously been decided at the ex parte hearing that the joint venture agreements were subject to an arbitration clause and that the loan agreement although did not contain an arbitration clause was also subject to same arbitration clause under the presumption of “one-stop adjudication”.

The court revisited the issue at the return date and held that as the companies under the loan agreement were not parties to the joint venture agreements, they were not entitled to enforce the arbitration agreement but should resort to the Chinese courts for adjudication as provided in the loan agreement. The presumption of “one-stop adjudication” did not apply under the circumstances.  In summary, although a dispute may potentially fall within the scope of the arbitration clause, if it is indeed agreed to be decided by a different mechanism, any arbitral award made can be challengeable.

Conclusion

The authors envisage that the court will continue to support arbitration and develop the law in the landscape in accordance with the international principles. Cross-border enforcement issues will also continue to feature the development of International arbitration in Hong Kong SAR.

Stephenson Harwood

18/F United Centre
95 Queensway
Hong Kong

+852 2868 0789

+852 2868 1504

Info.hk@shlegal.com www.arbitrationhub.com
Author Business Card

Law and Practice

Authors



Stephenson Harwood is a law firm with over 1,100 people worldwide, including more than 180 partners. The firm's headquarters are in London, with eight offices across Asia, Europe and the Middle East. The international arbitration team advises and represents clients at all stages of the arbitration process, from drafting valid and effective arbitration agreements, to representing corporates or individuals in arbitration proceedings, to enforcement (or resisting enforcement) of arbitration awards in courts around the world. The firm's key service sectors include banking and finance, construction, projects and infrastructure, government and state entities, international trade, marine, mining and metals, oil and gas, power and renewables, and shareholders.

Trends and Development

Authors



Stephenson Harwood is a law firm with over 1,100 people worldwide, including more than 180 partners. The firm's headquarters are in London, with eight offices across Asia, Europe and the Middle East. The international arbitration team advises and represents clients at all stages of the arbitration process, from drafting valid and effective arbitration agreements, to representing corporates or individuals in arbitration proceedings, to enforcement (or resisting enforcement) of arbitration awards in courts around the world. The firm's key service sectors include banking and finance, construction, projects and infrastructure, government and state entities, international trade, marine, mining and metals, oil and gas, power and renewables, and shareholders.

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