Legal update: Hong Kong’s New Arbitration Ordinance

Hong Kong has recently passed a new Arbitration Ordinance (Cap. 609). The New Arbitration Ordinance comes into effect on 1 June 2011, replacing the existing Arbitration Ordinance (Cap. 341).

Arbitral proceedings and related Court proceedings started before the New Arbitration Ordinance comes into force will be governed by the existing Cap. 341 Arbitration Ordinance.

The key change introduced by the New Arbitration Ordinance is the removal of the distinction between domestic and international arbitrations which exists under the current Cap. 341 Arbitration Ordinance. The New Arbitration Ordinance provides a single, unified regime based on the UNCITRAL Model Law, but with a number of modifications and additions tailored to suit Hong Kong’s requirements. This approach aligns Hong Kong’s arbitration regime more closely to international practice.

The structure of the New Arbitration Ordinance generally follows the same order as the Model Law and refers to each article regarding its application or non-application. This makes the New Arbitration Ordinance generally easier for practitioners and parties, particularly those from outside Hong Kong more familiar with the Model Law than the existing regime of domestic and international arbitrations under the Cap. 341 Arbitration Ordinance.

Opt-in provisions in Schedule 2

Although the New Arbitration Ordinance provides for a unified regime, it includes optional provisions (contained in Schedule 2) allowing parties to opt-in to some or all of the provisions governing domestic arbitrations under the existing Cap. 341 Arbitration Ordinance.

The opt-in provisions were included as a result of lobbying primarily by the construction industry which wished to preserve features of the domestic regime. The opt-in provisions are most likely to be utilised by parties in the construction sector, but may also appeal to some other sectors.

The opt-in provisions include arbitration by a sole arbitrator in the absence of agreement, consolidation of arbitrations, the decision of preliminary questions of law by the Court, the challenging of an arbitral award on the grounds of serious irregularity and appeals on questions of law.

Under the transitional arrangements the Schedule 2 provisions will automatically apply for six years from the introduction of the New Arbitration Ordinance if an arbitration agreement provides that it is to be treated as a “domestic arbitration”.

Construction contracts

“Construction Contract” is defined as having the same meaning given to it by Section 2(1) of the Construction Industry Council Ordinance namely ‘a contract between an employer and a contractor under which the contractor carries out construction operations but does not include a contract of employment’.

In the case of construction contracts only, the Schedule 2 provisions will be deemed to apply to sub-contracts (of any tier) where the main contract results in an automatic opt-in to Schedule 2 except in the following cases:

• If there is no arbitration agreement in the sub-contract;
• If the parties agree or the arbitration agreement provides that the automatic opt-in provisions do not apply;
• If the arbitration agreement provides that any of the provisions in Schedule 2 does or does not apply;
• If the sub-contractor is not based in Hong Kong;
• If a substantial part of the sub-contracted work is to be performed outside Hong Kong.

Interim measures

An important change is the adoption of the Model Law’s provisions regarding interim measures. The New Arbitration Ordinance expressly empowers arbitral tribunals to grant interim measures including injunctive relief, to maintain or restore the status quo, to prevent harm or prejudice to the arbitral process, to preserve assets and to preserve evidence. Additionally, arbitral tribunals are empowered to order the provision of security for costs and direct the discovery of documents or delivery of interrogatories.

Enforcement of arbitral awards

The New Arbitration Ordinance does not adopt the Model Law’s enforcement provisions. The enforcement provisions are similar to those under the existing Cap. 341 Arbitration Ordinance – i.e. awards whether made in or outside Hong Kong are enforceable with the leave of the Court in the same manner as a judgment of the Court. The provisions regarding the enforcement of New York Convention awards and awards from mainland China are retained. The enforcement in Hong Kong of non-New York Convention awards is also covered.

Taxation of costs

Provisions have been included in the New Arbitration Ordinance allowing the taxation of the costs of the arbitral proceedings if the parties have agreed to this, with costs payable on any basis on which the Hong Kong Court can award costs. On taxation by the Court, the arbitral tribunal must make an additional award of costs reflecting the result of such taxation. A decision of the Court on taxation is not subject to appeal.

Confidentiality

The New Arbitration Ordinance provides that disclosure of information relating to arbitral proceedings or awards is prohibited. Proceedings under the New Arbitration Ordinance are not to be heard in open court, although the Court may order them to be heard in open court on the application of any party or if in any particular case the Court is satisfied that the proceedings ought to be heard in open court.

Arbitrators as mediators

Provided that the parties consent in writing, an arbitrator may also act as a mediator after an arbitration has started. If an arbitrator acts as mediator, the arbitration must be stayed. Parties should be aware that if confidential information is obtained by an arbitrator acting as mediator and the mediation fails the arbitrator must disclose as much of that information as the arbitrator considers is material before resuming the arbitration.

Summary

The New Arbitration Ordinance will have a significant impact on arbitration practice in Hong Kong.

The introduction of a regime governed by international principles based on the Model Law aligns Hong Kong’s arbitration regime more closely to international practice. The opt-in provisions mean that Hong Kong will continue to retain two distinct regimes, which practitioners and parties will need to be aware of.

The powers of the Hong Kong Court to intervene will be more limited compared with the Court’s powers to intervene in domestic arbitrations under the existing regime of the Cap. 341 Arbitration Ordinance, although the opt-in provisions and their automatic application to domestic arbitrations for six years lessen the impact of this. It will be important for parties and practitioners to take care in the drafting of arbitration agreements and the review of arbitration agreements in standard term contracts to ensure that they achieve the intended result.

If you would like advice on any aspect of arbitration law in Hong Kong please contact us. The firm includes practitioners who concentrate on drafting contracts containing arbitration clauses and practitioners who concentrate on the preparation for the conduct of arbitration actions and on mediation of such disputes where possible and appropriate.