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Hong Kong Cements its Place in International Arbitration — Recent Developments in Hong Kong

10 August 2009
Mayer Brown Article

For a number of years, Hong Kong has battled with Singapore and other regional centres to be the dominant arbitration centre in Asia. Hong Kong’s position has benefited from a number of occurrences, such as the establishment by the ICC of a secretariat there. However, two recent developments will help to cement Hong Kong’s position as a leading arbitration centre. These are the adoption of the HKIAC Rules for Administered Arbitration and the court decision in A v. R.

HKIAC Rules for Administered Arbitration

In September 2008, the Hong Kong International Arbitration Centre (HKIAC) adopted the new Administered Arbitration Rules (Rules). Until the adoption of these Rules, arbitrations in Hong Kong were generally “ad hoc,” meaning that they were not administered by any authority. In ad hoc arbitrations, the HKIAC’s role is normally limited to the appointment of an arbitrator (if the parties cannot agree on the arbitrator) and the provision of a venue for the arbitration hearing.

However, it was perceived that certain parties, particularly from Mainland China, would prefer to engage in an arbitration that was administered by an overriding authority. There are two perceived reasons for this: first, that Chinese parties are accustomed to administered arbitrations, and second, that lingering doubts remain about the enforceability of ad hoc arbitrations in the Mainland despite the confirmation provided by the Supreme People’s Court of the PRC in October 2007 that “ad hoc” arbitration awards obtained outside the Mainland are recognisable and enforceable in the Mainland.

Approach of the New Rules

The overall approach of the new Rules is to provide “light touch” administration. They are generally based on the UNCITRAL arbitration rules and are said to be inspired by the Swiss Arbitration Rules. The HKIAC’s primary roles are:

  • The appointment of arbitrators if the parties cannot agree or refuse to appoint them within the specified time limit;
  • To determine challenges to arbitrators’ independence and impartiality; and
  • To determine fees of the arbitration tribunal in conformity with its own schedule.

The HKIAC does not have a role in vetting any arbitration award, and in that way, the service offered differs from the ICC. Some aspects of the Rules are highlighted below.

Commencement, Pleadings and Amendments
Once the Notice of Arbitration has been issued, the Respondent is obliged to provide a written Answer to the Notice of Arbitration within 30 days of receipt. However, unlike the ICC Rules, there is no obligation on the parties to agree to the Terms of Reference.
Once the arbitration has commenced and the arbitral tribunal appointed, the Rules provide for a formal written Statement of Claim and Statement of Defence to be served. These statements shall be accompanied with the documents on which the party shall rely. 

It should be noted that Article 19 provides a formal right to amend the Statement of Claim or Defence. However, this right is expressly limited. An arbitral tribunal can refuse amendments if the tribunal considers them inappropriate—after considering the party’s delay in proposing them, the prejudice to the other party or any other circumstances. This contrasts with the general practice in Hong Kong, which is that amendments are often accepted by arbitral tribunals at a late stage.

Expedited Procedure
Article 38 of the Rules provides for an expedited arbitration procedure for claims not exceeding US$250,000. The Rules, unfortunately, do not set out timing for submissions but instead set out a general requirement that the arbitral proceedings shall be conducted in a “shortened time” determined by the HKIAC. The expedited arbitration will proceed as a documents-only arbitration unless the tribunal decides that it is necessary to hold a hearing. 

Fees
Of course, the HKIAC charges a fee to administer arbitrations. This fee is established based on a sliding scale that depends upon the amount in dispute, subject to both minimum and maximum fees. The minimum fee for sums in dispute up to US$50,000 is US$1,500, and the maximum fee payable to the HKIAC for sums in dispute over US$50 million is US$26,850.

Both the claim and the counterclaim are taken into account in assessing the sum in dispute. Interest is not taken into account unless the amount claimed for interest is more than the principal sum. In such circumstances, the principal sum is excluded from the determination and only the interest amount is taken into account in assessing the fee.

In perhaps a sensible compromise, the Rules allow the parties to be able to choose whether the arbitrator(s) themselves are paid a fee in accordance with any agreement between the parties and the arbitrator(s) or pursuant to fees established by the HKIAC.

Drafting an Appropriate Administered Arbitration Clause

The Rules do not prevent parties from conducting ad hoc arbitrations in Hong Kong and, given the long-standing practice, it is likely that many arbitrations in Hong Kong will continue to be conducted on an ad hoc basis. However, now both options are available.

If parties would like their arbitration to be administered, then they should ensure that the arbitration clause is drafted to expressly state that the arbitration is to be “administered by the HKIAC.”

The Decision in A v. R

The second recent development is the Hong Kong Court’s decision in A v. R, handed down in April 2009.

The Facts
The facts of the underlying case are not in themselves remarkable. The case concerned an application in the Hong Kong courts to enforce an arbitration award issued in Denmark. Arbitration awards issued overseas are enforced in Hong Kong pursuant to the New York Convention.  The Respondent sought to oppose the enforcement proceedings.  However, under the New York Convention, courts are obliged to enforce arbitration awards other than in exceptional situations. One of those exceptional situations is if the enforcement of the award would be contrary to public policy.

In this case, the underlying claim was for liquidated damages, set at US$1 million per breach, which seemed to be out of proportion to the damages incurred. Counsel for R argued that the liquidated damages were a penalty and were unenforceable under Hong Kong law for public policy reasons.

The Decision
The judge did not accept this argument. This was for a number of reasons, including that:

  • The argument was not put to the arbitrator. Instead, although R had initially appointed lawyers, it had terminated those instructions. It was not repre­sented and did not attend the arbitration hearing. 
  • It was not clear on the information before the Hong Kong court that the liquidated damages were a penalty in any event.
  • Referring to case law from Hong Kong, Singapore and England, the court established the test for refusing to enforce an arbitration award on grounds of public policy as whether “upholding the arbitral award would ‘shock the conscience.’” The court did not consider that upholding this arbitration award would “shock the conscience.”

The court therefore upheld the award. This in itself is not remarkable. It is rare in Hong Kong for an arbitration award not to be enforced. What is surprising about this case is the award of costs. It would be usual for a winning party to be awarded costs, payable on a “party-to-party basis.” As a rough rule of thumb, a winning party can expect to receive about two thirds of its costs under this usual order. In this decision, A was awarded costs on an indemnity basis, which is a much higher basis of assessment.  In deciding to award indemnity costs, the court ruled:

  • Applications by a party to appeal against or set aside an arbitral award should be “exceptional events.” Where a party unsuccessfully makes such an application, he should in principle expect to have to pay costs on a higher basis.
  • If the losing party pays costs on the usual basis, the winning party would in effect be subsidising the losing party’s attempts to frustrate the enforcement of the valid award.

Additional reasoning for the decision was derived from the recent civil justice reforms in Hong Kong, which brought new court rules into effect from April 2009. The new court rules now require parties to assist the Court with the just, cost-effective and efficient resolution of a dispute. The court considered that, in the light of the civil justice reforms, the court ought not to be troubled with an application to appeal or set aside an arbitration award.

The decision, although surprising, is consistent with the hands-off approach Hong Kong courts have adopted to arbitration. This non-interventionist approach is one of the reasons why Hong Kong has attracted international arbitrations over the years.

Although the case concerned an enforcement action under the New York Convention, the reasoning would apply to the enforcement of all arbitral awards in Hong Kong, whether domestic or international.  Indeed the final paragraph of the decision reads:

Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the Court will henceforth normally consider awarding costs against the losing party on an indemnity basis.

It is clear that following the civil justice reforms, the courts intend to use the sanction of costs as an incentive for parties not to bring actions without merit. It is possible that the threat of an adverse indemnity costs award may act to reduce the number of challenges to arbitral awards in Hong Kong, which may in turn increase the strength of Hong Kong as an arbitration venue.

 

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