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Reform of the Law of Arbitration in Hong Kong

On 31 December 2007, the Department of Justice of the HKSAR published a Consultation Paper on Reform of the Law of Arbitration in Hong Kong and draft Arbitration Bill ("Consultation Paper"). Views are sought on the Consultation Paper by 30 April 2008.

The key object of the draft Arbitration Bill (the "draft Bill") is to seek to unify the domestic and international regimes of the arbitration law in Hong Kong. The origin of the law for domestic arbitration in Hong Kong was the English Arbitration Act 1950 (now repealed). In an attempt to align the arbitration law for international arbitration in Hong Kong with international standards, following the Law Reform Commission's recommendations, the UNClTRAL Model Law on International Commercial Arbitration (the "Model Law") adopted by the United Nations Commission on International Trade Law ("UNCITRAL") with minor modifications were applied to international arbitration in Hong Kong in 1990. The arbitration law in Hong Kong has since been divided into two separate regimes for domestic and international arbitrations.

The purpose of the reform, as stated in the Consultation Paper, is twofold. One objective is to make the law on arbitration more user-friendly. The other objective is to take a further step forward in aligning the domestic arbitration law with widely accepted international arbitration practices and development. It is hoped that this will secure Hong Kong's place as a Model Law jurisdiction, thereby attracting more business parties to choose Hong Kong as the place to conduct arbitral proceedings.

We shall in this article briefly look at the major changes to the domestic arbitration regime introduced by adopting the Model Law for domestic arbitration (as well as international arbitration) in Hong Kong.

Interim Measures and Preliminary Orders

Interim measures

Interim measures and preliminary orders are dealt with under Part 6 of the draft Bill. Clause 36(1) gives effect to Article 17 of the Model Law with revisions adopted by the UNCITRAL in 2006. Under Article 17, unless otherwise agreed by the parties, an arbitral tribunal may grant interim measures at the request of a party unless the parties have agreed otherwise. An interim measure is defined under Article 17(2) as any temporary measure by which the arbitral tribunal orders a party to:

1. "Maintain or restore the status quo pending determination of the dispute;
2. Take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral proceedings itself,'
3. Provide a means of preserving assets out of which a subsequent award may be satisfied; or
4. Preserve evidence that may be relevant and material to the resolution of the dispute."

The draft Bill in Clause 36(2) extends such meaning to include an injunction and under Clause 36(3) empowers the arbitral tribunal to make an award to the same effect as the interim measure granted to facilitate the enforcement of the interim measure. These are provisions which apply locally in Hong Kong if the draft Bill is enacted. The inclusion of an injunction may be seen to be a clarification of what is probably covered by the original provisions of Article 17. The making of an award to the same effect as the interim measure will enhance its enforcement, particularly in countries which are parties to the New York Convention.

Powers to order interim measures are provided under Section 2GB of the current Arbitration Ordinance. The scope of Section 2GB is considerably wider than Article 17. In particular, Section 2GB confers express powers (which are not provided under Article 17) on the tribunal to order security for costs and discovery of documents and to direct evidence to be given by affidavit. These additional powers provided under Section 2GB are retained, unless otherwise agreed by the parties, under Section 57 of the draft Bill. This seems to be a sensible approach because experience shows these powers are generally useful for the conduct of arbitral proceedings.

One other significant feature of the draft Bill in respect of the conduct of arbitral proceedings is the provision of the power, unless otherwise agreed by the parties, for the tribunal to make a peremptory order. Whilst Article 25 of the Model Law, which is adopted under Clause 54 of the draft Bill, provides for certain powers that can be exercised by the tribunal in the event of a procedural default, it only applies to certain specified defaults in respect of statements of claim and defence, non-appearance or non-production of evidence. The draft Bill goes further and gives the tribunal the power to make a peremptory order. Under Clauses 54(3) and (4) of the draft Bill, where a party fails to comply with a peremptory order made by an arbitral tribunal, the tribunal may direct that the party in default shall not be entitled to rely on any allegation or material which is the subject matter of the order, may draw adverse inferences from the noncompliance or may make an award on the basis of the materials provided. The tribunal may also make an order as to the payment of costs. Where the party fails to comply with an order for the provision of security of costs, the tribunal may under Clause 57(4) of the draft Bill make an award dismissing a claim or stay a claim. These are in our view useful and power tools which may be relied upon to ensure effective conduct of arbitral proceedings.

It is interesting to note that all the powers for making interlocutory orders as discussed above are subject to agreement otherwise by the parties. These are effectively powers which can be opted out by the parties. This gives weight to party autonomy whilst keeping, failing agreement by the parties, the useful powers.

Preliminary orders

The specific regime for preliminary orders under Clauses 38 and 39 of the draft Bill, adopting Articles 17B and 17C of the Model Law, allows any party to make ex-parte applications to the tribunal, without notice to any other party, to request an interim measure together with an application for a preliminary order directing a party not to frustrate the purpose of the interim measure requested. This mechanism bears some similarity to an application for an injunction to the Court in Hong Kong. The party requesting a preliminary order would need to satisfy the tribunal that prior disclosure of the request for the interim measure to the party against whom it is directed risks frustrating the purpose of the measure. The tribunal shall give an opportunity to any party against whom a preliminary order is directed to present its case at the earliest practical time and shall decide promptly on any objection to the preliminary order. The tribunal may require the party requesting an interim measure or applying for a preliminary order to provide security and such party shall be liable for any costs and damages caused by the measure or the order to any party if the tribunal later determines that the measure or the order should not have been granted.

A preliminary order will only be valid for a period of 20 days and a tribunal may issue an interim measure adopting or modifying the preliminary order. Whilst a preliminary order is binding on the parties, it is not subject to enforcement by the Court. A preliminary order also does not constitute an award. In those circumstances, it seems that a preliminary order alone has limited effect in preserving the status between the parties. Where there is a breach of the order, remedies may be sought from the tribunal. However, by that time, the purpose of the preliminary order may have been frustrated by the action of the party against whom the order is directed. We consider that provisions should be made in the new legislation for the preliminary order to be enforceable by the Court, perhaps even with some expedited procedure due to the short validity period of the preliminary order.

Awards

Part 8 prescribes procedures for deciding on the choice of substantive law in arbitral proceedings and sets out the requirements for the form and contents of an arbitral award. It also provides for the correction and interpretation of an award and the making of an additional award. It deals with the award on costs of the arbitral proceedings and empowers an arbitral tribunal under Clause 80 to order payment of interest on costs awarded in arbitral proceedings. This extends the relevant powers of the tribunal under Sections 2GJ and 2GH of the current Arbitration Ordinance which do not give an arbitral tribunal an express power to award interest on costs.

Court Assistance or "Intervention"

Power to grant interim measures

Under Clause 46 of the draft Bill, the Court in Hong Kong is given a concurrent power to grant interim measures. For arbitral proceedings conducted outside Hong Kong, an interim measure may be granted by the Court only if those proceedings are capable of giving rise to an arbitral award which may be enforced in Hong Kong under the new arbitration legislation or any other legislation in Hong Kong and that the interim measure sought belongs to a type or description of interim measures that may be granted in Hong Kong in relation to arbitration proceedings conducted in Hong Kong. There is an alternative proposal that reciprocity should be considered in granting an order in aid of arbitration proceedings conducted outside Hong Kong. This proposal is not recommended by the working party and is probably not conducive to promoting Hong Kong as an international arbitration centre.

Leave for enforcement

Clause 62 of the draft Bill preserves the present statutory position in respect of the enforcement of orders or directions, including interim measures, made by an arbitral tribunal in relation to arbitral proceedings conducted in or outside Hong Kong. For orders or directions made outside Hong Kong, there is a new requirement that leave for enforcement of such orders or directions shall not be granted by the Court in Hong Kong unless such orders or directions belong to a type or description of orders or directions that may be made in Hong Kong in relation to arbitral proceedings conducted in Hong Kong. An alternative proposal based on reciprocity is similarly not recommended by the working party.

Recourse against award

Under Section 25 of the Arbitration Ordinance, an arbitrator may be removed by the Court or an award set aside if there is misconduct by the arbitrator. Misconduct covers both personal misconduct of the arbitrator and misconduct which affects the proceedings. If the arbitrator has breached the principles of nature justice or fairness leading to substantial miscarriage of justice, it may be considered misconduct. Under Articles 12 and 13 of the Model Law incorporated by Clauses 25 and 26 of the draft Bill, potential challenges will have to be characterised as giving rise to justifiable doubts as to impartiality or independence. Whilst some of the grounds for misconduct may also lead to justifiable doubts as to the arbitrator's impartiality and independence, the concept of misconduct is probably wider than failing to demonstrate independence and impartiality.

The familiar provisions in domestic arbitration for appealing against an award on a question of law will not be available under the new regime (subject to opt-in provisions discussed below). An award may only be set aside on limited grounds specified in Article 34 of the Model Law such as the incapacity of a party to the arbitration agreement, the invalidity of the agreement under the chosen law, proper notice not being given of the appointment of the arbitrator, etc. The Court may not set aside an award on the ground of error of fact or law on the face of award.

Other court powers

Article 27 of the Model Law is adopted under Clause 56 of the draft Bill which allows an arbitral tribunal to request the Court's assistance in taking evidence. Clause 56 further provides that the Court may order a person to attend proceedings before the arbitral tribunal to give evidence or to produce documents or other evidence. The special powers for the Court under Section 2GC of the current Arbitration Ordinance to make an order, in relation to any arbitral proceedings, directing the inspection, photographing, preservation, etc. of any relevant property or directing samples to be taken from. observations to be made of. or experiments to be conducted on any relevant property are retained by Section 61 of the draft Bill.

Other available powers under the current Arbitration Ordinance such as the power to consolidate arbitration proceedings under Section 6B and the power to determine a preliminary point of law under Section 23A are not available under new regime. The consolidation provision in particular is something commonly used by parties to domestic arbitration in Hong Kong and is a powerful tool to facilitate the conduct of related arbitration proceedings. Its removal may require careful drafting of related contracts and sub-contracts to make sure all the necessary parties give their consent in the agreements for consolidation of related arbitration proceedings. This may not be practicable as not all the contracts are prepared at the same time and it is difficult for sub-contractors down the line to have provisions which contemplate consolidation of sub-contract arbitrations with arbitrations under the main or upstream contracts. It is worth considering keeping the consolidation provision in the Hong Kong legislation.

Opt-in Provisions

As may be seen from the above, the draft Bill once enacted will introduce significant changes to the current domestic regime of the arbitration law in Hong Kong. Many of the provisions which are available under the domestic regime and which will not be provided for in the unified regime are to a certain extent retained as opt-in provisions under Schedule 3 to the draft Bill. It is provided under Part 11 that parties to an arbitration agreement may include in the agreement any of the provisions in Schedule 3.

The opt-in provisions include the reference to a sole arbitrator, the power for the Court to consolidate arbitrations, grounds to challenge an award for "serious irregularity" (rather than misconduct), the power of the Court, upon application of any party to the arbitral proceedings, to determine a question of law arising in the course of the proceedings and the right (subject to certain conditions) to appeal against an arbitral award on a question of law.

One main difference between the old and the new regime (under Schedule 3) on the procedure of appeal against an arbitral award on a question of law is that the Court under the new provisions shall determine an application for leave to appeal without a hearing unless it appears to the Court that a hearing is required. Leave may be granted if the decision of the arbitral tribunal on the question is obviously wrong or the question is one of general importance and the decision of the arbitral tribunal is at least open to serious doubt. Whilst the criteria for granting leave may be said to bear some similarity to the common law criteria, the criterion of "serious doubt" now applies to a question of general importance which arguably also includes the interpretation of provisions in a "standard form" rather than a "one-off" contract. The absence of the requirement of a hearing may present some difficulty for the Court to deal with potentially complicated matters on paper.

It is provided under Part 11 of the draft Bill that, where an arbitration agreement entered into before, or at any time within a period of six years after, the commencement of the new legislation stipulates that an arbitration under that arbitration agreement shall be a "domestic arbitration", all the opt-in provisions under Schedule 3 shall automatically apply to that arbitration agreement subject to any express agreement to the contrary between the parties. This will reduce the impact of the new legislation on the current domestic arbitration provisions which the industry and the practitioners are used to and it is open to them to adopt the provisions in Schedule 3 even after the expiry of the sixyear period. There is also a deeming provision included under Part 11 to ensure that, subject to some exceptions, all the opt-in provisions in Schedule 3 would automatically apply to an arbitration agreement contained in every contract down the line of the sub-contracting process.

Conclusion

The introduction of new arbitration legislation in Hong Kong along the lines proposed in the Consultation Paper and the draft Bill should be seen as a positive step forward in enhancing the international status of Hong Kong as an arbitration centre. A balance however needs to be struck between the practical conduct and convenience of domestic arbitration proceedings in Hong Kong and the adoption of a law that is more familiar to the international community. It can be seen from the draft Bill significant efforts have been made to strike the balance. It remains to be seen after the consultation period as to what further changes will be made to the draft Bill. We encourage you to provide your comments to the Department of Justice by 30 April 2008 so that they are taken into account in any revision to the draft Bill.