All change for arbitration in Far East, says Mallesons Stephen Jaques

There have been significant developments to the arbitration regimes in both Hong Kong and China, which will enhance both countries’ reputations and competitiveness in this area


HONG KONG Premier arbitration centre
When it comes to arbitration, Hong Kong has reaped the rewards of an advanced arbitral regime that began with the UK’s accession to the New York Convention on its behalf in 1977 (when the territory was still a British colony). After that Hong Kong became something of a pioneer. In 1990, it became the first jurisdiction in Asia to enact the UNCITRAL Model Law to govern arbitration. It was also the first jurisdiction in Asia to implement an open legal services policy: meaning that lawyers from outside Hong Kong can practise on a level playing field with local lawyers.

Like all leading arbitral centres, it offers a combination that has enabled it to flourish: from an excellent Hong Kong International Arbitration Centre, its international airport, transport facilities, hotels and restaurants; to its English-based common law system, backed up by an independent judiciary. This legal system has deep roots in Hong Kong, and it remains in effect today, notwithstanding the reversion of Hong Kong to Chinese sovereignty in 1997.

There’s also the depth of expertise that Hong Kong has to offer. Hong Kong boasts a pool of professionals who are locally based and can be called upon to assist in international dispute resolution proceedings. The courts in Hong Kong will strive to give meaning to arbitration clauses, while in other Asian jurisdictions they can get struck down.

Hong Kong’s new arbitration ordinance
The new ordinance sets up a unitary system of arbitration based on the Model Law (UML), which is an internationally recognised model.

The previous regime was bifurcated: domestic and international (based on the UML). This caused confusion with foreign parties, or those who were governed by the domestic regime but were more familiar with the UML.

It is hoped that more international parties will find the regime more user-friendly, and either insert Hong Kong as the venue in the contracts, or hold the arbitration in Hong Kong.

It is based in part on additions to UML in 2006, and the notable changes are:
• a stay of court proceedings in breach of the arbitration agreement is compulsory;
• no right of appeal against award (only setting aside award under limited UML grounds based on the New York Convention);
• new interim measures and preliminary orders;
• tribunal will assess costs unless court taxation is agreed by the parties. No need to follow court scales and practices;
• opt-in provisions to previous domestic regime, for appointment of sole arbitrator, determination of preliminary question of law, challenging award on grounds of serious irregularity and appeal on question of law. Automatic opt-in where arbitration agreement entered into before new ordinance, or six years after.

State immunity – absolute
The recent decision of the Court of Final Appeal in the FG Hemisphere case affects the law on state immunity, but is unlikely to affect arbitrations in Hong Kong generally or its competitive edge as a pre-eminent venue.

The case rules that Hong Kong must follow China’s doctrine on absolute state immunity, and the Hong Kong Court can refuse execution of an arbitration award. This decision was referred by the Court of Final Appeal to the National People’s Congress Supreme Court, pursuant to the Basic Law.

Bearing in mind that Hong Kong is a Special Administrative Region of China, the decision was anticipated, as restricted immunity and absolute immunity are in conflict.

Most commentators agree that there is no question of the juridical autonomy of the Hong Kong Courts being compromised or harmed. And bearing in mind state arbitrations are very few, the decision will not affect the vast majority of commercial cases in Hong Kong.

Future trends
There will be an increase in cross-border and ISCID (Investor-State) arbitrations, and increasing use of Hong Kong as a venue – particularly for Chinese companies.

Furthermore, there will be an increase in financial institutions using arbitration for confidentiality and easier enforcement (instead of traditional litigation usually according to UK law). A financial dispute resolution centre is to be established to allow mediation / arbitration of consumer banking disputes.

Arbitration preferred
For disputes which involve an international party against a Chinese party, arbitration is preferred for these reasons:
• Arbitration is considered to be a fair and unbiased way of resolving disputes. While there have been improvements in the litigation process in China, particularly in the major cities, there remain doubts about the fairness of the process.
• In arbitration, one can choose the venue and the language. Even if the arbitration is held in China, the parties may still choose English as the language. Litigation in China obviously can only be conducted in Chinese, and is therefore less convenient for a foreign party.
• The parties may choose their own arbitrators. In a panel of three, each side will be able to choose its own arbitrator, with a third arbitrator acting as Chairman. At the very least, the party would feel that it is able to get on the panel someone that the party trust would be a fair arbitrator.
• Enforcement of arbitration awards is generally easier cross-border under the New York Convention than court judgments which depend upon reciprocal treaties between affected countries.

Changes to Arbitration Laws
There are many voices demanding that China should bring its civil procedure law and arbitration law more in line with international practice. It is expected changes will be introduced, in particular:
• There shall be greater flexibility for the parties to appoint arbitrators outside the panels for both domestic and foreign-related cases.
• China should open the door to foreign arbitration institutions and allow them to handle arbitration cases within China.
• Ad hoc arbitration should be allowed in China.
• The arbitrator or the tribunal should be allowed to rule on the validity of the agreement and on their own jurisdiction.
These changes will strengthen the independence of Chinese arbitration, and its legislation will be closer to international practice.

Enforcement of awards
Despite the increasing number of arbitrations conducted in China and improvements to the arbitration rules and regulatory framework, many foreign companies continue to be concerned about choosing China as a seat for arbitrations and enforcing foreign arbitral awards in China. However, such fears are on the whole unwarranted because, in general, foreign arbitration awards are enforced in China. Recently, if any provincial court decides not to enforce an award, it has to send its draft judgment to the Supreme People’s Court. This has stopped a lot of the previous problems. It should also be borne in mind that asset seizures are also possible in China, and should be utilised once award-enforced.

Recently, there have been some positive developments to the Chinese arbitration regime, including:
• The Supreme Peoples’ Courts’ Circular on Issues Relevant to the Enforcement of Hong Kong Arbitration Awards in Mainland China, published in December 2009, which clarifies the type of Hong Kong arbitral awards enforceable in China. In particular, arbitral awards rendered in Hong Kong (whether ad hoc or under the auspices of an institution) will be enforceable in China.
• The increased financial independence and flexibility of Chinese arbitration institutions: for example, the Beijing Arbitration Commission achieved financial independence from the government and operates as a public institution managed as an enterprise. It is expected that there will be increasing demand for the other Chinese arbitration institutions to operate independent from the government to gain international recognition.

• The planned review of the China International Economic and Trade Arbitration Commission rules. Hopefully, a rule will be introduced that the three arbitrators should have different nationalities, because currently the norm is two Chinese arbitrators, including the chairman.

These positive changes help increase credibility in China’s arbitration system and make arbitration in China more attractive to foreign companies interested in doing business in China. The arbitration commission has also evolved as one of the busiest arbitral institutions by number of cases worldwide.

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