Hong Kong Arbitration: Lapse of Automatic Opt-In Provisions for Domestic Arbitration

May 26, 2017

Hong Kong’s old Arbitration Ordinance (Cap. 341) provided for two separate arbitration regimes—one for domestic arbitration and the other for international arbitration.  Following the adoption of the new Arbitration Ordinance (Cap. 609) (the “Ordinance”) on 1 June 2011, the distinction between the two regimes was abolished and a unified regime was introduced in Hong Kong based on the UNCITRAL Model Law.  However, in order to satisfy key users of arbitration (especially the construction industry), it remains possible to choose certain features of the domestic arbitration regime in the old Arbitration Ordinance (Cap 341).  These features are set out in Part 11 and Schedule 2 of the Ordinance. 

The provisions under Schedule 2 are as follows:

  • Any dispute arising between the parties to an arbitration agreement is to be submitted to a sole arbitrator for arbitration (Section 1 of Schedule 2);

  • The Court of First Instance of the High Court of Hong Kong (the “Court”) may on the application of any party to the arbitral proceedings, consolidate two or more arbitral proceedings if it appears to the Court that: (i) a common question of law or fact arises in both or all of them; (ii) that the rights to relief claimed are in respect of or arise out of the same transaction or series of transactions; or (iii) that for any other reason it is desirable to make an order for consolidation (Section 2 of Schedule 2);

  • The Court may on the application of any party to the arbitral proceedings, decide any question of law arising in the course of the arbitral proceedings (Section 3 of Schedule 2);

  • A party to arbitral proceedings may apply to the Court challenging an award in the arbitral proceedings on the ground of serious irregularity affecting the arbitral tribunal, the arbitral proceedings or the award.  The Court considers “serious irregularity” to mean instances where the arbitral tribunal has failed to: (i) treat the parties equally; (ii) exceeded its powers; (iii) conduct the arbitral proceedings in accordance with the procedure agreed by the parties; (iv) deal with all the issues that were put to it; (v) comply with the requirements as to form of the award; or (vi) give an interpretation of the award which is certain or unambiguous. In addition, a “serious irregularity” can also include: (i) the award being obtained by fraud or being contrary to public policy; (ii) an irregularity in the conduct of the arbitral proceedings; and (iii) if an arbitral institution exceeds its powers (Section 4 of Schedule 2);

  • A party to arbitral proceedings has the right to appeal to the Court on a question of law arising out of an award made in the arbitral proceedings.  On hearing an appeal, the Court can either: (i) confirm the award; (ii) vary the award; (iii) remit the award to the arbitral tribunal for reconsideration; or (iv) set aside the award in whole or in part (Section 5 of Schedule 2);

  • An application by a party for leave to appeal to the Court against an arbitral award on a question of law is granted only if the Court is satisfied that: (i) the decision of the question will substantially affect the rights of one or more of the parties; (ii) the question is one which the arbitral tribunal was asked to decide; and (iii) the arbitral tribunal erred or that the decision of the arbitral tribunal is open to serious doubt (Section 6 of Schedule 2); and

  • Supplementary provisions on challenge to or appeal against an arbitral award which provide that, if it appears to the Court that the award does not contain the arbitral tribunal’s reasons for the award or does not set out the arbitral tribunal’s reasons for the award in sufficient detail to enable the Court to properly consider the application or appeal, the Court may order the arbitral tribunal to state the reasons for the award in sufficient detail for that purpose (Section 7 of Schedule 2).

Section 100 of the Ordinance provides that all the provisions in Schedule 2 would automatically apply to:

  • domestic arbitration agreements entered into on or before the commencement of the Ordinance (i.e. 1 June 2011); and

  • arbitration agreements entered into from 1 June 2011 to 1 June 2017, which expressly refer to “domestic arbitration”.

The automatic application of these opt-in provisions under Section 100 of the Ordinance expires on 31 May 2017.  However, if parties with a Hong Kong seat in their arbitration agreement would like to continue using the features of the domestic regime under Schedule 2, they can do so by expressly referring to any relevant provision of Schedule 2 in their arbitration agreement pursuant to Section 99 of the Ordinance.  It is important to note that mere references to “domestic arbitration” in the arbitration agreements will not attract the application of Schedule 2.  Importantly, Schedule 2 can be adopted in its entirety or in part.  This allows for the parties to “cherry pick” certain features of the domestic regime for use in future arbitrations.

Otherwise, if the parties do not make express reference to Schedule 2 (or any of its provisions), then the unified arbitration regime will automatically apply in future for all Hong Kong arbitration agreements.  From a practical perspective, the unified regime under the Ordinance offers fewer avenues to challenge or appeal awards made by an arbitral tribunal.  In keeping with the UNCITRAL Model Law, the unified regime is intended to achieve finality and avoid ongoing disputes regarding the award rendered by the tribunal.  This is one important reason why parties may want to retain aspects of the domestic regime when drafting their arbitration agreements.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Denis Brock, an O'Melveny partner licensed to practice law in Hong Kong (Solicitor-Advocate), England & Wales (Solicitor-Advocate), Ireland, Australia, New Zealand and New York, Kieran Humphrey, an O'Melveny Counsel licensed to practice law in Hong Kong, England & Wales, and New South Wales, Australia, and Aditya Kurian, an O’Melveny associate licensed to practice law in India, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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