UK: International Arbitration In Hong Kong After 1997

Last Updated: 21 July 1997
(First published in In House Lawyer, November 1996)

There is uncertainty about Hong Kong's future as a centre for international arbitration after 1997. However, Stewart Shackleton of Norton Rose argues that it will remain an attractive venue after the colony's reversion to Chinese sovereignty.

Hong Kong's development as an important centre in Asia for trade and financial transactions has also seen it grow into a primary venue for the resolution of major international commercial and construction disputes.

Background

In recent years, Hong Kong has been an increasingly popular seat of arbitration and claimed its place among other leading cities who play neutral host to contending parties from around the world. In the year it was founded in 1985, the Hong Kong International Arbitration Centre (HKIAC) handled only nine cases. In 1995, it dealt with over 180 cases, three times the number of cases before the London Court of International Arbitration and almost half the number of cases filed before the Paris-based International Chamber of Commerce in Paris in that same year. Such statistics are only one indication of arbitral activity. They do not, of course, take into account the many more arbitrations regularly conducted on an ad hoc basis. Perhaps in recognition of the considerable growth of arbitration in the Crown Colony, the ICC recently decided to open a representative office in Hong Kong - the only such office it has outside of Paris.

The dramatic increase in the number of international disputes resolved in Hong Kong is, in part, a reflection of Hong Kong's economic activities. The more trade that occurs, the more disputes are bound to arise. In spite of its small territory, Hong Kong is, by any standards, a busy city. Ranked in terms of container throughput, Hong Kong's port is the largest in the world. It presently handles some 13m containers a year and is undergoing improvements in order to meet a projected capacity of 35m containers 15 years from now. The old Hong Kong airport (Kai Tak) is the second most active in the world for international cargo. It also sees some 24m passengers per year. The new airport at Chek Lap Kok, is being constructed for an anticipated traffic of 80m annually. In terms of the volume of external banking transactions, Hong Kong is one of the world's top five financial centres. Last month Hong Kong's equivalent of a Central Bank, the Hong Kong Monetary Authority, was invited to become a member of the Bank for International Settlements in Basle, Switzerland. It will be the only non-State entry to join the BIS.

One of the acknowledged reasons for Hong Kong's economic success is the early establishment of a highly developed reliable system of law and a truly independent judiciary. Confidence in the legal system has naturally also been a determining factor in the recent growth of Hong Kong as a major arbitration centre in Asia. However, there is currently much speculation on the viability of Hong Kong's system of law and the possible future consequences for the city's future as an important venue for international arbitration. Today, because of the proximity of Hong Kong's reversion to Chinese sovereignty, it is commonly thought among international legal practitioners to be unwise to select Hong Kong as the place of litigation in jurisdiction clauses.

Hong Kong after 1997

In less than a year from now, Hong Kong will become a Special Administrative Region of China (HKSAR) marking the beginning of a unique political and legal experiment. A capitalist enclave will peacefully and voluntarily come under the sovereignty of a communist regime. A common law territory will function as an integrated part of a vastly larger State that has clearly opted for a civil law system. What will the these changes mean for Hong Kong's legal system after July 1997?

One rather dim view was expressed last year by Massachusetts District Court Judge, William Young who had to decide whether the family of a Massachusetts resident who drowned in a hotel swimming pool in Hong Kong could be allowed to sue the hotel in the US rather than commencing proceedings in Hong Kong. The judge, relying on what he saw as the uncertain future of Hong Kong's legal system after 1997, allowed the law suit to proceed in the US.

That judgement, and Fortune magazine's forecast last year of the impending 'death of Hong Kong' represent a widespread fear abroad that Chinese law and socialist policies are set to move in after 1997. However, if promises are kept on all sides, that is not what is supposed to occur. Rather, in accordance with the policy of 'one state, two systems' promoted during the Sino-British talks on Hong Kong by Deng Xiao-Ping who is still China's leader, Hong Kong is to retain its capitalist system for a transition period of fifty years. It has received important guarantees in this regard from China. Except in foreign and defence affairs, Hong Kong has been promised a 'high degree of autonomy' with effective executive, legislative and independent judicial power. Its courts are to enjoy the power of final adjudication. The economy is to continue unchanged. Most importantly, Hong Kong is to maintain its free port. The Basic Law, a law of the People's Republic of China which is intended to function as a constitution for the HKSAR after 1997, specifically provides that 'the previous capitalist system and way of life shall remain unchanged for 50 years'. The Basic Law also clearly spells out that 'the laws previously in force in Hong Kong, that is, the common law, rules of equity, ordinances, subordinate legislation and customary law shall be maintained'.

All necessary assurances would thus seem to be in place in order that Hong Kong might be able to protect and maintain the legal system and the specific legal practices evolved and adapted to Hong Kong's own social, geographic and economic circumstances. The application of English common law and rules of equity in addition to certain acts of Parliament was formalised in 1966. But however firmly entrenched it is in the English common law, Hong Kong has been able to establish its own legal culture with a distinct identity. Over the past 150 years, some 1,160 ordinances and much subsidiary legislation have been enacted.

1997 will not be without further changes. The Judicial Committee of the Privy Council will no longer hear appeals from Hong Kong courts who in turn will no longer be bound by its decisions. Hong Kong will have its own Court of Final Appeal and the decisions of the English courts will be accorded only the same persuasive status of decisions emanating from the courts of any other common law jurisdiction. Hong Kong law and legal practice will become a full and independent member-jurisdiction of the common law family. One evident sign of this increasing independence is the recent decision by the Law Society of Hong Kong that the standing exemption for English solicitors from qualification exams in Hong Kong cease as of July 1, 1997. Thereafter, English solicitors, like all other foreign lawyers presently seeking to qualify as solicitors in the territory, will be required to be examined on Hong Kong law.

Arbitration in the interim

Hong Kong law and its judiciary have shown a reassuringly positive and highly supportive attitude to international arbitration. Hong Kong will go into the transition period with thoroughly up-to-date arbitration legislation complemented by substantial case law in the area. The Hong Kong arbitration law is based on the United Nations model law (UNICITRAL). Its enactment in 1990 set Hong Kong apart from the English arbitration model. The result is a very liberal and flexible regime for international dispute resolution which safeguards to a great extent the freedom of parties to determine the conduct of their own arbitration proceeding without undue interference or supervision from local courts who remain available to assist in certain circumstances.

The parties are free to choose not only their arbitrators, but also the language of the proceedings, the sort of procedure to be followed and the amount of formal pleadings allowed, the rules of evidence, the time, place and length of hearings, the modalities of expert evidence and by whom they wish to be represented before the arbitral tribunal. The parties' freedom is highlighted by the authority given to them to opt out of the arbitration law completely. This flexibility is important because it allows for the construction of an arbitral framework of procedure that is unique to each individual case and that will address and accommodate the needs of parties from different cultural and legal backgrounds.

The courts play a supportive role. They are empowered, for example, to assist in the appointment of arbitrators and to order interim protective measures relative to the subject matter of the dispute or to require a party to provide adequate security.

The arbitration law in Hong Kong affirms the principle of the autonomy of the arbitration clause. It thus ensures that the agreement the parties have made to submit their dispute to arbitration will survive even if the contract of which it is found to be a part is null and void.

Hong Kong's arbitration law distinguishes between international and domestic arbitrations. The interpretation of what is considered to be an international dispute is quite liberal. An arbitration will be considered to be international even where both parties have their places of business in Hong Kong as long as the 'place of a substantial performance of the contract' is outside of Hong Kong as, for example, the delivery of shipment of soya beans in Fung Sang Trading v Kai Sun Sea Products & Food Company ([1992] HKLR 40) (See also Katran Shipping Co Ltd v Kenven Transportation Ltd digested in [1992] HKLY61). Under the old rules such a situation would have been dealt with as a domestic arbitration.

The grounds for appeal against an arbitration award are very narrow in Hong Kong, a position recently reaffirmed in A-G v Shmzu Corp. (1996 2 HKC 412) and this is all the more so if the award is rendered in international as opposed to domestic arbitral proceedings. Hong Kong courts have been very favourable to the enforcement of Convention awards and have adopted a very restricted notion of public policy under which awards might be refused enforcement following the cases of Werner A. Bock KG v The N's Company [1978] HKLR 281 and Zhejiang Province Garment Import & Export v Siemssen & Co (Hong Kong) Trading Ltd, (digested at [1992] HKLY 58). The courts will only refuse to enforce in very rare circumstances such as, for example, where an arbitral Tribunal, by basing its decision on a tribunal-appointed expert report that one of the parties was not allowed to analyse, answer or comment on, commits some fundamental procedural flaw as occured in Paklito Investment v Klockner East Asia ([1993] HKLR 39)

Both Hong Kong and China are signatories to the 1958 New York Convention. The States who are members of this Convention essentially agree to recognise and enforce arbitration awards rendered in other member States and severely restrict the grounds on which a foreign award might be refused. The United Kingdom extended the Convention to Hong Kong in 1977. China ratified it in 1987. Because of this Convention, it is often easier to enforce an arbitration award rather than a court judgement especially in the absence of reciprocity agreements for enforcement.

The Convention will continue to apply in Hong Kong after July 1, 1997. However, after that date, any arbitrations as between Hong Kong and Chinese parties held on the mainland or in Hong Kong will normally be considered as domestic arbitrations. Consequently, awards rendered in Hong Kong will no longer be enforceable in China under the Convention as international arbitral awards. A solution will have to be found with respect to the question of enforcement since enforcement even of international arbitral awards in China can be highly problematic. Only an extremely small number of arbitral awards rendered in China have been refused enforcement in Hong Kong. Another difficulty to be resolved is that after 1997, the commercial reservation made by China when it adhered to the New York Convention will apply to Hong Kong as well. Presently in Hong Kong, whose law does not know the distinction between commercial and non-commercial disputes, international arbitration is not limited to the commercial category. In fact, in one of the very few changes made to the UNCITRAL model law before it was enacted, Hong Kong, which has no separate law for merchants, omitted the word 'commercial' from the phrase international commercial arbitration.

An attractive venue

Despite continuing uncertainty, reasonable or unreasonable, about the political situation after 1997, it would appear that Hong Kong will be able to preserve existing procedural and substantive legal rights and usages in the territory. It will remain an attractive venue for arbitration after 1997 for a number of reasons. First among the advantages it offers has to be Hong Kong's biculturalism and bilingualism. Although Hong Kong's population is 96 per cent Chinese speaking and just 2 per cent anglophone, the language of the law in Hong Kong has been English only for the past 150 years. That is now changing with the gradual implementation of a new policy of legal 'localisation'. The first bilingual ordinance was enacted in 1989. Already existing legislation and with it, the language and concepts of the common law are presently being translated into Chinese. Hong Kong courts are moving quickly towards the provision of full services in both Chinese and English. By 1 July 1997, both English and Chinese are to be used equally as the official languages of Hong Kong. However, Hong Kong courts and arbitral tribunals are already quite used to conducting proceedings in more than one language with assistance from interpreters.

Hong Kong's history has thus provided it with qualities and talent for the resolution of international disputes between European and Asian trading nations that are unequalled anywhere else in Asia. In addition, a large proportion of the legal community is either trained abroad in Britain, the USA, Australia and Canada or has worked abroad. Local legal professionals in Hong Kong are uniquely equipped with the international and comparative legal culture required for the understanding and resolution of disputes that often result from opposing trade, industry and business practices. They are aware of and sensitive to evolving international rules and standards of contract and arbitration law.

These aspects are bound to increase in importance with the possibility that Hong Kong may, after 1997, be permitted to serve as a venue for China-centred arbitration. The most significant growth to have occurred anywhere in the international arbitration world in recent years is the spectacular increase in arbitral activity in China. In 1985 the China International Economic and Trade Arbitration Commission (CIETAC) saw only 37 cases. By 1995 that figure had risen to over 900 cases. In terms of the number of cases handled, CIETAC is by far the busiest arbitration institution in the world at the moment with a case load that is well over twice that of the Paris ICC. It would be entirely logical for Hong Kong to become a venue for CIETAC arbitration sometime after 1997.

Finally, in addition to a modern arbitration law, Hong Kong has an experienced judiciary which favours arbitration. Hong Kong judges have an understanding and an appreciation of the arbitral process and a demonstrated willingness not to interfere. International dispute settlement in Hong Kong can draw on a pool of experienced and qualified arbitrators in addition to the resident lawyers from all over the world who practice law in Hong Kong and who are familiar with international transactions and the laws of the major trading nations. Hong Kong places no limits whatsoever on the representation of parties to arbitral proceedings by foreign lawyers. There is a local availability of technical and financial experts in a wide range of disciplines. From a practical point of view, Hong Kong has excellent transportation and communication services. It also has an independent and specialised arbitration centre with excellent facilities, the HKIAC mentioned above.

Hong Kong is improving its laws to adapt to developing commercial realities. Draft legislation was gazetted on September 27, 1996 to be subsequently debated. It is intended to amend the arbitration law in order to broaden significantly the meaning of an 'agreement in writing'. This will resolve potential problems of arbitration clauses that are not signed by the parties. The new language is expected to cover a variety of situations: arbitration clauses that are contained in unsigned documents, an exchange of letters or other means of communication, those which are incorporated by reference, recorded or evidenced by one of the parties or some authorised third party or the existence of which has been simply affirmed by one party in the course of the proceedings and not denied by the other. To some extent these changes have already been anticipated by practical business minded courts as, for example, in the recent decision in the case of Jiangxi Provincial Metal and Minerals Import and Export Corporation v Sulanser Company Limited, (1994, MP 887, [1995] HKLD E8, [1995] 2 HKC373). In the same draft legislation, it is also proposed to remove the power of default appointment of arbitrators from the courts and to confer it on the HKIAC in a manner similar to the appointment authority of the Paris ICC, thus assisting parties by reducing the costs and time involved in formal court applications.

In the context of international contract negotiations and dispute resolution which are increasingly less 'Eurocentric', Hong Kong is likely to continue to be a venue in Asia that offers important advantages. Its procedural law favours arbitration by ensuring the independence and autonomy of the parties and the arbitrators. Hong Kong will enter the transition period with the unimpaired ability to maintain those conditions and the rank it has achieved as an important forum for international dispute resolution as well as its great potential as a bridge of understanding and arbiter between different cultural and legal traditions in a region of the world that is bound to remain an area of strong economic growth.

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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