A regional comparison of arbitration landscapes: Hong Kong

Hong Kong retained its status as a leading global arbitration hub in 2023, recovering from setbacks caused by the pandemic. The resumption of cross-border trade, improved connections within the Greater Bay Area and beyond, and support from both local and central governments in its development as a leading Asia-Pacific centre for regional and international dispute resolution services, continue to favour better conditions for resolving domestic, regional and international disputes by arbitration in the city.

Hong Kong’s pro-arbitration reputation is supported by an arbitration-friendly judiciary and its status as an UNCITRAL Model Law jurisdiction, as well as a variety of legal and institutional developments.

This article examines three specific aspects and their impact on arbitration practice in Hong Kong, namely, outcome-related fee structures; the Court of Final Appeal’s elucidation of the approach to the interpretation of multi-tiered dispute resolution clauses; and broader access to interim measures in PRC courts.

OUTCOME-RELATED FEES

The Arbitration (Outcome Related Fee Structures for Arbitration) Rules, also known as ORFS Rules, took effect in December 2022. They enable lawyers and clients to agree on fee arrangements conditional on the outcome of arbitration.

This marks a significant departure from Hong Kong’s traditionally conservative funding in legal actions, as evidenced by the continued existence of the offences of champerty and maintenance for litigation.

The ORFS rules provide for three kinds of fee structures: conditional fee agreements; damages-based agreements; and hybrid damages-based agreements. Their functions and strengths have already been explored in an expert briefing article in Asia Business Law Journal’s May/June 2022 issue, and need no repetition.

However, of particular interest are additional conditions for a hybrid damage-based agreement, with part of the fees contingent on whether the client wins.

The ORFS Rules require a hybrid agreement to set out payments for scenarios where a client obtains a financial benefit, or no financial benefit is obtained. If the client loses, the client is only required to pay at most 50% of the irrecoverable costs, known as the capped amount, being the benchmark lawyer fees that would have been charged no matter whether an ORFS agreement has been made.

On the other hand, if the client wins but the fee payable arising from the damages-based portion of the agreement is less than the irrecoverable costs, the lawyer may instead elect to retain the capped amount, namely the amount of irrecoverable costs that would have been payable in the event the client lost.

The provisions for ORFS, particularly hybrid damage-based agreements, are much welcomed additions. Not only do they make arbitration more accessible to local and international businesses of various sizes, but they also allow for flexible yet structured fee arrangements to be made. The option for electing between the capped amount and amount payable under the damages-based agreement payment if the client is successful enables lawyers to better recuperate the amount of fees they have incurred. Particularly for arbitration involving multiple and complex claims, it is quite possible that a party is only partially successful, resulting in an award that may be significantly lower than originally claimed.

By allowing lawyers to claim either the capped amount or that payable under damages-based agreement payment, the ORFS regime on one hand allows lawyers to better balance the needs and preferences of their clients, and on the other hand the need to ensure they can be adequately remunerated for their work. This is, self-evidently, particularly important for complex arbitrations with multiple items of claim.

MULTI-TIERED CLAUSES

Hong Kong’s arbitration-friendly approach also enjoys contributions from the courts. The highly anticipated judgment of the Court of Final Appeal in C v D (2023) – the first of its kind by a common law apex court – laid down the proper approach to interpretation and understanding of multi-tiered or cascading dispute resolution clauses in arbitration agreements.

The arbitration agreement in C v D provided that in the event the dispute “cannot be resolved amicably within 60 business days of the date of a party’s request in writing for such negotiation”, it shall be referred to arbitration. The tribunal considered that the parties fulfilled their negotiation requirements and proceeded to render an award in favour of the respondent. The appellant sought to set aside the award on the ground that the tribunal lacked jurisdiction.

The issue before the Court of Final Appeal was: if an arbitration agreement contains a multi-tiered dispute resolution clause, whether an arbitral tribunal’s determination on the fulfilment of that precondition was subject to recourse of the court under article 34(2)(a)(iii) of the UNCITRAL Model Law.

The court unanimously dismissed the appeal on the basis that on a proper construction of the agreement, both parties intended any dispute as to fulfilment of the pre-arbitration conditions to be submitted to an arbitral tribunal for consideration. As such, the appellant could not rely on article 34(2)(a)(iii) to set aside the award.

Justice Roberto Ribeiro (with whom Chief Justice Andrew Cheung, Justice Joseph Fok and Justice Johnson Lam agreed) held that a court’s jurisdiction to review a pre-arbitration condition must be set out in clear language in the arbitration agreement before a court would conclude so. A pre-arbitration condition is presumptively non-jurisdictional, subject to interpretation of the agreement’s purpose and the parties’ intention.

The majority judges also held that the distinction between jurisdiction and admissibility is helpful in construing a multi-tiered dispute resolution clause. In simplest terms, the distinction is one between a challenge to the tribunal (a question of jurisdiction) and a challenge to the claim (a question of admissibility).

The objection in question was only that the claim had been prematurely referred to arbitration, but not an objection refusing to give consent to the tribunal’s authority to decide and render an award on the matter. That said, given that such clauses are only presumptively non-jurisdictional, it is still open to parties to elevate a non-jurisdictional matter (like a multi-tiered dispute resolution method) into a jurisdictional one by express consent. This is embodied in section 3(2) of the Arbitration Ordinance, freeing parties to agree on how a dispute should be resolved, and a court should only interfere with the arbitration of a dispute as expressly provided for. Such an expansion of the scope of curial review was, however, observed to be “contrary to all normal commercial expectations”.

The judgment resoundingly maintained the distinction between jurisdictional and admissibility disputes, which finds firm roots in well-established approaches in ascertaining arbitrating parties’ intentions. It correctly highlights the importance of commercial certainty and the need for express indicia of intention before courts would consider intervening in arbitration disputes. More importantly, the judgment also elucidates what commercial parties may normally expect from Hong Kong courts: They are willing to assist in arbitration procedures and only make a limited intervention in arbitration disputes.

All in all, the judgment contributes to and solidifies Hong Kong’s reputation as a leading global arbitration hub, where commercial parties may conduct business and resolve disputes with reliable certainty, rooted in the very agreements they entered in the first place.

INTERIM MEASURES

This year has also seen broader access to interim measures in PRC courts, which dates back to 2019, when the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region was entered into (interim measures arrangement). 2023 has seen increased use of asset preservation orders, and conduct preservation orders and evidence preservation orders for parties conducting arbitration in Hong Kong.

Recently, in May 2023, the Asian-African Legal Consultative Organisation (AALCO) Hong Kong Regional Arbitration Centre signed memoranda of understanding with 15 different organisations, including the Hong Kong Institute of Arbitrators. This signifies further and greater co-operation and integration of the city’s arbitration regime with the rest of the world.

As an institution approved by Hong Kong’s Department of Justice to be a qualified institution under the interim measures arrangement, parties using the AALCO arbitration can apply directly to PRC courts for interim measures.

Considering the development of stronger economic ties between Asia-Pacific and African economies, the AALCO may be expected to serve as a convenient platform for the resolution of commercial disputes between Asian and African entities, including commercial and investment disputes arising from the Belt and Road Initiative.

CONCLUSION

Hong Kong’s arbitration landscape has much to look forward to as a result of these legal and institutional developments.

With continuing government support for further use of arbitration and development of commercial ties with up-and-coming economies from different corners of the globe, the special administrative region is well-poised to serve as a progressive, reliable and user-friendly dispute resolution centre for domestic and international commercial parties of various industries.

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