The HKIAC’s arbitration caseload reached its highest level for more than a decade last year, underlining Hong Kong’s continuing international appeal as well as its unique strengths as a seat for China-related. Lawyers say that additional measures like third-party funding and success-based fee arrangements are set to cement the city’s reputation further.

 

Hong Kong’s status as a gateway to mainland China has long been propped up by a deep pool of legal and financial expertise driven by professionals who can handle commercial matters and disputes in an increasingly complex global regulatory landscape.

Arbitration options in the Special Administrative Region (SAR) are central to keeping Hong Kong as a centre of commerce in Asia and globally and to attract the kind of risk-taking and investment that powers business.

At the same time, the increasing attractiveness of arbitration for business parties worldwide and from a growing number of sectors and industries is an important factor in the growth of arbitration in Hong Kong.

The growing role of Hong Kong as a centre for dispute resolution has become increasingly visible. The Hong Kong International Arbitration Center (HKAIC) posted the highest number of new cases in just over a decade in 2022. The total number of cases rose a touch above 24 percent from 2021. The rising number of arbitrations highlighted the increasing complexity of global commerce, with most fresh cases involving multiple parties and contacts.

This is putting more demands on alternative dispute resolution approaches and powering the growth of arbitration as the preferred method. A Hong Kong-mainland China arrangement on arbitration has gathered steam, highlighting the growing complexity of commerce and the need for dispute resolution. At the same time, the Outcome Related Fee Structures for Arbitration (ORFSA) structure has put new incentives in place for legal firms.

There is still a lot to learn about how the arbitration process works separately from mainland China for companies and businesses from abroad seeking legal surety in Hong Kong.

“Overseas parties are starting to realise that all the ‘hype’ about Hong Kong being in the pocket of ‘China’ is just that – hype. The fact is that the mainland does not interfere with commercial arbitration, while, of course, Hong Kong maintains a fiercely independent bar and judiciary,” says Paul Starr, head of Hong Kong dispute resolution and co-head of global arbitration at King & Wood Mallesons.

“The growth to me can be explained by the fact that overseas parties are hearing more and more about the absolutely unique benefits which selection of Hong Kong arbitration can bring – benefits simply not available to parties if they select Singapore arbitration, London or anywhere else,” Starr adds.

HONG KONG VS SINGAPORE

Arbitration is growing as a preferred method of dispute resolution around the world, not just in Hong Kong. To be sure, Singapore is the regional rival to Hong Kong when it comes to arbitration.

The city-state houses the Singapore International Arbitration Centre (SIAC), the International Court of Arbitration of the International Chamber of Commerce (ICC) and the International Centre for Dispute Resolution (ICDR), the international division of the American Arbitration Association (AAA).

In addition to the HKIAC, Hong Kong houses the International Chamber of Commerce (ICC), and the China International Economic and Trade Arbitration Commission (CIETAC).

Other options are further afield, perhaps most notably the London Court of International Arbitration (LCIA).

But as Starr points out, there is a high level of comfort for all parties with doing arbitrations in Hong Kong.

“Mainland Chinese parties also seem to prefer Hong Kong seated arbitration. Over 50 percent of new cases of an international nature administered by the HKIAC in 2022 involved Mainland Chinese parties,” Starr says. “All users no doubt appreciate Hong Kong’s robust legal framework permit-ting both third-party funding and now success fees for arbitration and related proceedings. Further, the Hong Kong Court administers its curial responsibilities with a light touch, integrity, and independence.”

Arbitration is increasingly popular in many areas, including banking and financial services, construction, corporate, maritime, technology, crypto, international trade, and more. They all lend themselves to flexible arbitration paths to resolving disputes with different procedures dependent on the type of matter involved, from documents only or expedited procedures for smaller matters to full hearings for large-scale commercial disputes, Starr adds.

ARBITRATION IN THE GBA

This increasing penchant for arbitration to resolve disputes is also visible throughout the Greater Bay Area (GBA) and through the plans to integrate Hong Kong, Macau and nine cities along the Pearl River Delta of Guangdong economically and socially.

“Hong Kong will continue to be the legal backbone for the GBA. Hong Kong is the only common law jurisdiction within China, rules, and principles of which are familiar, if not equivalent, to other major business hubs in the world,” says Dantes Leung, a partner at Oldham, Li & Nie.

“With the constitutional protection under ‘One Country, Two Systems,’ the one-stop financial and dispute resolution services provided by Hong Kong keeps inspiring international investors’ confidence in the GBA and the Belt and Road Initiative, and therefore springboard investors into business opportunities in mainland China.”

Leung also notes that shareholder disputes with family companies and an upsurge of arbitration involving cryptocurrencies were apparent in the past year.

These issues are global, however. Leung says that almost half of the arbitrations submitted to HKIAC in 2022 involved no Chinese parties directly, showcasing the global nature of arbitration in Hong Kong and the new rules in place, such as the HK-Mainland Arrangement and ORFSA.

“Our experience is that clients from Asia and continental Europe typically expect external funding in resolving disputes,” Leung says. “These new rules align their expectations with the arbitration rules in Hong Kong and strengthen Hong Kong’s status as an international arbitration hub.”

AVOIDING PITFALLS AND COSTS

Agreed and deep experience in resolving disputes remains of paramount importance. The ability to avoid escalations in tone and, as importantly, costs can also help salvage a business relationship during rocky times. Unlike litigation, arbitration has established paths to arrive at flexible outcomes.

Arbitration is generally an out-of-court approach to resolve disagreements between commercial parties. The approach benefits from an impartial third party that can provide speed, especially when the process is written into commercial contracts and outlines the use of arbitration as a resolution tool.

Costs is, as always, a factor, but often more relevant is the flexibility of ORSA, along with the limited discovery and legal procedure steps that can add time, and the need to draw on qualified experts can bring a sharper focus to the issues at hand. More importantly, the privacy of the process can bring a cool down for parties that are often business associates.

One area of note is that banks increasingly use arbitration in Hong Kong as part of global operating models, says Joseph Chung, a litigation and dispute resolution partner for Deacons, Hong Kong’s largest local firm.

“Worth mentioning is that in 2022, the banking and financial services sector topped the HKIAC statistics,” Chung says. “This is perhaps part of the global trend of banks and financial institutions being more prepared to use arbitration to resolve their disputes. With increased investments in the technology space, it is envisaged that there will be an increase in arbitrating crypto disputes.”

“Hong Kong also supports online dispute resolution, which is a growing trend in international arbitration,” adds Chung.

Indeed, the diverse nationalities of parties involved in arbitration in Hong Kong point to a level of comfort and understanding that business and disputes often go together. “This reality was especially noticeable during the COVID-19 pandemic, a period during which there were many instances of loan defaults and contractual disputes,” says Edward Liu, a partner at Haiwen & Partners.

“The success of Hong Kong in becoming an international arbitration centre can be attributed to many factors, including the immense support by the Central Government, the unrelenting promotional efforts by the Hong Kong SAR Government, especially the Department of Justice, and continuous economic growth on the international scale, as seen from the unprecedentedly active economic activities, including trading, IPOs, and investments,” Liu says.

“In order to save costs and avoid publicity, many parties would opt for arbitration instead of court litigation. Accordingly, the comprehensive set of arbitration rules and guidelines in Hong Kong have been alluring to international entities and corporations, who are more than willing to choose Hong Kong as the seat of arbitration.”

Hong Kong is also the only jurisdiction in China that practices common law. This practical reality provides a strong incentive for international commercial parties to use Hong Kong as the seat of arbitration, Liu says.

“Overall, the implementation of these new measures can enhance and consolidate Hong Kong’s competitive edge and attractiveness in international arbitration. Hong Kong should capitalise on its inherent advantages, including its deep connection with mainland China and its unique common law system, to integrate into the national development and to provide quality and convenient legal services to the world,” says Liu.

HARD SKILLS, SOFT TOUCH

One side effect of Hong Kong’s long-standing reliance on the common law system is that arbitrations can draw on a large pool of in-depth legal skills, but also a lot of talent with a softer touch if needed.

“As arbitration is increasingly recognised as a viable, convenient, and cost-effective mechanism to resolve disputes, different areas of businesses have been specifying arbitration in the dispute resolution clauses in their contracts, which in turn leads to a more diversified spectrum of cases going to arbitration,” Liu says.

“Contractual, banking and financial, corporate and shareholder, energy, shipping and commodity disputes, which are amongst the most popular types of disputes involved in arbitration in Hong Kong. The other common type of disputes involve construction,” he notes.

Other types of cases are also increasingly part of the mix, including a visible uptick in technology and cryptocurrency disputes. The relatively effi-client and private nature of arbitral proceedings and the cross-border flexibility of enforcing an arbitral award makes arbitration the preferred dispute resolution forum for resolving these types of disputes, says Yvonne Shek, a consultant specialising in commercial litigation and arbitration at Clifford Chance in Hong Kong.

Shek says that Hong Kong is the centre for leading arbitral institutions such as the HKIAC, ICC, and CIETAC, giving it robust and pro-arbitration infrastructure through the judiciary and arbitration legislation, including outcome-related fee structures for arbitration.

“It offers a deep pool of international arbitrators and a wide spectrum of legal expertise; and it has unique features which no other jurisdiction can offer, such as the arrangements between Hong Kong and mainland China concerning the enforcement of arbitral awards and concerning interim measures in aid of arbitral proceedings,” Shek says.

Of the changes to fee structures and the integration of the GBA, among other areas of reform, Hong Kong has set the bar high for arbitration, Shek says.

“These changes have high impact on the use and practice of international arbitration in Hong Kong – they reflect that Hong Kong remains at the forefront of development in arbitral rules, legislation, and its arbitration framework. The changes allow greater flexibility and have expanded the toolkit available to parties to any Hong Kong arbitration; and they highlight the unique advantages of Hong Kong as an arbitration seat,” says Shek.

Shek also points to changes over the last few years, including stronger links to the People’s Republic of China (PRC) and why they matter for Hong Kong arbitration.

“In the last few years, we have seen the implementation of the Hong Kong and Mainland Arrangement Concern-ing Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings. This was a significant development as it has enabled parties to arbitrations seated in Hong Kong to apply to the PRC courts for asset freezing injunctions and other forms of interim relief in support of the Hong Kong arbitration,” Shek says.

“These can be strategically powerful measures in a dispute resolution process, and the arrangement provides access to the PRC courts, which is unique to Hong Kong arbitration and not available in support of proceedings in any other jurisdiction outside of the PRC.”

A series of recent changes in fee arrangements have also provided a boost to arbitration.

“More recently, Hong Kong has fully rolled out its legislation on… ORFSA, enabling parties to arbitrations seated in Hong Kong to enter conditional and damages-based legal fee arrangements. As a result, Hong Kong now has one of the broadest legal success fee regimes for arbitration globally,” says Shek.

BENEFITS TO PARTIES

One other aspect that cannot be overlooked is Hong Kong’s robust and “party-friendly arbitration framework” and the pro-arbitration attitude of the Hong Kong courts, says Joanne Lau, a partner at Allen & Overy.

“Importantly, Hong Kong is also a leading international financial and commercial hub with strong links to Mainland China. The Covid-19 pandemic had a cooling impact on business and trade in and around Hong Kong, as indeed was the case virtually everywhere else,” Lau says.

“Against the backdrop of the pandemic, many commercial parties faced with a potential breach or default by their counterparties preferred to adopt a ‘wait and see’ attitude. As countries around the world began to lift pandemic-related restrictions, we have also seen commercial parties becoming more prepared in taking legal measures and, consequently, an uptick in new arbitrations.”

Lau also points to the numbers.

“According to HKIAC’s statistics, approximately $3.3 billion of assets have been preserved under the arrangement as of the end of 2022,” Lau says.

“More recently, the inclusion of the HKIAC in the “one-stop platform” of the China International Commercial Court is another significant development, as it streamlines the process for seeking interim measures and enforcement of awards in appropriate HKIAC cases. As the GBA continues to develop, we expect the need for arbitration in Hong Kong will also increase.”

Lau also highlights the tenor of current disputes in finance and banking and with shareholders and says that, going forward, energy will be an area to watch as geopolitical tensions cause disruptions to business models and plans.

“In the wake of the Covid-19 pandemic, a relatively large number of banking and finance-related disputes were referred to arbitration. According to HKIAC statistics, 36.9 percent of HKIAC cases registered in 2022 related to ‘banking and financial services’, up from 16.2 percent in 2021,” Lau says.

“On general corporate and commercial cases, we continue to see many shareholder disputes, joint venture disputes and post-M&A disputes being resolved through arbitration, many of which involve private equity investors. The sectors are wide-ranging, but in the past couple of years, we have seen a marked increase in cases in the telecommunications, media and technology, and real estate sectors,” she adds.

But, as noted, energy disputes are already drawing more attention.

“In light of the political and economic developments of the recent year, we are also likely to see a rise in energy-related arbitrations and increased interest in investment treaty arbitrations,” Lau notes.