Article written by Paul Starr, Nicholas Lee and Felicity Ng (Hong Kong)
The year is 2028. KWM is ranked at No. 1 in the Global Arbitration Review Top Thirty international arbitration law firms. Clearly, as exemplified by Brexit, Donald Trump’s tweets and North Korea/US relations, predicting even the immediate future is no easy feat. When it comes to what international dispute resolution will look like in the medium-term – how we resolve disputes, where we hear those disputes, what tools we will use to resolve them – it gets even trickier. But doing so can give us a fresh perspective on the challenges and opportunities of today. We discuss below our predictions following the four key findings arising out of the 2018 International Arbitration Survey by Queen Mary University, London (the “Survey”), namely:
- Finding 1 – Singapore displaces Hong Kong as the most preferred arbitral seat in Asia-Pacific;
- Finding 2 – Enforceability of awards as arbitration’s most valuable characteristic;
- Finding 3 – Cost as arbitration’s worst characteristic; and
- Finding 4 – 97% of respondents are aware of third party funding in international arbitration with the majority of respondents having a generally positive perception.
Finding 1. The Hong Kong vs Singapore arbitration rivalry continues – how Hong Kong will maintain its competitiveness
Survey respondents displaced Hong Kong’s previous ranking, as the most preferred arbitral location in Asia-Pacific, in favour of Singapore. Singapore became the world’s third most preferred arbitral seat, according to the Survey. Singapore International Arbitration Centre (“SIAC”) swapped rankings with Hong Kong International Arbitration Centre (“HKIAC”).
In this close rivalry, the two cities share key characteristics which make them highly favourable arbitral seats. Both: have enacted arbitration laws based on the UNCITRAL Model Law; are parties to the New York Convention; and are known for their pro-arbitration stance with specific arbitration court lists and judicial power to grant interim orders to assist arbitration proceedings. Emergency arbitration is also a vehicle available in both jurisdictions.
Singapore was ranked in the top four in all regions except Latin America, where it came sixth as the most preferred arbitral seat. Hong Kong only came third in Asia-Pacific. At the institutional level, SIAC had a record-breaking caseload in 2017, 452 cases, the most significant contributors being parties from China and India, with Japan and several countries from Europe and the Middle East breaking into the top ten. SIAC proposed a cross-institution cooperation initiative for consolidation of arbitral proceedings. Recently, Singapore’s Ministry of Law and Maxwell Chambers announced plans to become the world’s first “smart hearing facility”, working together with Singapore tech start-ups to introduce smart booking, secretariat and concierge services, and a logistics assistant robot in its “Smart Maxwell” initiative.
So how will Hong Kong regain its position as the most preferred arbitral location? For a start, legislative reform has confirmed the arbitrability of intellectual property disputes in 2018. At the institution level, HKIAC has proposed amendments to its 2013 Administered Arbitration Rules, including use of secured online document repositories, multilingual procedures, disclosure of third-party funding (“TPF”) and issuing investment arbitration rules. HKIAC recently introduced a panel of arbitrators specialising in financial services disputes with multi-jurisdiction and multilingual expertise, and signed a cooperation agreement with the Institute of Modern Arbitration of Russia.
Most significantly of all, we see the rise of China’s Belt and Road Initiative (“BRI”) leading to an increased use of Hong Kong as a neutral dispute resolution centre to facilitate these disputes. We discuss the impact below.
Finding 2. Enforceability of awards as arbitration’s most valuable characteristic - how award enforceability will bring opportunities to Hong Kong in the Belt and Road context
According to the Survey, enforceability of awards continues to be perceived as arbitration’s most valuable characteristic.
Preferences for a given seat continue to be primarily determined by the seat’s track record in enforcing agreements to arbitrate and arbitral awards. As between China mainland and Hong Kong, beneficiaries of arbitral awards made in Hong Kong can apply for enforcement in the mainland under the ‘Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and Hong Kong’ (the “Arrangement”).
The Intermediate People’s Court at the place of domicile of the party, or the place where the party’s property is located, has jurisdiction over the enforcement application. That application will be governed by the relevant PRC laws, including the Arrangement.
This makes Hong Kong an especially attractive seat for arbitration with mainland Chinese-related parties. The Arrangement’s importance is expected to increase further as Hong Kong continues to be the seat of choice for Chinese and foreign parties seeking a neutral venue. Indeed, this has already been the case, with HKIAC noting that it “has the largest caseload involving Chinese parties among all international arbitral institutions”.
The BRI continues to drive growth in emerging markets around Asia. As these BRI disputes will involve Chinese parties, enforcement may take place in mainland China against Chinese assets. Over the next 10 years it will therefore be important that parties choose the correct seat and arbitral institution to administer these disputes. HKIAC notes that “HKIAC maintains a strong record of enforcement in China. Over the past seven years, the Chinese courts have only refused to enforce one HKIAC award.” CIETAC also has its own Hong Kong Centre, and a Hong Kong award issued under their auspices can be a powerful tool for enforcement in the mainland.
It follows that the BRI is expected to bring more arbitrations to Hong Kong. The Central Government repeatedly stresses Hong Kong’s role as Asia’s premier international legal dispute resolution centre for the BRI. Hong Kong enjoys unique advantages given its combination of highly-ranked judicial independence, its familiarity to Chinese litigants, and its many arbitration experts for example in the construction, infrastructure and maritime fields. It is therefore a very reliable platform for Chinese companies to go global whilst offering reassurance to international partners as an excellent legal and dispute resolution buffer should disputes arise. China’s Greater Bay Area Initiative (“GBA”, itself part of the BRI) will only add to the importance of Hong Kong as a dispute resolution centre. Over the next 10 years, we see Hong Kong continuing to expand its geographical footprint in light of the BRI. By the time Hong Kong hosts the 26th ICCA Congress in 2022, the world’s largest regular conference dedicated to international arbitration, we predict that the tables will have turned, such that Hong Kong will emerge as the No.1 arbitration choice.
Finding 3. Cost as arbitration’s worst characteristic - how costs in arbitration can be effectively mitigated and reduced
Survey respondents cited Cost as arbitration’s worst feature. This issue is not new. It was recognised by previous Queen Mary surveys dating as far back as 2006, all indicating cost as the factor with which users are most discontent.
The starting point of any arbitration is inevitably the arbitration agreement. In previous articles we have stressed the importance of a properly drafted arbitration agreement within a contract to mitigate risks down the road, which in turn will help to reduce cost. Techniques such as joinder, consolidation, and sole arbitrators are just a few methods to reduce the costs of an arbitration. It is also important for legal advisors to select the most appropriate arbitral institution in line with their client’s needs. Some arbitral institutions have expedited procedures which give the tribunal a fixed time for the delivery of an award, such as the China International Economic and Trade Arbitration Commission (“CIETAC”). Under the 2013 HKIAC Administered Arbitration Rules, expedited procedures can be used where the claims are under HK $25 million (over US $3 million), or if the parties agree.
Beyond the parties themselves, the significant majority of Survey respondents (80%) consider arbitral institutions to be best placed to influence the future evolution of international arbitration. More than half of the Survey respondents (61%) think that increased efficiency, including through technology, is the factor most likely to have a significant impact on the future evolution of international arbitration. The Survey cites examples such as utilising cloudbased storage, videoconferencing, and virtual hearing rooms as ways to reduce costs. We have seen an increase in the use of these tools in our own arbitration experience.
Ultimately for arbitration, technology will be developed with a view to reduce time and costs. Document review and legal research are examples of labour-intensive tasks which practitioners are increasingly completing with the assistance of software programmes or algorithms. There are, however, limitations which explain the reluctance of some in fully embracing technological tools. For one, data breaches might occur and confidentiality of claims might be compromised if technological systems are not sufficiently secure. Additional disputes may arise out of the use of such tools. It remains to be seen the extent to which new technology will find itself adopted in arbitration.
Finding 4. Third party funding in international arbitration
The Survey shows a clear shift in perception of TPF from neutral to positive since its 2015 results: the more users encounter TPF in practice, the more favourable they tend to perceive it.
Typically, TPF is offered on a “non-recourse” basis, which means the funded party does not have to reimburse the funder if the case is unsuccessful. Historically, TPF assisted financially distressed claimants to pursue meritorious claims, but nowadays well-resourced companies also utilise the process to reduce legal budgets and hedge legal cost risks.
The positive perception of TPF is exemplified by recent legislative developments in Hong Kong and Singapore. Both historically prohibited TPF based on English law doctrines of champerty and maintenance, but have introduced “light touch” legislation permitting TPF in arbitration. The Hong Kong TPF guidelines are still awaited at the time of this publication, themselves required to kick-start TPF in Hong Kong. Once they are in place, the existence of a funding agreement and the identity of the funder must be disclosed on the commencement of the arbitration. Where a funding agreement is entered into after the arbitration commences, disclosure must be made within 15 days if in Hong Kong or “as soon as practicable” in Singapore.
With increasing acceptance of TPF, further clarity on practices and harmonisation across different jurisdictions is anticipated. The ICCA-Queen Mary Task Force Report on Third-Party Funding in International Arbitration released in April 2018 formulated principles and best practices on disclosure and conflicts of interest, privilege and professional secrecy, allocation of costs in final awards and security for costs. These recommendations will likely be transposed into soft law instruments and tested by arbitral tribunals in future. TPF users should be prepared for these developments and engage advisors at the outset to consider the following:
- specifying in the funding agreement conditions for and the degree of control a funder has over case strategy, settlement proposals and how disagreements between the funder and the funded party will be resolved;
- including provisions in the funding agreement dealing with scope and extent of funding, potential adverse costs, award enforcement costs, termination and dispute resolution between the funder and the funded party; and
- entering into a separate non-disclosure agreement between the funded party, its counsel and the funder to address confidentiality obligations.
Given the Survey findings, Hong Kong is well-positioned to benefit from recent developments to return to its place as the most preferred seat for arbitration in Asia-Pacific.
The immense scale of opportunity offered to Hong Kong as a result of the BRI, coupled with Hong Kong’s bold infrastructure projects within the GBA such as its high-speed rail and bridges connecting it to the Chinese mainland, are likely to bring in many more users of Hong Kong’s independent legal system. The huge advantages which Hong Kong arbitration enjoys regarding the special Arrangement for enforcement in the Mainland should prove attractive to BRI host entities, providing they are educated about that Arrangement. Coupled with continued advancements in technology, innovation and new arbitration procedures designed to reduce costs, we see in our crystal ball that Hong Kong will eclipse other venues as the dispute resolution Centre for years to come.
SIAC, 2017 Annual Report (7 March 2018)
SIAC, “Memorandum Regarding Proposal On Cross-Institution Consolidation Protocol” (19 December 2017)
ee HKIAC Website at www.hkiac.org/arbitration/why-choose-hkiac
For more on the BRI, see KWM’s bilingual Belt & Road Hub on our website: kwm.com/belt-and-road.
King & Wood Mallesons, Conference Report: Belt and Road risks and mitigation strategies www.kwm.com/en/knowledge/insights/belt-and-road-risks-andmitigation-strategies-20170522
Hong Kong: Part 10A to the Arbitration Ordinance (Cap. 609); Singapore: Civil Law (Amendment) Act 2017