Hong Kong: Asia-Pacific’s Leading Arbitration Centre
02 May 2018
With its mature and well-developed judicial system and the existence of a large pool of experienced legal and related professionals, Hong Kong is a prime venue for commercial dispute resolution through arbitration. Noteworthy is that arbitration awards made in Hong Kong are enforceable through the courts of most of the world's trading economies.
Under Hong Kong’s Arbitration Ordinance, effective from June 2011, both local and international arbitrations follow the same set of rules, hence providing a unified regime based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, along with a number of modifications specifically adapted for Hong Kong. This aligns Hong Kong’s arbitration regime more closely to international practice, reduces confusion over regime differences, and makes the arbitration laws in Hong Kong in line with international standards
Moreover, Hong Kong has its own home-grown arbitration body: the Hong Kong International Arbitration Centre (HKIAC), which has been designated the appointing body under the Arbitration Ordinance to appoint arbitrators and to determine the number of arbitrators where the parties to a dispute are unable to agree. Of note is that HKIAC is totally independent and free from governmental interference.
In the 2017 Policy Address published in October 2017, the Chief Executive of the Hong Kong Special Administrative Region (HKSAR) reported that the Department of Justice (DoJ) will implement various initiatives to consolidate Hong Kong's position as a centre for international legal and dispute resolution services in the Asia-Pacific region. The initiatives include promoting such services of Hong Kong on the Chinese mainland and overseas and making extra efforts to promote further co operation among relevant sectors in Hong Kong, the Chinese mainland and overseas, and providing professional services to mainland enterprises "going global" as well as those enterprises investing on the mainland.
Another DoJ priority is to step up efforts in proactively promoting Hong Kong as an international legal and dispute resolution services centre for the Belt and Road Initiative and the Guangdong-Hong Kong-Macao Bay Area (Bay Area) development, while encouraging the legal sectors of Hong Kong and the Bay Area to enhance co-operation. In a bid to attract more international legal services and dispute resolution institutions to set up branches or offices in Hong Kong, the HKSARG is rolling out the Legal Hub programme to provide office space for international and local law-related organisations, including arbitration institutions.
Study on Hong Kong’s Arbitration Sector
Supported by DoJ, the Hong Kong Trade and Development Council (HKTDC) has commissioned a consultancy study on Hong Kong's arbitration services. The aim of the study is to (a) identify Hong Kong's strengths and weaknesses in international arbitration services and identify opportunities and threats to Hong Kong; and (b) make recommendations on enhancing Hong Kong's status as a leading centre for international arbitration services in the Asia Pacific region. The full report of the consultancy study is entitled Enhancing Hong Kong’s Position as the Leading International Arbitration Centre in Asia-Pacific. The scale of the survey and consultation exercise of the study can be found in this footnote.
In meeting with the Legislative Council’s Panel on Administration of Justice and Legal Services on 30 April of 2018, the DoJ briefed the panel on the above commissioned study. A background brief to the panel meeting can be found here, while the HKSAR Government’s response to the recommendations set out in the consultant study can be found here.
Key Survey Findings
Some of the key survey findings of the consultancy study are outlined below:
The categorisations in Table 1 below are not mutually exclusive, with 76 service providers having worked as an arbitrator and 104 worked as a party representative in arbitration proceedings, such as barrister, solicitor, attorney or counsel.
Figure 3 shows the popularity and usage of arbitration among user sectors, with 26% in the infrastructure/construction/engineering sector, 18% in the corporate/commercial sector, 16% from the finance/banking/insurance sector, 13% from the maritime/logistics sector and less than 10% from the energy/raw materials/resources sector.
A key focus of the survey was the respondent’s experience with arbitration. It was found about 72% of the arbitration cases which had a Hong Kong connection were international in nature, whilst 28% were domestic cases. Institutional cases accounted for 56% of the total number of Hong Kong-related arbitrations, while only 44% were ad-hoc cases. Of note is that the survey also captured non-Hong Kong seated arbitrations that were heard in Hong Kong or otherwise had a connection to Hong Kong.
Of the Hong Kong-related arbitration cases captured in the survey, 76% of them were seated in Hong Kong, whereas 10% were not seated, yet heard in Hong Kong, whilst 14% of reported cases were otherwise connected to Hong Kong.
Of the total number of institutional cases reported by respondents, the HKIAC handled a majority of the institutional cases (43%), whereas other arbitration institutions each handled relatively small numbers of institutional cases.
Regarding the arbitration cases, 37% were shipping and maritime in nature, 24% were corporate and commercial in nature and 17% were related to infrastructure and construction cases. For the remainder of cases, 9% were energy and raw materials related, 5% were treaty protection, 4% were finance, banking and insurance and 2% were IP cases. The findings are generally consistent with were consistent with HKIAC statistics.
Insofar as the quantum in dispute is concerned, 80% of the reported cases involved an amount in dispute in excess of US$500,000. Notably, cases with a dispute amount of over US$50 million accounted for 17% of all reported cases. On average, the amount of dispute per case was US$16 million.
The average duration of reported arbitration cases was 21 months. More than 70% of all reported arbitration cases were over one year in duration. Of that, 43% took between one and two years from the commencement of the arbitration to the conclusion.
Of the total number of reported arbitration cases, 59% of them involved a hearing while in 41% of the cases the arbitral tribunal did not order any hearing.
For arbitration cases involving hearings, 80% of them took five or more days of combined hearings days. Breaking that number down, 35% of them had total hearing days between 5 and 15 days. The average number of arbitration hearing days was 17 days.
In terms of estimated costs incurred in different stages of the proceedings, that the part for hearing-related activities ranked top and accounted for about 40% of total arbitration cost, followed by commencement and completion of exchange of written pleadings/memorials (16%), hearing preparation (13%) and the cost of related court proceedings (3%).
More than 70% of cases cost over US$100,000, with about 30% between over US$100,000 and up to US$500,000. On balance, the average cost per arbitration reached US$1.2 million, comparing more favourably than arbitration costs in the UK and Europe, which averaged around US$2.1 million as found in in a CIArb Survey. Arbitration costs typically include all expenditure relating to the arbitration, including direct legal fees, arbitrator fees, arbitrator expenses, arbitral institution expenses, expert witness expenses, external document management expenses, reporting services, translation services and other miscellaneous expenses, such as meals, travel and accommodations.
As seen in Figures 15 and 16 below, professional fees charged by service providers accounted for the bulk of arbitration cost. In 72% of the total cases, service providers charged US$500,000 in professional fees or less. In contrast, about 83% of the cases led to disbursements and other costs of US$500,000 or less.
Significantly, the survey found that about 58% to 60% of total costs in both ad-hoc and institutional cases were attributed to legal practitioners’ fees, with 16-17% of the total arbitration cost attributed to arbitrators’ fees. Other costs included fees for experts and witnesses, venue rental, court reporting/transcript costs, translating costs, document discovery and litigation support service provider costs, air transport, hotel, F&B and local transport, but these were all single digits as a share of the total cost. For institutional cases, the institution’s fees were reported as being about 5% of the total cost of the case.
On average, each arbitration case involved about 25 professionals from commencement to conclusion, and the average number of arbitrators was 2.1. Since the number of arbitrators must be an odd number, the number of arbitrators appointed in an arbitration case is in most jurisdictions is either one or three. Respondents also reported that an arbitration case involved an average of two barristers, counsel or advocates, four legal practitioners working as instructing solicitors and three expert witnesses.
Of the average 25 professionals involved in an arbitration case, at least 35% of them were reported to be from outside of Hong Kong, a fairly high percentage as most survey respondents were locally based. By role, 76% of instructing solicitors and other legal practitioners and 60% of barristers, counsel and advocates were from Hong Kong. Besides, 60% of witnesses were reported to be from outside Hong Kong, owing to the fact that arbitrations captured in the survey were international rather than domestic in nature.
Preference of Choosing Arbitration Seats
In terms of the factors conducive to choosing a seat of arbitration, the “enforceability of awards under the New York Convention” was ranked top by both users and service providers, followed by “perceived independence of the judiciary in that seat”, “perceived neutrality of the seat” and “perceived arbitration friendliness of that seat’s laws and courts”.
Respondents were also asked to compare Hong Kong to four other key Asian seats on 10 important criteria pertaining to the choice of seat. Each criterion attracted a score ranging from one to five, with one being the top performing city among the 5 seats. Therefore, the closer the average score is to 1, the better the city scored on a given criterion.
From Table 4, Hong Kong and Singapore were, by some distance, the two leading seats in Asia for nine out of the 10 criteria. This aligned with the consultation findings that the two predominant seats in Asia are Hong Kong and Singapore. On a side by side analysis of these two seats, respondents rated Hong Kong higher than Singapore for seven of the 10 criteria, but Singapore led Hong Kong in two others, and both seats were tied on one criterion.
As a large number of the survey respondents were based in Hong Kong, an attempt was made to single out responses from those based outside of Hong Kong, as shown in Table 5 below. Singapore was rated higher than Hong Kong for seven of the 10 criteria, but Hong Kong led Singapore in the remaining three. Hong Kong was rated higher than Singapore in attractiveness to clients from the Chinese mainland, ease of entry and convenience to get into that country and arbitrate there and choice of hotels and ancillary services (e.g. sightseeing, shopping, and catering). Singapore was also rated ahead of Hong Kong for quality and availability of physical hearing facilities in that seat and promotion of that city as a seat of arbitration.
Survey respondents were also asked to compare Hong Kong’s performance against that of London, commonly reckoned to be the world’s leading seat of arbitration, on the same 10 criteria. While London was ahead of Hong Kong on only three out of 10 criteria, those three that it led are seen as crucial factors in the choice of seat for users – (1) local arbitral institutions; (2) the availability of quality service providers; and (3) perceived neutrality and independence as a seat of arbitration.
Views on the Growth of Arbitration Cases in Hong Kong and Asia
The survey also sought the respondents’ views on the growth of arbitration in Hong Kong and Asia – 70% of those who responded expected the number of arbitrations in Hong Kong to increase by 5% or more in the next five years, of which 24% of them foresaw 10-15% growth, and 18% expected an increase in excess of 20%.
Interestingly, growth expectations were stronger for Asia on the whole, with 88% seeing an increase of 5% or more in the coming five years in Asia. Of the 88% who held this view, 22% of them expected arbitration supported in Asia would grow by 10-15% over the next 5 years, and 32% of them thought there would be growth in excess of 20%.
Aside from the survey, the study also attempted to estimate the economic contributions of the arbitration sector to Hong Kong. Based on historical economic and arbitration-related data as well as inputs from the survey and consultations, it was found that international arbitration activity brought significant economic activity to Hong Kong. The total Gross Value Added (GVA) of arbitrations to Hong Kong was estimated at about HK$1.96 billion in 2014, which contributed to 13% of the legal sector’s GDP, or just less than 0.1% of Hong Kong’s total GDP. This economic activity also supported over 2,600 full time-equivalent jobs in Hong Kong and contributed more than HK$170 million to the HKSAR Government’s fiscal receipts for the same year.
In conclusion, the study identified the threats arising from the growing regional competition and changing trends in dispute resolution, suggesting that the HKSAR Government take more pro-active steps to support market participants if Hong Kong is to maintain its leading position and market share. In response to the recommendations of the study, the HKSAR Government prepared a written response as found here, just prior to the Legislative Council’s panel meeting on 30 April 2018.
 The commissioned study consisted of an extensive survey (comprising 223 users and service providers), a large number of consultations with members of Hong Kong’s arbitration community and those overseas (113 meetings) and two roundtables of focus groups with legal sector stakeholders on arbitration education and training.
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