Hong Kong's reputation as a neutral arbitration centre grows

Paul Starr of King & Wood Mallesons discusses the role of Hong Kong as a neutral arbitration centre for companies operating in the region

PUBLISHED : Wednesday, 20 February, 2013, 12:00am
UPDATED : Wednesday, 20 February, 2013, 5:46am

After the flurry of major disputes in the 2000s that followed the construction of Hong Kong's then new airport, the average number of construction arbitrations has dropped in the city.

Figures from the Hong Kong International Arbitration Centre show that in 2007, of the 448 arbitrations the centre handled, two in every five involved construction. By 2011, the number had dropped to 275, of which just one in seven was a construction arbitration.

Several reasons explain this decrease. First, Hong Kong is at the early development phase of the next huge surge of construction, which almost rivals the airport's heady days. Disputes may not crystallise into arbitrations for a few more years.

Second, Hong Kong has seen an important trend of non-construction arbitration initiated in the city by parties actually conducting their business on the mainland. That trend has decreased the overall share of construction arbitration.

What we have seen increasingly is international and mainland parties selecting Hong Kong as their neutral arbitration forum. Even banks are doing it.

I was contacted by the legal team of an Australian bank who were concerned that they may face litigation in mainland China against their mainland counterpart bank. I suggested that both might benefit from an arbitration clause in a neutral jurisdiction - Hong Kong.

We also recently handled a manufacturing dispute where the European party began arbitration proceedings in Hong Kong against a mainland entity, both parties having drafted a neutral arbitration clause into their manufacturing contract at the outset. Arbitration in Hong Kong not only worked, it preserved their business relationship.

Alternative dispute resolution methods for Hong Kong construction projects

The decrease in the number of construction arbitrations does not mean that the actual number of claims and disputes has diminished. It is more indicative of the way that parties are using alternative methods of dispute resolution.

While many construction contracts incorporate arbitration provisions, there is nothing to stop parties either before or during that arbitration invoking mediation. A quicker and more "summary" justice, mediation is a voluntary, non-confrontational, non-binding and private process where an independent person tries to help parties settle their dispute. Its status was further enhanced by the enactment of the Mediation Ordinance this year, which protects the confidentiality of mediation communications.

The Arbitration Ordinance also allows for an arbitrator to change hats mid-stream and become a mediator to facilitate settlement.

Adjudication is another alternative process, where an independent specialist nominated by the parties assesses the evidence presented by the parties and makes a decision that is legally binding. Since adjudication is the method of dispute resolution in the New Engineering Contract 3 (NEC3), which has been embraced on some government projects, this may spark discussion on whether a statutory adjudication scheme should be implemented in Hong Kong.

These ways of resolving disputes are not exclusive: contracts may provide for any or all of the above methods, and parties may subsequently choose all or any. Other popular forms exist, such as determination by dispute resolution advisers.

Legal challenges

Legal challenges ahead include whether Hong Kong will implement security of payment legislation to protect those who have worked and supplied materials on a project. Its absence means that if an employer/developer does not promptly pay the contractor, lower-tier subcontractors, suppliers and workers may not get paid as well. "Pay when paid" provisions, although outlawed in other jurisdictions, are still legal in Hong Kong.

They generally mean that a subcontractor is only entitled to be paid when the contractor receives money from the employer. Jurisdictions such as Britain, Australia, mainland China, Sri Lanka and Singapore have enacted administrative or legislative measures to address this problem.