Mr Ian Cocking, Mr Gilbert Kwok and Mr Tom Palmer at Clyde & Co Hong Kong explain the new Arbitration Ordinance (Cap 609) and what it means for policy disputes.
The introduction of the new Arbitration Ordinance (the “New Ordinance”) may have some unintended consequences and even some unpleasant surprises for insurers.
Many insurance policies provide for disputes in relation to policy interpretation to be resolved by arbitration. By and large the majority of these arbitrations were (and still are) what used to be described as “domestic” arbitrations, i.e. between Hong Kong parties relating to Hong Kong matters.
Same rules for domestic and international arbitrations
This domestic demand was reflected in the old Arbitration Ordinance (Cap 341) (the “Old Ordinance”) which was broadly divided into 2 parts, the “domestic” and “international” regimes. The domestic regime has become very familiar territory to everyone involved in policy disputes.
However, in response to calls from the international arbitration lobby for a single “unitary” regime covering all arbitrations, the law has now been changed to make them all effectively subject to the same rules as for international arbitrations.
Creation of Schedule 2 and how to opt in
However, this was not the end of the story. In the face of strenuous campaigning by the construction industry in particular, the proposed legislation was amended to include “Schedule 2”, which attempts to re-incorporate a scheme which is very similar to the old domestic regime by virtue of what is commonly described as an “automatic opt in” for the next six years.
So, whilst there is supposed to be a unitary regime, this is not, in fact, the case. Since there are big differences between Schedule 2 and the new arbitration law, careful attention will need to be paid to all arbitration clauses to ensure that they do invoke Schedule 2.
Despite the fact that much has been written about the New Ordinance in general, some of the practical implications are only just coming to light. This article will look briefly at some of the main reasons why it is important to opt in to Schedule 2 and the key differences between Schedule 2 and the rules that would otherwise apply under the new regime. It will then go on to look at the mechanics of opting in. It will quickly become apparent that there are a number of potential pitfalls, and that far from having simplified the position, the New Ordinance has introduced a new level of complication.
Some readers may find that they have not opted-in when they thought they had.
The Old Ordinance – Don’t throw it away just yet
The first important point to note is that the Old Ordinance will continue to govern arbitrations commenced prior to 1 June 2011. Consequently, if you have served or received a notice of arbitration prior to this date, the Old Ordinance will apply to those arbitrations and any related proceedings. Surprisingly, copies of the Old Ordinance are proving increasingly hard to come by.
The key differences when Schedule 2 does not apply
In summary, the main reasons why it is important to opt in to Schedule 2 (the “Opt-In Provisions”) are as follows:
• Any dispute arising between the parties to an arbitration agreement to which the Opt-In Provisions apply, will be submitted to a sole arbitrator. If the Opt-In Provisions do not apply, in default of agreement between the parties, the Hong Kong International Arbitration Centre (HKIAC) will decide whether one or a panel of three arbitrators should be appointed.
• The parties to an arbitration will not be able to apply to the Courts to have related arbitrations consolidated unless the Opt-In Provisions apply. The ability to have related arbitrations consolidated may be an important option to a party looking to avoid the time and cost consequences of fighting on multiple fronts.
• The right to challenge an arbitration award on a point of law or to ask the Courts to determine a preliminary point of law will also be lost when the Opt-In Provisions do not apply. Although it is true that parties to arbitrations do not want their disputes re-tried in Court or to be subject to endless appeals, it is also the case that arbitration should provide the parties with a decision which, whilst it may not please them, will at least be based on the correct application of the law.
When will the New Ordinance and the Opt-In Provisions apply?
The parties can expressly provide for the Opt-In Provisions (or some of them) to apply in their arbitration agreement by virtue of Section 99 of the New Ordinance. Similarly, parties can “opt-out” of the Opt-In Provisions by virtue of Section 102.
“Automatic” Opt-In
Section 100 of the New Ordinance provides that the Opt-In Provisions will apply with respect to arbitration agreements entered into before 1 June 2011 and at any time before 31 May 2017, provided that the arbitration under the agreement is a domestic arbitration. As to whether an arbitration will be considered domestic, the test adopted under the Old Ordinance no longer applies and some form of express wording providing for domestic arbitration in the arbitration agreement is now required.
A review of some of the more widely used policy wording in Hong Kong reveals that not all policies expressly provide for domestic arbitration, and that the Opt-In Provisions will not therefore apply automatically. Many standard form construction contracts do not do so either.
Existing Policies
It follows that you may have policies that were made before the New Ordinance was introduced which do not refer to domestic arbitration. Consequently, the Opt-In Provisions will not apply to arbitrations commenced under them, even though these may have been domestic under the old regime. It seems unfair that parties will be deprived of the benefit of the Opt-In Provisions in these circumstances, especially when considers they were available to the parties at the time the policy was entered into.
After 31 May 2017
From 1 June 2017, it will not be enough to simply refer to domestic arbitration in your policies in order to invoke the Opt-In Provisions. Instead, you will have to incorporate the Opt-In Provisions under Section 99 expressly. If after reading this article, you are one of those who need to amend your policies, you may want to consider expressly incorporating the Opt-In Provisions now to save yourself another round of amendments in a few years time.
Payments into Court
By virtue of an amendment to the Rules of the High Court, another key change affecting all arbitrations in Hong Kong is the abolition of payments into Court in support of arbitration proceedings. As most readers will be aware, these payments were used by Respondents involved in arbitrations to support settlement offers. This was a valuable means of forcing early settlement and determining liabilities to pay costs.
Conclusions
The preservation of certain elements of the old “domestic” regime by way of the Opt-In Provisions is undoubtedly sensible. However, the mechanism chosen to incorporate those provisions is likely to lead to problems. We understand the Government is undertaking a harmonisation of its general conditions to ensure the Opt-In Provisions will apply to all arbitrations to which it is party. However, the same cannot be said for all the insurers, developers, contractors and major sub-contractors working in Hong Kong.
With the Civil Justice Reform (CJR) improving efficiency, court facilities and judges coming for free or close to, and useful tools, such as the plaintiff sanctioned offer at a party’s disposal, arbitration may find itself coming under increased competition from the Courts.
Mr Ian Cocking is a Partner, Head of Construction Hong Kong & China at Clyde & Co Hong Kong;
Mr Gilbert Kwok is a Partner at Clyde & Co Hong Kong; and
Mr Tom Palmer is a Counsel at Clyde & Co Hong Kong.