Risk and Opportunity Co-exist in Hong Kong’s Arbitration Service Industry

When promoting Hong Kong’s dispute resolution services over the past three years, the HKSAR government and the legal profession have relied on the survey published by the Queen Mary University in London in 2015, which showed that Hong Kong was ranked behind London and Paris as the third-most preferred seat in all regions and the Hong Kong International Arbitration Centre (HKIAC) was ranked as the third-most preferred institution in all regions and the most preferred one outside Europe.

Regrettably, in the recently published 2018 edition of the International Arbitration Survey, Hong Kong has seen a double drop down to fourth in terms of the most preferred seats and most preferred institutions. Instead, Singapore and the Singapore International Arbitration Centre (SIAC) have successfully taken the third place on respective lists. The SAR government and the legal profession, however, are surprisingly silent and have rarely made public remarks about that outcome. Despite the fact that those rankings are for reference only, since the survey is the world’s most authoritative one on international arbitration, Hong Kong is of course unhappy to see itself drop in the rankings. The survey is undoubtedly a wake-up call for the SAR government, which strives to develop and promoting Hong Kong’s legal arbitration and mediation services. Therefore, the SAR government is keen to be not perceived as being unconcerned about the ranking change by carefully examining the data of the survey’s rankings and exploring the reasons for the drop, so as to take Hong Kong’s arbitration industry back to its rightful place as soon as possible.

Behind the Numbers

The top five most preferred seats in 2018 are the same as those in the 2015 survey, except for the fact that Hong Kong has swapped places with Singapore. As seen from the chart below, the percentage of respondents selecting Singapore as a most preferred seat was 39%, 11 points than the 28% for Hong Kong. Among the most preferred institutions, SIAC is 36% of the vote, which also significantly higher than the 27% for HKIAC.

What is likely to make Hong Kong’s lawyers more anxious is breakdown by region, as shown in the chart below. It can be seen that Hong Kong only ranks among the top four in the Asia-Pacific region, where it lies in third place behind London and Singapore. However Singapore ranks among the top four in all regions except Latin America, and ranks a close second in the Asia-Pacific region behind London. Singapore has not only overtaken Hong Kong in the overall ranking, but has also achieved its goal of moving beyond Asia to establish a footing globally.

Never Too Late

It is never too late to make amends. Part of the answer to how Hong Kong’s arbitration industry can catch up can also be drawn from this survey. According to the statistics, of the total 12 factors that determine the preferred seats, the four most important factors are general reputation and recognition of the seat (14%), neutrality and impartiality of the local legal system (13%), national arbitration law (12%) and track record in enforcing agreements to arbitrate and arbitral awards (11%).

The author does not know the scores of Hong Kong and Singapore in those four areas. However, according to the author’s experience in international arbitration over the years, their scores in the above third and fourth should be similar: the arbitration laws of both regions are based on the UNCITRAL Model Law, and the Hong Kong courts’ strong support for arbitration is supported by the following data: according to HKIAC’s statistics, from the commencement of the new Hong Kong Arbitration Ordinance in 2011 to 2017, Hong Kong courts accepted a total of 203 applications for enforcement of arbitral awards from all over the world, of which only three (or 1.5%) were rejected for enforcement.

As for the second factor, neutrality and impartiality of the local legal system, according to the Rule of Law Index 2017 published by the World Justice Project in February this year, Hong Kong ranked overall 16th among 113 countries and regions in the world and ranked 12th in Civil Justice Index (to which commercial arbitration may be relevant). Singapore ranked 13th and fifth, respectively, in both rankings. There seems to be a certain gap between Hong Kong and Singapore from the rankings, but there is only a slight difference if you study the scores.

Therefore, the difference in the rankings of Hong Kong and Singapore may be more subject to the first factor, namely “general reputation and recognition,” which is actually more subjective and depends mainly on the strength of the two regions in shaping the arbitration brand names and the influence exerted on other regions.

One tiny clue reveals the general trend. Take the shipping and trade arbitration industry that the author is engaged in as an example. Singapore has achieved remarkable results in shipping and trade arbitration through more than ten years of hard work and has gradually gained wide recognition from the international community. For instance, in 2013 the Baltic and International Maritime Council (BIMCO), which is responsible for drafting and issuing various standard form contracts for the international shipping market, accepted Singapore as the third alternative arbitral seat, after London and New York, in arbitration clauses. As we all know, over 90% of the world’s cargo is carried by sea, and the standard format contracts or recommended clauses issued by BIMCO are either adopted for or incorporated into most of the contracts for the carriage of cargo by sea.

The selection of Singapore as an alternative arbitral seat for standard format contracts can undoubtedly greatly increase its presence in the international shipping and trading market. In addition, the English Lloyd’s Maritime Law Newsletter (LMLN), with a history of nearly 40 years, has been working with the Singapore Maritime Arbitration Association (SCMA) since July this year through anonymous publication of the maritime arbitral awards administered and recommended by SCMA in each issue. LMLN regularly publishes the jurisprudence of the English courts and other common law countries and regions as well as maritime arbitral awards in London twice a month, which is a definitive reference for global lawyers, insurers and corporate and legal personnel dealing with affairs in shipping law. The arbitral awards published in LMLN are more likely to be cited by relevant authoritative books and even in court judgments. Singapore’s arbitral awards can be published through LMLN, and this undoubtedly enhances Singapore’s presence and recognition in the global maritime law sector. Moreover, along with the increase in arbitration dealings, a large number of top UK law firms or barristers have been attracted to open offices in Singapore.

Harness the power

According to the survey, 97% of respondents indicated that international arbitration was their most preferred method of dispute resolution. More than 80% of respondents tended to resolve cross-border contract disputes by arbitration in the areas such as energy (including oil and gas), construction and infrastructure construction – which are currently very popular due to the Belt and Road Initiative - and technology, while over 50% of respondents tended to select arbitration in the banking and finance area.

Hong Kong needs to harness its innate advantages. Hong Kong, as part of China, should enhance its international influence of and recognition for legal dispute resolution services such as arbitration services with the firm support of the national policy. The National 13th Five-Year Plan clearly supported Hong Kong’s development as an international legal and dispute resolution services centre in the Asia-Pacific Region. In addition, the Opinions Regarding the Establishment of the Belt and Road International Commercial Dispute Resolution Mechanism and Institutions, promulgated by the Central Government in June this year, clearly stated that the principle of diversification of dispute resolution methods was firmly adhered to and the resolution of the Belt and Road international commercial disputes by mediation and arbitration, etc. was supported, except for the noteworthy establishment of international commercial courts in Shenzhen and Xian.

The economies along the “Belt and Road” have different legal systems. It is inevitable that enterprises need to face and properly manage various legal risks in participating in relevant commercial and investment activities. Under the “one country, two systems” framework, Hong Kong, as the only jurisdiction in the PRC practicing common law, adopts a common law system familiar to the international business sector, which is relatively similar to those of some economies along the Maritime Silk Road in the 21st century. Also, Hong Kong possesses a strong legal professional community (including approximately 1,500 registered foreign lawyers from different jurisdictions), the members of which have extensive experience in resolving commercial disputes in various areas such as international commerce, intellectual property, shipping and construction, and can provide legal advice on the laws of their home jurisdictions for enterprises. Therefore, compared with Singapore, Hong Kong has its own unique advantages and favourable conditions and can provide convenient, neutral and diversified legal and dispute resolution services for enterprises, including in Mainland China and other economies while dovetailing with the development strategy focusing on both “going global” and “attracting foreign investment” implemented by the PRC. 

Jurisdictions: 

Reed Smith Richards Butler, Senior Registered Foreign Lawyer

The Hong Kong and Mainland Legal Profession Association, Vice President

Qualified in both China and England & Wales, Mr. Liu specialises in shipping and commercial litigation and arbitration. His practices covers all areas of maritime and commercial law, including charterparty and shipbuilding contract disputes, cargo claims and sale of goods disputes etc.  He handles a wide variety of cases of different types and sizes under LMAA Terms and HKIAC rules.  He has published numerous articles and cases commentaries in respect of shipping and arbitration topics in reputable journals and newsletters in England, China and Hong Kong.  He is a member of The Chartered Institute of Arbitrators.  In December 2017, Mr. Liu was listed as one of Top 5 Next Generation in Shipping and recommended as “a leading heavyweight lawyer of the future in the marketing and symbolizes a ‘new generation’ of Asian lawyers”. In August 2016 and 2017, he was shortlisted twice for “The Next Generation Award”, one of the Lloyd’s List Asia & Pacific Awards 2016. In March 2015, Edward was honoured to be one of “The Ten Outstanding New Hong Kong Young Persons”.