By Paul Starr and James McKenzie King & Wood Mallesons’ Hong Kong office.
Paul Starr, Practice Leader Hong Kong Dispute Resolution and Infrastructure and James McKenzie, Senior Associate, King & Wood Mallesons, Hong Kong in conversation with Dr Wang Wenying, Secretary General at China International Economic and Trade Arbitration Commission Hong Kong (CIETAC HK) and Sarah Grimmer, Secretary General at Hong Kong International Arbitration Centre (HKIAC).
The Belt and Road Initiative in Hong Kong
When you hear ‘Belt and road’, what does that conjure up for your institution?
Wenying: While the Belt and Road initiative will directly or indirectly affect billions of people across the world and more than 60 countries along the routes, it will also create opportunities to build and grow Hong Kong’s role as a financier and dispute resolution hub for Belt and Road projects. This, in turn, will create opportunities for dispute resolution service providers in Hong Kong including CIETAC HK, which is usually the institution of choice for parties from China and Belt and Road countries to arbitrate considering its unique features.
Hong Kong plays a vital role in the initiative by bridging countries in the Asian region together. The establishment of CIETAC HK is itself a recognition by CIETAC of Hong Kong’s importance to the region. Many sectors in Hong Kong will consequently have a bigger role to play and will benefit from the initiative.
That’s true that Hong Kong is a bridge, in fact, the Hong Kong Special Administrative Region has referred to Hong Kong as a ‘super-connector’ for the Belt and Road initiative. What does HKLAC see as being particularly important to this connection?
Sarah: Hong Kong’s independent legal system and judiciary, extensive network of professional services in finance, accounting, construction and law, bilingualism, and geographical proximity to China are particularly important. A large proportion of the initiative’s investment will be channeled through Hong Kong, particularly through Hong Kong incorporated vehicles. As a result, Hong Kong is a critical center for Belt and Road projects.
In the legal industry alone, Hong Kong has over 1,000 barristers and 6,700 practicing lawyers. Hong Kong is one of the world’s top arbitration venues (voted the third most preferred venue in the world and first in Asia in a 2015 survey by Queen Mary University of London/White & Case survey). HKIAC, Hong Kong’s flagship institution, as well as other arbitral entities based in Hong Kong, and individuals providing legal and arbitration services, will need to think about how their services are relevant in the Belt and Road context and promote them.
In thinking about Hong Kong’s services, what would your institutions say to a Russian or African company that has previously only ever used the English arbitration system but is now involved with a Belt and Road project in which it is considering Hong Kong as a seat? What does Hong Kong have to offer?
Sarah: As many of the companies doing business on Belt and Road projects will be dealing with a Chinese counterparty, they should anticipate that the Chinese party may propose that the seat of the arbitration be in China and/or that the governing law is Chinese. Foreign parties should take advice on what it means for an arbitration to be seated in mainland China and/or on the particularities of Chinese law. Foreign parties often prefer Hong Kong as a seat given its modern arbitration legislation and independent legal system and judiciary. Chinese parties are also equally comfortable with Hong Kong as a seat and thus it is a compelling compromise.
Companies familiar with the common law and the English arbitration system will find Hong Kong particularly attractive as a seat or governing law when negotiating their arbitration clauses because it is a common-law system largely influenced by English law. With its large pool of legal professionals, independent judiciary (including non-permanent judges from other common law jurisdictions on its highest court) and state-of-the-art arbitration legislation, Hong Kong is the go-to jurisdiction for parties looking to meet their Chinese counterparties half-way. Russian parties in particular are looking more and more to Asia for business and dispute resolution services due to sanctions in other jurisdictions, we receive regular enquiries from Russian entities about our services.
Wenying: Under the principal of One Country, Two Systems, Hong Kong, as a Special Administrative Region of China, is supported by the Central Government to maintain its stability, development and prosperity. On the other hand, Hong Kong, under the Basic Law, enjoys independent judicial power including the power of final adjudication. It also continues to be an independent and neutral seat of arbitration to resolve the disputes arising from projects and contracts related to the Belt and Road initiative.
Hong Kong is a common law jurisdiction and there are similarities between arbitration practices in Hong Kong and England & Wales. But Hong Kong is at the same time fully capable of embracing parties and practitioners of different legal and cultural backgrounds together to resolve a dispute. Hong Kong also provides great options for parties when choosing arbitrators because a large number of experienced arbitrators reside or work in Hong Kong.
Belt and Road and dispute resolution
Another layer to this, of course, is that many of the Belt and Road countries contain high levels of legal and political risk. What do you think are some of the advantages and disadvantages of arbitrating Belt and Road disputes versus other dispute resolution methods such as litigation?
Sarah: Submitting disputes to arbitration avoids the perils of litigating in jurisdictions where the rule of law is not applied or where the courts are not independent. Given that some of the Belt and Road projects are massive, and involve national interests, removing disputes from local court sphere is critical.
Also, one of the greatest advantages of arbitration is the enforceability of awards. Belt and Road disputes will involve Chinese parties which means that enforcement may take place in mainland China against Chinese assets. We know that HKIAC and Hong Kong based awards have a strong enforcement rate in the PRC by virtue of the 1999 Arrangement between Hong Kong and the PRC. Recent studies show that enforcement rates in the PRC are improving, particularly with the reporting up system whereby an award can only be refused enforcement with the endorsement of the Supreme People’s Court. Foreign parties can also take comfort in the fact that the Hong Kong courts have enforced awards against Chinese SOEs.
Wenying: I agree that Hong Kong awards have a very strong track record. As the PRC is a signatory to the New York Convention, awards made in Hong Kong can be enforced in more than 150 countries and places under the New York Convention.
There is also some harmonisation of arbitration laws along the Belt and Road with more than half of the Belt and Road countries having adopted the UNICTRAL model law in their domestic arbitration laws.
The enforcement of Hong Kong seated awards in the PRC is well handled by the ‘Arrangements of the Supreme People’s Court on the Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region’. As an example, just recently, on 13 December 2016, the Nanjing Intermediate People’s Court of Jiangsu Province enforced a CIETAC HK arbitral award in the PRC, which demonstrates the capability of the PRC courts to enforce Hong Kong awards issued by CIETAC HK.
That’s an encouraging development. How important for enforcement and the ability to seek interim relief is it that Belt and Road disputes are seated in ‘pro-arbitration’ jurisdictions such as Hong Kong?
Wenying: In the PRC arbitration law, for example, interim relief cannot be made by the arbitral tribunal. In Hong Kong, the Arbitration Ordinance provides not only for court based relief in support of arbitration but that the arbitral tribunal can grant interim measures to protect the parties’ urgent interests when needed.
Interim relief is very important because, firstly, it may assist with enforcing the award capable of being enforced at the end when the winning party gets the award so the award is not just on paper. Secondly, it may help to resolve disputes more efficiently since it may facilitate the disputants to discuss settlement. Hong Kong is a well- known pro-arbitration jurisdiction with all the usual advantages in seeking interim relief and enforcing an order on interim relief rendered by an arbitral tribunal.
Given the operational and credit risks associated with many of the Belt and road countries, what do you perceive to be some of the key considerations for investors in structuring their investment vehicle or drafting dispute resolution clauses?
Sarah: Investors should opt for arbitration rather than the submission of disputes to local courts. Investors should ensure that arbitration clauses across multiple instruments relating to a particular project are compatible. Parties should use compatible model clauses and may consider adopting an umbrella dispute resolution clause that applies to all related contracts.
Another important dimension we are now advising our clients on is investment treaty rights. What consideration should be made of these potential rights when investors are structuring their Belt and Road investments?
Sarah: Investors and host States should know which bilateral and/or multilateral investment treaties apply to their investment and decide how to structure their investment in order to attract treaty protection. This should happen prior to a dispute arising. This will include an assessment of whether the provisions of other treaties can be accessed through the application of most-favoured nations clauses.
Investment treaties often contain dispute resolution clauses referring investor state disputes to arbitration under, inter alia, the UNCITRAL Arbitration Rules. HKIAC has already hosted multiple investor- state arbitrations and has administered arbitrations under the UNCITRAL Rules since 1986 under its own separate procedural guidelines. Furthermore, HKIAC has a tribunal secretary service which is particularly useful in large, complex cases (which investor state arbitrations very often are). HKIAC also recently launched a “free hearing space” initiative, offering parties in an HKIAC-administered arbitration involving a State listed on the OECD list of development assistance (which 70% of Belt and Road jurisdictions are) access to HKIAC’s hearing facilities free of charge. For some parties, the cost savings on hearing facilities will be a factor towards them choosing HKIAC and Hong Kong.
Wenying: For protection under an investment treaty, the person or company making the investment must qualify as an ‘investor’. Most treaties define ‘investor ’as either a natural person or a company having the nationality of the home State. The definition may differ between each bilateral and multilateral investment treaty and investors should always check the exact requirements under the relevant treaty. Although the method used to determine whether a company or person is ‘foreign’ varies across investment treaties, the party seeking to utilise the investment treaty must demonstrate that it is a national of one of the countries that is signatory to the treaty.
Belt and Road and CIETAC HK / HKIAC
What is being done to encourage use of your centres in disputes involving the Belt and Road Initiative?
Sarah: In 2017 and beyond, HKIAC will be playing a very active role in the Belt and Road initiative. We are planning to visit many Belt and Road jurisdictions this year, with the aim of educating local contracting parties about the key issues they need to know when undertaking a Belt and Road project. For example, what does a party need to know when concluding a construction contract funded by a Chinese SOE? Or one that may also involve a Chinese entity contracted in production capacity? What does a party need to know when its project is funded by a Chinese finance institution, whether that be an infrastructure bank, private equity firm or sovereign wealth fund? These are some of the practical considerations that parties need to take into account when embarking on Belt and Road projects.
Because of the very nature of Belt and Road projects, the disputes that emanate from them will often involve multiple contracts as well as multiple parties, including public entities, private equity funds, and SOEs both from within and without Belt and Road jurisdictions. The deals are major infrastructure projects which may involve high-stake disputes with a significant political element.
The 2013 HKIAC Administered Arbitration Rules (the “Rules”) are designed to deal with multi-party and multi-contract scenarios, such as those arising in Belt and Road disputes – specifically, our Rules allow for consolidation, joinder and commencement of a single arbitration under multiple contracts, and default appointment options. Our Rules also contain provisions allowing for expedited proceedings, emergency arbitrator proceedings and a choice of method for determining the tribunal’s fees which can save costs. To assist tribunals in handling large disputes, HKIAC also offers a tribunal secretary service from among the members of our multilingual Secretariat. They have experience in both commercial and investment arbitration and can work in English and/or Mandarin.
HKIAC has recently released statistics on the average duration and costs of its proceedings which demonstrate that it leads among the other major international arbitral institutions on both of these heads. HKIAC also has a deep pool of qualified and bilingual English/Mandarin arbitrators from which parties and the institution can appoint.
Wenying: CIETAC HK currently uses the CIETAC Arbitration Rules 2015 to administer its cases. The Rules are a happy marriage between the Chinese and the international practice of arbitration, which perfectly suits the potential commercial disputes among companies from the Belt and Road initiative. We have witnessed a convergence of arbitration rules among different institutions as they have developed over the past few years. However, there can be some distinctive features in practice among institutions, for example, mediation, scrutiny of awards and case manager systems.
CIETAC HK has gained a reputation of maintaining a relatively more efficient arbitration. Its average time for rendering an award in 2015 was 115 days from the date the arbitrators are appointed. CIETAC will update its pool of arbitrators this May thereby enhancing its capacity in resolving Belt and Road disputes by increasing Belt and Road related arbitrators.
What role do you see your respective centres playing in providing hearing facilities?
Sarah: HKIAC offers modern hearing facilities in the heart of Hong Kong’s central business district. Its premises were voted the best in the world for location, value for money, helpfulness of staff and IT services in 2015 and 2016. Additionally, as I mentioned earlier, HKIAC offers free hearing space for proceedings administered by HKIAC where at least one party is a State listed on the OECD DAC List of ODA assistance.
Wenying: CIETAC has a great network around the globe which allows us to provide hearing facilities readily available in China and at a great number of jurisdictions. CIETAC HK has adequate hearing facilities and caters to cross-border hearings on a regular basis. CIETAC HK will move to the Legal Hub, a wonderful initiative by the Department of Justice, in two years, which is exciting news that we wish to share.
For the traditional commercial arbitration cases that CIETAC HK carries out, if we look at CIETAC’s Fee Schedule, we can easily draw the conclusion that CIETAC is one of the very few international arbitration institutions that puts no additional burden on the parties for hearing facility costs.
We have talked a bit about the role investors play in choice of seat and arbitral institution. another important party are “funders”. What role do your institutions see funders as playing in choice of dispute resolution clauses and what are your centres doing in terms of outreach to funding bodies?
Sarah: Third party funders’ primary concern is making returns in proceedings either through an award or settlement agreement.
Effective enforcement of an eventual award is therefore critical, and choosing experienced arbitrators and institutions with modern rules goes a long way towards ensuring a valid and enforceable award.
We work closely with third party funders in terms of mutual involvement in events and educating users. We also formed a special taskforce to consult with the Hong Kong SAR government on legislative reform as it concerns third party funding in Hong Kong.
Wenying: Yes, absolutely, and we are spending a lot of time in China talking to those groups. We recognise that as the parties providing the funds they have a lot of say in what dispute resolution clauses go into contracts.
What is being done by your centres to liaise with these organisations and encourage the choice of your centres and hong kong as a seat?
Sarah: We promote our work to Chinese SOEs both in the PRC and in Hong Kong. For example, in the week before Christmas, we hosted three large delegations of Chinese SOEs and arbitral centres in Hong Kong. In the PRC, HKIAC staff often meet with contractors and funders to understand their positions in different transactions and to promote the use of HKIAC’s Rules and services. We have also implemented Belt and Road seminars in Hong Kong and held Belt and Road roadshows in relevant jurisdictions that are recipients of outbound Chinese investment.
Wenying: We will have tailor-made events for investors on commercial arbitration, intellectual property disputes, construction disputes etc., including but not limited to seminars, mock arbitrations and negotiation workshops. We also work with chambers of commerce, governments, and institutes of arbitrators to communicate with arbitration users along the Belt and Road countries on the possibility of arbitration in Hong Kong.
Given all the talk about funding, it seems germane to talk about the pending third party funding reforms to the arbitration ordinance. What do your centres think the effect of the reform will be on Belt and Road arbitrations?
Sarah: The legislative reforms will bring Hong Kong into line with other major jurisdictions in terms of third party funding being available in arbitration. This is a positive development and makes Hong Kong more attractive as an arbitral seat. Some parties (whether these are impecunious parties or sophisticated entities using third party funding as a means of capital and liquidity management) may not wish to fund their disputes in the classical way, so third party funding arrangements are an interesting alternative.
Wenying: The Hong Kong Government has a long-standing policy of promoting Hong Kong as a leading centre for international legal and dispute resolution services in the Asia Pacific region. In recent years, third party funding of arbitration has become increasingly common in various jurisdictions.
The pending amendments to the Arbitration Ordinance to allow third party funding in arbitration and mediation proceedings is good news for dispute resolution services in Hong Kong. Third party funding will provide more options for parties initiating their arbitration case. CIETAC HK, with the help of its Working Group Members, has drafted guidelines to assist parties and arbitrators to be informed when considering using funding in their arbitrations.
Finally, what do you both see as the future of CIetaC HK’s and HKIAC’s involvement in Belt and Road?
Wenying: Before the Belt and Road, CIETAC HK was already the choice for resolving China related cross border commercial disputes. With the increasing volume of investment and trade, CIETAC HK will play a crucial role to resolve disputes arising from both.
Sarah: In 2017 and beyond, the Belt and Road initiative will constitute a significant part of HKIAC’s outreach and capacity work. As I mentioned, HKIAC has designed a roadshow for Belt and Road jurisdictions and has held that in the Philippines. We will also visit Mongolia and other jurisdictions this year. We are excited about promoting Hong Kong for Belt and Road disputes.