Table of Contents
- Class 1 - Introduction & Overview of the Practice of Arbitration
- Class 2 - Discovery and Disclosure of Documents in International Arbitration
- Class 3 - Challenges to Jurisdiction and Tribunals
- Class 4 - Nuts and Bolts of Awards
- Class 5 - Preliminary Meeting
- Class 6 - Challenges to Awards and Public Policy Considerations
- Class 7 - Interlocutory Proceedings: Part 1
- Class 8 - Interlocutory Proceedings: Part 2
- I. Should relief be sought from the Tribunal or from a court?
- II. If a court, which court?
- III. Considerations for Choosing Court vs. Tribunal Relief
- IV. Interim Measures of Protection
- V. Security for Costs
- A. What is Security for costs?
- B. Questions for the arbitrator to ask:
- C. Do I have the power?
- D. How can I exercise such power?
- E. Thought Process
- F. How to determine the quantum of costs?
- G. In what form should security be given?
- H. What are the consequences for non-compliance?
- I. Timing of Security for Costs Application
- J. Practical Issues
- VI. HK/PRC Arrangement for Interim Relief in Support of Arbitration
- A. Overview of the Arrangement
- B. Practical Operation of the Arrangement
- C. Understanding the Types of Preservation
- D. Preservation Measures in Hong Kong
- E. Requirements Under the Arrangement
- F. Practical Insights: Usage and Impact
- G. Practicalities for Applicants
- H. Interim Measures in Hong Kong Arbitration: A Case Study
- Class 9 - Costs
- I. Introduction
- II. Controlling Costs
- III. Costs in Arbitration
- IV. Costs estimation and allocation
- V. Security for Costs
- VI. Cost Deduction and Reduction in Court and Arbitration
- VII. Outcome related fee structures
- VIII. Strategic and Procedural Considerations in Arbitration
- A. Initial Procedural Flaws
- B. Cost Implications and Tribunal’s Approach
- C. Jurisdictional Objections and Strategic Considerations
- D. The Importance of Full Disclosure in Enforcement Applications
- E. Key Takeaways
- IX. Cost Recovery
- A. Case Example: Minimal Success and Cost Allocation
- B. Importance of Detailed Cost Evidence
- C. Contesting Costs: The Risks of Insufficient Detail
- D. The Risk of Inadequate Cost Documentation
- Key Takeaways
- Class 10 - Interest
Class 1 - Introduction & Overview of the Practice of Arbitration
I. Dispute Resolution and the Role of Arbitration
A. Different forms of Dispute Resolution
1. Arbitration
(1) Definition
International commercial arbitration is a means by which international business disputes can be definitively resolved, pursuant to the parties’ agreement, by independent, non-governmental decision-makers, selected by or for the parties, applying neutral adjudicative procedures that provide the parties an opportunity to be heard. ——G. Born, §1.02 International Commercial Arbitration (3(rd) Edition, 2021)
(2) Essential elements of arbitration
① Consensual
Arbitration is based on party agreement.
UNCITRAL Model Law Art 7(1) (Hong Kong Arbitration Ordinance sec. 19)
“Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes […] in respect of a defined legal relationship, whether contractual or not.
New York Convention Art II(1)
Applies to an “agreement […] under which the parties undertake to submit to arbitration”
② Resolves a dispute
Arbitration is a process to resolve a dispute, not a process for the formation of a contract, etc.
Compare HKIAC model clause for arbitration under the HKIAC Administered Arbitration Rules:
“Any dispute, controversy, difference or claimarising out of or relating to this contract, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non- contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered by the Hong Kong International Arbitration Centre (HKIAC) under the HKIAC Administered Arbitration Rules in force when the Notice of Arbitration is submitted.”
③ Non-governmental decision-maker
Arbitrators are non-governmental decision maker who preside over an arbitration.
They are selected by the parties. In their capacity as arbitrators they do not discharge a function or office of government or the national courts. If parties cannot agree on the arbitrators, they are appointed by arbitral institutions selected by the parties or national courts. However, duties, role and powers of an arbitrator are often regulated by national laws and courts.
④ Final and Binding
Arbitration results in a final and binding decision (award) by the decision-maker. This final and binding decision can be enforced against the unsuccessful party and its assets
Arbitration Ordinance, section 73
(1)Unless otherwise agreed by the parties, an award made by an arbitral tribunal pursuant to an arbitration agreement is final and binding both on—
- the parties; and
- any person claiming through or under any of the parties.
⑤ Use of Adjudicatory Procedures
Arbitration is an impartial adjudicatory process which affords each party the opportunity to present its case. The arbitrator’s decision is not administrative but based on the submissions and evidence presented by the parties.
Art. 18 of UNCITRAL Model Law (Arbitration Ordinance, sec. 46)
(2) The parties must be treated with equality.
(3) When conducting arbitral proceedings or exercising any of the powers conferred on an arbitral tribunal by this Ordinance or by the parties to any of those arbitral proceedings, the arbitral tribunal is required—
- to be independent;
- to act fairly and impartially as between the parties, giving them a reasonable opportunity to present their cases and to deal with the cases of their opponents; and
- to use procedures that are appropriate to the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for resolving the dispute to which the arbitral proceedings relate.
(3) Advantages
- Flexibility: Arbitration is based on party agreement and can be flexible as to procedure, language, presiding arbitrators, etc.
- Confidentiality: Arbitral awards are not published and hearings are not open to the public.
- Impartiality: Wide range of competent arbitrators available with different qualifications (including foreign nationals).
- Enforceability: Arbitral awards are generally enforceable worldwide (pursuant to New York Convention – 168 member states).
- Availability of Interim Remedies: Since October 2019, parties of certain HK-seated arbitrations can apply for PRC interim relief.
2. Litigation
(1) Elements
① Compulsory Jurisdiction
Courts exercise the jurisdiction they are given by statute, convention, history or practice. Individuals cannot ‘opt-out’ of the Court’s jurisdiction.
High Courts Ordinance (Cap 4)
- Jurisdiction of Court of First Instance
(1)The Court of First Instance shall be a superior court of record.
(2)The civil jurisdiction of the Court of First Instance shall consist of—
(a)original jurisdiction and authority of a like nature and extent as that held and exercised by the Chancery, Family and Queen’s Bench Divisions of the High Court of Justice in England; and
(b)any other jurisdiction, whether original or appellate jurisdiction, conferred on it by any law.
② Legal disputes
Courts resolve legal disputes (not social disputes or moral / ethical disputes). Courts resolve disputes according to and by applying the law.
Not _ex aequo et bono_meaning “according to the right and good” or “from equity and conscience.”
③ State Appointed Decision Makers
Governments appoint and pay decision makers (Judges). A decision maker is assigned without input from the Parties.
High Courts Ordinance (Cap 4)
4.Constitution of Court of First Instance
(1)The Court of First Instance shall consist of—
(a)the Chief Judge of the High Court; (Amended 79 of 1995 s. 50)
(b)such judges as the Governor may appoint; (Amended 80 of 1994 s. 3)
(ba)such recorders as the Governor may appoint; and (Added 80 of 1994 s. 3)
(c)such deputy judges as the Chief Justice may appoint. (Added 52 of 1987 s. 4)
④ Subject to further review
Courts usually have a system for appeals. Appeals can exist as a matter of discretion or as a matter of right
High Courts Ordinance (Cap 4)
- Appeals in civil matters
(1)Subject to subsection (3) and section 14AA, an appeal shall lie as of right to the Court of Appeal from every judgment or order of the Court of First Instance in any civil cause or matter. (Amended 25 of 1998 s. 2; 3 of 2008 s. 24)
(2) Advantages
- Enforceability: Parties can use the coercive power of the State to enforce judgments in their favour as a matter of right.
- Interim Relief: Courts use their coercive power to order interim relief against Parties and non-Parties.
- Public: Judicial proceedings are done in the open and subject to public observation and criticism.
- Certainty: The litigation process is understood and applied by qualified experts (judges and lawyers).
- Review: Judges who make mistakes can be corrected on appeal.
(3) Litigation & Arbitration: Statistics and Context
In 2023, arbitration institutions in China handled a total of 607,000 arbitration cases but there were 45.3m court cases.
3. Mediation
(1) Definition
Mediation Ordinance (Cap 620)
4.Meaning of mediation
(1) For the purposes of this Ordinance, mediation is a structured process comprising one or more sessions in which one or more impartial individuals, without adjudicating a dispute or any aspect of it, assist the parties to the dispute to do any or all of the following—
(a) identify the issues in dispute;
(b) explore and generate options;
(d) reach an agreement regarding the resolution of the whole, or part, of the dispute.
(2) Advantages
- Flexibility: Parties choose their mediator and decide how the mediation is conducted.
- Time / Cost saving: Mediation is usually shorter and cheaper than litigation or arbitration.
- Private: Mediation and any settlement reached are confidential to the Parties.
- Relationship: Mediation delivers mutually acceptable outcomes.
4. Adjudication
(1) Elements
(2) Advantages
- Time / Cost saving: Adjudication is usually much shorter and therefore cheaper than litigation / arbitration & the other side may not be able to claim its costs.
- Cash Flow: Quick decisions allow parties to get paid now to fund their business.
- Mandatory: If imposed by statute, no agreement needed and no ability to contract out.
- Early Communication: Avoids stalling behaviour or ignoring entitlements.
- Confidentiality: Decisions are not published and hearings are not open to the public.
- Impartiality: Wide range of competent adjudicators available with different qualifications (including foreign nationals and industry professionals).
(3) HK’s Construction Adjudication Scheme: Construction Industry Security of Payment Bill
Enacted 18 Dec 2024
Payment Scheme
- Payment Claim by the contractor (s. 18)
- Payment Response in 30 days (s. 20)
- Adjudication starts within 28 days (s. 24)
- Determination within 55 days (unless extended by agreement) (s. 42(5))
Determinations
- Cover payment claim and costs of adjudication (not representation costs) (s. 42(1))
- Be in writing and contain reasons (s. 42 (6))
- Given by adjudicator to ANB and by ANB on the parties (s. 42(5) & (7))
- Binding unless set aside by the Court, settlement or court / arbitration decision (s. 44)
B. Different ways of dispute resolution and how they compare
Litigation | Arbitration | Mediation | Adjudication | |
|---|---|---|---|---|
Jurisdiction | Local law & civil procedure / Conflicts of Law Rules | Party Agreement | Party Agreement | Contract and/or statutory procedure |
Governing Procedure / Rules of Evidence | Local civil procedure laws | Flexible | Flexible | Prescribed by contract / statutory procedure |
Governing Law | Default: Local law | Flexible | Flexible (decision making not necessarily based on legal principles) | Flexible |
Confidentiality | No | Yes | Yes | Yes |
Appeal | Yes | No | No | Maybe |
Enforceability | Yes | Yes | Yes | Maybe |
Interim Relief | Yes | Yes | No | No |
II. Arbitral Institutions: Drivers of Change?
A. Basic Questions
1. Institutional Arbitration v. ad hoc Arbitration
- Institutional Arbitration: Proceedings conducted under administration of an arbitral institution with its pre-formulated arbitration rules.
- Ad Hoc Arbitration: Proceedings of which the parties select the arbitrator(s), the rules and procedures, and organize the process.
2. What is an arbitral institution?
…a permanent organization to which parties to a dispute reserve some decisional authority in order to facilitate an arbitration conducted in accordance with a set of arbitration rules. —— The Functions of Arbitral Institutions, Rémy Gerbay (2016)
B. The role of Arbitral Institutions
Arbitral institutions play an important role in organizing and overseeing arbitration proceedings. They provide a set of rules and administrative support to ensure the process runs smoothly. Here’s a brief breakdown:
- Administering Arbitrations: Arbitral institutions help by managing the logistical aspects of the arbitration process, including appointing arbitrators, coordinating hearings, and managing documentation.
- Providing Rules and Procedures: Institutions offer standardized rules (like the ICC Rules or SIAC Rules) that guide the arbitration process, helping parties to understand the procedure and expectations from the outset.
- Offering Expertise: They can provide a pool of experienced arbitrators who are experts in specific fields, which is crucial for complex disputes.
- Ensuring Neutrality and Fairness: The institution’s role is to ensure the process is fair and neutral, especially in cross-border disputes where there might be concerns over bias or lack of familiarity with the local legal system.
C. The Rise of the Arbitral Institution
Arbitral institutions began forming in the late 19(th) Century as a means of facilitating and administering arbitral proceedings.
Alphabet soup: ICC, SIAC, HKIAC, CIETAC, MCIA, KCAB, LCIA, SCC, ICSID, PCA etc. These institutions are known collectively as the “alphabet soup” of arbitration because of their wide range of acronyms.
Initially, arbitration was primarily used for resolving commercial disputes between businesses. However, over time, it expanded to include investor-State and State-to-State arbitration, especially with the rise of international trade and investment.
Growth and rise of institutions: As international trade and investment increased, the need for reliable and neutral dispute resolution mechanisms led to the rise of arbitral institutions. The institutions have become increasingly important in the global legal landscape.
1 | 💡 Are all institutions the same? Are they all independent and neutral? |
No, they are not identical.
- Different Rules: Each institution has its own set of arbitration rules, timing, and costs.
- Different Services: Some provide more intensive case-management support; others are more “hands-off.”
- Costs Vary: Filing fees and arbitrator hourly rates differ from one institution to another.
Independence and Neutrality
- Designed to Be Neutral: Institutions are meant to be impartial administrators, not favoring either party.
- Institutional Governance: Most have independent councils or boards made up of arbitrators and lawyers from many countries.
- Potential Concerns:
- An institution based in one country may have more local users, leading some to worry about “home-court bias.”
- Funding sources (e.g. member contributions or government ties) can raise questions about true independence.
- Practical Neutrality: In practice, parties pick the institution whose rules, seat, and reputation they trust most. If they doubt neutrality, they can choose a different institution or an ad hoc procedure.
D. Institution’s Power
1. An Institution’s Hard Power
Hard power refers to an institution’s decisive authority in arbitration. This means that the institution has the formal power to make decisions that directly impact the arbitration process. These decisions are typically outlined in the arbitration rules or statutes.
… some decisional authority in order to facilitate an arbitration conducted in accordance with a set of arbitration rules
1 | 💡 What decisional authority? |
Appointment of Arbitrators: The institution can decide who will act as the arbitrators, either based on the rules or laws (statutory).
Procedural Decisions: The institution may make decisions on certain procedural matters like whether a claim is valid (prima facie), whether parties can join a case together (joinder), or whether cases can be consolidated (consolidation).
Scrutiny of Awards: Some institutions review or scrutinize the arbitral awards to ensure they meet certain standards.
Time and Cost Controls: The institution can set procedures to make the arbitration process faster (expedited procedures), or impose caps on the arbitrators’ fees, making the process more efficient and cost-effective.
1 | 💡 What about statutory authority? |
Statutory authority refers to the legal power granted by statutes. For example, in Hong Kong:
Cap. 609, Sections 23 and 24
Section 23 (Article 10 of UNCITRAL Model Law – Number of Arbitrators)
- This section allows the parties to determine the number of arbitrators (usually 1 or 3).
- If the parties cannot agree on the number of arbitrators, the HKIAC (Hong Kong International Arbitration Centre) has the authority to decide on the number of arbitrators (either 1 or 3) in that case.
- Hard power here refers to the institution (HKIAC) having the authority to step in and decide if the parties cannot agree.
Section 24 (Article 11 of UNCITRAL Model Law – Appointment of Arbitrators)
- Article 11 gives the parties the freedom to decide how arbitrators will be appointed.
- If the parties cannot agree on the arbitrators, then the HKIAC has the power to appoint the arbitrators, either directly or by helping the parties reach an agreement.
- In situations where the parties or their appointed arbitrators fail to make the appointments within the required timeframes, the HKIAC can step in and make the appointment. This is another example of the institution exercising its hard power.
- This section outlines the procedure for appointments, including the possibility of a court or other authority stepping in if the institution (or the parties) cannot resolve the issue.
Cap. 609C
Appointment Advisory Board (AAB): This is a 11-member board established by the Hong Kong International Arbitration Centre (HKIAC), with members nominated by prominent organizations such as the Chief Justice and various professional associations.
Consultation: HKIAC must consult at least 3 members of the Appointment Advisory Board before appointing an arbitrator or mediator or deciding on the number of arbitrators. However, the advice is not binding.
Appointment Process: Parties may request the HKIAC to appoint an arbitrator (under section 24 of the Arbitration Ordinance) or mediator (under section 32(1)) by submitting specific forms. The HKIAC will appoint based on factors like the nature of the dispute and availability of qualified persons.
Fee: The standard fee for the appointment of an arbitrator or mediator is HK$8,000, but this may vary depending on the specifics of the case. The HKIAC also has the authority to waive or vary these fees.
Decision on Number of Arbitrators: If the parties cannot agree on the number of arbitrators, the HKIAC decides whether there should be 1 or 3 arbitrators, considering factors like the complexity of the case, the amount in dispute, and customs of the relevant industry.
2. An Institutions’ Soft Power
Soft power refers to a form of influence or persuasion that does not rely on coercion or force but instead uses attraction, appeal, and subtle influence. In the context of arbitration, an institution’s soft power is its ability to shape the arbitration process and the legal landscape through its authority, rules, and practices, without direct imposition or enforcement.
… some decisional authority in order to facilitate an arbitration conducted in accordance with a set of arbitration rules
1 | 💡 What do we mean by soft power? |
In the context of institutions, soft power is the ability to influence or guide the development of international arbitration practices through subtle and non-coercive means, such as:
- Influencing Arbitration Rules and Practices: Institutions, such as the ICC, LCIA, or HKIAC, can introduce or amend arbitration rules to reflect evolving global standards, societal values, and fairness principles. This is done without imposing them through state-enforced laws.
- Appointment of Arbitrators: Institutions exercise soft power by playing a role in the appointment of arbitrators, ensuring diverse, qualified, and impartial individuals are selected. This process can shape the diversity of arbitrators and how they interpret and apply arbitration rules. Institutions influence the broader cultural and social dimension of arbitration through such decisions.
1 | 💡 How do institutions influence change? |
Several initiatives and pledges demonstrate how arbitration institutions use their soft power to influence change, such as:
The Equal Representation in Arbitration Pledge:
This pledge encourages institutions to promote gender equality and diversity in the appointment of arbitrators. By making this pledge, institutions exert soft power to challenge biases and encourage diversity in the arbitration process.
Green Arbitration Pledge:
The Green Arbitration Pledge encourages arbitration participants and institutions to reduce the environmental impact of arbitration proceedings. This includes practices like reducing travel-related emissions and using more sustainable resources. Institutions adopting this pledge influence the arbitration process in an environmentally-conscious direction, leveraging their authority to promote ecological responsibility.
Mindful Business Charter:
This is a set of principles for ethical business conduct, and when institutions endorse it, they promote mindfulness, ethical practices, and inclusivity in arbitration proceedings. This soft power helps embed values such as fairness and transparency in arbitration.
1 | 💡 Should there be limits on that influence? |
Yes, some argue that arbitration institutions should focus primarily on ensuring procedural fairness, efficiency, and impartiality in the arbitration process, without being overly involved in social or political issues. The potential risk is that institutions may impose values that some parties might not agree with, potentially influencing the neutrality of the arbitration process.
However, others argue that these values are part of the evolution of international arbitration and reflect society’s changing expectations. Institutions adopting these soft power strategies may help promote diversity, sustainability, and ethical practices, which are increasingly seen as necessary in modern arbitration.
1 | 💡 Are institutions instruments for social change? |
Arbitration institutions can indeed be seen as instruments for social change. By endorsing various pledges, initiatives, and practices that focus on diversity, sustainability, and ethical conduct, they shape the evolving norms of the arbitration world. This influence extends beyond merely resolving disputes, as institutions help shape the ethical, social, and environmental standards of the arbitration community.
III. Practising Arbitration in a Globalised World
A. International Commercial Arbitration
1. Definition
International commercial arbitration is a means to resolve business disputes between profit-making enterprises.
2. What do Companies / Users say about Arbitration?
The five most preferred seats for arbitration are: London, Singapore, Hong Kong, Paris and Geneva.
The five most preferred arbitral institutions are: ICC, SIAC, HKIAC, LCIA and CIETAC.
In a Queen Mary University study on energy arbitration (published Jan 2023), results were similar:
- 72% of the respondents gave arbitration a score of 4/5 for suitability as a dispute resolution mechanism ranking much higher than any other form of dispute resolution.
- Neutrality (63%), choice of arbitrators / technical expertise (60%) and enforceability of awards (60%) were seen as main benefits.
- London and Singapore were named as preferred seats.
3. International Commercial Arbitration vs Cross Border Litigation
Concerns re Cross Border Litigation | International Arbitration |
|---|---|
Neutrality of local courts | Arbitrators with neutral nationalities |
Lack of expertise / familiarity with international commercial practices and/or very technical disputes | Technical experts / senior commercial arbitrators to be selected as arbitrators |
Costs and delay | Freedom to adopt specific procedural restraints to limit time / costs |
Lack of convenience | Flexible venue / broad adoption of online hearings |
Jurisdictional issues / forum selection | Very limited grounds for local courts to interfere with jurisdiction of arbitral tribunals |
Enforceability of judgments | Awards broadly enforceable due to New York Convention |
4. Fact of Fiction?
1 | 💡 Is arbitration flexible? |
Arbitration is typically more flexible than litigation. This flexibility is one of its key advantages. Parties can:
- Choose their own arbitrators, subject to institutional rules or mutual agreement.
- Tailor the procedural rules to suit the specific needs of their dispute, as long as these procedures are compatible with the relevant arbitration rules.
- Select the venue (or “seat”) of arbitration, which can influence the applicable legal framework.
This flexibility allows parties to design a process that is more efficient and suited to their specific needs, which is harder to achieve in court proceedings, where procedures are largely standardized and controlled by the court system.
1 | 💡 Is arbitration cheaper and quicker than litigation? |
Arbitration is often cheaper and quicker than litigation, but this is not always the case. Here’s why:
Cheaper:
Arbitration can be more cost-effective because parties have greater control over the proceedings (e.g., fewer procedural delays). Moreover, arbitration avoids the extensive costs associated with public court procedures, like lengthy trials and extensive discovery processes.
Quicker:
Arbitration can be faster due to its streamlined procedures, limited opportunities for appeal, and flexible scheduling. However, delays may still occur depending on the complexity of the case, the efficiency of the arbitrators, or the availability of witnesses and experts.
1 | 💡 Arbitrators better suited to deal with international / highly technical disputes? |
Arbitrators can often be better suited to handle international or highly technical disputes for the following reasons:
Expertise:
Arbitrators are often selected for their specialized knowledge in a particular field, such as construction, technology, or intellectual property, which makes them well-equipped to handle complex and technical matters.
International Scope:
In international disputes, arbitrators are usually well-versed in cross-border legal issues, cultural differences, and international law, which makes them better suited than judges in a national court who might not have this expertise.
1 | 💡 Is arbitration more convenient? |
Arbitration can indeed be more convenient, but it depends on the procedure adopted by the parties:
Convenience:
Arbitration allows the parties to choose the time, place, and manner of the proceedings, which can make it more convenient than court proceedings, especially in international disputes where courts may be located in different jurisdictions.
Depends on Parties’ Choices:
If the parties agree on a streamlined process and an efficient arbitrator, arbitration can be very convenient. However, if the process is poorly designed or if there are significant delays in appointing arbitrators or securing documents, it can become less convenient.
1 | 💡 Is arbitration greener? |
Arbitration can be greener, but it requires party commitment to adopt relevant procedures:
Sustainability:
Arbitration can be made more environmentally friendly by reducing the need for travel (via virtual hearings), minimizing paper use (through electronic submissions), and adopting more sustainable venues and logistics. Some arbitration institutions and parties are increasingly adopting “green” initiatives to reduce the environmental impact of proceedings.
Commitment from Parties:
While arbitration offers the potential for more eco-friendly practices, this depends on the parties’ willingness to adopt them. For example, if the parties insist on in-person hearings or refuse to go paperless, the environmental impact may still be significant.
B. Strategy in Cross Border Disputes
Important points to consider to identify the most appropriate dispute resolution mechanism:
- What are the available counterparties?
- Where are the assets of such counterparties located?
- What is the value of the contract / dispute?
- How / where would a potential award / judgment have to be enforced?
- Availability of interim relief?
At the time when a dispute arises, the options are usually limited and depend on the relevant dispute resolution / arbitration clause in the contract.
It is therefore important to consider these issues before or at the time a contract is entered into between the parties.
C. Case Study
Example 1: Investment Dispute Resolution via Arbitration
This case highlights how arbitration can be used as a mechanism to resolve disputes in complex international investment situations. Let’s break it down step by step:
(1) The Dispute Overview:
Parties Involved:
- Client (Offshore Holdco), with a Hong Kong-listed company (HK Listco) and main operations in the PRC (People’s Republic of China).
- Counterparty, with a similar structure (offshore Holdco and PRC operations).
Investment Structure:
The parties jointly invested in a target company through a Share Purchase Agreement (SPA), with the ultimate goal of listing the target company on the stock exchange. The client secured a put option, allowing them to withdraw from the investment after a set period if the listing did not happen.
Dispute Trigger:
The target company did not list as planned. Consequently, the client wanted to exercise the put option to exit the investment, but the dispute arose regarding how to unwind or end the investment.
(2) Difficulties in Resolving the Dispute:
Offshore Holdcos with No Direct Assets:
The contracting parties (client and counterparty) were offshore Holdcos (holding companies), meaning they did not have direct assets. This made it difficult to enforce any claims directly against them, as they were essentially shell companies with no significant tangible assets.
Assets Located in PRC:
The real assets were held by the parent company of the Holdcos, based in the PRC. The issue here was that the offshore Holdcos did not have direct access to or control over these assets, making the dispute more complicated to resolve.
Incompatible Arbitration Clauses:
The arbitration clauses in the various agreements (SPA, guarantee agreement, etc.) were not compatible, meaning the different agreements could not be consolidated into a single arbitration proceeding. This posed a logistical challenge in terms of trying to resolve all issues in one place, as the arbitration rules would differ.
(3) The Solution
To overcome these challenges, the legal team used the following approach:
Commence HKIAC Arbitration under a Guarantee Agreement:
The arbitration was initiated through the Hong Kong International Arbitration Centre (HKIAC) under the guarantee agreement. Importantly, this agreement involved the PRC-based parent companies, who had assets within China. By focusing on the guarantee provided by the parent companies, they were able to bring the dispute into the scope of arbitration, even though the main contracting parties were offshore entities.
Use of Interim Relief to Freeze Assets in the PRC:
A key strategy was to request interim relief in the form of freezing the assets in the PRC. This allowed the parties to effectively secure the value of the dispute by freezing assets in excess of RMB 550 million. This step was crucial because it gave the client leverage in the negotiations and ensured that the assets were protected while the dispute was being resolved.
Negotiation Pressure:
With over RMB 550 million in assets frozen, the pressure on the parties significantly increased. As a result, both parties were compelled to return to the negotiation table to seek a settlement, as the frozen assets made it clear that the status quo could not continue indefinitely.
(4) Outcome
- The interim relief (asset freeze) was successful in forcing the parties to negotiate and reach a resolution. The threat of losing access to valuable assets in the PRC created sufficient pressure for both sides to find common ground.
- Arbitration provided a structured, neutral platform to address the dispute, with the option for interim measures to protect the client’s position while the dispute was resolved.
Key Takeaways:
- Arbitration for Offshore Parties: Even when the parties involved are offshore entities without direct assets, arbitration can still be a useful tool, particularly if the dispute involves guarantees or assets located in a jurisdiction where interim measures are possible.
- Interim Relief in Arbitration: The ability to obtain interim relief to freeze assets (especially in the PRC, where enforcement can be challenging) plays a critical role in influencing the outcome of the dispute. This can provide a tactical advantage, forcing parties to negotiate.
- Arbitration Clauses and Consolidation: If arbitration clauses are incompatible across multiple agreements, it may be necessary to find creative solutions, such as focusing on the guarantee agreement or a specific clause that permits arbitration.
In this case, arbitration served as a powerful mechanism not only for resolving the dispute but also for exerting pressure on the counterparty to come to the table for negotiations.
Example 2: Enforcing an Arbitration Award in a Complex International Dispute
This case presents another scenario in which a large multinational company (the client) sought to enforce an arbitration award in a dispute involving mismanagement and embezzlement of assets. Let’s break down the case details:
(1) The Dispute Overview
- Parties Involved:
- Client: A large multinational corporation that had invested in an offshore company. The client had shares in the Hong Kong-listed company (HK Listco), which owned subsidiaries operating in the PRC.
- Counterparty: Allegedly mismanaged the target company and embezzled assets.
- The Investment:
The client invested in an offshore company with key operating subsidiaries in the PRC. However, after discovering that the counterparty had mismanaged the company and embezzled funds, a dispute arose. - The Arbitration: The client engaged a Singapore-based law firm to pursue the dispute, leading to a successful SIAC (Singapore International Arbitration Centre) award. The arbitration awarded in the client’s favor, but enforcement became problematic, as the client did not engage a Hong Kong/China law firm until several years after the arbitration, during the enforcement phase.
(2) Difficulties Encountered
No Asset Searches During Arbitration:
One of the major issues was that no contemporaneous asset searches were conducted during the ongoing arbitration. Typically, asset searches can help identify available assets for enforcement purposes, but in this case, it was not done early on.
Parallel Structure Setup by Counterparty:
While the arbitration was ongoing, the counterparty set up a parallel structure in the PRC. This structure was used to transfer key assets, including key employees, away from the original target company. As a result, the target company (the one involved in the dispute) lost its assets, and the remaining PRC structure became an empty shell with no substantial value.
Empty Shell at Time of Award:
By the time the arbitration award was issued, the remaining structure of the company in the PRC had been hollowed out. There were no valuable assets remaining that could be used for enforcing the award, which made the enforcement process incredibly difficult.
(3) The Solution and Steps Taken
Realization of Asset Shift and Lack of Enforceable Assets:
Since the asset shift to the parallel structure had gone unnoticed during the arbitration, there were no remaining assets in the target company that could be used to enforce the arbitration award.
Criminal Complaint and Blacklisting:
To take action against the counterparty, a criminal complaint was filed in the PRC, targeting the involved director/shareholder. Additionally, a blacklisting process was initiated in China to prevent the involved parties from engaging in certain business activities. This was a strategy to put pressure on the counterparty, even if it did not directly recover assets.
Appointment of Liquidators:
To access books and records and trace the dispersed assets, liquidators were appointed both offshore and in Hong Kong. Their role was to dig deeper into the structure and financials of the offshore company and its PRC subsidiaries to try to locate the hidden assets and understand the full scale of the asset transfers.
Costly Asset Searches and Investigations:
As the assets were not easy to trace, costly and extensive asset searches and investigations were initiated. However, these processes were resource-intensive and uncertain. The investigation was unclear in terms of whether it would lead to meaningful recovery of the misappropriated funds or assets.
(4) Challenges with Recovery
The primary issue here was that while the SIAC award was in favor of the client, the counterparty had already transferred assets to a parallel structure, and those assets were not easily traceable. Additionally, by the time enforcement efforts were initiated, much of the PRC structure had become an empty shell, rendering enforcement difficult.
The asset searches were costly and time-consuming, and it was not immediately clear if the client would be able to recover any significant amount. The criminal complaint and blacklisting were strategic steps to apply pressure on the counterparty, but these actions alone could not ensure a meaningful recovery.
Key Takeaways
Importance of Asset Searches Early On:
One of the key lessons here is the importance of conducting asset searches during the arbitration process itself. This would have allowed the client to identify available assets to target for enforcement before the counterparty moved them.
Parallel Structures and Asset Concealment:
The case underscores how parallel structures (especially in jurisdictions like the PRC) can be used to shield assets from enforcement. This strategy makes it harder for the winning party to recover any funds, even when the award is in their favor.
Post-Award Enforcement Challenges:
The case illustrates that even after obtaining a favorable arbitration award, the enforcement phase can be extremely complex and costly, especially when the counterparty is actively trying to hide or transfer assets to another jurisdiction.
Use of Liquidators and Investigators:
The appointment of liquidators and the reliance on asset tracing experts are essential in international disputes where assets are hidden or transferred to avoid enforcement. However, these measures can be time-consuming and expensive with no guaranteed success.
In essence, this case highlights the challenges involved in enforcing an arbitration award when the counterparty has taken steps to hide or transfer assets, and it shows how the client was forced to pursue costly and complicated enforcement measures.
Class 2 - Discovery and Disclosure of Documents in International Arbitration
I. Introduction
1 | 💡 What is discovery / document production? |
Discovery is a term usually used in common law countries to identify a process by which, commonly before the hearing / trial, evidence can be obtained.
The available tools to obtain evidence through discovery include:
- Requests for document production
- Interrogatories
- Inspection of documents, goods, etc.
- Requests for a person to be provided as a witness
In civil procedures, parties can apply to the court’s assisting in collecting documents from counter-parties and non-parties. They are ways to collect evidence too, but strictly speaking not the “discovery / document production” process in common law proceedings.
In arbitration, discovery of documents is called document production and is not automatic / mandatory as in litigation (under common law).
II. Discovery in Hong Kong Litigation
After the close of pleadings, discovery by the parties of the documents “which are or have been in their possession, custody or power relating to matters in question in the action.” (O.24, r.1, RHC Cap. 4A)
- Possession, custody, or power: including documents of other parties.
Any document which, it is reasonable to suppose, “contains information which may enable the party (applying for discovery) either to advance his own case or to damage that of his adversary, if it is a document which may fairly lead him to a train of inquiry which may have either of these two consequences” must be disclosed. (Compagnie Financière du Pacifique v. Peruvian Guano Co. (1882) 11 Q.B.D. 55)
Discovery by exchanging lists of documents within 14 days after close of pleading. (O.24, r.2)
To ensure completeness, the court can:
- order a party to provide a sworn affirmation verifying its list of documents, i.e. to confirm that the party has disclosed all relevant documents in his possession, custody and control.(O.24, r.3)
- order discovery of a specific document or class of documents.(O.24. r.7)
Parties need to make the documents available for inspection.(O.24, r.9)
III. Applicable rules for document disclosure in international arbitration
A. Key Sources
1 | 💡 Where to find the relevant rules on document production / use of evidence in international arbitration? |
Parties can refer to the rules on evidence / document disclosure in the arbitration agreement. Tribunals can make procedural orders that incorporate / adopt the relevant rules as guidelines for the ongoing arbitration.
Below is an extract from a procedural order in an arbitration:
DOCUMENTARY EVIDENCE
The Parties and the Tribunal may, in all matters pertaining to evidence, be guided but not bound by, the IBA Rules on the Taking of Evidence in International Arbitration.
The Parties shall identify all relevant documents in their submissions…
Either Party may request, and the Tribunal may direct, the other Party or Parties to produce any relevant documentary evidence in its or their respective possession, custody or control. Any documents which the Tribunal orders to be produced shall be transmitted to the Tribunal within any time limit directed by the Tribunal…
All documents submitted by the Parties shall be accepted as being true copies of the originals unless their authenticity is expressly challenged by the other Party.
B. National Laws
The relevant local law in Hong Kong is the Arbitration Ordinance (Cap. 609) which, as with local laws in many other countries, adopts / incorporates the UNCITRAL Model Law.
Section 47 (2)
If or to the extent that there is no such agreement of the parties, the arbitral tribunal may, subject to the provisions of this Ordinance, conduct the arbitration in the manner that it considers appropriate.
Section 47 (3)
When conducting arbitral proceedings, an arbitral tribunal is not bound by the rules of evidence and may receive any evidence that it considers relevant to the arbitral proceedings, but it must give the weight that it considers appropriate to the evidence adduced in the arbitral proceedings.
Section 56 (1)
Unless otherwise agreed by the parties, when conducting arbitral proceedings, an arbitral tribunal may make an order […]
(b) directing the discovery of documents or the delivery of interrogatories;
(c) directing evidence to be given by affidavit; or
(d) in relation to any relevant property
Other relevant local laws are:
Arbitration Law of the People’s Republic of China
- Article 43 Parties shall provide the evidence in support of their own arguments. The arbitral tribunal may, as it considers necessary, collect evidence on its own.
- Article 45 The evidence shall be presented during the hearings and may be examined by the parties.
- Article 46 Under circumstances where the evidence may be destroyed or lost or difficult to obtain at a later time, a party may apply for preservation of the evidence. If a party applies for preservation of the evidence, the arbitration commission shall submit his application to the basic people’s court in the place where the evidence is located.
The arbitral tribunal may, as it considers necessary, collect evidence on its own.
International Arbitration Act (Cap. 143A) (IAA) [Singapore]
Arbitration Act 1996 [England, Wales, Northern Ireland]
International Arbitration Act 1974 (IAA) [Australia]
C. Arbitral Institutions
Institutional rules deal with document production and feature frequently in international arbitration (as they are usually incorporated in the Parties’ arbitration agreement).
- HKIAC Administered Arbitration Rules (2024)
- ICC Arbitration Rules (2021)
- UNCITRAL Arbitration Rules (2013)
- SIAC, LCIA, various others…
1. HKIAC Administered Arbitration Rules (2024)
Scope for document production narrower than for HK court proceedings.
Art. 22.3
At any time during the arbitration, the arbitral tribunal may allow or require a party to produce documents, exhibits or other evidence that the arbitral tribunal determines to be relevant to the case and material to its outcome. The arbitral tribunal shall have the power to admit or exclude any documents, exhibits or other evidence.
Art. 13.1
[…] the arbitral tribunal shall adopt suitable procedures for the conduct of the arbitration in order to avoid unnecessary delay or expense, having regard to the complexity of the issues, the amount in dispute and the effective use of technology, and provided that such procedures ensure equal treatment of the parties and afford the parties a reasonable opportunity to present their case.
2. ICC Arbitration Rules
The tribunal is not expressly empowered to order document disclosure, but authority is implied.
Article 25(1) (2021 Rules)
[t]he Arbitral Tribunal shall proceed within as short a time as possible to establish the facts of the case by all appropriate means,
Article 25(5)
may summon any party to provide additional evidence.
D. International Guidelines
Guidance is also found in guidelines published by international organizations which can be incorporated into arbitral proceedings:
- IBA Rules on the Taking of Evidence in International Arbitration (IBA Rules)
- Inquisitorial Rules on the Taking of Evidence in International Arbitration (The Prague Rules)
- ICC Arbitration Commission Report on Managing E-Document Production
- CIArb Protocol for E-disclosure in Arbitration
1. IBA Rules
IBA Rules are widely accepted as internationally applicable standards / best practices on taking evidence (including document production) in international arbitration.
- A balanced approach taken between civil and common law procedures.
- Scope of production: a document request has to be:
- for specific documents or for specific and narrow categories of documents [3(3)(a)(ii)]
- prima facie relevant to the case and material to its outcome [3(3)(b)]
- for documents
- not in the possession, custody or control of the requesting party [3(3)(c)(i)],
- in the possession, custody or control of the requested party (Article 3(3)(c)(ii)
- not unreasonably burdensome to produce [3(3)(c)(i)]
Article 9 of the IBA Rules
- The Arbitral Tribunal shall determine the admissibility, relevance, materiality and weight of evidence.
- The Arbitral Tribunal shall, at the request of a Party or on its own motion, exclude from evidence or production any Document […] for any of the following reasons:
- lack of sufficient relevance to the case or materiality to its outcome;
- legal impediment or privilege under the legal or ethical rules determined by the Arbitral Tribunal to be applicable…;
- unreasonable burden to produce the requested evidence;
- loss or destruction of the Document that has been shown with reasonable likelihood to have occurred;
- grounds of commercial or technical confidentiality that the Arbitral Tribunal determines to be compelling;
- grounds of special political or institutional sensitivity […]; or
- considerations of procedural economy, proportionality, fairness or equality […].
- The Arbitral Tribunal may, at the request of a Party or on its own motion, exclude evidence obtained illegally.
2. Competitor to IBA Rules: Prague Rules
The Prague Rules came into effect on 14 December 2018. The working group creating the Prague Rules comprises mostly of civil law practitioners and the civil law influence is reflected in the Prague Rules.
The Prague Rules are aimed at increasing efficiency of arbitration by encouraging a more active role for arbitral tribunals in managing proceedings (as with courts in civil law countries).
Document production is discouraged and the Prague Rules require the tribunal to decide at the outset whether document production is necessary. In case the tribunal allows for production, requests have to pertain to specific document relevant and material to the outcome of the case.
IV. Comparison of litigation and arbitration
International Arbitration | Court / Litigation | |
|---|---|---|
Discovery automatic | No automatic right to request disclosure – depending on discretion of tribunal | Automatic process for actions commenced by writ [HK – common vs civil law] |
Counterparties for | Limited to parties in arbitration | Parties to dispute / third parties |
Scope | No common standard but generally less broad - relevant and material to a party’s case (IBA Rules) | Wide scope: relevant document under Peruvian Guano[HK – common vs civil law] |
Privilege protection | Yes | Yes [HK – common vs civil law] |
Confidentiality | Yes | Implied but otherwise specific court order required |
Characteristics |
|
|
V. Practical application in international arbitration
A. Guidelines for Legal Representatives Regarding Document Production
At the outset of the dispute, inform the client about the importance of preserving potentially relevant documents (continuing duty).
Also, at the outset, clients should locate / search for relevant / material documents as soon as possible (at the direction or with the assistance of the legal representative).
At an early stage of the arbitration, consider and agree applicable rules and scope of documents disclosure – whether to exclude or limit the scope of document requests, providing time for document requests and disclosure in the timetable.
During dispute, document requests (or objections to such request) should only be made for a proper purpose (and not for procedural advantage e.g. to create delay).
If production of documents is agreed by the parties or ordered by the tribunal, parties are required to abide by such agreement or orders (and do not unreasonably withhold relevant documents).
During dispute, advise client on issues such as privilege, data privacy, state secrets etc. which may affect document production.
B. Disclosure and Inspection of Documents in Arbitration Proceedings
Each party would normally produce with its submissions, witness statements and expert reports, documents in support of its propositions and facts presented therein.
Additional / specific production of documents would then only be required to obtain documents going beyond what was already produced by each party with submissions – i.e. if more documents exist that are relevant / material to the issues in the dispute.
As discussed, unless specifically provided for in the parties’ arbitration agreement, the tribunal would usually make orders at the outset of the arbitration how such document requests should be formulated and the process and timing for the same.
Here is an example from a Procedural Order given by a tribunal:
Disclosure of documents
- Disclosure or discovery of documents shall be carried out with the IBA Rules serving as a guideline.
- Any requests for disclosure of documents shall be in accordance with the procedural timetable and in the form of a Redfern schedule.
[…]- No new evidence may be submitted in the agreed hearing bundle unless agreed between the parties or permitted by the Tribunal.
C. Reasons for Objecting to Document Requests
- Failure to identify document/category of document with sufficient detail.
- Documents identified lack sufficient relevance or materiality.
- Documents cannot be produced due to:
- Privilege.
- Confidentiality.
- State secret / data privacy, other legal grounds.
- Contractual or other grounds.
- Production of documents would be an unreasonable burden.
- Loss or destruction.
- Considerations of procedural economy, proportionality, fairness or equality.
D. Redfern Schedule
1. Introduction
If parties cannot agree document requests, the tribunal will usually ask for the preparation of a joint document with requests from both sides, which allows the tribunal to rule on each request.
An example of such a document is the so-called Redfern Schedule – a schedule for document production popularized by Alan Redfern.
2. Basic Checklist for Redfern Schedule
Check which rules apply, and the procedural order for Tribunal’s directions on document disclosure. | |
CATEGORISE the different claims, counterclaims, or defence. | |
DESCRIBE requested category of document with SPECIFICITY (sufficient details to identify it) [IBA, Art. 3(a)(i) and (ii)] E.g.: “[Document category, e-mails, reports, agreements] in relation to, or pertaining to [specific topic] involving [specific entities or persons] from [date]” | |
3.1. | Name or nature of the document (e.g. mandate, e-mail, agreement) |
3.2. | Identify specific date range for requested document(s) |
3.3. | Set out individuals or entities who created, are mentioned, or somehow related to, involved with the document. |
3.4. | For e-mails, provide search keywords (e.g. “operating agreement negotiation”) |
3.5. | “Documents reasonably believed to exist” – be prepared to justify this (by inference, implication). |
EXPLAIN document’s MATERIALITY and RELEVANCE [IBA, Art. 3(b)] | |
4.1. | Identify the material (sub) issue between the parties that the documents are responsive to. |
4.2. | Explain the relevance of the document to the material (sub) issue between the Parties. |
4.3. | Explain how the documents are relevant to the case and material to its outcome |
4.4. | Provide SPECIFIC REFERENCES and quotes in the pleadings to guide the Tribunal. |
EXPLAIN why the documents requested are in the CUSTODY, POSSESSION, or CONTROL of the other party, and it is NOT UNREASONABLY BURDENSOME TO PRODUCE [IBA, Art.3(c)(i)(ii)]. | |
[For Opposing Party] OBJECT to document based on: | |
6.1. | Or, other grounds including: |
3. Real example of Redfern Schedule (anonymized)
Oil & gas dispute in relation to a gas field development project
No. | Documents or Category of Documents Requested | Relevance and Materiality According to Requesting Party | Objections to Document Request | Reply to Objections to Document Request | Arbitral Tribunal’s Decision | |
Ref. to | Comments | |||||
1. | The original mandate and/or instructions and/or service agreement agreed between Dept. A and Dept. B, including a description of scope of work and responsibilities, budget, and schedule between 2010 and 2020. | Statement of Defence (SOD) / para. 125 | It is a material issue between the Parties whether Rs complied with its obligations with respect to Project management under the Operating Agreement, which required Dept. B to report to Dept. A. | Respondents object to this request. | The Respondents do not contest that the relevant mandate and service agreements exist and can be produced without undue burden. They only take issue with the meaning of the word “instructions”. | The Request is granted |
2. | The studies and reports (and all underlying data relied on) relating to the Respondents’ attempted exploration and development of the gas field. | SOD/ 450 | It is a material issue between the Parties whether the Respondents failed to appraise the gas field and drill for additional gas. | Respondents object to this request. | Response required additional submissions to the tribunal on state secretbut the core points made were:
| The Request is granted. |
No. | Documents or Category of Documents Requested | Relevance and Materiality According to Requesting Party | Objections to Document Request | Reply to Objections to Document Request | Arbitral Tribunal’s Decision | |
Ref. to | Comments | |||||
1. | Documents generated internally by the Claimants discussing or referring to its decision to purchase Microsoft software licenses in the amount of USD 150,000 including communications, internal studies or surveys, reports and other documents regarding the Claimant’s alleged finding and purchase. | SOC / 359 | These documents should be in the Claimant’s possession or control as are Claimant’s internal documents. | Claimant will search for and produce non-privileged Documents in its possession, custody or control that are responsive to this request. | The Claimant’s position is noted, without prejudice to the generality of the Respondents’ Request as originally formulated. | It is noted that Claimant agrees to search for and produce non-privileged Documents. No further order is made. |
F. HKIAC 2024 Administered Arbitration Rules
Apart from other changes, the 2024 Rules include two additions which are relevant in terms of the Tribunal’s decision on document production:
- The Rules require the Tribunal to take into account the environmental impact of arbitration at the stage of determining procedures for the arbitration but also when ruling on costs (Articles 13.1 and 34.4(f)).
- The Rules encourage party agreement on, and empower the Tribunal to order, measures for the protection of information security in the arbitration (Articles 13.2 and 45A).
G. Other considerations for document production
E-Discovery
- Electronic aspect of identifying, collecting and producing electronically stored information in response to a request for production
- Requests are scoped by:
- Custodians, time period and key words
- Special document review and search platform used for the process
- Potential use of AI in addition to or replacing search algorithms
Green Pledge
- The Campaign for Greener Arbitrations.
- Electronic exchange of documents, no hard copy required.
- Environmental impact as consideration for procedures to be adopted in arbitration under 2024 HKIAC Rules.
Data privacy
- Consent for cross-border transfer of private data.
- Pre-approval required by relevant authorities.
- Ability for tribunal to adopt measures for information security under 2024 HKIAC Rules.
VI. Specific issues
A. Privilege
While authority on privilege is limited in international arbitration, it is universally recognized that privilege protection exists in arbitration.
The IBA Rules protect privilege in the Arts. 9(2)(b) and 9(4). While there are additional types of privilege, the two most relevant types (which are also expressly protected under the IBA Rules) are:
- Legal advice privilege Art. 9(4)(a).
- Without prejudice / settlement negotiation privilege Art. 9(4)(b).
The exact scope of legal advice privilege is defined by national laws and deciding which law applies is a choice of law issue.
Art. 9(4)(c) IBA Rules specifies that the ‘expectations of the Parties and their advisors at the time the legal impediment or privilege is said to have arisen’ should be taken into consideration. This could potentially disadvantage one party where its home jurisdiction does not have laws protecting privilege equivalent to the rules available under common law - Art. 9(4)(e) IBA Rules provide that arbitral tribunals should respect the fairness and equality of the parties when deciding on privilege.
B. Third Party Production
Generally, orders of the tribunal can only bind parties to the arbitration, therefore, third party discovery cannot be ordered by the tribunal.
Under Art. 3(9) of the IBA Rules, the tribunal can take the necessary steps for third party production if it determines that the documents would be relevant and material.
The Arbitration Ordinance provides for third party production:
Section 55(1) [Article 27 of the UNCITRAL Model Law]
The arbitral tribunal or a party with the approval of the arbitral tribunal may request from a competent court of this State assistance in taking evidence. The court may execute the request within its competence and according to its rules on taking evidence.
Section 55(2)
The Court may order a person to attend proceedings before an arbitral tribunal to give evidence or to produce documents or other evidence.
VII. Sanctions
In Hong Kong, under the Arbitration Ordinance (AO), tribunals have the power to make interim decisions to preserve evidence and protect relevant property during the arbitration process.
1. Types of Interim Measures Available
Preservation, custody, or sale of relevant property
The tribunal can order that relevant property (e.g., documents, goods) involved in the arbitration be preserved, stored, or even sold if necessary.
(Sections: 56(1)(d)(i), 56(6), 60(1)(a), 60(2))
Inspection, photographing, preservation, or detention of relevant property
The tribunal can order that property be inspected, photographed, or kept in custody to prevent tampering.
(Sections: 56(1)(d)(i), 56(6), 60(1)(a), 60(2))
Sampling, observation, or experiments on relevant property
The tribunal can order that samples be taken from property, or that experiments or observations be conducted to preserve evidence.
(Sections: 56(1)(d)(ii), 56(6), 60(1)(b), 60(2))
Interim injunctions or other interim measures of protection
The tribunal can issue temporary orders (like injunctions) to protect the parties’ interests until the arbitration is finished.
(Sections: 35, 45)
2. Power of the Tribunal and Courts
- The tribunal has the primary power to make these interim orders.
- However, some interim measures can also be ordered by the courts (e.g., Section 45, 60(1), 60(3), 60(4)).
- Enforcement: Any interim measure made by the tribunal can be enforced by the courts. (Section: 60 AO)
3. Preservation of Evidence under PRC-HK Interim Measures Arrangement
In addition to the AO, the PRC-HK Interim Measures Arrangement also allows for the preservation of evidence in Hong Kong and mainland China, ensuring cooperation between the two jurisdictions.
4. Sanctions for Non-Compliance
The tribunal cannot directly fine or impose coercive sanctions (like contempt) for failure to comply with evidence production orders.
If a party refuses to comply with an order to produce evidence, the tribunal may ask the courts to enforce the order or may draw an adverse inference (negative assumption) about that party’s case.
Example: In the case of Active Media Services Inc v Burmester (2021), the English court drew an adverse inference against the claimant because they deliberately deleted emails just before trial and failed to call important witnesses.
Class 3 - Challenges to Jurisdiction and Tribunals
I. Challenges to Arbitrators
A. Introduction
The focus of arbitration lies in the decision-making process, which is primarily shaped by the arbitrator’s role in guiding various procedural and substantive phases. This class’s discussion explores how decisions are made, the role of arbitrators, the types of awards issued, and other procedural considerations. The objective is to understand how these elements come together to contribute to the arbitration process and build a foundation for effective outcomes.
1. Basic Definition of Arbitration
International commercial arbitration is a means by which international business disputes can be definitively resolved, pursuant to the parties’ agreement, by independent, non-governmental decision-makers, selected by or for the parties, applying neutral adjudicative procedures that provide the parties an opportunity to be heard. —— G. Born, §1.02 International Commercial Arbitration (3rd Edition, 2021)
- Non-governmental decision-maker
- Chosen by or for the parties
- To render a final and binding decision
- Using adjudicatory procedures
2. Independence v Impartiality
In Hong Kong, both independence and impartiality are required. The independence ensures that an arbitrator’s decision is not influenced by any relationship with one of the parties, while impartiality ensures that the arbitrator has no bias towards one party’s case over the other.
Independence: the existence of a relationship between the arbitrators and one of the parties. Usually capable of objective quantification.
e.g. arbitrator is 30% shareholder in one of the parties
Impartiality: the arbitrator’s state of mind which is more difficult to assess / subjective
e.g. arbitrator actively prefers one party over the other
Not every jurisdiction requires both:
- England: Only impartiality is emphasized under the Arbitration Act 1996 (s. 24(1)(a)), meaning the law focuses on ensuring that an arbitrator does not favor one party over the other.
- USA: Impartiality is the core standard under the Federal Arbitration Act (s. 10(a)(2)), which aims to prevent situations where arbitrators have a personal or financial interest in the outcome of the case.
1 | 💡 Is impartiality sufficient? |
In jurisdictions that only require impartiality (e.g., England, the USA), impartiality might be seen as sufficient because the assumption is that as long as an arbitrator does not consciously favor one party, fairness is ensured.
In jurisdictions like Hong Kong, both independence and impartiality are required because an arbitrator could still act impartially, but any financial or personal relationships could undermine the perceived fairness and integrity of the process.
B. Entitlement to Challenge Arbitrators
1. Legal Basis
① s. 25 Arbitration Ordinance giving effect to Art 12 Model Law
Article 12. Grounds for challenge
When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him.
An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.
② s. 26 Arbitration Ordinance giving effect to Art 13 Model Law
Article 13. Challenge procedure
1)The parties are free to agree on a procedure for challenging an arbitrator, subject to the provisions of paragraph (3) of this article.
(2)Failing such agreement, a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstance referred to in article 12(2), send a written statement of the reasons for the challenge to the arbitral tribunal. Unless the challenged arbitrator withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.
If a challenge under any procedure agreed upon by the parties or under the procedure of paragraph (2) of this article is not successful, the challenging party may request, within thirty days after having received notice of the decision rejecting the challenge, the court or other authority specified in article 6 to decide on the challenge, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal, including the challenged arbitrator, may continue the arbitral proceedings and make an award.
2. Practical Considerations
1 | 💡 Do the parties have unlimited choice to agree with the challenge procedure? Can they resolve challenges by flipping a coin? |
No, parties do not have unlimited choice when it comes to agreeing on a challenge procedure. While parties have some flexibility in setting procedures within their arbitration agreement, the challenge procedure must be consistent with fundamental principles of fairness and due process.
- Challenge Procedure Constraints: Many arbitration rules (e.g., those of the HKIAC, ICC, SIAC, etc.) and national laws impose certain standards for challenging arbitrators. For instance, the challenge procedure typically requires that:
- Grounds for challenge are reasonable and based on specific criteria (e.g., lack of impartiality, independence, or other conflicts of interest).
- Challenge mechanisms are conducted through proper, predefined channels (such as involving an external body, like an arbitral institution, or a court).
- Flipping a coin: Resolving a challenge through a method like flipping a coin is not generally acceptable, as it would fail to ensure fairness and transparency in resolving such a serious issue. Arbitration institutions and rules have clear guidelines that require arbitrator challenges to be resolved based on substantive reasoning (for example, whether the arbitrator’s independence or impartiality is compromised) and procedural fairness (such as through an independent decision by the remaining members of the tribunal or by an external challenge body).
Thus, while the parties may agree to certain procedures, they cannot make arbitrary or capricious decisions regarding challenges—such as flipping a coin—because this would undermine the integrity of the arbitration process.
1 | 💡 What degree of knowledge is required before you have ‘become aware of circumstances’ justifying a challenge? |
Generally, a party needs to have actual knowledge of the facts or circumstances that could justify a challenge. This means that the party must have a clear and substantiated basis for their belief that an arbitrator is biased or has a conflict of interest. It is not sufficient for a party to merely suspect bias or conflicts—they must be able to point to concrete facts or evidence.
In most cases, the challenge must be made within a reasonable time frame after becoming aware of the circumstances. The challenge may be rejected if the party waits too long to raise the issue, especially if they knew (or should have known) about the potential issue but failed to act promptly.
The standard for “awareness” generally involves a reasonable person test: would a reasonable person in the party’s position have known or recognized the circumstances giving rise to the challenge? If so, the party is expected to challenge the arbitrator promptly.
1 | 💡 What does it mean for the “arbitral tribunal” to determine the challenge? What is the scope and role of the challenged arbitrator in such a challenge vis-à-vis his fellow tribunal members and how do parties manage this? |
When the arbitral tribunal is tasked with determining a challenge to one of its members, the situation is complex. It involves both procedural considerations and potential conflicts of interest.
- Tribunal’s Role: In most arbitration systems, the remaining members of the tribunal (if the challenge is not brought against the entire tribunal) will decide whether the challenged arbitrator should be removed. This process often involves:
- A vote or decision by the other arbitrators on whether the challenge is justified, based on the grounds presented by the challenging party.
- The remaining members are expected to act impartially, but there can be a potential bias in these situations (e.g., if the challenge is against one arbitrator, the others might not want to remove a colleague).
- Challenged Arbitrator’s Role: The challenged arbitrator generally has the right to present their defense and explain why they believe they should remain on the tribunal. However, they may have limited influence in the final decision, especially if the challenge is related to impartiality or conflicts of interest, which call into question their objectivity.
- Conflict of Interest: If the challenge is based on impartiality or independence, the challenged arbitrator may find it difficult to make an objective defense since it directly involves their own credibility.
- How the Parties Manage This:
- Neutral Forum for Decision: In most cases, if the tribunal cannot resolve the challenge internally, the parties may refer the matter to an external body (e.g., the arbitral institution or a national court) for a decision.
- Transparency: The parties need to ensure clear communication throughout the challenge process, especially if the dispute is particularly contentious. If the challenge is against one arbitrator, the parties may need to carefully manage the process, especially if the remaining arbitrators are involved in deciding the challenge.
- Practical Considerations: Often, the parties will agree on an expedited process for handling challenges to avoid unnecessary delays, particularly in cases where the integrity of the tribunal is in question.
In summary, the tribunal’s determination of a challenge is a procedural matter that balances the need for fairness with the practicalities of maintaining the tribunal’s integrity. The challenged arbitrator can defend themselves, but their role is constrained by the need to avoid any appearance of bias, while the remaining arbitrators and parties must carefully manage the process to ensure fairness and procedural efficiency.
3. Institutional Role
HKIAC Rules Art 11
11.9 Unless the arbitrator being challenged resigns or the non- challenging party agrees to the challenge within 15 days from receiving the notice of challenge, HKIAC shall decide on the challenge. Pending the determination of the challenge, the arbitral tribunal (including the challenged arbitrator) may continue the arbitration.
- Notice of Challenge + Answer to Notice of Challenge
- Panel appointed by HKIAC Proceedings Committee
- Recommendation from Panel to Proceedings Committee
- Determination of Proceedings Committee
- Reasons usually given
- No provision as to costs of determination
- No automatic provisions as to timetable in the arbitration
- Protection
C. Avoiding Entitlements to Challenge
HKIAC Administered Rules 2024
13.8 After the arbitral tribunal is constituted, any proposed change or addition by a party to its legal representatives shall be communicated promptly to all other parties, the arbitral tribunal and HKIAC.
13.9 The arbitral tribunal may, after consulting with the parties, take any measure necessary to avoid a conflict of interest arising from a change in party representation, including by excluding the proposed new party representatives from participating in the arbitral proceedings.”
D. Timeline to Challenge Arbitrators
The timing of a challenge to an arbitrator and the status of awards or orders made before the challenge are important aspects of arbitration proceedings.
1. Challenge During Ongoing Arbitration Proceedings
Section 26 of the Arbitration Ordinance (AO) and Article 13(2) & (3) of the UNCITRAL Model Law provide that even if an arbitrator has been challenged, they may continue with the arbitral proceedings and issue an award, despite the pending challenge.
- This helps to avoid delays, particularly when a challenge is seen as frivolous or lacking merit.
- The use of the word “may” gives the challenged arbitrator discretion whether to proceed with the arbitration or suspend their involvement until the challenge is resolved.
This provision is crucial for ensuring efficiency in the arbitration process and minimizing interruptions to the arbitration timeline.
2. Court’s Role in Relation to the Challenge
If a party challenges an arbitrator, they may request that the court decide on the validity of the challenge (depending on the jurisdiction). However, this brings some nuances about enforcement:
- Court May Not Enforce the Award: While the arbitration can continue, the court may not enforce an award made by a challenged arbitrator if a challenge is pending and the court is asked to decide the matter.
- Court May Set Aside the Award: If the court ultimately upholds the challenge, it may set aside the award made by the challenged arbitrator. This reinforces the principle that the integrity of the tribunal is paramount, and if the challenge to the arbitrator is successful, the resulting award can be invalidated.
3. Timing Considerations for Awards or Orders Made Before the Challenge
Awards or orders made before the challenge are generally considered valid and enforceable, provided that they were issued in good faith and under the assumption that the arbitrator was impartial and independent at the time of their decision.
However, if a party challenges an arbitrator after an award has been rendered, the court may revisit the validity of that award during the challenge process.
Potential for Setting Aside: If the court finds that the arbitrator should have been removed from the proceedings (for instance, if they were not impartial or independent), the court may set aside the award, even if it was issued before the challenge was formally made.
4. Practical Considerations
Pre-challenge Orders or Awards: While the challenged arbitrator may continue issuing awards or procedural orders, parties must consider the risks of relying on an award made by an arbitrator who may later be removed due to a successful challenge.
If a party is concerned about the possibility of a challenge, they may opt to suspend the process temporarily until the challenge is resolved to avoid investing in potentially invalid awards.
Delay Due to Challenge: Even though a challenge does not automatically halt the arbitration proceedings, it may cause delays in the enforcement of the award or the arbitration process as a whole. Parties involved should be prepared for possible procedural complications.
In summary, timing is crucial in arbitrator challenges. While an arbitrator may continue with proceedings and issue awards despite a challenge, the court’s power to set aside an award upon upholding the challenge could render earlier decisions void if the challenge is successful. Therefore, both parties and the tribunal must carefully consider the timing of challenges and their potential impact on the arbitration process.
E. The Respondent to the Challenge
1. Gong Benhai v HKIAC [2015] 2 HKLRD 537
Three-arbitrator Tribunal ordered only partial disclosure of certain documents – Plaintiff brought challenge against two arbitrators on the grounds they were not impartial and unfair, incompetent or unqualified.
HKIAC dismissed challenge (HKIAC Challenge Rules applied)
Plaintiff then applied to court naming the HKIAC as sole defendant to set aside HKIAC decision.
HKIAC applied for striking out claim which was granted by the court:
- The court should interfere in the arbitration of a dispute only as expressly provided for in the Arbitration Ordinance (Cap. 609) (the “Ordinance”) and the Model Law.
- Art. 12 of the Model Law specified the only grounds for a challenge to an arbitrator, namely there were justifiable doubts as to the arbitrator’s impartiality or independence, or he lacked any of the qualifications agreed to by the parties. Errors of fact or law were not a ground of challenge. There was no evidence of any justifiable doubt as stipulated in Art. 12 or any error in the Partial Disclosure Decision.
- Section 105 of the Ordinance, any person who appointed an arbitral tribunal or performed any administrative function connected to such proceedings was liable in law only if it was proved that his act or omission was dishonest. There was no basis to suggest that HKIAC was acting dishonestly in its determination of the Challenge.
The HKIAC was not the proper defendant to the Court Proceeding. The proper defendant should have been respondent in the arbitration.
The court also confirmed that pursuant to Art. 13(3) of the Model Law, an arbitration should continue pending a Court’s decision on a challenge to an arbitrator – there is no reason to stay proceedings.
2. Haliburton v Chubb
1 | 💡 What gives rise to justifiable doubts? |
The test for apparent bias is central to determining whether there are justifiable doubts regarding an arbitrator’s impartiality. The key question is:
…whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.
This standard examines whether a reasonable person, fully informed of the facts and circumstances, would perceive a real possibility of bias in the arbitrator’s conduct. The focus is on the appearance of bias, not necessarily actual bias.
1 | 💡 What’s a fair minded observer to do? |
A fair-minded observer should:
- Take a balanced approach to any information provided about the arbitrator’s situation.
- Consider the context of arbitration, including:
- The difficulty of appealing arbitration awards, which means that ensuring impartiality is crucial from the start.
- Arbitrators often have multiple appointments, and involvement in several cases is common.
- Confidentiality of arbitration proceedings, meaning that the existence of other arbitrations involving the same arbitrator may not be immediately apparent to parties or the public.
- Arbitrators come from diverse jurisdictions and professions, and this diversity can influence how they handle conflicts.
- Parties may expect some degree of favour from the arbitrator they nominate, which could influence how the fair-minded observer interprets potential conflicts of interest.
In short, the observer must weigh the reputation of the arbitrator and their experience in the field while considering the particular circumstances of the arbitration.
1 | 💡 What’s a fair minded arbitrator to disclose? |
An arbitrator has a duty to disclose facts or circumstances that may give rise to the appearance of bias. This includes:
- Disclosure obligation: The arbitrator must inform the parties of any situation that could potentially be perceived as a conflict of interest.
- IBA Guidelines on Conflict of Interest in Arbitration: These guidelines assist arbitrators in identifying situations that require disclosure. They establish what might constitute an unacceptable conflict of interest and what should be disclosed to the parties.
- Extent of disclosure: The extent of the disclosure depends on the customs and practices in the particular arbitration framework, as well as the jurisdiction-specific rules.
Failure to disclose a relevant conflict doesn’t automatically mean the arbitrator is partial or lacks independence. However, it can indicate that the arbitrator did not show sufficient regard for the interests of the non-common party.
Non-disclosure and independence: The IBA Rules emphasize that non-disclosure alone doesn’t necessarily affect an arbitrator’s impartiality; it’s the specific facts or circumstances not disclosed that could affect the impartiality and independence of the arbitrator.
In the Halliburton v Chubb case, the arbitrator was required to disclose the fact that he was involved in multiple arbitrations related to the same incident (the Deepwater Horizon oil spill) and the same parties (Transocean). This information, if disclosed, could have raised questions about his impartiality. The Appellant’s challenge was based on the non-disclosure of these multiple appointments, arguing that this could create justifiable doubts about the arbitrator’s independence and impartiality.
This case underscores the importance of transparency in arbitration, as non-disclosure of relevant circumstances can raise questions about an arbitrator’s impartiality and independence, potentially leading to challenges against the arbitrator or the arbitration process itself.
3. When to Decline or Disclose
This chart outlines the circumstances under which an arbitrator should refuse to act or cease acting in a case, as well as when disclosures are required. It categorizes potential conflicts of interest into color-coded lists (Red, Orange, Green) based on severity and action required.
(1) When Should an Arbitrator Refuse to Act or Cease Acting?
Self-Doubt About Impartiality
- If an arbitrator questions their ability to remain impartial or independent (e.g., due to personal bias or conflicts of interest), they must withdraw immediately.
Reasonable Third-Party Doubt
- If a reasonable person, aware of the relevant facts, would question the arbitrator’s impartiality or independence, the arbitrator should step down.
Red Non-Waivable Situations (Mandatory Withdrawal)
The arbitrator must not act if any of the following apply:- They are the legal representative of a party or share an identity with a party (e.g., same organization).
- They have a controlling influence over a party (e.g., a senior executive of a parent company).
- They receive significant income from regularly advising the appointing party (e.g., ongoing consultancy fees).
Red Waivable Situations (Withdrawal if Parties Disagree)
The arbitrator may act only if all parties agree. If parties cannot agree, the arbitrator must withdraw.
Examples include:
- The arbitrator has a direct or indirect interest in the dispute (e.g., holds shares in a party).
- They have a contractual relationship with another arbitrator or counsel in the case.
- They previously expressed a legal opinion related to the dispute.
(2) When Should a Disclosure Be Made?
An arbitrator must disclose any facts or circumstances that could reasonably raise doubts about their impartiality or independence. Examples include:
- Current or past professional services for a party.
- Holding a position in the arbitral institution involved.
- A relationship with the subject matter of the dispute.
F. Practicality of Arbitrator Challenges
Institution | Number of Challenges (2023) | Number of Arbitrations (2023) |
|---|---|---|
SCC | 6 | 175 |
LCIA | 5 | 377 |
SIAC | 5 | 663 |
HKIAC | 5 | 281 |
CIETAC | 35 | 5,237 |
Total | 56 | 6,733 |
This suggests about 0.8% of institutional arbitrations/year see an arbitrator challenge.
II. Objections to the Tribunal’s Jurisdiction
A. Challenges to Jurisdiction
Jurisdiction depends on the agreement of the parties
- The arbitration can be easily ended if there is no jurisdiction
- As means of defence or delaying tactics, one party may try to argue:
- The agreement to arbitrate is not applicable / void
- The tribunal was not constituted correctly
- The dispute falls outside the scope of the arbitration agreement and the tribunal’s jurisdiction
Parties should ensure that they invoke the correct arbitration agreement(s) when commencing an arbitration
See e.g.AAA, BBB, CCC v DDD [2024] HKCFI 513
B. Prima Facie Assessment of Jurisdiction
HKIAC AAR: Arts 19.3, 19.4 and 19.5
HKIAC AAR Art 19.5
The arbitration shall proceed only if and to the extent that HKIAC is satisfied, prima facie, that an arbitration agreement under the Rules may exist or the arbitration has been properly commenced under Article 29.
Any question as to the jurisdiction of the arbitral tribunal shall be decided by the arbitral tribunal once constituted, pursuant to Article 19.1.
See also: 2021 ICC Rules Art 6(3) or 2016 SIAC Rules Art 28.1
C. Raising a Jurisdictional Challenge
1. Role of the Tribunal
UNCITRAL Model Law Art 16
The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
2. Jurisdiction vs Admissibility
Example case: T v B [2021] HKCFI 3645
- On a conceptual level, the distinction between what would normally be considered a jurisdictional challenge and the prematurity issue is intuitive. A typical jurisdictional challenge concerns the existence, scope and validity of an arbitration agreement. The answer to such a challenge is a binary one; the tribunal either has jurisdiction or has no jurisdiction. The lack of jurisdiction is permanent, and parties cannot cure the defects by entering into an arbitration clause ex post facto or to rewrite the clause to bring the dispute within its ambit.
- In comparison, an allegation that the institution of arbitration is premature does not entail a permanent bar to arbitration. The bar is a temporary one. The bar could be removed once the parties have complied with the contractually agreed pre- arbitration requirements. An attempt to enforce pre-arbitration procedures is a positive affirmation of the existence of a valid arbitration agreement, instead of the denial of the agreement. This puts a prematurity objection at the opposite side of a conventional jurisdictional challenge.
3. Timing
Deadline for raising the Jurisdictional Point
- Full substantive defence (see e.g. Article 19.3 of the 2018 HKIAC Arbitration Rules, Article 28.3 of the 2016 SIAC Arbitration Rules, and Article 23.3 of the LCIA Arbitration Rules 2020)
- Terms of Reference: Article 23(4) of the 2021 ICC Rules
Exceptions:
- Due Process (new evidence emerges)
- Improper Notice (non-participating party)
4. Procedure
Directions on Handling Jurisdictional Challenges:
- Whether it will be treated as a preliminary issue or dealt with at the merits stage
- Process of determining the challenge (written submissions, interim partial award, etc.)
If preliminary, then:
- Written submissions to the Arbitral Tribunal
- Hearing / documents only following submissions
- Interim / Partial Award issued on jurisdiction if proceeding is bifurcated
5. Preliminary Decision - Appeals
If Arbitral Tribunal finds it has jurisdiction
- proceed with arbitration to merits stage
- appeal decision
If an appeal (AO s. 34(1)(3)):
- The matter may be referred to the court within 30 days after having received notice of the Arbitral Tribunal’s decision.
- The decision of the Court cannot be further appealed.
- Tribunals can proceed while court proceedings are pending.
6. No Preliminary Decision
The decision on jurisdiction would be in a Final Award.
Need to apply to the Courts for setting aside or refusing enforcement of the award
Not always possible to “challenge” a negative jurisdictional decision in your setting aside or challenge to enforcement application
D. Practicalities of Jurisdictional Challenges
Need to consider:
- Merits of jurisdictional challenge
- Likely approach of the arbitrators to the challenge
- Cost and delay of the procedure used – especially if separate challenge
- Willingness of client to challenge jurisdiction on appeal / setting aside / enforcement
- Will clients spend time arguing the same point in different forums?
- In Appellate Courts? Inconsistent outcomes?
- National laws approach jurisdictional issues:
e.g. Qatari law views all jurisdictional challenges (if successful) as permanently removing the Tribunal’s jurisdiction – i.e. claim can never be resubmitted to arbitration
III. Restrictions on Challenges
A. Waiver
May waive by failing to raise objections during the arbitration
s11 AO / Art 4 Model Law
A party who knows that any provision of this Law from which the parties may derogate or any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time-limit is provided therefor, within such period of time, shall be deemed to have waived his right to object.
Non-compliance; actual knowledge; continued participation in the proceedings; and no objection was raised within a given time or with due diligence
Gao Hai Yan - Not allowed to keep the point up one’s sleeve for later use
B. Res judicata or issue estoppel
Not allowed to re-litigate or re-arbitrate the same cause of action or issue between the same parties which has already been finally and conclusively determined by a court or tribunal of competent jurisdiction
Yukos Capital S.A.R.L v OJSC Rosneft Oil Company , CA England, 2012➡️Different standards of public policy between The Netherlands and England
C. Additional Challenges
1. Question of Law
AO Schedule 2, s 5 & 6
Appeal can be made to Court in respect of a question of law
Matters because: “The construction or interpretation of contract is traditionally classified as a point of law. As Lord Diplock pointed out in Pioneer Shipping Ltd v. BTP Tioxide Ltd. (The Nema) [1982] AC 724 at page 736, this classification is too well entrenched to be disturbed.” [Cheung JA in Chun Wo & Ors v Housing Authority]
Leave is required under AO Sch 2 s.6. Leave is given where inter alia:
- The decision of the arbitral tribunal on the question is obviously wrong; or
- The question is one of general importance and the decision of the arbitral tribunal is at least open to serious doubt.
If leave is given, the Court will decide under AO Sch 2 s. 5 the point of law again. If wrongly decided by Tribunal, it will remit the award to the Tribunal.
2. Serious Irregularity
AO Schedule 2, s. 4
(2) Serious irregularity means an irregularity of one or more of the following kinds which the Court considers has caused or will cause substantial injustice to the applicant-
(a) failure by the arbitral tribunal to comply with section 46;
(b) the arbitral tribunal exceeding its powers (otherwise than by exceeding its jurisdiction);
(c) failure by the arbitral tribunal to conduct the arbitral proceedings in accordance with the procedure agreed by the parties;
(d) failure by the arbitral tribunal to deal with all the issues that were put to it;
(e) any arbitral or other institution or person vested by the parties with powers in relation to the arbitral proceedings or the award exceeding its powers;
(f) failure by the arbitral tribunal to give, under section 69, an interpretation of the award the effect of which is uncertain or ambiguous;
(g) the award being obtained by fraud, or the award or the way in which it was procured being contrary to public policy;
(h) failure to comply with the requirements as to the form of the award; or
(i) any irregularity in the conduct of arbitral proceedings, or in the award which is admitted by the arbitral tribunal or by any arbitral or other institution or person vested by the parties with powers in relation to the arbitral proceedings or the award.
Class 4 - Nuts and Bolts of Awards
When dealing with a legal or arbitration case, the first question is: what exactly is in dispute?
- Is the issue procedural, or is it substantive?
- Even within a single claim, there can be multiple sub-issues that require separate analysis.
Arbitrators often work with a list of issues that they must consider carefully when reaching a decision.
I. Arbitrator’s Role
A. Introduction
1. What is an arbitrator’s main function?
Render decisions to resolve disputes between the parties
e.g. decisions on procedure, jurisdiction, interim applications and substance of the dispute
The arbitrator is central to the arbitration process, not only as the ultimate decision-maker who delivers the final award, but also as a guardian of fairness throughout the proceedings. The arbitration process involves multiple intermediate decisions, such as procedural orders and interim applications. Key responsibilities of an arbitrator include:
Managing the Arbitration Process: The arbitrator (or tribunal) must oversee the arbitration proceedings and ensure they unfold in a controlled and efficient manner.
Addressing Jurisdictional Challenges: If there are disputes regarding the tribunal’s jurisdiction, the arbitrator has the responsibility to rule on such challenges.
Handling Substantive and Procedural Matters: Throughout the arbitration, arbitrators address substantive issues raised by the parties as well as procedural issues, such as setting timelines and organizing hearings. For instance, in ICC arbitration the “reference for the first case” sets the procedural framework for the entire process.
Deciding on Interim Applications: Interim measures might include decisions on asset preservation or other temporary orders intended to maintain the status quo while the arbitration progresses.
Interim applications represent a vital category of non-final decisions within arbitration. Common Types of Interim Applications may include asset preservation orders (e.g., freezing shares) or other measures that “hold the ring” while the process unfolds. Such measures are not permanent but are nonetheless binding, often serving as a precursor to the final award. These applications are instrumental in maintaining fairness and preventing irreparable harm before a final ruling is issued.
Occasionally, some decisions might blur the lines between full and interim resolutions, requiring the arbitrator to carefully discern whether an application is strictly temporary or part of a broader decision-making framework.
2. Fundamental Duties of the Arbitrator
AO s. 46, Model Law Art 18
Arbitrators owe the following due process duties to the parties:
- To treat the parties with equality;
- To be independent;
- To act fairly and impartially, giving them a reasonable opportunity to present their case and to address the case of their opponent;
- To use procedures appropriate for the particular case, avoiding unnecessary delays and expenses, and providing fair means for resolving the dispute.
Ensuring Fair Party Participation
A fundamental principle in arbitration is that parties must be afforded a reasonable opportunity to submit their evidence and arguments. Even in cases where one party, such as a respondent, may fail to engage—as illustrated by a scenario where the respondent did not address key payment issues—the arbitrator cannot simply disregard the matter. Instead, a fair process requires setting up clear procedures that allow both sides to make submissions. This ensures that non-engagement by one party does not automatically simplify or prejudice the decision-making process.
Establishing Procedural Timetables
To guarantee fairness, it is common practice to establish uniform time frames for submissions. For example, both parties may be given an identical period—such as four weeks—to present their evidence. Some arbitration tribunals further enhance efficiency by employing a consolidated timetable, where all parties adhere to a single, clearly defined schedule. This method supports orderly governance of the arbitration process and ensures that all decisions are made in accordance with the rules chosen by the parties, strictly following the agreed procedural framework without arbitrary timing adjustments.
3. On what do arbitrators base their decisions?
- The relevant contracts
- Evidence presented by the parties during the course of the arbitration
- The law applicable to the merits and to the procedure
- The parties’ correspondence with the arbitral tribunal during the course of the arbitration
- Terms of Reference / Procedural Orders
- List(s) of Issues
When making decisions, arbitrators rely heavily on:
- Evidence Submitted by the Parties: This could include documentary evidence, witness statements, and other factual submissions provided by the parties.
- Legal Principles and Rules: Arbitrators apply the governing law and procedural rules agreed upon by the parties during the arbitration.
- Terms of Reference and Procedural Orders: These documents (especially in ICC arbitrations) set the procedural framework and reference points for decision-making.
Additionally, the arbitrator considers contractual provisions, the overall purpose of the contract, any registration details, and applicable legal principles. Special attention is paid to the submissions regarding procedural matters and any defenses raised by the parties.
Arbitrators critically evaluate these materials, balancing both parties’ submissions, to reach a fair and impartial decision. Parties thus play a pivotal role by providing the “ingredients” that enable the tribunal to form its determinations.
4. Procedural Fairness and Single-Party Engagement
The tribunal’s decision-making process involves balancing the evidence and arguments provided by both sides.
A significant challenge arbitrators encounter arises when one party (typically the respondent) fails to engage with the arbitration process. In these situations, the tribunal only has access to the claimant’s evidence and arguments. This absence complicates the tribunal’s ability to fairly scrutinize the claimant’s submissions because it lacks the respondent’s counterarguments.
In such cases, arbitrators often take a more inquisitive approach, asking probing questions and demanding additional supporting evidence from the present party (typically the claimant). This ensures that the tribunal reaches a reasoned decision, even in the absence of the other party. For example, the tribunal may ask claimants to consider potential defenses a respondent might raise, as well as the weaknesses in their own claims. This proactive scrutiny helps fill information gaps caused by single-party participation.
Regardless of whether both parties participate, arbitrators must adhere to fundamental principles of procedural fairness. These include:
- Providing all parties with a reasonable opportunity to present their case.
- Setting down procedural frameworks (such as aligned timetables) that offer parity to both sides.
- Ensuring decisions comply with the procedural rules and legal framework governing the arbitration.
Arbitrators must avoid any appearance of bias or unfairness, even in situations where one party fails to participate.
5. Temporal Management Framework
Arbitral tribunals typically implement a standard four-week submission period to ensure procedural fairness, while retaining flexibility for customized timetables. Effective case management involves three operational phases:
Evidence Consolidation Phase: Guaranteeing parties’ substantive rights to present critical materials
Procedural Coordination Phase: Conducting interim conferences to align procedural milestones
Adjudication Finalization Phase: Establishing binding timelines for dispute resolution
This dynamic framework empowers tribunals to exercise procedural activism, particularly when adjudicating time-sensitive matters such as extension requests (e.g., documentary submissions) through strict application of party-agreed arbitration rules.
B. Arbitrator’s Decisions
1. Statutory Requirements – Hong Kong
Section 46 AO
- Treat parties with equality
- To be independent, act impartially
- Give parties reasonable opportunity to present their cases and deal with opponent’s case
- Use appropriate procedures to provide a “fair means for resolving the dispute”
Section 64 AO (Article 28 of the Model Law)
- Decide the dispute “in accordance with such rules of law as are chosen by the parties”
- Failing any designation, law determined by the conflict of laws rules applicable
- No ex aequo et bono unless agreed by the parties
- In all cases,we shall decide in accordance with the terms of the contract, taking into account applicable usages of trade
2. Types of Decisions: Orders vs. Awards
Procedural orders should be distinguished from arbitral awards.
1 | 💡 How do they differ? |
| Procedural Orders | Arbitral Awards |
|---|---|
| Small decisions about how the arbitration will be handled (e.g., deadlines, hearings, evidence procedures) | Final decisions that settle the parties’ rights and obligations (e.g., who wins and who loses, who pays) |
| No majority vote needed – arbitrators can handle it flexibly | Majority vote needed – if there is a panel, they must agree according to the rules |
| About procedure and administration (like giving directions, or dealing with urgent requests) | About the main issues (like deciding on compensation or enforcing rights) |
| Not checked or approved by the arbitration institution (like HKIAC, ICC, etc.) | Awards often need review/approval depending on the institution rules |
| No strict formalities needed (e.g., detailed reasons, formal structure) | Strict formal and substantive requirements (must be reasoned, signed, date-stamped, etc.) |
- Procedural orders are about how the arbitration is run day-to-day, while arbitral awards are about who wins or loses the actual dispute.
- Procedural orders don’t need a majority vote, are not reviewed by institutions, and don’t follow strict formalities like awards must.
For most part, procedural orders are not subject to be set aside, recognized or enforced.
Section 61 AO
order/decision, whether made in or outside Hong Kong, is enforceable in the same manner as an order or direction of the Court, but only with leave of the Court. If leave is granted, Court may enter judgment in terms of the order or direction.
| Mainland China Context | Hong Kong SAR Framework |
|---|---|
| Procedural orders require conversion into arbitral awards for enforcement | Direct enforcement of tribunal-issued orders under Arbitration Ordinance (Cap. 609) Section 61 |
| Strict adherence to PRC Arbitration Law Article 58 requirements | Hybrid mechanism allowing court-assisted execution of interim measures |
This jurisdictional dichotomy necessitates early-stage strategic planning regarding seat designation and enforcement route mapping.
| Decision Type | Interim Relief Orders | Preliminary Rulings |
|---|---|---|
| Legal Nature | Procedural safeguards | Quasi-final determinations |
| Typical Applications | Asset preservation & Evidence freezing | Jurisdictional challenges & Choice-of-law disputes |
| Enforcement Basis | Domestic civil procedure codes | New York Convention Art. III(1) |
| Review Mechanism | Immediate reconsideration requests | Limited to annulment proceedings |
Notably, interim measures like share freezing injunctions maintain provisional status without prejudging case merits, whereas jurisdictional rulings generally attain finality under most institutional rules (e.g., ICC Article 6(5)).
II. Validity of Award / Formalities
A. What is an arbitral award?
An arbitral award is the final, binding decision made by arbitrators about the parties’ dispute — and it can be enforced like a court judgment.
| Key Concept | Simple Explanation |
|---|---|
| Final and conclusive determination | It is a final decision — it settles the issue completely. |
| Binding on the parties | The parties must follow and obey the decision. |
| Can be challenged or enforced | If a party disagrees, they can try to challenge (set aside) the award. If a party refuses to comply, the other can enforce it through the courts. |
| Res judicata | This means the matter is closed forever — the same issue cannot be brought again in another case. |
| Usually relates to substantive merits and jurisdiction | Awards typically decide who wins and who loses and whether the tribunal has authority to decide the case. |
| Can include interim measures or procedural directions | Sometimes, awards may also contain decisions about urgent protective measures or procedural steps, but these decisions are more formal than normal procedural orders. |
B. Requirements
For an arbitral award to be valid, it must meet certain formal and substantive requirements, based on the Hong Kong Arbitration Ordinance (AO), the UNCITRAL Model Law, and the New York Convention.
1. Basic Legal Requirements
| Source | Requirements | Simple Explanation |
|---|---|---|
| Section 65 AO / Article 29 Model Law | Decisions must be made by a majority, unless the parties agree otherwise. | If the tribunal has three arbitrators, at least two must agree unless the parties have chosen a different rule. |
| Section 73 AO / Article 31 Model Law | Award must be in writing. | It cannot be an oral decision. |
| Award must be signed by the arbitrator(s). | The award must carry valid signatures. | |
| Award must state reasons for the decision, unless the parties agreed no reasons are needed or it is a settlement award. | Normally, the tribunal must explain why it reached its decision. | |
| Award must state the date and place of arbitration. | Important to prove the arbitration was validly conducted. | |
| A signed copy must be delivered to all parties. | Both parties must receive a proper, official copy. |
2. International Requirements (New York Convention - Article V)
| Requirement | Simple Explanation |
|---|---|
| Award must not deal with issues outside the arbitration agreement. | The tribunal must stick to what the parties agreed to arbitrate — no extra decisions. |
| Award must follow any agreed procedural rules or the law. | If the parties agreed on specific rules (like timelines or procedures), the tribunal must respect them. |
3. Dual Validation Criteria for Binding Effect
For an arbitral award to have full binding force (meaning it is legally effective and enforceable), it must satisfy two types of requirements:
| Formal Requirements | Substantive Requirements |
|---|---|
| Written instrument containing operative provisions | Final disposition of defined claims (Res judicata effect) |
| Duly executed by tribunal members | Comprehensive coverage of disputed rights/obligations |
| / | Unambiguous determination of legal relationships |
Contemporary practice witnesses growing adoption of compound decision models combining partial awards with procedural directions, particularly in complex cross-border disputes involving parallel proceedings.
4. Contemporary Practice
In complex international cases, especially when there are parallel proceedings happening in different places, tribunals often use compound decision models.
This means the tribunal may issue partial awards (deciding parts of the case early) along with procedural directions (instructions on how the rest of the arbitration will proceed).
👉 This flexible approach helps manage large and complicated cases better and ensures smoother enforcement.
A valid arbitral award must follow formal steps (writing, signing, delivering) and substantively settle the disputes fully, within the scope of what the parties agreed — otherwise, it risks being unenforceable.
C. Contents
Contents of a standard award:
- The Parties, their legal representatives, and contact details
- The Tribunal, case management team, and contact details
- Arbitration clause, governing law, place and language of arbitration
- Factual background to the dispute
- Summary of the proceedings to date
- Requests for Relief
- Tribunal’s discussion/decisions
- Costs/interest
- Tribunal’s orders (dispositive section)
- Signature page
Tribunals are generally required to provide reasoning for their awards. However, parties may agree to an award without detailed reasoning.
Not all jurisdictions allow for an award to be issued without reasoning, even if the parties agree to it. At the ICC, Article 321 mandates that awards should include reasoning, making this a mandatory requirement in their procedures.
A similar case occurred in the US under the ICDR rules, where Mimmie Chan J set aside an award in the A v. B case. The arbitrator had refused to provide any reasoning for the decision. Mimi Chan determined that the lack of reasoning made it unfair to the parties, as they could not understand why they had won or lost.
This highlights the importance of reasoned decisions:
- Parties need to understand why they won or why they lost in order to have grounds to challenge or set aside the award.
- Without reasoning, parties are left in the dark and might find it harder to negotiate or enforce the award.
D. Formal Requirements & Substantive Reasoning Standards for Arbitral Awards
1. Core Elements of Valid Arbitral Awards
(1) Mandatory Formal Requirements
Finality: Must conclusively resolve defined claims (res judicata effect)
Written Instrument: Physical/digital document containing operative provisions
Authentication:
• Majority arbitrator signatures sufficient under most rules (e.g., UNCITRAL Art. 34)
• Explicit dating and designation of arbitration seat
Reasoning Disclosure: Obligation to state essential factual/legal bases for decisions
(2) Prohibited Content
- Extra-arbitral matters beyond terms of reference
- Unpleaded claims or undecided issues (“infra petita” violations)
2. Reasoning Adequacy Standards
| Jurisdiction | Minimum Threshold | Enforcement Consequences |
|---|---|---|
| Hong Kong SAR | “Sufficient Chain of Logic” test | Set aside under AO Sec. 81(2)(c) |
| Mainland China | “Key Dispute Coverage” mandate | Non-enforcement per Arbitration Art. 63 |
| ICC Arbitration | “Reasons Supporting Conclusion” | Remand to tribunal under Art. 35(3) |
Illustrative Case Example (Hong Kong):
In a 2022 commercial arbitration enforcement proceeding, the CFI refused recognition of an award where the tribunal:
- Failed to address respondent’s preliminary jurisdictional objection
- Provided only conclusory statement: “Agree with claimant’s contract interpretation”
- Omitted analysis of applicable conflict-of-laws principles
The Court held this constituted breach of natural justice under Article 34(2)(a)(ii) Model Law, emphasizing that “thin reasoning failing to connect evidence to conclusions” violates public policy.
3. Practical Compliance Guidelines
Structural Best Practices
Explicitly identify and sequentially address each pleaded issue
Demonstrate evidentiary evaluation process through:
• Documentary evidence weighting• Witness credibility assessments
• Legal authority reconciliation
Risk Mitigation Measures
Include “catch-all” reasoning clause:
“The Tribunal has considered all submissions and evidence presented, even if not expressly referenced herein.”
Conduct pre-finalization checklist review for:
• Date/seat confirmation
• Signature page completeness
• Cross-referencing terms of reference
III. Types of Awards
Section 71 AO
Unless otherwise agreed by the parties, an arbitral tribunal may make more than one award at different times on different aspects of the matters to be determined.
A. Interim Award
In arbitration, not every decision made by the tribunal is the final decision on the case.
Sometimes, the tribunal makes temporary decisions to protect the parties’ rights or the arbitration process before the final award is given.
These are called interim measures or temporary awards.
Key Points About Interim Decisions:
They do not finally resolve the claims.
(The main dispute remains open until the final award.)
Examples include:
- making a provisional order for the payment of money or the disposition of property as between the parties;
- an order to make an interim payment on account of the costs of the arbitration;
- applications for interim measures
| Source | What it Allows | Simple Explanation |
|---|---|---|
| Article 23 HKIAC Rules (Interim Measures of Protection and Emergency Relief) | Tribunals can give interim protection and emergency relief. | In urgent cases, parties can get quick help even before the final decision. |
| Section 35 AO (Article 17 of UNCITRAL Model Law) | Tribunals have the power to grant interim measures. | They can order parties to take or stop actions to protect rights, assets, or evidence. |
22B. Enforcement of emergency relief granted by emergency arbitrator
(1) Any emergency relief granted, whether in or outside Hong Kong, by an emergency arbitrator under the relevant arbitration rules is enforceable in the same manner as an order or direction of the Court that has the same effect, but only with the leave of the Court.
(2) The Court may not grant leave to enforce any emergency relief granted outside Hong Kong unless the party seeking to enforce it can demonstrate that it consists only of one or more temporary measures (including an injunction) by which the emergency arbitrator orders a party to do one or more of the following—
(a) maintain or restore the status quo pending the determination of the dispute concerned;
(b) take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself;
(c) provide a means of preserving assets out of which a subsequent award made by an arbitral tribunal may be satisfied;
(d) preserve evidence that may be relevant and material to resolving the dispute;
(e) give security in connection with anything to be done under paragraph (a), (b). (c)or (d):
(f) give security for the costs of arbitration.
(3) If leave is granted under subsection (1), the Court may enter judgment in terms of emergency relief.
(4) A decision of the Court to grant or refuse to grant leave under subsection(1) is not subject to appeal.
35.Article 17 of UNCITRAL Model Law (Power of arbitral tribunal to order interim measures)
(1) Article 17 of the UNCITRAL Model Law, the text of which is set out below, has effect–
“ Article 17. Power of arbitral tribumal to order interim measures
(1) Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant interim measures.
(2) An interim measure is any temporary measure, whether in the form of an award or in another form, by which, at any time prior to the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party to:
(a) Maintain or restore the status quo pending determination of the dispute;
(b) Take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself:
(c) Provide a means of preserving assets out of which a subsequent award may be satisfied: or
(d) Preserve evidence that may be relevant and material to the resolution of the dispute.”.
(2) An interim measure referred to in article 17 of the UNCITRAL Model Law, given effect to by subsection (1), is to be construed as including an injunction but not including an order under section 56.
(3) If an arbitral tribunal has granted an interim measure, the tribunal may, on the application of any party, make an award to the same effect as the interim measure.
B. Partial Award
1. Overview
In some arbitrations, the tribunal decides some parts of the dispute first, while other parts are left open to be decided later.
✅ Example: The tribunal may first decide that one party breached a contract (deciding liability) but will decide how much money is owed (damages) later.
**After a partial award is made:**The parties can continue the arbitration to deal with the remaining issues.
2. Position in Mainland China (PRC)
| Type of Decision | Enforceable in PRC? | Simple Explanation |
|---|---|---|
| Emergency arbitrator decisions (preliminary/provisional) | ❌ No | Not seen as “awards” because they are not final and conclusive. Cannot be enforced in PRC courts (but this has not yet been officially tested by the Supreme People’s Court). |
| Partial or Interim Awards (that resolve some substantive issues) | ✅ Yes | If the decision finally settles a part of the dispute (like confirming liability), it can be recognized and enforced. |
PRC:
- Decisions in preliminary/provisional proceedings (such as decisions by emergency arbitrators) are not enforceable because they are not considered as awards, which must be final and conclusive. However, to date this issue has not been tested before the SPC.
- Cf. Partial or interim awards that dispose of some (but not all) of the substantive issues in the arbitration are capable of recognition and enforcement.
In Hong Kong SAR v. China Co. (2023), a partial award determining breach of contract was challenged on grounds of non-finality. The enforcing court emphasized:
The award’s language must confirm its finality on specific issues (citing New York Convention, Article III).
Unresolved quantum calculations do not negate finality if liability is conclusively decided.
✅ Key takeaway:
➔ If a partial award finally resolves a specific issue (like “Party A breached the contract”), it is considered final on that point and can be enforced, even if other parts (like calculating damages) are still pending.
3. Partial Awards vs. Interim Awards
| Partial Awards | Interim Awards |
|---|---|
| Final and binding determinations on specific substantive issues (e.g., liability or contractual interpretation), resolving discrete claims within a broader dispute. For example, in a construction arbitration, a partial award may conclusively decide delay penalties while leaving quantum for later resolution. | Procedural or temporary measures (e.g., preservation of assets or injunctive relief) that lack finality. Notably, under the ICC Rules, tribunals may issue partial awards under Article 2(v) but must ensure clarity to avoid enforceability risks under Article V(1)(e) of the New York Convention. |
C. Consent Award
A consent award is a special type of arbitral award. It happens when the parties reach a settlement during the arbitration. Instead of the tribunal deciding who wins or loses, the parties agree on how to end the dispute. The tribunal then records their settlement in an official document called a consent award.
Tribunal’s ruling that incorporates the settlement reached by the parties in arbitration.
A consent award officially records the settlement between parties during arbitration, making it enforceable like any other arbitral award, and must clearly separate settled and unsettled issues if not everything is resolved.
Usually, the parties have reached a settlement and agreed terms which are then incorporated into an award which can be enforced. (similar to a Judgment by consent).
Decisions recording the parties’ agreement to end the arbitration without a decision from the arbitral tribunal.
Tribunals may convert settlements into consent awards (e.g., ICC Article 36), enhancing enforceability. However, challenges arise when parties seek partial termination of claims without resolving the entire dispute, requiring tribunals to delineate settled vs. outstanding issues explicitly.
Recognised by many arbitration rules or arbitration laws
- S66(1) AO / Art 30 Model Law and s66(2) AO
- Art 37(2) HKIAC
- Art 45(5) CIETAC Rules, Art 49 PRC Arbitration Law
D. Draft Award
This is not binding on the parties until it has been confirmed by the tribunal.
ICC / SIAC procedure:
ICC Article 34
Before signing any award, the arbitral tribunal shall submit it in draft form to the Court. The Court may lay down modifications as to the form of the award and, without affecting the arbitral tribunal’s liberty of decision, may also draw its attention to points of substance. No award shall be rendered by the arbitral tribunal until it has been approved by the Court as to its form.
SIAC Article 32.3
The Registrar may, as soon as practicable, suggest modifications as to the form of the Award and, without affecting the Tribunal’s liberty to decide the dispute, draw the Tribunal’s attention to points of substance. No Award shall be made by the Tribunal until it has been approved by the Registrar as to its form.
E. “Default” Award
Decision where one party failed to participate in the proceedings.
In arbitration, it’s critical to identify the issues, understand the disputes, and recognize any potential defenses.
- The tribunal relies heavily on the information provided by the parties involved.
- When the respondent doesn’t engage, the tribunal faces a unique challenge: they don’t know what they don’t know.
In such cases, the tribunal often ends up with even more questions than usual because it’s aware of the missing party’s absence. This absence means the tribunal is unable to hear the respondent’s side, making the task of decision-making more complex.
Unlike litigation, arbitral tribunals cannot issue “default judgments” akin to court systems. Even if a respondent fails to engage (e.g., neglects to submit defenses), tribunals must:
Ensure due process by serving all notices and materials (UNCITRAL Model Law, Article 24).
Evaluate claims based on evidence provided, per the Kompetenz-Kompetenz principle.
opportunity should be given to each party to present its case and to reply to the arguments of the other
set out applicable rules regarding non-participation (HKIAC Rules Article 26)
keep documentary proof of communications with both parties (record of courier or registered mail delivery / attempted delivery)
issue of jurisdiction should be examined and dealt with
decision based on well-founded facts and law
Example: In ICC Case No. 2321 (2020), the tribunal proceeded ex parte after confirming 11 failed communication attempts with the respondent.
F. Draft Award
This is not binding on the parties until it has been confirmed by the tribunal.
ICC / SIAC procedure
ICC Article 34
Before signing any award, the arbitral tribunal shall submit it in draft form to the Court. The Court may lay down modifications as to the form of the award and, without affecting the arbitral tribunal’s liberty of decision, may also draw its attention to points of substance. No award shall be rendered by the arbitral tribunal until it has been approved by the Court as to its form.
The ICC Court’s mandatory scrutiny of draft awards (Article 34) ensures:
- Compliance with procedural rules.
- Logical consistency in reasoning.
- Mitigation of unenforceability risks, particularly for partial awards addressing complex cross-border issues.
SIAC Article 32.3
The Registrar may, as soon as practicable, suggest modifications as to the form of the Award and, without affecting the Tribunal’s liberty to decide the dispute, draw the Tribunal’s attention to points of substance. No Award shall be made by the Tribunal until it has been approved by the Registrar as to its form.
G. Additional Award
Usually, once the final award is made, the tribunal has no further authority (functus officio).
Section 69 AO: within 30 days of the Award, parties can apply for:
- Correction of an award (computational, clerical, typographical or similar) (HKIAC Art. 38)
- Interpretation of a specific point or part of an award (HKIAC Art. 39)
- Additional award as to claims omitted from the award (HKIAC Art. 40)
IV. Post - Award Processes
Once an award is issued, especially under the ICC rules, both parties generally have an obligation to honor the award promptly. However, in practice:
- It is rare for the parties to immediately pay the full amount.
- Often, the parties will negotiate after the award is issued.
- Sufficient reasoning in the award strengthens the position of the winning party in these negotiations.
A. The Complexities of Award Interpretation
The interpretation of the award is an area that presents a plethora of possibilities. A common example is related to costs and interest. Often, claimants will include a claim for costs and interest in their submissions. When the tribunal issues the award, it may state that it will award the costs as per the claimant’s success in the case. However, the determination of interest can be more complex. There may be uncertainty as to whether the claimant is entitled to interest and, if so, how much. In such situations, parties may attempt to get the tribunal to clarify these issues. This can be a delicate process, as it is not always easy to obtain a clear answer. If a party requests an interpretation or clarification, they may face challenges. For instance, the opposing party may raise objections, and in some institutions like those in China, there is an additional process before a correction can be made. During this time, the party may be wasting valuable time that could be used for enforcing the award. This is a significant concern, considering that there are time limits for the enforcement of awards. Thus, while the process of interpretation and correction offers possibilities for resolving uncertainties, it is not a straightforward one.
B. Time Frames for Award Delivery
Unless otherwise agreed by the parties, the tribunal is not subject to a time limit for delivery of the award (in HK).
If the arbitration agreement imposes a time limit to render an award, Section 72 of the Arbitration Ordinance (Cap 609) provides that the court may extend that time limit, regardless of whether it has expired.
ICC Article 31
The time limit within which the arbitral tribunal must render its final award is six months. Such time limit shall start to run from the date of the last signature by the arbitral tribunal or by the parties of the Terms of Reference or, in the case of application of Article 23(3), the date of the notification to the arbitral tribunal by the Secretariat of the approval of the Terms of Reference by the Court. The Court may fix a different time limit based upon the procedural timetable established pursuant to Article 24(2).
HKIAC Articles 31.1 and 31.2
When it is satisfied that the parties have had a reasonable opportunity to present their case, whether in relation to the entire proceedings or a discrete phase of the proceedings, and no later than 45 days from the last directed substantive oral or written submissions in respect of the entire proceedings or the discrete phase of the proceedings (excluding submissions on costs under Article 34), the arbitral tribunal shall declare the proceedings or the relevant phase of the proceedings closed.
Once the proceedings are declared closed, the arbitral tribunal shall inform HKIAC and the parties of the anticipated date by which an award will be communicated to the parties. The date of rendering the award shall be no later than three months from the date when the arbitral tribunal declares the entire proceedings or the relevant phase of the proceedings closed, as applicable. This time limit may be extended by agreement of the parties or, in appropriate circumstances, by HKIAC.
For comparison, in a court setting, such as in Hong Kong, if there is a 5 - day trial, it is not always easy to predict how long it will take for the court to issue a judgment. Estimates suggest that for medium to large cases, it could take around three months, and in some complex cases, it may even take up to a year and a half.
In the context of arbitration, people generally expect the award to be issued around three months after the relevant proceedings, although this can vary significantly.
In practice, the time it takes to receive an award depends on various factors, including the complexity of the case, the efficiency of the arbitration institution, and the actions of the parties involved. Some parties may want to delay the process, while others may be eager to receive the award promptly. There have been cases in other institutions (not in Hong Kong) where the process has taken more than a year, highlighting the variability in the time frames for arbitration awards.
C. Transformative Changes in HKIAC Rules
The Hong Kong International Arbitration Centre (HKIAC) has witnessed a significant transition in its rules, which is a matter of great importance in the arbitration landscape. In the past, the HKIAC rules had a guidance suggesting that the tribunal should issue an award within approximately three months after the conclusion of the proceedings. In theory, once all the necessary steps of the arbitration process were completed, and there were no further outstanding matters, the parties could expect to receive the award within this three - month timeframe. However, this led to several issues.
There were instances where, despite the parties having submitted all required materials, the tribunal did not issue the award within the stipulated three months. This delay could be due to various reasons, some of which might not be malicious but rather genuine difficulties faced by the tribunal. Nevertheless, it caused problems for the parties, who had to endure additional waiting times and potential uncertainties. To address this, the HKIAC has now made a change. The new rule aims to accelerate the process, requiring the tribunal to close the proceedings and issue an award within 45 days from the date when all substantial submissions have been made. This is a significant step forward in ensuring more timely resolutions in arbitration cases, and the HKIAC is among the first institutions to take such a proactive approach in dealing with this common issue in the arbitration world.
V. Remedies
In a typical arbitration process, once an award is issued, the hope is that all parties are satisfied. However, in reality, this is not always the case. Sometimes, unforeseen circumstances arise that may require further action. There is a process known as the request for various actions related to the award, such as correction or interpretation of specific points. For example, if the decision base in the award is unclear, parties may try to rely on this process to seek clarification. This could be crucial in cases where the outcome of the award has significant implications for the parties involved.
Tribunals have wide discretion in determining the appropriate measures, but their authority is constrained by the scope of the arbitration agreement or the parties’ agreement.
If you are an arbitrator, it helps if legal counsel presents clear and specific relief requests. This makes the tribunal’s job easier and ensures the requested relief is precisely what is required.
A. Interim measures
The topic of budgets and the types of remedies allowed in arbitration, especially in the context of requests for interim measures, is crucial. Arbitral tribunals generally possess a wide range of discretion when determining the appropriate measures to take. However, it is essential to note that the tribunal’s power is derived from the scope of the parties’ agreement. In other words, the tribunal cannot issue an order or award that goes beyond what the parties have consented to, unless it falls within the specific parameters of the arbitration agreement.
1. Various Types of Interim Measures
Tribunals generally have a wide discretion in determining the appropriate measures.
The various types of interim measures can be categorised as follows:
- Orders preserving the status quo
- Orders requiring specific performance
- Orders requiring security for underlying claims
- Orders requiring security for legal costs
- Orders for preservation or inspection of property
- Enforcement of confidentiality obligations
- Orders for interim payment
- Anti-suit orders - order issued by the arbitral tribunal that prevents an opposing party from commencing or continuing a proceeding in another jurisdiction or forum
There are numerous types of interim measures available in arbitration. For example, in situations where a party wants to prevent the other party from dissipating their assets, an order can be sought to maintain the status quo. This ensures that the assets are preserved, and the financial position of the parties remains stable until the final resolution of the arbitration.
Orders for specific performance are also common. Instead of allowing a party to simply ignore their contractual obligations, the tribunal can require them to perform a particular action as specified in the contract. This is useful when the non - performance of a specific task has a significant impact on the other party’s interests.
Another type of interim measure involves requests for security related to underlying claims. This could be in the form of requiring a party to provide collateral or a guarantee to cover potential damages or losses. Additionally, orders for the preservation or inspection of property can be crucial, especially in cases where the condition or existence of the property is in dispute.
Enforcement of confidentiality obligations is another important aspect. In some arbitration cases, especially those involving sensitive business information or personal matters, maintaining confidentiality is of utmost importance. The tribunal can issue orders to ensure that the parties and any involved third parties adhere to strict confidentiality requirements.
Orders for payment are also among the available interim measures. In cases where there is an urgent need for funds, such as to cover ongoing expenses related to the arbitration or to compensate for losses suffered immediately, a tribunal can order one party to make a payment to the other.
2. Importance of Clear Specification by Parties
For a party seeking interim measures in arbitration, it is of the essence to clearly specify what they are requesting. As an arbitrator, having a precise understanding of the party’s needs and expectations is crucial for making a well - informed decision. Vague or ambiguous requests can lead to misunderstandings and potentially result in the tribunal issuing an order that does not fully address the party’s concerns.
Therefore, parties should take the time to clearly define the nature, scope, and purpose of the interim measures they are seeking, ensuring that their requests align with the overall goals of the arbitration and the terms of the parties’ agreement.
B. Relief Granted in Award
International arbitrators are bound by the prayers for relief set forth by the parties.
What are the remedies an award can order?
- Monetary compensation;
- Damages
- Punitive: exceeding simple compensation and awarded to punish the Respondent;
- Compensatory/Actual: compensation to injured party for loss/injury;
- Liquidated: contractual
Specific performance and restitution [recompense for injury or loss];
Injunctions;
Declaratory relief;
Rectification (offering an improvement to replace a mistake);
Adaptation of contracts and filling gaps;
Interest;
Costs.
C. Is all relief granted in an arbitration proceeding recognisable and enforceable?
Laws to consider
- Substantive law governing the dispute
- Power of the arbitrator to grant the remedy under the arbitration agreement, arbitration rules and/or applicable arbitration law
- The law of the place of enforcing courts
S70 AO
- Arbitral tribunal may award any remedy or relief that could have been ordered by Hong Kong court, and
- unless otherwise agreed by the parties, it has the same power as the court to order specific performance of any contract, other than a contract relating to land or any interest in land
Differences between different legal systems mean remedy or relief obtainable in one jurisdiction may be unenforceable in the other
D. Decision Making Process
1. Should the award contain reasoning?
Article 32(1) of the ICC Rules stipulates that it is almost a universal principle that arbitral awards should state the reasons for the tribunal’s decision and the relief ordered by the tribunal (dispositive section). Specifically, the article states, “The award shall state the reasons upon which it is based.”
The HKIAC Rules provide that “35.4 An award shall state the reasons upon which it is based unless the parties have agreed that no reasons are to be given.”
The failure to include reasons may lead to the challenge or setting aside of the award, as demonstrated in the case of A v. B and Others [2024] HKCFI 751.
2. Unanimity or Majority or Neither?
According to HKIAC rules (Article 33) and ICC rules (Article 321), if there is more than one arbitrator, the award must be made by majority. For a sole arbitrator, there is no issue of majority or unanimity.
HKIAC Rules: Art 33
33.1 When there is more than one arbitrator, any award or other decision of the arbitral tribunal shall be made by a majority of the arbitrators. If there is no majority, the award shall be made by the presiding arbitrator alone.
For cases with three arbitrators:
- The decision must be made by the majority, not the minority, and there cannot be a tie.
- Two-member arbitrator panels have emerged in some cases, where each arbitrator is aligned with one of the two parties. This creates a situation where there is a split decision, and the third arbitrator may be required to cast the deciding vote.
ICC Rules
Under Article 32(1) : Making of the Award
When the arbitral tribunal is composed of more than one arbitrator, an award is made by a majority decision. If there is no majority, the award shall be made by the president of the arbitral tribunal alone.
Most arbitration laws provide that the parties can agree otherwise.
3. What happens when the majority cannot be reached?
(1) Dissenting opinions
In certain cases, an arbitrator may disagree with the majority’s opinion and still wish to publish their view. In such cases, the arbitrator can issue a dissenting opinion. This allows for the inclusion of alternative views and provides a complete record of the decision-making process.
Most arbitration legislation does not address dissenting opinions. However, in some countries like the UAE, dissenting opinions must be attached to the final award for it to be valid.
Dissenting opinions are commonly seen when arbitrators disagree with the majority view, providing transparency and an opportunity for further analysis.
There was an unusual case under ICC rules where the arbitration agreement called for seven arbitrators. In this case:
- The parties nominated seven arbitrators.
- However, the question arose: what happens when the panel cannot reach a majority decision, or when an even number of arbitrators creates a tie?
- This can lead to difficult procedural questions, particularly about how to proceed with a split decision.
(2) Truncated tribunals
When an arbitrator is no longer able to participate, the tribunal might become truncated, meaning it is reduced to fewer members. This could occur if an arbitrator passes away or for other reasons such as resignation.
In cases where a majority decision cannot be reached, or when an arbitrator must be replaced, the procedures for how to proceed can vary by jurisdiction. For example:
- If the majority decision cannot be achieved, there is a need to decide how to resolve the situation. In some cases, an additional arbitrator might be appointed.
- In situations where an arbitrator must be replaced mid-proceeding, the procedure varies depending on the arbitration rules and the stage of the proceedings.
Article 15(4) of the ICC Rules allows for the continuation of proceedings with a truncated tribunal. This provision allows a tribunal to issue an award without the third arbitrator if all parties agree, as long as there is a majority decision from the remaining arbitrators.
ICC Rules Article 15(4)
When an arbitrator is to be replaced, the Court has discretion to decide whether or not to follow the original nominating process. Once reconstituted, and after having invited the parties to comment, the arbitral tribunal shall determine if and to what extent prior proceedings shall be repeated before the reconstituted arbitral tribunal.
A noteworthy example occurred under the ICC rules:
The tribunal had three arbitrators: two Supreme Court justices from India and one President from Switzerland. As the proceedings were closing and the tribunal was deliberating, one of the Indian justices tragically passed away. The remaining two arbitrators agreed that the deceased arbitrator had already expressed an opinion on how the award should be decided.
Because of the stage of the arbitration, the parties agreed that the ICC would not appoint a replacement for the third arbitrator. The remaining two arbitrators issued a majority award as a truncated tribunal. However, the opinion of the deceased arbitrator was not reflected in the final award, and the parties never knew what that arbitrator’s position had been.
4. How and where should arbitrators deliberate?
One of the unique aspects of international arbitration is the flexibility in where arbitrators can deliberate:
- The place of arbitration does not necessarily determine where the deliberations must take place.
- Arbitration proceedings can take place anywhere in the world, so the tribunal can choose different locations for hearings and deliberations.
This flexibility has made arbitration a globally convenient method of dispute resolution, as it allows parties and arbitrators to avoid being tied to a single location, instead choosing a neutral venue that suits both sides.
Article 18(3) of the ICC Rules: “The arbitral tribunal may deliberate at any location it considers appropriate.”
Failure to participate in the deliberations can in some cases lead to removal of an arbitrator.
Before the onset of COVID-19, many tribunals took advantage of the flexibility offered by the place of arbitration. The place of arbitration didn’t necessarily need to be where the tribunal members were located, and it was quite common for tribunals to travel to the designated place of arbitration for hearings and deliberations. However, the rules themselves allow the tribunal to deliberate anywhere they deem appropriate. This means the tribunal has the discretion to deliberate in any location, regardless of the designated arbitration venue.
With the pandemic changing the way we work, virtual deliberations have become a regular practice. For example, in a recent case, a tribunal deliberated online using Zoom. One arbitrator was based in Hong Kong, another in Ethiopia, and the third in Europe, meaning no one had to travel for the deliberations. This is a direct consequence of the pandemic, making remote arbitration not just possible but increasingly common.
5. How long may the arbitral tribunal deliberate?
Article 31.1 of the ICC Rules – Time Limit for Rendering Final Awards (6 months from TOR)
Article 31.2 of the HKIAC Rules – Time Limit for Rendering Final Award (3 months from closing of proceedings)
In the context of ICC rules, the tribunal generally has a six-month time limit to issue an award, starting from when the terms of reference are signed. However, the ICC court has the discretion to grant extensions to this time limit in exceptional circumstances.
The process for issuing an award in ICC arbitration works as follows:
- The tribunal submits a draft award well in advance of the time limit.
- The ICC court reviews the draft award, provides comments, and then decides whether to approve it.
This review process can take anywhere from a single day to several months, depending on the complexity of the case and whether there is any disagreement among the ICC court members.
While extensions are possible for complex cases, there is an interesting situation where tribunal members might ask for more time repeatedly due to the complexity of the matter. This extra time is often required to ensure that the award is sufficiently detailed to withstand scrutiny by the ICC court.
An interesting phenomenon is the speed of the review process in some cases. For example, the lecturer has personally seen an award get approved in one day. This wasn’t because the award was simple, but because the draft award was accidentally sent to the parties. This led to an unintentional leak of the draft award, but because of the pressure to get the award approved quickly, the award was reviewed and issued that same day.
Sometimes, tribunals may inadvertently send out drafts of the award, especially if they are not careful with their email communications. For example, there have been incidents where arbitrators accidentally copy all parties when sending the draft award to the institution for review. In one case, an arbitrator replied all with the draft award twice, which resulted in the parties receiving the award prematurely.
As a representing lawyer, when you receive such a draft, there is an inherent professional dilemma: do you delete the email as instructed, or do you take a moment to read the award and see if your client won? Of course, professional ethics dictate that you should delete it, but human curiosity often takes over.
In a particularly extreme case, the ICC court was forced to review and approve a 150-page award on the same day to make sure it was issued promptly. This incident underscores how, in certain situations, even a complex award can be processed and issued in a very short time frame if the circumstances demand it.
E. Is all relief granted in an arbitration proceeding recognisable and enforceable?
**Short answer:**➔ Not always.
Sometimes the relief awarded by the tribunal cannot be enforced exactly as given — for example, if it becomes impossible to perform.
Key Case: Xiamen Xinjingdi Group Co Ltd v Eton Properties Ltd (2020)
Background:
- The tribunal made an award that ordered Eton Group to transfer certain shares in a company to the Applicant.
- Problem:
After the group restructured, the shares could no longer be transferred — it was impossible to do what the award ordered.
What the Applicant did:
- Tried to enforce the award in Hong Kong.
- Instead of asking for share transfer (which was now impossible), the Applicant asked for damages (money) instead.
3. What the Hong Kong Court of Final Appeal (CFA) said
There are two ways to enforce an arbitral award:
| Method | What it Means | Court’s Power |
|---|---|---|
| Statutory Enforcement (under Arbitration Ordinance) | Court simply enforces the award as it is written. | The court cannot change or adjust the award. |
| Common Law Action on an Award | A party brings a new court case based on the fact that there is an award. | The court can grant different relief, such as ordering damages instead of specific performance. |
Section 2GG of the old Arbitration Ordinance (similar to Section 84 of Cap. 609) describes the statutory enforcement method, which is “mechanistic”: ➔ The court must stick exactly to the award’s terms — it cannot modify it.
If you need different relief (because performance is impossible), you must sue at common law based on the award.
👉 Not all arbitral relief is automatically enforceable — if the original relief becomes impossible, parties may need to rely on a common law action to get an alternative remedy like damages.
VI. Finality
One of the core benefits of arbitration that is often highlighted is the finality of the award. In arbitration, the expectation is that once a final or partial award is issued, it should resolve the dispute in a conclusive manner. As an arbitrator, one of the things I used to tell my clients is that the award is not subject to appeal just because they believe the law was applied incorrectly. This is part of the reason why it’s critical to choose a good arbitrator, ensure that your submissions are clear, and make sure that all arguments are adequately presented.
In fact, finality is one of the reasons why arbitration is considered better than other forms of dispute resolution, as evidenced by surveys like the 2018 Whiten Case survey. The ability to issue a final and binding award is highly valued by parties seeking certainty. Additionally, the enforceability of arbitration awards is another major advantage, as they are enforceable in over 270 jurisdictions under the New York Convention.
A. Appeals Mechanism?
Key Point:
👉 In arbitration, awards are meant to be final and binding.
👉 No automatic right of appeal — unless the parties specifically agree otherwise.
Under various arbitration rules, including Section 73 of the Hong Kong Arbitration Ordinance and rules 35.2 (HPIC) and 35.6 (ICC), it is clear that an arbitration award is final and binding unless otherwise agreed by the parties. This means that the award must be written, and it binds not only the parties but also any person claiming through or under them. The concept of finality is central to arbitration, creating an expectation that once an award is issued, there is no further recourse to change or challenge it.
Section 73 of the Arbitration Ordinance (Cap 609)
- Effect of award
(1)Unless otherwise agreed by the parties, an award made by an arbitral tribunal pursuant to an arbitration agreement is final and binding both on—
(a)the parties; and
(b)any person claiming through or under any of the parties.
(2) Subsection (1) does not affect the right of a person to challenge the award-(a) as provided for in section 26 or 81, section 4 or 5 of Schedule 2, or any other provision of this Ordinance; or
(b) otherwise by any available arbitral process of appeal or review.
Article 35.2 of the HKIAC Rules and Article 35.6 of the ICC Rules
- HKIAC: Awards shall be made in writing and shall be final and binding on the parties and any person claiming through or under any of the parties.
- ICC: Every award shall be binding on the parties.
Section 81 of the AO, Article 34 of UNCITRAL Model Law(Application for setting aside as exclusive recourse against arbitral award)
(1) Recourse to a court against an arbitral award may be made only by an application for setting in accordance with paragraphs (2) and (3) of this article.
(3) An arbitral award may be set aside by the court…only if:
(a) the party making the application furnishes proof that:
(b) the court finds that:
The idea of allowing parties to appeal an arbitration award on points of law is one that has evolved in different jurisdictions. While finality is traditionally considered a cornerstone of arbitration, some jurisdictions and institutions have been experimenting with allowing greater flexibility for appeals or corrections, often based on party autonomy or specific agreements between parties. Let’s break down some of the developments in different regions, particularly focusing on Singapore, the UK, and other arbitral institutions.
Hong Kong → express opt-in to Schedule 2 by Parties (2011 Hong Kong AO):
- Section 4 of Sch 2 (Challenging arbitral award on ground of serious irregularity)
- Section 4 of Sch 2 (Appeal against arbitral award on question of law)
1. Singapore’s Approach to Appeal on a Question of Law
Singapore: not allowed
- 2019, Ministry of Law considered amendment to the International Arbitration Act to allow for appeals on errors of law on an ‘opt-in’ basis similar to Hong Kong.
- Not included in 2020 revised IAA.
In Singapore, the domestic arbitration law does provide for an appeal on a question of law. However, this is not available in international arbitration unless specifically agreed upon by the parties, which is often a rare occurrence in practice.
In 2019, the Ministry of Law in Singapore considered amending the law to allow appeals on a question of law in international arbitration. This was based on the fact that the domestic arbitration law had this provision, but the 2020 revision of the Arbitration Act did not extend this right to international arbitration.
This highlights the ongoing debate on whether allowing appeals on points of law undermines the key benefit of finality in arbitration, or if it improves fairness by allowing a higher court to review legal interpretations. As of now, Singapore has not included the ability to appeal on a question of law in international cases.
2. The UK’s Arbitration Act 1996: Appeal on Points of Law
Section 69 of the UK Arbitration Act 1996 provides parties to an arbitration seated in England & Wales with an opportunity to appeal against an award on a point of law.
- No need to opt-in
In contrast, the UK’s Arbitration Act 1996 does allow for an appeal on a point of law, provided certain conditions are met. This is unique compared to many other jurisdictions, as it provides a mechanism for judicial review of legal errors in arbitration awards.
However, this appeal is not automatic. The parties must demonstrate that the legal error has significant consequences on the outcome of the case. Even then, the court will not automatically overturn the tribunal’s decision but will consider the implications of the legal error in the broader context of the dispute.
While this option exists, it is still rarely exercised, as many parties prefer the finality arbitration provides, and the procedural barriers to appealing can be substantial. The fact that the option exists, though, provides an additional layer of legal recourse for those who feel that an error of law has occurred.
3. Institutional Internal Appeal Procedures: A Growing Trend
Arbitral Institutions - Internal appellate procedures
- CPR, JAMS, AAA → US based
- SCA, ECA → European based
Interestingly, arbitral institutions have started to introduce internal appellate procedures within their own rules. This allows for an appeal within the institution itself, rather than going through national courts.
For example:
- CPR JAMS and ICDR-AAA in the US have internal procedures for appealing awards, provided that both parties agree to this in their arbitration agreement.
- In Europe, both the Spanish Court of Arbitration and the European Court of Arbitration offer similar mechanisms.
These procedures are based on the principle of party autonomy—meaning the parties can agree in advance to allow a review or appeal process. This allows for some flexibility and may appeal to parties seeking more certainty or fairness in their disputes.
B. The Possibility of Setting Aside an Award
While finality is a key benefit, the possibility of setting aside an award does exist in certain circumstances. In Hong Kong, under Section 81 of the Arbitration Ordinance, there are very limited grounds for setting aside an award, as there are in many jurisdictions worldwide. The grounds for setting aside an award are typically narrow and focused on egregious procedural issues, such as:
- Lack of notification
- Failure to provide due process
- Public policy violations
These issues must be serious enough to warrant the setting aside of an award. Therefore, while it’s possible to challenge the award in these cases, it is rare for the challenge to succeed unless there is something particularly egregious about the process.
One interesting aspect of Hong Kong’s arbitration system is that negative jurisdictional decisions—for instance, when a tribunal rules that it does not have jurisdiction over a party—cannot be set aside under current law. It highlights the complexity of arbitration law and its evolving nature. Even though there are mechanisms in place to challenge awards, jurisdictional decisions made during the arbitration process are generally not subject to setting aside.
However, parties often try to find creative ways to challenge such decisions. In these situations, counsel may come up with novel arguments to dispute the tribunal’s jurisdiction, but the law, as it stands in Hong Kong, does not allow the setting aside of such jurisdictional decisions.
C. Correction/Clarification of award?
Even after an award is issued, there are still opportunities for correction or clarification. This is especially true when there are ambiguities in the award that need interpretation.
For example, the ICC and SIAC both allow for correction or interpretation of an award, typically to resolve clerical errors or to provide clarity on specific points. This ensures that the award is properly understood and implemented. However, this is a limited process and does not involve a reassessment of the substance of the case.
For ad hoc arbitration—where there may not be an overseeing institution—there are more applications for corrections or clarifications. Without an institution to review the award, the parties may resort to seeking judicial intervention to correct or clarify the award.
Section 69 of the Arbitration Ordinance (Cap 609) (Article 11 of UNCITRAL Model Law):
Article 33. Correction and interpretation of award; additional award
(1) Within thirty days of receipt of the award, unless another period of time has been agreed upon by the parties:
(a) a party, with notice to the other party, may request the arbitral tribunal to correct in the award any errors in computation, any clerical or typographical errors or any errors of similar nature;
(b) if so agreed by the parties, a party, with notice to the other party, may request the arbitral tribunal to give an interpretation of a specific point or part of the award.
If the arbitral tribunal considers the request to be justified, it shall make the correction or give the interpretation within thirty days of receipt of the request. The interpretation shall form part of the award.
(2) The arbitral tribunal may correct any error of the type referred to in paragraph (1)(a) of this article on its own initiative within thirty days of the date of the award.
(3) Unless otherwise agreed by the parties, a party, with notice to the other party, may request, within thirty days of receipt of the award, the arbitral tribunal to make an additional award as to claims presented in the arbitral proceedings but omitted from the award. If the arbitral tribunal considers the request to be justified, it shall make the additional award within sixty days.
HKIAC Rules Articles 38, 39, 40 and ICC Rules Article 36 (correction of award, interpretation of award, additional awards)
Section 69 of the Arbitration Ordinance (Cap 609) (Article 11 of UNCITRAL Model Law)
Article 33. Correction and interpretation of award; additional award
(1)Within thirty days of receipt of the award, unless another period of time has been agreed upon by the parties:
(a)a party, with notice to the other party, may request the arbitral tribunal to correct in the award any errors in computation, any clerical or typographical errors or any errors of similar nature;
(b)if so agreed by the parties, a party, with notice to the other party, may request the arbitral tribunal to give an interpretation of a specific point or part of the award.
If the arbitral tribunal considers the request to be justified, it shall make the correction or give the interpretation within thirty days of receipt of the request. The interpretation shall form part of the award.
(2)The arbitral tribunal may correct any error of the type referred to in paragraph (1)(a) of this article on its own initiative within thirty days of the date of the award.
(3)Unless otherwise agreed by the parties, a party, with notice to the other party, may request, within thirty days of receipt of the award, the arbitral tribunal to make an additional award as to claims presented in the arbitral proceedings but omitted from the award. If the arbitral tribunal considers the request to be justified, it shall make the additional award within sixty days.
HKIAC Rules Articles 38, 39, 40 and ICC Rules Article 36
A significant benefit of using institutional arbitration (e.g., ICC, SIAC, CAC) is that the institution often scrutinizes the award before it is issued. This helps minimize the need for corrections or interpretations of the award after it’s been rendered. The institutional oversight serves as a safeguard to ensure the award is legally sound and properly written.
On the other hand, ad hoc arbitrations, where there is no overseeing body, often see more applications for correction or interpretation of the award. This is because there is no institution to review the award before it is issued, and parties may feel the need to clarify certain points or challenge errors in the decision-making process.
D. Opting Into Additional Grounds for Challenge
In a fascinating aspect of Hong Kong law, parties can opt into Schedule 2 of the Arbitration Ordinance when they enter into their arbitration agreement or even during the arbitration process itself. Opting into this schedule can give parties more recourse to challenge the award. Under Schedule 2, parties can challenge an award on the following grounds:
- Serious irregularity in the process.
- The ability to appeal the award based on a question of law.
This offers more opportunities for a party to seek a review or correction of an award, especially in cases where they believe there were significant errors in the legal reasoning or procedural fairness.
Class 5 - Preliminary Meeting
One of the tribunal’s first tasks after constitution is to set the procedural framework for the arbitration. This often begins with a procedural meeting or case management conference, where the tribunal and parties agree on the structure and timeline of the proceedings.
I. Purpose of the Preliminary Meeting
The legal basis for procedural matters in Hong Kong arbitration includes Section 47 of the Arbitration Ordinance, which emphasizes two key principles:
- Equal treatment of parties
- Fair and efficient process, avoid unnecessary delay and expense
Arbitration Ordinance (Cap 609)
Section 47: Article 19 of UNCITRAL Model Law (Determination of rules of procedure)
(1) Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.
(2) If or to the extent that there is no such agreement of the parties, the arbitral tribunal may, subject to the provisions of this Ordinance, conduct the arbitration in the manner that it considers appropriate.
A. Upholding Equality, Fairness & Efficiency in Arbitration
The principles mentioned above are echoed in Section 46, which further requires that tribunals act independently and impartially, ensuring that each party has a reasonable opportunity to present its case.
Arbitration Ordinance, Section 46: Article 18 of UNCITRAL Model Law (Equal treatment of parties)
(2) The parties must be treated with equality
(3) When conducting arbitral proceedings… the arbitral tribunal is required-
(a) to be independent;
(b) to act fairly and impartially as between the parties, giving them a reasonable opportunity to present their cases and to deal with the cases of their opponents; and
(c) to use procedures that are appropriate to the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for resolving the dispute to which the arbitral proceedings relate.
The tribunal has wide discretion in shaping the procedural framework. This includes decisions on:
- The admissibility and relevance of evidence
- The format and timetable of submissions
- Whether hearings are necessary or matters can be resolved on paper
This discretion is supported by commonly used institutional rules, such as:
- HKIAC Rules: Article 13 allows broad powers to manage proceedings.
- ICC and UNCITRAL Rules: Both confirm the tribunal’s authority over procedure.
- Articles 22 and 24 of the 2021 ICC Rules and ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (January 2021)
- Article 17 of the UNCITRAL Arbitration Rules
However, with great discretion comes responsibility. Tribunals must:
- Avoid any appearance of bias or procedural unfairness
- Ensure their conduct does not provide grounds for challenge of the final award
B. Establishing a Clear Roadmap
Parties need a road-map to resolve the dispute. The procedural conference essentially serves as the roadmap for the arbitration. It sets out:
- The timeline for submissions and hearings
- Mode of communication between parties and with the tribunal
- Document production protocols
- Any initial applications (e.g. challenges to jurisdiction or interim relief)
The road-map should be:
- Understood by the Parties (and stakeholders)
- Focused on the ultimate objective of the Parties
- Strategic and effective
- Time and cost efficient
Before the meeting, tribunals usually require parties to consult with each other to:
- Narrow down areas of disagreement
- Prepare a joint draft agenda or procedural proposal
Parties may be invited to submit brief written statements outlining their positions in advance, allowing the tribunal to prepare and engage meaningfully during the hearing. A draft agenda is often prepared before the meeting, outlining points of agreement and dispute. This allows parties to be well-prepared and enables the tribunal to consider the issues in advance, asking relevant questions during the meeting.
Capture agreed common procedural ground between Parties Tribunal needs to resolve disagreements.
Decisions need to be discussed and captured for all Parties.
C. Practicalities
Needs to be done shortly after tribunal constituted.
Procedural meetings, which set the tone for the arbitration, should be scheduled as soon as the tribunal is constituted. Such meetings help keep the process moving forward without delays, addressing procedural issues early to avoid disputes later on.
Parties can engage directly to agree issues reduce costs draft a PO1.
Following the procedural meeting, the tribunal typically issues Procedural Order No. 1, which:
- Records all procedural decisions made
- Includes a detailed arbitration timetable
This order forms the backbone of the arbitration and is critical for managing expectations and ensuring a smooth process.
Tribunals usually request short submissions to get input for common disputed issues.
In-person hearing often dispensed with to save costs Frequently conducted by telephone or video conference Agreed procedure and steps agreed usually set out in Procedural Order No. 1.
Most procedural meetings are conducted virtually (via videoconference or telephone), especially in international arbitration where participants span multiple jurisdictions and time zones. Video conferencing is often preferred as it facilitates better communication and allows parties to observe the tribunal’s reactions.
In-person meetings may still occur, particularly when substantive preliminary issues arise (e.g. jurisdictional challenges).
Clients can attend these meetings alongside their legal counsel, but it is critical that seasoned arbitration practitioners advocate clearly to avoid any misunderstanding, especially due to:
- Language barriers
- Cultural differences in communication style, which may influence perceptions of strength or credibility
D. Practical Problems
While the procedural meeting is intended to establish certainty, several issues can arise:
- Requires the parties and tribunal at outset to have a vision of what a fair and effective process looks like for them
- The tribunal may not know enough about the dispute to have a strong view on effective conduct of the proceedings.
- Preliminary documents in arbitration (e.g. NoA/RFA, Answer) may not capture all claims/arguments. Claims, counterclaims, and challenges may be raised at later stages, which may require the timetable to be revised.
- Requirement for summary of claims in the Terms of Reference in ICC cases and limited ability to introduce new claims (Art. 23 of the ICC Rules) Tribunal may not appreciate cultural preferences, individual preferences, personalities and style at an early stage
- The parties and tribunal may be focused on creating a ‘positive’first impression
- Parties may miss deadlines or request extensions due to unforeseen developments
While the tribunal strives to set a clear and firm timetable, adjustments may be necessary as the arbitration progresses. Unexpected developments, like new claims or interim applications, can require modifications to the timetable. The tribunal must retain some flexibility to address these changes, but delays without good cause may result in the tribunal enforcing stricter timelines.
II. Agenda for the Preliminary Meeting
During the preliminary meeting, several key issues are typically addressed to establish the procedural framework of the arbitration. Below are the most common agenda items:
At the first preliminary meeting, the tribunal typically circulates a draft agenda to the parties for feedback. The goal is to streamline the process and resolve non-disputed issues first, such as the overall adoption of arbitration rules and procedural matters. In this case, the tribunal suggested the adoption of IBA Rules of Evidence as a guideline for handling evidential issues, although this was not mandatory for the parties.
Once the procedural framework was settled, the tribunal moved on to address more substantive matters that had been flagged in the Notice of Arbitration.
A. Arbitration Agreement
The tribunal must confirm the existence and validity of the arbitration agreement. If there is any dispute between the parties on this point, it directly affects the tribunal’s jurisdiction.
Important points may have to be agreed (or argued) at the preliminary hearing:
Place of the arbitration (seat of the arbitration place for the hearing)
Language and Seat of Arbitration
Usually stipulated in the arbitration agreement. If not, parties must agree or the tribunal will decide.
Language choice affects submissions, hearings, and translations, and can have strategic implications, especially in cross-border disputes.
Arbitration Rules to be applied
Governing Law
This may differ from the law governing the substantive contract. If not specified, parties must address this, as it influences how procedural issues are resolved.
B. Jurisdiction of the Tribunal
If a party disputes the tribunal’s jurisdiction, this must be raised before the statement of defense under the Arbitration Ordinance. This is where the principle of kompetenz-kompetenz applies: the tribunal has the authority to rule on its own jurisdiction without the need for court intervention. Efficiency is enhanced by this principle, keeping the arbitration self-contained and avoiding delays caused by parallel court proceedings.
1. Legal Position
| Section | Key Points | Legal Reference | Practical Implications |
|---|---|---|---|
| 1. Kompetenz-Kompetenz | - The tribunal has authority to rule on its own jurisdiction (even if the underlying contract is disputed). | AO Art 34(1) | Prevents delaying tactics – tribunal can proceed without court intervention. |
| 2. Jurisdictional Objection Deadline | - Any objection to jurisdiction must be raised before submitting the Statement of Defence. Late objections may be barred. | AO Art 34(2) | Parties must analyze jurisdictional issues early in the process. |
| 3. How to Handle Objections | - The tribunal may: • Decide jurisdiction as a preliminary issue (separate hearing), OR • Combine it with the merits phase. | AO Art 34(3) | Affects procedural efficiency – bifurcation may save costs if jurisdiction is disputed. |
2. Practicalities: Bifurcation?
| Section | Key Points | Legal Reference | Practical Implications |
|---|---|---|---|
| 1. Submission Methods | - Parties can request bifurcation through: • Written submissions • Oral arguments • Both | (Procedural discretion) | Tribunal may set deadlines for bifurcation requests. |
| 2. Consequences of Decision | - If bifurcated: • Jurisdiction/priority issues resolved first • Potentially faster resolution but longer overall case - If not bifurcated: • All issues heard together (efficiency but complexity) | (Tribunal’s procedural power) | Strategic choice: Bifurcation may benefit parties challenging jurisdiction. |
C. Interim Measures
Statutory basis – AO Art. 35
Any temporary measure .. by which, at any time prior to the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party to:
- Maintain or restore the status quo
- Take action that would prevent, or refrain from taking any action that is likely to cause, harm or prejudice to the arbitral process itself
- Provide a means of preserving assets out of which a subsequent award may be satisfied
- Preserve evidence
An interim measure is a temporary decision made by the arbitral tribunal before the final award. It helps to protect the parties’ rights or the arbitration process while the dispute is still ongoing.
Parties often seek to maintain the status quo pending the outcome of arbitration.
- Asset Freezing Orders: To prevent a respondent from dissipating assets, especially if enforcement is anticipated.
- Preservation of Evidence: To ensure crucial documents or materials are not destroyed or tampered with.
- Injunctions: To prevent specific actions that may harm the other party’s interests (e.g., reducing company value).
Timing: Requests should be raised at or before the preliminary meeting. The tribunal (once constituted) or an emergency arbitrator (in some institutions) may issue such orders.
…at any time prior to the issuance of the award by which the dispute is finally decided…
✅ This means the tribunal can order these measures at any stage before the final award is issued.
- Before the final award (so, anytime during the arbitration).
- Can be urgent—sometimes even requested before the tribunal is fully formed (through the courts or emergency arbitrator).
D. Arbitrator’s Terms of Appointment
Terms of Appointment are the written terms that explain the responsibilities, rights, and expectations of the arbitrator and the parties.
1. Do They Always Need to Be Signed?
May vary due to applicable law, terms of the arbitration agreement.
Generally unnecessary for institutional matters.
Whether these terms are needed depends on:
- The law that applies to the arbitration;
- The arbitration agreement between the parties;
- Whether it is an institutional arbitration (e.g. under HKIAC).
➡️ If it’s under institutions like HKIAC, Schedules 2 and 3 of the HKIAC Administered Arbitration Rules already cover many of these issues, so parties may not need a separate appointment agreement.
2. What Do These Terms Usually Include?
1️⃣ Basic details of the dispute & procedural rules
- What the dispute is about (just a short description).
- What procedural rules apply (if not already agreed in the arbitration clause).
Example: “This is a dispute over a commercial lease contract. The UNCITRAL Arbitration Rules will apply.”
2️⃣ Remuneration, deposits, expenses, cancellation
- Remuneration = How much the arbitrator gets paid.
- Deposits = Advance payments by the parties to cover expected costs.
- Expenses = Things like travel, hotel, or courier fees.
- Cancellation = What happens if arbitration is cancelled—who pays for what.
🧾 Joint and several liability:
- Means each party is individually and collectively responsible for the arbitrator’s fees.
- If one party doesn’t pay, the other may have to cover it.
3️⃣ Conflicts of Interest
- The arbitrator must disclose anything that might make them look biased.
- Parties must trust that the arbitrator is independent and impartial.
- Immunity from suit: The arbitrator is usually protected from being sued for anything they do while acting in their role—unless there’s bad faith or dishonesty.
4️⃣ Governing law and dispute resolution clause
- What law governs the arbitrator’s appointment agreement (e.g. Hong Kong law).
- How disputes about the appointment itself will be resolved (e.g. court or arbitration).
3. Fee Structure
HKIAC: Offers both hourly rates (Schedule 2) and ad valorem rates (Schedule 3).
ICC: Typically uses a scale based on the amount in dispute.
E. Mode of Service
“Mode of Service” refers to how legal documents (like claims, responses, evidence, etc.) are delivered between the parties and the tribunal during arbitration. This is important to ensure that everyone receives documents on time and can respond appropriately.
Setting the “mode of service” means deciding how documents will be exchanged during arbitration—whether it’s through emails, secure portals, or even physical copies. Clear contact details and labelling systems help keep everything organized and ensure no party misses important information.
1. Document Delivery Methods
How documents will be served can be agreed upon at the start of the arbitration. Common methods include:
- Email: Fast, easy, and often the default method for communication.
- Document Portal: A secure, online place where parties can upload and access documents.
It’s essential that all parties agree on the method(s) for document delivery to avoid delays or misunderstandings.
2. Submission Format
When it comes to how documents should be submitted, there are two main options:
- Hard Copies: Traditional physical copies of documents.
- Electronic-only Filings: More common nowadays, especially in institutional arbitrations, where all documents are submitted electronically (via email or a portal).
3. Contact Details & Communication Methods
It’s important to specify the contact details of the parties and their lawyers, so communication is clear and direct. Key things to include are:
- Non-participating parties: Even if a party isn’t actively participating in the arbitration, they should still receive notices and updates.
- Updating contact details: There should be a clear process for notifying other parties and the tribunal if contact details change.
4. Methods of Service for Submissions
Common methods for sending documents include:
- Secure File Transfer Sites: Specialized, secure websites for transferring large documents.
- USB or Hard Copy: Sometimes parties still use physical media to exchange documents, especially for sensitive or large files.
- Case Management Platforms: Platforms like the HKIAC Case Management System or others that allow all documents to be submitted and tracked in one place.
5. Document Labelling
Documents must be properly labelled to keep everything organized. Labels help identify what each document is and where it fits in the case. Common labels include:
- Correspondence: Letters or communications between parties.
- Exhibits: Evidence presented during the arbitration.
- Statements: Parties’ written arguments or witness statements.
F. Arbitral Rules
The arbitration procedure is often outlined directly in the arbitration agreement. If not agreed at the start, it might be useful to agree to a set of rules or a framework to ensure clarity on how the arbitration will proceed.
Administered Arbitration offers structure, clear rules, and support in managing finances and procedures, but it comes with institutional fees.
Ad Hoc Arbitration gives more flexibility and potential savings, but it also requires the parties to handle everything themselves.
1. Types of Arbitration Procedures
Administered Institutional Arbitration
This type of arbitration is handled by a designated institution (like HKIAC, ICC, LCIA, etc.).
The institution has a set of detailed rules that govern the procedure and the management of the case.
Ad Hoc Arbitration (e.g., UNCITRAL Rules)
This means arbitration is managed by the parties themselves without an institution’s involvement.
The parties can agree on the procedural rules (like the UNCITRAL Arbitration Rules) or develop their own set of rules.
2. Benefits of Administered (Institutional) Arbitration
Comprehensive Rules for Proceeding
Institutions like HKIAC provide clear, pre-established rules that govern every step of the process. This can be useful to avoid disputes over procedure.
Administration of Financial Aspects
The institution takes care of deposits, payments, and other financial matters, ensuring things run smoothly.
Challenge Procedures: If there are any issues with the appointment of an arbitrator or disputes on procedures, the institution often has mechanisms in place to address them.
Scrutiny of Decisions/Orders/Awards
Many institutions have a scrutiny process to ensure the quality and fairness of the decisions, orders, and awards made by the arbitrators (though the level of scrutiny varies depending on the institution).
3. Benefits of Ad Hoc Arbitration
Full Flexibility to Agree on the Procedure
In ad hoc arbitration, the parties have the freedom to design their own rules and set the procedures as they wish, without being tied to an institution’s set rules.
Cost Savings (Questionable)
In theory, ad hoc arbitration can be cheaper because there are no administrative fees charged by institutions.
However, the lack of structure and the need for parties to manage everything themselves could lead to higher costs in terms of time and effort.
G. Written Submissions
The tribunal decides the form (Memorial-style vs. Pleadings-style) and timeline for written submissions to ensure the arbitration process is efficient.
- Clear deadlines are essential to avoid delays.
- Practical issues include whether submissions are electronic or paper, and specific formatting rules.
- Environmental concerns, like the Green Pledge, are becoming important in ensuring arbitrations are more sustainable.
1. Forms of Written Submissions
The tribunal needs to decide what type of written submissions are required from the parties, and this usually falls into two styles:
1️⃣ Memorial-style
This is a detailed statement of the case that includes:
- All evidence and arguments (fact and law).
- Supporting documents.
- Witness statements and expert reports that will be relied upon.
A “Memorial” is like a comprehensive book of everything the party wants to present in their case.
2️⃣ Pleadings-style
A more brief and focused statement, which typically includes:
- Essential facts for the claim or defence.
- Later, documentary evidence will be exchanged, as well as witness statements and expert reports.
A “Pleading” is like a short summary that presents the core facts, and then parties can submit more details over time.
2. Firm Deadlines for Written Submissions
A detailed schedule is set, including:
- Number and timing of submissions.
- Length and structure of written pleadings.
- Timelines for disclosure/discovery.
Disclosure Practices:
- Common law systems often allow broader document discovery.
- Civil law systems are typically more limited.
- The tribunal must balance these differences.
At the preliminary hearing, the tribunal should set clear deadlines for the submission of written materials to avoid delays and uncertainty.
Why this is important: Clear deadlines help keep the process moving smoothly and ensure that all parties have enough time to prepare their submissions. It also prevents one side from dragging out the process unnecessarily.
3. Practical Considerations for Submissions
(1) Electronic or Paper Submissions?
Will submissions be made electronically, via email or a case management platform?
Or will physical copies be required (e.g., printed and delivered)?
Many arbitrations now favor electronic submissions for efficiency, but some cases still require hard copies.
(2) Formatting Requirements
The tribunal may set specific rules on formatting:
- Font size, font type, page count, paper size, and paragraph numbering may all be regulated.
These rules ensure that all submissions are consistent and easy to read. It also helps the tribunal quickly find important sections in the documents.
(3) Green Pledge and Greener Arbitrations
There is an increasing movement in arbitration towards being more environmentally friendly. This includes initiatives like the Green Pledge, which encourages parties to:
- Minimize paper usage.
- Avoid unnecessary printing.
- Use electronic submissions whenever possible to reduce the environmental impact.
H. Document Discovery
1. Civil law vs Common law in Evidence Gathering
In civil law countries (like France, Germany, Mainland China):
➔ The judge is very active.
➔ The judge gathers evidence, asks questions, and leads the investigation.
In common law countries (like UK, US, Hong Kong):
➔ The parties (lawyers) are in charge.
➔ Each side finds its own evidence through a process called discovery (asking the other side to give documents, answer questions, etc.).
In international arbitration, we mix these two styles:
➔ Parties still collect evidence.
➔ But the arbitral tribunal (the arbitrators) can also manage the process, making sure it is fair and efficient.
Arbitration is one area where civil law and common law approaches have a unique blend. There’s a mix of both systems: parties may have to gather evidence, but the tribunal often has a role in overseeing the process to ensure fairness and efficiency.
2. Gold Standard: IBA Rules on Evidence (especially Article 3)
The International Bar Association (IBA) Rules are considered the gold standard for how evidence should be handled in international arbitration.
IBA Rules = International Bar Association Rules.
They are not binding law, but they are the most respected “soft law” guide for how evidence should be handled in international arbitration.
Article 3 of the IBA Rules is very important:
- It sets general principles for gathering evidence.
- The goal is to make sure:
- Both sides are treated equally.
- The process is fair and transparent.
- Each side gets a proper opportunity to present their case.
The IBA Rules help arbitrators and parties avoid confusion and set clear standards for what’s acceptable when requesting and handling evidence.
3. Anticipated Process vs Reality: Discovery in Arbitration
Discovery = the phase where each party asks the other for documents, evidence, etc.
Using Redfern Schedules: A Redfern Schedule is a tool to organize discovery requests clearly.
It usually has a simple table format with these columns:
| Document Requested | Relevance and Materiality | Response | Tribunal Decision |
|---|
Each request will say:
- What document is wanted?
- Why is the document important for the case?
- What time period or specific issue is involved?
✅ Why use Redfern Schedules?
- They make the discovery process structured, clear, and easier to manage.
- They help tribunals quickly see what’s disputed and make rulings.
4. Timetable for Discovery
Timetable for submission, response, reply, determination by Tribunal
A timetable is established for:
Submission of discovery requests by the requesting party.
Responses to requests: The other party must provide or object to the documents.
Replies and determinations by the tribunal: The tribunal will review any disputes and may issue orders regarding the requests.
Review, reformulating requests, redaction, partial production, half-hearted compliance and adverse inferences
After the initial discovery requests, parties may review the documents received and may need to reformulate their requests if the evidence isn’t sufficient or relevant. This could lead to:
- Redaction (removing sensitive information from documents).
- Partial production (producing only parts of the requested documents).
- Half-hearted compliance (where parties don’t fully comply with discovery orders).
If a party fails to comply with discovery requests, the tribunal may draw adverse inferences, meaning they may assume that the withheld evidence would have been harmful to the party’s case.
e.g. If a party refuses to hand over an important document, the tribunal might assume that document would not support their case.
Discovery in international arbitration is where civil and common law approaches meet, and it follows guidelines like the IBA Rules on Evidence. The process usually involves using Redfern Schedules for document requests, and the tribunal sets a clear timetable for submissions and responses. There may be issues such as redactions, partial production, or half-hearted compliance. If a party fails to fully comply, the tribunal might make adverse inferences.
I. Witness Evidence
1. PO1 and Mandatory Content for Statements
A Procedural Order (PO1) is typically issued by the tribunal at the start of the arbitration to set the rules and deadlines for the procedure. One of the things it often covers is the content required for witness statements. These statements must contain the following:
Identity, role, relationship to party and dispute
The statement must clearly identify the witness (e.g., name, occupation), their role in the case, and their relationship to the parties involved in the dispute.
Description of education and qualifications
The witness needs to provide a brief background of their education and qualifications, particularly if they are an expert witness.
Affirmation of truth of the statement
The witness must affirm that their statement is true to the best of their knowledge and belief.
Statements of fact and basis for knowledge belief
The witness should clearly state what facts they know, how they know them, and the basis of their knowledge or belief. This ensures that the tribunal understands where the information is coming from.
Supporting documentary evidence
Any documentary evidence that supports the witness’s statement must be included to provide context or proof of their claims.
2. Timing of statements
The timing for submitting witness statements depends on the style of submissions agreed upon by the parties and the tribunal:
Memorial Style (together with pleadings)
In this approach, the witness statements are submitted alongside the pleadings. This means that both the legal arguments (pleadings) and witness statements are presented at the same time.
Pleadings Style (after pleadings discovery but before experts)
In this approach, witness statements are submitted after the pleadings and discovery phases but before the expert reports are filed. This allows the parties to exchange evidence and arguments before involving experts.
3. Key Questions for Witness Statements
1 | 💡 To stand as evidence in chief? |
Normally, when a witness testifies, they need to speak directly in the hearing to present their side — this is called giving evidence-in-chief.
However, in international arbitration:
- Instead of having the witness speak everything out loud, their written witness statement can replace the oral evidence-in-chief.
- This saves time during hearings.
- The written statement becomes their official main testimony (“primary evidence”).
✅ Practical result:
- During the hearing, the witness does not need to re-read their statement.
- They can go straight to cross-examination by the other party.
Example: A witness writes a 10-page statement explaining what happened in a contract dispute. In the hearing, they just confirm the statement is true, and then the other party immediately starts questioning them.
1 | 💡 To be available for cross-examination? |
After a witness statement is submitted:
- The opposing party usually has the right to cross-examine the witness.
- Cross-examination means asking tough questions to test whether the witness is credible, truthful, or consistent.
✅ Why important:
- Without cross-examination, a witness’s story might go unchallenged.
- Cross-examination helps the tribunal assess the reliability of the witness.
Practical point: If a party submits a witness statement but refuses to produce the witness for cross-examination, the tribunal may give little or no weight to that statement.
1 | 💡 To be in the hearing room before giving evidence? |
This is about “witness sequestration” — keeping witnesses out of the hearing before they testify. Sometimes, tribunals do not allow a witness to sit in the hearing room and listen to other witnesses before giving their own testimony. This is to prevent them from being influenced by what others say.
✅ Why important:
- Ensures that each witness’s evidence is independent and genuine.
- Avoids “coaching” or “changing stories” based on hearing what others have said.
Practical approach:
- The tribunal will usually issue directions on this point early.
- In simple cases or where parties agree, witnesses may be allowed to stay.
1 | 💡 Costs of witness? |
Having witnesses can involve significant costs, such as:
- Preparation fees for expert witnesses.
- Travel, accommodation, food for factual witnesses.
- Time away from work (lost income for the witness).
✅ Key issue:
- Who is responsible for paying these costs?
- Often, each party bears their own witness costs initially. Later, in the final award, the tribunal might order the losing party to pay part of the winning party’s costs (including witness-related expenses).
Example: If Company A flies 3 witnesses from Europe to Hong Kong for a 3-day hearing, it could cost a lot. If Company A wins, the tribunal might order Company B to reimburse those costs.
1 | 💡 Special Case: No Need for Witnesses? |
Sometimes, in simple cases like:
- Debt claims (e.g., “Party A owes Party B $1 million”),
the parties might agree that:
- No witnesses are needed.
- The case can be decided purely on documents without any hearings.
✅ Result:
- Saves time and costs.
- The tribunal decides based on written submissions only.
J. Expert Evidence
- It’s crucial to appoint experts based on their discipline and the issues at hand.
- Party-appointed experts are controlled by the party but may be seen as biased, while tribunal-appointed experts are neutral but offer less control to the parties.
- Experts are required to provide a statement of instructions and statement of independence to ensure clarity and neutrality.
- Experts should meet and produce joint statements to resolve differences before the hearing.
- The CIArb Protocol provides best practices for using expert witnesses, promoting transparency and independence.
1. Identifying Expert Disciplines and Issues
When experts are involved in an arbitration, it’s essential to ensure that evidence is given in the right disciplines for the right issues. For example:
- If the dispute involves construction, an engineering expert might be needed.
- If the issue is related to finance, a financial expert or accountant might be appointed.
By ensuring that experts are appointed for the specific issue at hand, the tribunal can better assess the relevance and credibility of their testimony.
2. Party-Appointed vs. Tribunal-Appointed Experts
There are two main categories of expert witnesses:
1️⃣ Party-Appointed Experts
These experts are appointed by one of the parties to the arbitration.
- Pros: The party has more control over the expert’s instructions and selection.
- Cons: There may be concerns about bias, as the expert is hired by one side.
2️⃣ Tribunal-Appointed Experts
These experts are appointed by the tribunal itself.
Pros: The tribunal can appoint an independent expert to ensure fairness and neutrality, particularly in cases where both parties disagree on the expert’s findings.
Cons: The parties may have less control over the expert’s selection and the instructions they receive.
3. Requirements for Expert Witnesses
To ensure that expert testimony is fair and reliable, certain requirements must be met:
(1) Statement of Instructions
The expert must provide a statement of instructions that explains what they have been asked to do, and the specific issues they are addressing. This helps ensure transparency in the process.
(2) Statement of Independence
Experts must also provide a statement of independence, confirming that they are neutral and not influenced by the party that appointed them. This statement ensures the objectivity of the expert’s testimony.
(3) Expert Meetings and Joint Statements
- Experts are often encouraged (or required) to meet before the hearing to discuss their differences and agree on areas of common ground.
- After these meetings, experts may be required to produce a joint statement, which summarizes their agreed-upon conclusions and highlights the areas of disagreement. This helps streamline the process and makes it easier for the tribunal to assess the experts’ testimony.
4. Chartered Institute of Arbitrators Protocol
The Chartered Institute of Arbitrators (CIArb) has developed the Protocol for the Use of Party-Appointed Expert Witnesses in International Arbitration.
This protocol sets out best practices for using expert witnesses, ensuring that they are used effectively and ethically in arbitration proceedings. It encourages:
- Clear instructions and transparency in the expert’s role.
- Emphasis on the independence of the expert.
- The use of joint meetings and joint statements to help resolve areas of disagreement before the hearing.
K. The Hearing
- Document-only arbitration may be possible, but hearings are required when witnesses need to be examined or parties request oral submissions.
- The decision to hold a hearing (physical or virtual) should be made early, with clear timelines for scheduling and addressing logistical issues.
- A chess clock can be used to allocate time during the hearing, ensuring both parties have equal opportunities to present their case.
- Pre-hearing and post-hearing submissions help streamline the process.
- The concept of bifurcation—separating liability and quantum—can save time and costs, but in practice, it may not always be efficient.
1. Arbitrations Decided on Documents Alone
Some arbitrations can be decided entirely based on documents, without the need for a hearing. This is often referred to as a documents-only arbitration, where the tribunal reviews the written submissions, evidence, and witness statements to make a decision.
However, a hearing may be necessary in certain cases, such as when:
- Disputed facts require witness testimony.
- Parties demand oral submissions to present their case in person.
2. When is a Hearing Necessary?
A decision on whether an evidential hearing is required should be made early in the process to avoid delays and uncertainty.
1 | 💡 Is an evidential hearing required? |
If the facts are disputed and the parties need to examine witnesses, a hearing may be necessary.
An evidential hearing is a formal session where:
- Parties present their evidence (e.g., witness testimony, expert reports).
- Parties make oral arguments.
- Witnesses may be cross-examined.
✅ When is it needed?
- If facts are disputed: When the two sides disagree about important factual issues (for example: “Did the goods arrive on time?” “Was the contract properly signed?”).
- If witnesses need to be questioned: When one party wants to challenge the evidence given by the other party’s witnesses.
If there is no real dispute about the facts, and the case is mostly about legal interpretation, sometimes the tribunal can decide the case based on written submissions without a hearing.
👉 Example: If Company A says it delivered goods on January 1, and Company B says they never received them, this factual conflict probably requires a hearing with witness testimony.
1 | 💡 Physical or Virtual? |
In recent years, there has been an increase in virtual hearings, especially for international arbitrations where the parties and tribunal are spread across different locations.
✅ Physical Hearings: Everyone — parties, witnesses, tribunal — travels to the same physical location (e.g., an arbitration center like HKIAC in Hong Kong, or ICC in Paris).
- Advantages:
- Easier to assess witness credibility (body language, tone).
- More formal atmosphere, which can sometimes make proceedings more organized.
- Disadvantages:
- Expensive: Travel, hotels, venue rental.
- Logistical difficulties, especially with parties from multiple countries.
✅ Virtual Hearings: Held over video conference (e.g., Zoom, MS Teams). Became very popular during and after COVID-19, especially for international cases.
- Advantages:
- Saves a lot of time and money.
- More flexible scheduling.
- Disadvantages:
- Harder to control technical problems (bad internet, time zones).
- Slightly harder to assess witnesses’ demeanor and credibility online.
The decision between physical or virtual hearings will depend on factors like:
The complexity of the case.
If the case involves many witnesses, experts, and complicated documents, physical hearings may be better.
The convenience for the parties and tribunal.
If parties and arbitrators are spread across many countries, virtual hearings can be much more practical.
The need for direct witness examination.
If cross-examination is crucial to the outcome, and credibility is highly contested, parties may prefer in-person hearings.
3. Timetable for Hearing
The timing and logistics of the hearing are crucial for an efficient process. Some key points include:
- Fixing hearing dates as early as possible, along with the venue.
- Addressing practical issues like:
- Transcription: Who will transcribe the hearing (e.g., stenographer)?
- Translation: If required, which documents or witness statements need translation?
- Hearing bundles: Preparing and organizing all documents and evidence for the hearing.
- Room bookings: Ensuring the hearing venue is available.
- A chess clock method might be used to allocate time during the hearing. This is a technique where each party is given a set amount of time to present their case, and the time is tracked. The goal is to ensure that both parties have equal time and that the hearing runs efficiently.
- The use of a chess clock helps keep the hearing focused and avoids unnecessary delays.
4. Pre-Hearing and Post-Hearing Submissions
Pre-hearing and post-hearing submissions are common:
Pre-hearing: Parties may submit additional materials, like evidence or a summary of their arguments, in preparation for the hearing.
Post-hearing: After the hearing, parties may submit a final post-hearing brief or additional documents to address issues raised during the hearing.
5. Bifurcation: Separating Liability and Quantum
Bifurcation in arbitration refers to dividing the proceedings into two or more phases. This approach is used when the tribunal decides that certain issues should be addressed separately, rather than all at once. The tribunal may handle specific matters first, with the results of these phases potentially impacting the rest of the case.
- Bifurcation divides arbitration into phases, typically addressing jurisdiction, liability, and quantum separately.
- Advantages include potential savings in time and costs, especially if the early findings resolve the dispute.
- Drawbacks include delays in the substantive hearing and potential disadvantages for claimants.
- Respondents often favor bifurcation, while claimants may find it disadvantageous due to delays in addressing the main issues.
(1) Should Liability and Quantum Be Dealt with Separately?
In technical disputes, especially in areas like energy or infrastructure, issues of liability (responsibility for the defect) and quantum (the value of the loss or damage caused by the defect) are often complex and separate. Here’s how this can be handled:
In theory, if the Respondent (defendant) wins on liability, the costs associated with quantum evidence are wasted because there’s no need to address the amount of damages.
As a result, splitting the case into two phases—liability first, then quantum—can save time and costs. This is called bifurcation.
However, in practice, the availability of the parties and the tribunal, as well as the time required to reach a decision on liability, may outweigh the potential cost savings from bifurcating the case.
For example, splitting the case might take longer than dealing with both issues at once, especially if the parties or tribunal have limited time for hearings.
(2) Typical Uses of Bifurcation
Jurisdiction and Merits
First phase: Determine whether the tribunal has jurisdiction to hear the case.
If the tribunal rules that it lacks jurisdiction, the case ends there, and no further proceedings are needed. This can save both time and costs if the jurisdictional challenge is successful.
Liability and Quantum
Second phase: Address the liability issue before proceeding to quantum (the value of damages).
In a case involving complex issues of liability (e.g., fault or responsibility for an incident), separating this issue from the quantum phase may streamline proceedings. If the tribunal finds that there is no liability, there’s no need to address the amount of damages.
(3) Advantages of Bifurcation
Saves Time and Costs
- Efficiency: If the findings in one phase (e.g., jurisdiction or liability) resolve the entire dispute, bifurcation can save considerable time and costs by avoiding unnecessary proceedings.
Encouraged by Legal Frameworks
Efficiency in arbitration is encouraged by laws and rules, like:
- Section 46 of the Arbitration Ordinance (Hong Kong)
- Article 13 of the HKIAC Rules
These provisions push tribunals to manage the arbitration process efficiently, which can include bifurcation if it leads to a faster resolution.
(4) Drawbacks of Bifurcation
Delay in Substantive Hearing
- Bifurcation can delay the substantive hearing because the tribunal first resolves issues like jurisdiction or liability before addressing the full merits of the case.
- Mini-trial phase: The bifurcation process can lead to an additional “mini-trial” phase, during which time and resources are spent on issues that might not be relevant if the tribunal decides against jurisdiction or liability.
Claimant Disadvantage
- If the tribunal decides to bifurcate the case, claimants may suffer delays. This can be particularly disadvantageous if the substantive claims (e.g., damages) cannot progress while the tribunal deals with preliminary issues.
(5) Who Benefits from Bifurcation?
Respondents (defendants) often favor bifurcation, especially if they are challenging the tribunal’s jurisdiction or want to delay discussions on liability and damages. If jurisdiction is not established, they avoid addressing the merits of the claim entirely.
Claimants, on the other hand, may not benefit as much from bifurcation. While bifurcation could result in a quicker decision on jurisdiction or liability, it could also delay the progress of their substantive claims and prolong the dispute resolution process.
A survey of parties and counsel reveals varying levels of willingness to forego certain procedural steps in order to reduce costs and streamline the process. For example, many parties and legal teams are opting for more concise submissions, aiming to limit page counts and avoid excessive documentation. This approach is not just about reducing length but also about being creative with formatting, such as expanding margins or adjusting font sizes, to condense information.
III. Practical Issues
A. The Role of Memorials and the Issue of Length
Memorials are a key part of the arbitration process, where both sides submit their detailed arguments. However, the length of memorials can become problematic. One example shared was a case where the first round memorial was around 150 pages, and the third round stretched to 400 pages per side. This increase in volume, while not always necessary, is often the result of legal teams’ efforts to cover all potential points, even those that may seem less relevant to the tribunal.
Long memorials are challenging for associates and younger lawyers, who are tasked with reading, analyzing, and summarizing voluminous documents. Often, important information gets lost in the sheer volume of material.
From a lawyer’s perspective, there is often pressure to address every potential issue, as clients may want to ensure all possible angles are covered. However, it is crucial to recognize that tribunals typically prefer short, succinct submissions that get to the point. Tribunals are not interested in reading long, repetitive arguments that don’t advance the case significantly.
The key is to balance thoroughness with brevity, addressing only the most crucial issues that will influence the outcome of the arbitration. As one example, a former firm policy emphasized the importance of brevity and clarity: if a tribunal cannot read your witness statements and memorials within the time allotted (including travel time between hearings), the submission is too lengthy.
Typically, submissions should range around 100 pages or less, although larger cases with multiple complex issues may result in longer documents. Submissions exceeding 100 pages are generally seen as excessive, and tribunals may question their relevance.
However, there are instances where a client’s input may demand longer submissions, even if the case could be addressed more concisely. One example involved a straightforward case that could have been resolved with a brief 6-page submission, but the client’s nervousness led them to demand additional arguments, resulting in a much longer document.
B. Technological Challenges and Human Limitations
Arbitrators, lawyers, and clients often face technological and logistical challenges in today’s arbitration process. For instance, early cases were conducted with less reliable technology, such as poor Wi-Fi, which sometimes led to delays or issues with delivering submissions. Today, virtual hearings are common, which, although convenient, come with their own set of challenges.
Additionally, there are human limitations to consider when reading extensive memorials. A lawyer shared an experience where they had to read a 15-page submission and then face the challenge of remembering details as they moved through the document. In cases with hundreds of pages, it becomes difficult for anyone, regardless of experience, to process all the information without forgetting key points, especially if the document is not properly organized.
C. Client Expectations and Managing Submissions
Managing client expectations is also a significant part of the process. In some cases, clients may want to include all potential arguments in the submission, even if they are less relevant to the case. This can be due to the client’s inexperience in arbitration or their desire to be thorough, but it often leads to unnecessarily long documents.
During reply rounds, the situation can become even more complex. While the initial submission might address the core issues, reply submissions can end up reiterating points already made. As a result, tribunals are left to sift through the same arguments over and over without gaining new insights.
D. Jurisdictional Challenges: Timing and Strategy
Jurisdictional challenges are often raised at the start of the arbitration to avoid unnecessary proceedings. However, raising a jurisdictional challenge late in the process can complicate matters. While some tribunals might not entertain objections raised after a certain point, tribunal flexibility exists, especially if a party was not fully involved or did not participate in earlier stages.
In some rare instances, tribunals may still consider late jurisdictional challenges to ensure that the fairness of the process is upheld, particularly when there is a concern that procedural issues could lead to the award being set aside at a later stage. The jurisdictional challenge in this case was predicated on the necessity of reviewing the claimant’s statement of claim before formulating a solid challenge. The claimant’s page was not yet available, so the respondent requested additional time to assess the statement of claim. The opposing party did not object to this approach. As a result, the timeline was structured to allow the respondent to:
- Review the statement of claim after it was submitted.
- Take several weeks to decide whether to proceed with a jurisdictional challenge.
This approach was a strategic decision to ensure the respondent had ample time to properly analyze the claimant’s position before deciding on further legal actions. The extra time also allowed the respondent to adjust the timeline if necessary, without unduly delaying the proceedings. The situation was less extreme than the example of Eric’s scenario, but it demonstrates how respondents sometimes need time to assess claims before moving forward.
E. Last-Minute Participation
In one particular case, the responding party had initially refrained from participating. However, two days before the jurisdictional hearing, the respondent engaged legal counsel. This last-minute involvement raised concerns, as the full case had already been framed and the timetable had been established. The institutional pressures to keep the arbitration on track and avoid delays were evident, as both the claimant and the institution were keen to proceed without further disruptions.
It’s not uncommon for parties to engage in strategic delay tactics to gain an advantage. These tactics, such as delaying participation or objecting to procedural issues, are often used to undermine the arbitration process or to gain a strategic edge. These challenges are part of the procedural landscape and can result in increased complexity in managing the arbitration timeline.
Class 6 - Challenges to Awards and Public Policy Considerations
I. Introduction
A. Overview
Imagine you have spent years working on an international arbitration: constituting the tribunal, preparing submissions, attending hearings. Now, after all that effort, you hold a lengthy award — fifty to sixty pages or more — and it is not in your favor.
At this point, critical questions arise:
- What can you do if you believe the award is flawed?
- Are there errors in the application of law?
- Was the tribunal improperly constituted?
- Were there procedural irregularities?
Understanding the challenge process is essential at this juncture.
This session focuses on the mechanisms available to challenge an arbitral award, with a specific emphasis on the public policy exception.
We will cover:
- How awards can be challenged based on public policy
- How public policy is defined in Hong Kong law and international arbitration
- Examples of how public policy has been applied in actual cases
B. Distinguishing Challenges from Appeals
Important: challenging an international arbitral award is not the same as appealing a court judgment.
For example, in Hong Kong, you cannot simply file an appeal because you believe the tribunal made an error of law.
This is due to:
- The New York Convention, which governs international arbitration
- Article V of the Convention, which limits the grounds for refusing recognition and enforcement of an award
Thus, recourse against an arbitral award is highly restricted compared to domestic court appeals.
II. Public Policy – A Ground to Annul or Refuse Enforcement
A. Ground for Annulment
This lecture zeroes in on a particular ground for challenge: the public policy exception, found in:
Article V(2)(b) of the New York Convention
Under the New York Convention, courts may refuse recognition or enforcement of an arbitral award if doing so would violate the public policy of the enforcing country.
Set aside proceedings (annulment) require a party’s application.
Refusal of enforcement can be initiated by the court itself, even if no party requests it.
Article 34(2)(b)(ii) of the UNCITRAL Model Law
Article 34(2)(b)(ii)
An arbitral award may be set aside by the court… only if:
(b) the court finds that:
…
(ii) the award is in conflict with the public policy of this State.Under the Model Law, an arbitral award may be set aside if it is in conflict with the public policy of the state.
Section 81 of the Hong Kong Arbitration Ordinance
Hong Kong has adopted the Model Law verbatim through Section 81 of its Arbitration Ordinance. Thus, Hong Kong courts apply the same language and standards as the Model Law.
Other national arbitration regimes
The public policy ground is a recognized concept worldwide, including:
PRC Arbitration Law (Section 58): Courts may set aside awards violating public policy.
PRC Arbitration Law, Section 58
人民法院认定该裁决违背社会公共利益的，应当裁定撤销。（If People’s Court determines that the award is against public policy, such award shall be set aside.）
UK Arbitration Act (1996 and upcoming revision): Both recognize public policy as a ground for refusing enforcement or setting aside an award.
While “public policy” seems like a simple phrase, its actual scope and application are far more complex.
B. Catch-All Provision — But Narrowly Interpreted
Public policy often appears at the end of statutory lists of grounds for challenging awards. This positioning tempts parties to treat it as a catch-all argument, claiming any dissatisfaction as a “public policy” issue.
However, courts in pro-arbitration jurisdictions like Hong Kong, Singapore, and England, have firmly resisted such expansive interpretations. Instead, courts emphasize:
- Public policy challenges are permitted only in highly exceptional circumstances.
- Mere disagreement with the tribunal’s findings of fact or law is insufficient.
- Public policy is not an avenue for substantive review of the merits of the case.
In other words, Public policy is often used as a very narrow exception where a court can interfere with an arbitration award (for example, to set it aside or refuse to enforce it). Most national courts have annulled international awards on the basis of public policy only in limited, exceptional circumstances.
In most jurisdictions, the public policy doctrine is not a basis for reviewing the substance of the arbitrators’ award in an annulment action, and has generally been invoked only in cases of clear violations of fundamental, mandatory legal rules, not in cases of judicial disagreement with a tribunal’s substantive decisions or procedural rulings.
👉 Courts do not use public policy as an excuse to:
- Re-evaluate the merits of the tribunal’s decision (whether the tribunal made the “right” or “wrong” decision).
- Disagree with the tribunal’s legal interpretations or procedural rulings.
Instead, public policy challenges are usually accepted only when:
- There is a clear violation of fundamental, mandatory legal principles.
- The breach is so serious that it shocks the conscience of the legal system.
e.g. Under French law, the bar for public policy violation is very high: the violation must “manifestly affect an essential rule of law or a principle of fundamental importance.” In other words, the breach must be obvious and involve a core legal principle (like fundamental human rights, due process, or rules against corruption or fraud).
Public policy is a shield, not a sword — courts use it to protect their fundamental values, not to re-argue cases. Annulments based on public policy are extremely rare in international arbitration. Most mistakes or disagreements with the tribunal’s reasoning are not enough to invoke public policy.
Successful invocation of public policy typically requires showing a fundamental defect in the arbitration, such as:
- Serious procedural irregularities
- Breach of basic notions of morality or justice
- Violations of rules essential to the state’s legal order (e.g., anti-money laundering, anti-bribery laws)
Simple mistakes by the tribunal — even if they involve errors of law — do not amount to public policy violations.
C. Refuse Enforcement
1. Article V, New York Convention
Under Article V of the New York Convention (1958), courts can refuse to enforce an arbitral award in specific situations. These are exceptions, not the rule — enforcement is the default.
This means that each country decides what its own public policy is — this is called national public policy.
Article V
- Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
(a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or
(b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or
(c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or
(d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or
(e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.- Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or
(b) The recognition or enforcement of the award would be contrary to the public policy of that country.
Interestingly, this provision states that recognition “may be refused”, giving rise to a discussion about judicial discretion, which varies between jurisdictions.
The use of “may” in Article V of the New York Convention has sparked debate:
- In Germany, courts interpret “may” as shall — they must refuse enforcement if public policy is violated.
- In England, courts retain discretion — even with a violation, they may still enforce if justice so requires.
This seemingly minor linguistic difference can have major consequences.
Example: Deutsche Telekom Case (Singapore, 2023)
Although not a public policy case, this dispute illustrates how the interpretation of “may” has practical significance. The Singapore Court of Appeal had to determine whether it had discretion to enforce an award that had been refused enforcement by an English court.
It shows how fine-grained differences in treaty language can lead to real-world legal divergence.
2. General Principles
Paralleling the NY Convention, national arbitration legislation uniformly permits the non-recognition of awards because they violate public policy.
One of the most frequently invoked bases for refusing to recognise an award is the public policy exception.
UNCITRAL Model Law (Article 36(1)(b)(ii)): Allows courts to set aside awards in conflict with public policy
Enforcement may be refused if it would be contrary to the public policy of the enforcing state.
Hong Kong Arbitration Ordinance (Section 89(3)(b)): For refusing enforcement (if award was made abroad)
Courts may refuse enforcement if doing so would be contrary to public policy.
So, most legal systems align with the NY Convention, but they interpret “public policy” in their own way.
3. NZ Standards & Divergent Approaches under NYC
An award is contrary to the public policy of New Zealand if:
(a) the making of the award was induced or affected by fraud or corruption; or
(b) a breach of the rules of natural justice occurred –
(i) during the arbitral proceedings; or
(ii) in connection with the making of the award.
New Zealand’s arbitration law gives concrete examples of what counts as a public policy violation:
- The award was obtained through fraud or corruption, or
- There was a breach of natural justice, either during the arbitration or in making the award.
This is helpful because it shows how broad or narrow a country might interpret public policy.
4. Key Principles and Differences Between Countries
In arbitration, when a country is asked to enforce a foreign arbitral award, it has the right to refuse only in very limited situations. One of those is if enforcing the award would violate that country’s public policy.
This is called “national public policy.”
✅ Why is it considered “national”?
- The text of Article V(2)(b) says enforcement can be refused if it’s contrary to the public policy “of that country”.
- Courts are not applying international standards, but their own domestic legal values and principles. That’s why different countries may interpret public policy in different ways.
The court in the country where enforcement is being sought (the judicial enforcement forum) decides whether public policy has been breached. The idea is: each country has the sovereign right to protect its fundamental legal principles.
1️⃣ Germany
- Treats “may” as “shall” → If there’s a violation of public policy, enforcement must be refused.
- This approach is strict.
2️⃣ England
- Treats “may” as discretionary → Even if public policy is affected, the court can still enforce the award if appropriate.
- This approach is flexible and pragmatic.
3️⃣ France
French arbitration law sets a very high bar for public policy violations. To succeed, the violation must be:
“Of such a nature as to affect in a manifest manner a central rule of law or a principle of fundamental importance.”
This wording highlights the extraordinary nature of the exception — it is not enough to show mere legal error.
4️⃣ New Zealand
New Zealand has gone further in defining public policy. Under the New Zealand Arbitration Act, an award may be set aside only if its making was:
- Induced or affected by fraud or corruption
- Involved a breach of natural justice (i.e., due process)
- Violated public policy in connection with the proceedings or the making of the award
This is a precise formulation — moving away from ambiguity and toward clearly defined triggers.
5. Pro-Enforcement Bias of the New York Convention
To properly interpret “public policy,” we must remember the overarching goal of the New York Convention:
To promote the global enforcement of arbitral awards and provide international commercial parties with a reliable dispute resolution mechanism.
It favors enforcement.
The exceptions (like public policy) are interpreted narrowly.
This is different from the older 1927 Geneva Convention, which had broader grounds to refuse enforcement, like:
…contrary to the public policy or the principles of the law of the country…
In short, the NY Convention implies a pro-enforcement bias, and courts should be cautious when applying exceptions like public policy, ensuring they do not undermine the Convention’s purpose.
II. How is Public Policy Defined?
A. Open Discussion: How Should It Be Defined?
💭 Eric King posed a hypothetical: Suppose the Hong Kong government asked you to redefine public policy in more concrete terms. What would you suggest?
📚 Suggested definitions from students:
- State-reserved matters: Issues only the state should decide (e.g., criminal law)
- Justice and morality: Fundamental conceptions of fairness
- Perversity test: Decisions so unreasonable that no rational arbitrator could have made them
- Violation of domestic law
- Contravention of mandatory rules
- Matters affecting third parties (e.g., family law, competition law)
- International public policy violations
All of the above have been raised in real cases, showing that while “public policy” is elusive, it is not unlimited. Courts strive to balance:
- Respect for party autonomy and arbitration
- Protection of core legal values and public interest
**Examples of What Might Constitute a Public Policy Violation: **
- Criminal matters: Arbitrators cannot impose criminal penalties; such matters lie with courts
- Procedural injustice: Gross denial of due process
- Awards affecting non-parties: Breach of procedural or substantive fairness involving third-party rights
- Contravention of international obligations or national economic regulation
- Awards based on fraud or corruption
B. The Unreasonableness Test
One fundamental question arises when determining whether an arbitral award should be challenged based on public policy: What constitutes unreasonableness? If an arbitral decision is so extreme or perverse that no reasonable arbitrator would have issued it, then it may fall under the category of violating public policy. However, it is crucial to note that merely disagreeing with the outcome of an award or finding it unfair does not make it a public policy violation. This principle has been consistently raised in applications to set aside or refuse enforcement of awards.
The concept of public policy can often be linked to domestic law, with some suggesting that any violation of a country’s domestic law should be enough to set aside an award. But it is more complex. Public policy may also involve violations of mandatory rules, such as those pertaining to criminal law, family law, or areas affecting third parties, like competition law. A key example is when an arbitral award might violate international policies or treaties.
In discussing public policy, we are not just considering domestic laws but also international laws, including treaties. The overarching principle, however, is that public policy exceptions are to be interpreted restrictively.
C. Restrictive Approach
Despite the potentially expansive character of public policy, courts in most jurisdictions are very reluctant to invoke the public policy exception.
Courts have underscored the narrow, exceptional character of the public policy defence in recognition proceedings.
To avoid opening the floodgates, courts are reluctant to use public policy as a ground for refusal unless the violation is so fundamental that it affects the core values of the legal system. Courts often emphasize that public policy exceptions are narrow and only apply in exceptional cases where the fundamental principles of justice are breached.
Courts would uphold a public policy ground to refuse recognition and enforcement of an award only when the most fundamental and core values of a legal system have been deviated from.
| Jurisdiction | Test for Public Policy |
|---|---|
| USA | Only if enforcement violates basic morality and justice |
| England | Only if enforcement is clearly injurious or wholly offensive |
| Switzerland | Only if award disregards essential legal values |
| Australia | Only if enforcement violates core morality and justice |
| Hong Kong | Only if award is fundamentally offensive to justice |
1. United States — Parsons & Whittemore case
According to the Second Restatement of Conflict of Laws, a foreign arbitral award can only be refused on public policy grounds if enforcing the award would violate the basic notions of morality and justice. While these terms are vague, they reflect the need for public policy exceptions to be reserved for the most extreme cases.
Parsons & Whittemore Overseas Co. v. Societe General de l’Industrie du Papier (RAKTA), 508 F2d 969, 977 (2d Cir 1974).
Perhaps more probative, however, are the inferences to be drawn from the history of the Convention as a whole. The general pro-enforcement bias informing the Convention and explaining its supersession of the Geneva Convention points toward a narrow reading of the public policy defense. An expensive construction of this defense would vitiate the Convention’s basic effort to remove preexisting obstacles to enforcement.
We conclude, therefore, that the Convention’s public policy defense should be construed narrowly. Enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum state’s most basic notions of morality and justice.
Cf. 1 RESTATEMENT (SECOND) OF THE CONFLICT OF LAWS S 117, comment c, at 340 (1971); Loucks v. Standard Oil Co., 224 N.Y. 99， 111 (1918).
- The public policy defence must be interpreted narrowly.
- Enforcement can only be refused if it violates the most basic ideas of morality and justice in the United States.
- Courts should not lightly use public policy to block enforcement, or it would defeat the whole point of the New York Convention (which is to make enforcement easier).
2. England — Deutsche Schachtbau case
In cases like the Deutsche Schöpfung case, the English courts have held that an arbitral award may only be set aside if it is clearly injurious to the public good or wholly offensive to the ordinary, reasonable, and fully informed public.
Deutsche Schachtbau-und Tiefbohrgesellschaft m.b.H. v. Shell International Petroleum Co. Ltd., Court of Appeal, England and Wales, 24 March 1987, [1990] 1 A.C. 295
[e]ncompasses cases where “the enforcement of the award would be clearly injurious to the public good or, possibly, enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the state are exercised”; [c]onsiderations of public policy can never be exhaustively defined, but they should be approached with extreme caution.
The English Court said public policy means enforcement would have to be:
- Clearly harmful to the public good, or
- Totally offensive to an ordinary, reasonable, well-informed member of the public.
Courts should use the public policy exception very carefully and cautiously.
3. Switzerland — X S.p.A. v. Y S.r.l.
Swiss courts allow an award to be set aside if it disregards widely recognized values that form the basis of any legal order.
X S.p.A. v. Y S.r.l., Federal Tribunal, Switzerland, 8 March 2006, Arrêts du Tribunal Fédéral (2006) 132 III 389
An arbitral award contravenes public policy “if it disregards essential and widely recognized values which, according to the conceptions prevailing in Switzerland, should form the basis of any legal order”.
In Switzerland, a public policy violation happens only if an award ignores essential and widely accepted values — values that are foundational to any legal system in Switzerland.
Again, a very high threshold is required.
4. Australia — Traxys case
Traxys Europe S.A. v. Balaji Coke Industry Pvt Ltd., Federal Court, Australia, 23 March 2012, [2012] FCA 276
It is only those aspects of public policy that go to the fundamental, core questions of morality and justice in [the] jurisdiction [where enforcement is sought] which enliven this particular statutory exception to enforcement.
In Australia, only violations of fundamental morality and justice in Australia would justify refusing enforcement.
Minor disagreements or unfairness do not qualify — it must go to the heart of basic justice.
5. Hong Kong — Hebei Import & Export case
In Hong Kong, the landmark case of Hebei Imported Export v. Polytech (1999) offers the leading judicial position on public policy. The judgment, issued by Justice Bukhari, holds that an arbitral award may be set aside if it is so fundamentally offensive to the jurisdiction’s notions of justice that it cannot reasonably be overlooked. This case remains a cornerstone in Hong Kong’s legal framework on public policy.
Hebei Import & Export Corp. v. Polytek Engineering Co. Ltd., Court of Final Appeal, Hong Kong, 9 February 1999, [1999] 2 HKC 205
In my judgment, the position is as follows. Before a Convention jurisdiction can, in keeping with its being a party to the Convention, refuse enforcement of a Convention award on public policy grounds, the award must be so fundamentally offensive to that jurisdiction’s notions of justice that, despite its being a party to the Convention, it cannot reasonably be expected to overlook the objection.
In Hong Kong, the court said an award must be so fundamentally offensive to Hong Kong’s concept of justice that it would be unreasonable to enforce it.
Hong Kong courts also apply the narrow, exceptional approach to public policy defenses.
D. Public Policy ≠ National Policy
1. National Policy vs. International Public Policy
The distinction between national policy and international public policy is key when discussing challenges to the enforcement of arbitral awards.
- National Policy: This refers to a country’s domestic laws and political interests. However, in international arbitration, national policy alone is generally not enough to prevent enforcement of an award.
- International Public Policy: This considers broader principles, often embedded in international conventions like the New York Convention, and must align with global legal standards. Public policy in this context is more supranational and focuses on principles that apply across borders.
As seen in various cases, when we deal with public policy in arbitration, it is not enough to simply focus on domestic law. Instead, we must consider international legal instruments and agreements like the New York Convention. This broadens the scope of what constitutes public policy and includes considerations that go beyond national legal interests.
For instance, a US court addressed a case where an arbitral award was challenged on the grounds that it conflicted with US domestic law. However, the court rejected the challenge, emphasizing that public policy in this context is not just about national legal positions but must align with the broader international framework, such as the New York Convention.
A similar issue arose in the US case involving the Ministry of Defense and the Islamic Republic of Iran (2011), where a challenge was raised against the enforcement of an award in favor of Iran. The court ruled that national policy alone does not suffice to justify the non-enforcement of an award, especially when international law is involved.
2. Key Case Examples
(1) Parsons & Whittemore Overseas Co. v. Societe General de l’Industrie du Papier (RAKTA), 508 F2d 969, 977 (2d Cir 1974).
Background: A challenge was raised against enforcing an arbitral award in favor of Egypt, arguing it conflicted with US national policy (political disagreement with Egypt).
What Overseas Is Arguing:
- The U.S. cut ties with Egypt, and the government (specifically AID) stopped funding Overseas’ contract with an Egyptian company (RAKTA).
- Overseas says: “As a loyal American company, we had to drop the project because the U.S. government no longer supported it.”
- They claim that if a court forces them to go back and finish the project (despite U.S. policy), it would violate U.S. public policy—meaning U.S. courts shouldn’t enforce such a ruling.
Court Ruling: The court rejected the challenge, clarifying that national policy alone cannot prevent enforcement. The public policy defense must be narrow and aligned with international legal standards, particularly the New York Convention.
Why the Court Disagrees:
- “National Policy” ≠ “Public Policy”
- Overseas is mixing up government political decisions (like cutting ties with Egypt) with legal public policy (fundamental moral/legal principles).
- The court says: “Just because the U.S. and Egypt had a fight doesn’t mean enforcing this contract is morally or legally unacceptable.”
- The Convention (International Agreement) Has a Strict Definition of “Public Policy”
- The New York Convention (which governs international arbitration) only allows courts to reject foreign rulings in extreme cases (like fraud or serious injustice).
- If courts could block rulings just because of political disputes, it would create a huge loophole—every country could ignore arbitration awards they don’t like.
In equating “national” policy with United States “public” policy, the appellant quite plainly misses the mark. To read the public policy defense as a parochial device protective of national political interests would seriously undermine the Convention’s utility. This provision was not meant to enshrine the vagaries of international politics under the rubric of “public policy.” Rather, a circumscribed public policy doctrine was contemplated by the Convention’s framers and every indication is that the United States, in acceding to the Convention, meant to subscribe to this supranational emphasis. Cf. Scherk v. Alberto-Culver Co., U.S., 42 U.S.L.W. 4911, 4915-16 n. 15 (June 17, 1974).5
To deny enforcement of this award largely because of the United States falling out with Egypt in recent years would mean converting a defense intended to be of narrow scope into a major loophole in the Convention’s mechanism for enforcement. We have little hesitation, therefore, in disallowing Overseas proposed public policy defense.
(2) Ministry of Defense & Iran Case (US, 2011)
Background: A challenge to enforce an award in favor of Iran based on US sanctions and foreign policy.
- Iran’s Ministry of Defense (successor to Iran’s old Ministry of War) won an arbitration award against Cubic Defense Systems, Inc. (a U.S. company) in an international arbitration (ICC case).
- Cubic tried to block enforcement of the award in U.S. court, arguing that U.S. sanctions and hostile relations with Iran made it against U.S. public policy to enforce the ruling.
- The U.S. government (as a “friend of the court” or amicus curiae) supported enforcing the award, saying it did not violate U.S. policy.
Court Ruling: The court confirmed that national policy expressions cannot override international enforcement principles under the New York Convention. National policy is relevant but must be weighed against the international framework.
- “National Policy” ≠ Automatic Bar to Enforcement
- Just because the U.S. and Iran have bad relations or sanctions doesn’t automatically mean enforcing an arbitration award is against U.S. public policy.
- Courts have ruled before (like in Parsons Whittemore) that letting political disputes block arbitration awards would weaken international business law.
- But the U.S. Government’s Opinion Matters
- Since Cubic argued that U.S.-Iran tensions should prevent enforcement, the court looked at what the U.S. government said.
- The government confirmed that enforcing this award would NOT harm U.S. policy—so the court gave that view heavy weight.
The Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran, as Successor in Interest to the Ministry of War of the Government of Iran v. Cubic Defense Systems, Inc, Court of Appeals, Ninth Circuit, United States of America, 15 December 2011, 665 F.3d 1091.
Finally, as noted, the United States as amicus curiae supports affirmance of the district court’s confirmation of the ICC’s award. An expression of national policy is not necessarily dispositive of the public policy issue under the Convention. See Parsons Whittemore, 508 F.2d at 974 (“To read the public policy defense as a parochial device protective of national political interests would seriously undermine the Convention’s utility.”). Nonetheless, given Cubic’s invocation of our country’s fraught relationship with Iran as expressed through various trade sanctions, the government’s confirma- tion that the ICC’s award comports with the national and for- eign policy of the United States is entitled to great weight.
Political tensions alone usually aren’t enough to ignore an arbitration award. Courts won’t let companies use “public policy” as an excuse just because their government doesn’t like the other country. But if the U.S. government itself says enforcement is okay, that’s a strong argument in favor.
(3) Eco Swiss China Time Ltd v. Benetton (1999, EU)
Background: A case concerning whether mandatory EU law (Article 85 EC Treaty) could override an arbitral award.
Court Ruling: The court ruled that EU competition law was so fundamental that the award was void under EU law, demonstrating the supremacy of mandatory national laws.
Eco Swiss China Time Ltd v. Benetton International NV, [1999] ECR 1–3055
However, according to Article 3(g) of the EC Treaty (now, after amendment, Article 3(1)(g)EC), Article 85 of the Treaty constitutes a fundamental provision which is essential for the accomplishment of the tasks entrusted to the Community and, in particular, for the functioning of the internal market. The importance of such a provision led the framers of the Treaty to provide expressly, in Article 85(2) of the Treaty, that any agreements or decisions prohibited pursuant to that article are to be automatically void.
4. Mandatory Rules of Law (Non-Derogable by Contract)
Certain legal principles are so essential that they cannot be waived by agreement in arbitration. These principles are embedded in public policy and mandatory rules of law.
In the context of the European Union (EU), for instance, certain provisions of the EC Treaty (now part of EU law) create mandatory rules, such as those related to the internal common market. These rules bind member states together and cannot be violated by private agreements, including arbitral awards.
In Eco Swiss v. Benetton (1999), Article 85 of the EC Treaty (on competition law) was treated as a mandatory rule. The Court held that an arbitral award that violated such mandatory EU rules could not be enforced, as this would breach public policy.
Mandatory rules reflect deep, core values of a legal system. If an arbitral award violates these rules, enforcement may be refused on public policy grounds. However, the threshold remains very high — trivial or procedural issues are not enough. Public policy includes domestic public policy applied to international disputes (per Hebei case).
“Public Policy” is not about every little rule. It’s about the core values of justice and fairness in a country. Courts apply their own deep values, even in international cases.
e.g. In Hong Kong (Hebei case), actual bias is a serious issue, but small procedural mistakes won’t stop enforcement.
| Jurisdiction | Key Principle | Case | Outcome |
|---|---|---|---|
| France | Creditors’ actions must be suspended during bankruptcy | Mandataires judiciaires Associés v. ICCE (2009) | The court said this rule is part of public policy. If ignored, the award won’t be enforced. |
| China | Futures trading offshore forbidden | ED & F Man v. China National Sugar (2003) | The award was refused because it involved illegal futures trading. |
| Germany | Arbitration of insolvency disputes permitted | OLG Karlsruhe (2012) | The court said arbitrating bankruptcy disputes does not break public policy. |
| Hong Kong | Only serious breaches justify refusal based on public policy | Hebei Import & Export v. Polytek (1999) | Actual unfairness (“actual bias”) is needed. Mere “appearance of bias” (looking unfair) is not enough. |
It is recognized that it would be impossible to create a full, universal list of what constitutes public policy globally.
Notable Cases Involving Mandatory Rules of Law:
Mandataires judiciaires Associés v. International Company for Commercial Exchanges (France, 2009)
The principle that creditor actions are stayed during bankruptcy was held to be part of public policy.
ED & F Man v. China National Sugar & Wines Group (China, 2003)
The court refused to recognize an award related to offshore futures transactions, considering it in conflict with Chinese mandatory rules forbidding futures contracts.
Oberlandesgericht [OLG] Karlsruhe, Germany, 9 Sch 02/09, 4 January 2012.
The arbitration of insolvency disputes is not contrary to public policy.
Hebei Import & Export Corp v Polytek Engineering Co Ltd, Court of Final Appeal, Hong Kong, 9 February 1999, [1999] 2 HKC 205
Mr Justice Bokhary PJ: “In regard to the refusal of enforcement of Convention awards on public policy grounds, there are references in the cases and texts to what has been called “international public policy”. Does this mean some standard common to all civilized nations? Or does it mean those elements of a State’s own public policy which are so fundamental to its notions of justice that its courts feel obliged to apply the same not only to purely internal matters but even to matters with a foreign element by which other States are affected? I think that it should be taken to mean the latter. If it were the former, it would become so difficult of ascertainment that a court may well feel obliged as the Supreme Court of India did in Renusagar Power Co. Ltd v. General Electric Co. Yearbook Comm. Arb’n XX (1995) 681 at p.700 to abandon the search for it.
“In the present context, I think that a distinction can and should be made between the effect of actual bias and that of apparent bias. [……] Actual bias would be more than our courts could overlook even where the award concerned is a Convention award. But short of actual bias, I do not think that the Hong Kong courts would be justified in refusing enforcement of a Convention award on public policy grounds as soon as appearances fall short of what we insist upon in regard to impartiality where domestic cases or arbitrations are concerned. Our stance must be that something more serious even than that is required for refusing such enforcement. In adopting such a stance, we would be proceeding in conformity with the stance generally adopted in regard to Convention award enforcement by the commercial jurisdictions whose decisions from around the globe have been cited to us by leading counsel for the buyer.”
C. ILA Report on Public Policy (2002)
In 2002, the International Law Association (ILA) tried to make it easier for courts around the world to understand and apply public policy in arbitration cases.
They published a report to give clear guidance on when a court should refuse to enforce an arbitral award based on public policy.
- Respect the final decision of arbitrators.
- Only reject awards in very exceptional situations, when enforcing the award would break international public policy.
Final Report on Public Policy as a Bar to Enforcement of International Arbitral Awards made recommendations in relation to public policy as a ground for refusal to enforce.
Key recommendations:
- Courts must respect the finality of international arbitration awards.
- Public policy defenses should be very limited — only used in rare and serious cases.
- Such exceptional circumstances may in particular be found to exist if recognition or enforcement of the international arbitral award would be against international public policy. Courts must think about international public policy, not just their own domestic rules.
In order to identify which rules are forming the public policy of any State, the ILA Recommendations provided three categories:
- Fundamental principles
- Public Policy Rules
- International Obligations
| Category | Meaning | Example |
|---|---|---|
| Fundamental Principles | Basic rules of justice/morality in a country | Impartial tribunal, no abuse of rights |
| Public Policy Rules | Laws protecting vital national interests | Antitrust/competition law |
| International Obligations | Duties to the international community | UN sanctions, anti-corruption rules |
1. Fundamental principles
Category 1: Fundamental principles pertaining to justice or morality, that the state wishes to protect even when it is not directly concerned. ➡️ Basic principles of justice or morality that every country protects, even if the country is not directly involved in the case.
The court verifying the arbitral award conformity with fundamental principles should do so by reference to those (substantive and procedural) principles considered fundamental in its own legal system.
Substantive principles
e.g. No abuse of rights (you can’t use your rights to harm others unfairly).
Procedural principles
e.g. The arbitrators must be impartial (fair and neutral).
No party can waive (give up) these protections.
Courts must check awards based on their own country’s fundamental principles.
2. Public Policy Rules (“Lois de police”)
Category 2: Public Policy Rules designed to serve the essential political, social or economic interests of the State, these being known as “lois de police” or “public policy rules”. ➡️ Special laws made to protect the country’s essential political, social, or economic interests.
e.g. Competition law (antitrust laws) — making sure companies compete fairly, not form illegal monopolies.
An award contrary to a rule of public policy is to be refused to enforcement if:
(i) the scope of said rule is intended to encompass the situation under consideration; and
(ii) recognition or enforcement of the award would manifestly disrupt the essential political, social or economic interests protected by the rule.
3. International Obligations
Category 3: Obligations – the duty of the State to respect its obligations towards other States or international organisations.
An example of an international obligation is a United Nations resolution imposing sanctions.
Some rules, such as those prohibiting corruption, fall into more than one category.
III. What Constitutes Public Policy?
A. Illegality
In arbitration, sometimes the contract or its performance might involve illegal acts.
But — not all illegalities automatically destroy a contract or award! Courts look very carefully at how serious the illegality is.
1. Illegality in Place of Performance
It is important to understand that illegality in the place of performance does not automatically render a contract (or its related arbitral award) unenforceable.
In England, for instance, if a contract is legal under the governing law of the contract and legal under the law of the seat, the fact that its performance would be illegal in the place of performance does not, by itself, make the award unenforceable.
Standard: Enforcement must be clearly injurious to the public good or wholly offensive to public policy to refuse recognition (Shoprite case reference).
2. Seriousness of Illegality
Courts will balance two things:
- Respect the finality of arbitration decisions.
- Protect the public good against serious illegality.
Key Points (from RBRG Trading v Sinocore and other cases):
- If the contract itself is deeply illegal (e.g., a contract to share stolen goods), enforcement can be refused.
- Minor illegality in performance is usually not enough.
- Courts must separate domestic policy from international public policy.
- If a contract was clearly made to break foreign law, enforcement might be refused.
Public policy is a very serious matter — it should only block enforcement if the award is clearly harmful to society.
3. Important Cases
| Case | Key Takeaway |
|---|---|
| RBRG Trading v Sinocore (2018) | Forged documents → no actual harm → award enforced. |
| Honeywell v Meydan (2014) | Allegations of bribery → court still enforced the award. |
| Soleimany v Soleimany (1999 | Smuggling carpets (illegal contract) → award refused. |
| ED & F Man v Haryanto (Indonesia) | Illegal sugar contract → award refused. |
| Betamax v State Trading (Mauritius, 2021) | Contract not illegal → setting aside the award was wrong. |
| A v R (Hong Kong, 2009) | Alleged illegality → should be dealt with by the supervising court, not enforcement court. |
⚖️ RBRG Trading (UK) Limited v Sinocore International Co Ltd [2018] EWCA Civ 838 (quoting from Dicey, Morris and Collins Conflict of Laws)
- Principles to be drawn from English authorities:
- If the underlying contract is in itself contrary to public policy (e.g. a contract to share the proceeds of crime), the award may be refused enforcement on the grounds of public policy
- It is important to distinguish between domestic public policy in English law and considerations of international public policy applied by the English courts so as to disapply foreign law or refuse to enforce an arbitral award, as the case may be.
- The mere fact that the performance of the contract may be illegal in the place of performance, without more, will not render an award on the basis of such a contract unenforceable in England, where the contract is legal by its applicable law and by the lex arbitri
- If it is apparent on the face of the award that the contract was made with the intention of violating the law of a foreign friendly State, then the enforcement of an award rendered on the basis of such a contract may be contrary to English public policy.
- The court has to perform a balancing exercise between the finality that prima facie should exist particularly for those that agree to have their disputes arbitrated, against the policy of ensuring that the enforcement power of the English court is not abused
⚖️ Deutsche Schachtbau und Tiefbohrgesellschaft mbH v Ras Al Khaimah National Oil Co. [1987] 2 Lloyd’s Re. 246, 254
Considerations of public policy can never be exhaustively defined, but they should be approached with extreme caution… It has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good or, possibly, that enforcement would be wholly offensive to the ordinary reasonably and fully informed member of the public on whose behalf the powers of the state are exercised.
⚖️ RBRG Trading (UK) Limited v Sinocore International Co Ltd
Issuance of forged bills of lading pursuant to a Sale Contract; Court held that the Sale Contract and its performance were not illegal under Chinese or English law, and that this was at most a case of ”attempted fraud”, as payment was not made under the forged bills and no benefit was obtained. Award was enforced.
⚖️ Honeywell International Middle East Ltd v Meydan Group LLC (formerly Meydan LLC) [2014] EWHC 1344 (TCC)
High Court refused the application of a party alleging bribery to set aside an order granting permission to enforce a Dubai International Arbitration Centre (DIAC) arbitration award.
⚖️ Soleimany v Soleimany [1999] QB 785
Contract for the purchase and illegal export of carpets from Iran. The Court of Appeal held that the award, which purported to enforce an illegal contract, was not enforceable in England and Wales.
⚖️ ED & F Man (sugar) Ltd v Haryanto (Indonesian Supreme Court)
Court held that the the agreement for the purchase of sugar was not valid under Indonesian law, as only the Government was authorized to import and export sugar. The agreement was therefore in violation of Indonesian law, and the award was refused enforcement on public policy grounds.
⚖️ Betamax Ltd v State Trading Corporation (Mauritius) [2021] UKPC 14
Judicial Committee of the Privy Council (the “Privy Council“) found that the Supreme Court of Mauritius was wrong to set aside an international arbitration award on the basis that the award was contrary to the public policy of Mauritius, in circumstances where the tribunal had found the underlying contract was not illegal and had the jurisdiction to do so.
⚖️ A v R (2009) 3 HKLRD 389
Allegations that something in the award renders it invalid should be referred to the court of the seat, it is not for the enforcing court to ”supervise” the supervising court.
⚖️ G v N [2023] HKCFI 3366
A recent important case demonstrating evolving approaches to illegality:
Facts:
Arbitration administered by HKIAC.
G wanted money back after a failed share transfer. N said the deal was illegal. The arbitrator made a decision under the old law (Tinsley v Milligan).
Legal Context:
- Under English law, previously the Tinsley v. Milligan (1993) “reliance test” applied: A party relying on its own illegal act could not recover.
- Patel v. Mirza (2016) changed the test: Courts should consider a range of factors to determine whether enforcement would be contrary to public policy.
- Hong Kong adopted the Patel approach — but five days after the arbitrator had issued the award.
Challenge:
- N applied to set aside the award, arguing it conflicted with Hong Kong’s new public policy on illegality.
Court’s Decision:
- No error of law by the arbitrator — the award was made according to the law at the time of decision.
- However, because public policy may have shifted regarding illegality, the court decided to remit the matter to the arbitrator for reconsideration based on the current Hong Kong law.
Debate:
- Criticism: Some argue the court improperly treated a change in law as a public policy violation, contrary to the high threshold (serious offensiveness) required by Hebei.
- Support: Others argue that illegality is so fundamental to the concept of justice that even a change in approach to illegality justifies reconsideration.
G initiated arbitration against N for restitution of monies paid in consideration for a share transfer. N contested the arbitration on the basis that the share transfer had been tainted by illegality due to a breach of BVI law.
Arbitrator issued partial award upholding the illegality defense, applying the test in Tinsley v Milligan, which was, at the time, the leading case on illegality defenses (i.e. that the party must not rely on illegal conduct in order to be granted relief).
Several days after issuance of award, Hong Kong Court of Appeal issued decision in Monat Investment Ltd v All Person(s) In Occupation of Part of The Remaining Portion of Lot No 591 in Mui Wo DD 4 No 16 Ma Po Tsuen, Mui Wo, Lantau Island [2023] HKCA 479 (“Monat”), changing the position on illegality from that in Tinsley v Milligan to that in Patel v Mirza (i.e., that the court needs to look at a range of factors before applying the illegality defense).
G applied to set aside the Partial Award on public policy grounds. Court determined that it could review the award and in light of the change in position in Hong Kong law, remanded the award back to the Tribunal for reconsideration.
4. Illegality and Jurisdiction of the Supervising Court
In MAXXAD v. India (2009) and other cases, it was clarified that illegality in performance does not automatically invalidate a contract or award.
Judge Reyes in a Hong Kong case emphasized:
- If a party believes the award involves illegality, the first step should be to apply to the supervising court at the seat of arbitration.
- Enforcement courts should not override the supervisory court without a compelling reason.
- Public policy objections based on illegality should first be raised at the seat.
However, different courts take different views:
- Some courts recognize that if enforcement would involve illegality under local law, the enforcement court has authority to refuse recognition under Article V(2)(b) of the New York Convention.
B. Fraud/Corruption
Fraud and corruption are recognized globally as valid grounds for challenging awards — but the threshold is very high.
1. Key Principles
✅ Fraud or corruption can justify refusing enforcement of an award.
❗ But courts demand strong proof:
- Suspicion is not enough. Courts trust arbitrators’ judgment unless something new and serious appears.
- Fresh, credible evidence is usually needed.
- Courts respect the finality of arbitration — they will not re-investigate unless absolutely necessary.
2. Important Cases
| Case | Key Takeaway |
|---|---|
| National Iranian Oil Co v Crescent Petroleum (2016, UK) | Tribunal carefully reviewed corruption claims and rejected them; no fresh evidence → Court enforced the award. |
| Karaha Bodas v Pertamina (2009, Hong Kong) | Fraud alleged based on new documents, but no strong case → Court refused to set aside the award. |
⚖️ National Iranian Oil Company v Crescent Petroleum Company International Ltd & Crescent Gas Corporation Ltd [2016] EWHC 1900 (Comm)
- Respondent alleged that the “award or the way it was procured” was contrary to public policy.
- Without enquiring into the tribunal’s reasoning, the Court found that the tribunal had made a very careful analysis of the facts and concluded that the Contract was not an illegal contract, that it was not procured by corruption and that any misconduct was of no material consequence to the Contract subsequently entered into.
- The Court placed particular importance on the lack of any “fresh evidence which might have been some justification for refusing to enforce the award” and concluded, in the circumstances, it was not prepared to interfere with the tribunal’s award.
⚖️ Karaha Bodas Co. LLC v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (2009) 12 HKCFAR 84
- Court of Final Appeal held that “an award which has been obtained by fraud plainly comes within this category”. Applicant alleged, inter alia, fraud and lack of good faith due to recently discovered documents. Court was not satisfied that applicant had “established a prima facie case of fraud, bad faith or lack of good faith which had a reasonable prospect of success.”
C. Bias
Bias (whether real or perceived) can also be a reason to challenge an award, falling under the broader public policy concern about due process.
1. Why Bias Matters
✅ Arbitrators must be independent and impartial under:
- Institutional rules (e.g., ICC, HKIAC).
- National laws (e.g., UNCITRAL Model Law jurisdictions).
✅ Disclosure:
Arbitrators must disclose any circumstances giving rise to justifiable doubts about impartiality.
If disclosed and accepted, parties waive later objections.
If not disclosed and later discovered → possible challenge on public policy grounds.
Public Policy Link: After an award is issued, if a serious bias issue is uncovered, it can justify setting aside the award.
2. Important Cases
| Case | Key Takeaway |
|---|---|
| Gao Haiyan v Keeneye (2011, Hong Kong) | Meeting at a hotel between an arbitrator and a party’s rep caused concern, but: (1) bias must be assessed by fair-minded observer test, (2) arb-med is accepted if no objection during arbitration → no refusal to enforce. |
| Paloma v Capxon (2018, Hong Kong) | Alleged bias against a Japanese tribunal. Court found no evidence of real bias — stressed that refusal must be based on conduct that is fundamentally offensive to morality or justice. |
⚖️ Gao Haiyan and Another v Keeneye Holdings Ltd and Another
CFI [2011] HKEC 514
Keeneye applied to set aside the court’s order enforcing the Award complaining that the Tribunal was biased in granting the Award since the Secretary General of the Arbitration Commission and one of the arbitrators in the Tribunal (the arbitrator nominated by Gao) had a dinner in the Xian Shangri-La Hotel with one of Keeneye’s representative three months before the Award was issued.
The Court focused on assessing whether the award was made in circumstances which would cause a fair-minded observer to apprehend a real possibility of bias on the part of the Tribunal
The Court also considered two competing public policy considerations at play in this case, namely (1) where the parties have opted for arbitration, they should be held to their choice and the resultant award should normally be enforced by the court and (2) it would be wrong to uphold an award tainted by an appearance of bias.
CACV 79/2011
- Arbitrators can act as mediators during the course of the arbitration (“arb-med“)
- Keeneye had failed to raise any objection to the “arb-med” procedure during the arbitration itself, and had therefore waived its right to do so in the enforcement proceedings
- The “arb-med” procedure adopted in this case did not disclose apprehended bias giving rise to an issue of public policy
⚖️ Paloma Co. Ltd. v. Capxon Electronic Industrial Co. Ltd. [2018] HKCFI 1147
- Court rejected a public policy challenge to an award rendered by a tribunal in Japan. The Respondent applied to set aside leave to enforce the Award, alleging that the tribunal’s conduct was biased.
- Court found that there was no evidence of bias on the part of the tribunal, nor any error or matter which would warrant setting aside the award. Court focused on basic concepts of morality, justice and public policy.
In order to refuse a Convention award on public policy or actual bias grounds, it must be so fundamentally offensive to the jurisdiction’s notions of morality and justice that it could not reasonably be overlooked.
3. Short Key Ideas
- Fair-minded observer test: Would a reasonable person suspect bias?
- Waiver: If a party knows but doesn’t object during the arbitration, it loses the right to complain later.
- High threshold: Only serious bias — fundamentally offensive to justice — justifies setting aside or refusal.
D. Due Process
Due process is one of the most fundamental principles courts protect when reviewing awards.
1. Introduction
What constitutes a due process violation?
A party was not given a fair chance to present its case.
A party did not receive proper notice.
A tribunal decided an issue without even explaining the reasoning or without considering arguments properly.
A tribunal issues a decision without applying the legal principles or evidence that parties submitted.
A tribunal ignores key issues that the parties raised.
Important Nuance:
- Some arbitral institutions (e.g., ICDR, AAA) allow parties to agree to awards without detailed reasoning.
- However, courts still require minimum fairness — parties must understand the basis of the tribunal’s decision.
- Short reasons are acceptable, but there must be enough to explain how and why the tribunal reached its conclusions.
2. Important Cases
| Case | Key Takeaway |
|---|---|
| Z v Y (2018, Hong Kong) | Court set aside enforcement because the tribunal failed to adequately explain dismissal of serious illegality claims. Short reasons are fine — but must address material issues clearly. |
| U v A (2017, Hong Kong) | Procedural mistakes (e.g., rejecting evidence) must be fundamentally unfair to breach public policy. Mere errors in law or evidence decisions are not enough. |
| JVL Agro v Agritrade (2016, Singapore) | Tribunal raised and decided an issue not properly argued by the parties → breach of fair hearing → award set aside. Tribunal must stick to the parties’ pleaded cases. |
| BZV v BZW (2021, Singapore) | Tribunal breached natural justice by using reasoning not connected to the parties’ arguments and failing to consider key issues. Court affirmed need for tribunals to stay within the case. |
⚖️ Z v Y (2018) HKCFI 2342
it was unclear whether the tribunal had thoroughly considered the issues of illegality raised by the Respondent”, and the Court had “serious reservations as to the reasons given by the tribunal as to why the Respondent’s claims were dismissed.
In the case of R v F [2012] 5 HKLRD 278 the Hong Kong court set out the necessary scope of such reasoning. The Court found that the reasons given “need not be elaborate or lengthy, provided they could be understood in its proper context”.
The reasons may be short, so long as the factual and legal basis is explained and the reasoning is expressed to enable the parties to understand how, and why, a finding is made on a material issue, and how a conclusion is reached by the tribunal”.
The Court therefore set aside the Order under section 95(3)(b) of the AO.
As a procedural matter, an award should show sufficient reasoning.
The claims made by the respondent as to the sham transactions of supply of materials being loans in disguise are credible, and supported by the evidence of Mr Y from HD. The allegations of such unlawful loans creating false increments in the financial records of HD and MD all raise serious consequences of illegality and possible offences under PRC law. They should be thoroughly considered by the tribunal, and the dismissal of such claims should be adequately explained. The reasons may be short, so long as the factual and legal basis are explained and the reasoning is expressed to enable the parties to understand how, and why, a finding is made on a material issue, and how a conclusion is reached by the tribunal (R v F[2012] 5 HKLRD 278, [2012] HKCU 1912, applied in S Co v B Co 2014] 6 HKC 421, HCCT 12/2013, 24 July 2014). In the context of the issues raised in the Arbitration, I regret that the tribunal failed to give any adequate reason as to why it had concluded that the respondent’s claim of illegality of the underlying Debt had not been established by the respondent. and should be dismissed.
The Court therefore set aside the Order under section 95(3)(b) of the AO.
The important issue of whether the underlying HD Contracts and MD Contracts were illegal and unenforceable under PRC law, so as to render the Guarantee void and unenforceable against the respondent, is not in my view addressed in the Award with adequate reasons, and it would offend our Court’s notions of fairness and justice to enforce the Award when it might be tainted by illegality, and when a significant issue brought before the tribunal for determination has not been seen to be properly considered and determined, contrary to the parties’ legitimate and reasonable expectations.
⚖️ U v A [2017] HKEC 468
- Application to set aside an Order for enforcement of an ICC award rendered in Hong Kong, on three grounds including that it would be contrary to public policy and unjust to enforce the Award. Respondents complained that the arbitrator had unjustifiably refused to admit a PRC Judgment as evidence in the arbitration, such that the Respondents were deprived of a full opportunity to present their case on a key issue.
- Held: Error in (PRC) law is not contrary to Hong Kong public policy, nor is it unjust (Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111).
- To justify refusing enforcement, the violation of public policy must be “contrary to the fundamental conceptions of morality and justice” of the forum – i.e. Hong Kong.
- The Court held that Hong Kong is not the correct forum to decide whether the award would violate PRC public policy, nor can it review the decision of the arbitrator that the agreement did not require approval under PRC law. To the extent that enforcement of the award is sought in the PRC, the Respondents are free to resist enforcement there.
- The Court rejected the application to set aside on each ground and ordered the Respondents to pay costs on the indemnity basis.
⚖️ JVL Agro Industries Ltd v Agritrade International Pte Ltd [2016] SGHC 126
- One of the Tribunal’s primary findings was based on an argument that (i) only raised briefly in the oral submissions, at the tribunal’s request; (ii) not fully pleaded by Agritrade; and (iii) never responded to by the losing party.
- The court initially set aside the proceedings for six months to give the tribunal an opportunity to reconsider its award and to receive further submissions if necessary. The tribunal declined to do so.
- The court decided that the award itself should be set aside as the Tribunal had “deprived JVL of its right to present evidence and address submissions” by exercising “unreasonable initiative” on the collateral contract question.
- The tribunal must confine itself to the issues selected by the parties for determination, recognising that parties’ ability to mutually determine the scope of the arbitration is considered one of the touchstones of arbitration.
Equal rights must be afforded to both parties.
Whether a point comes from another party or the tribunal itself, both sides must have a chance to respond.
This links to a broader phenomenon called “due process paranoia” — arbitrators are now extremely careful, constantly inviting comments, to avoid having awards set aside.
⚖️ BZV v BZW and another [2021] SGHC 60
The Court addressed the issue of whether the requisite elements to set aside an award under section 24(b) of the IAA have been met, specifically:-
- Whether and which rule of natural justice was breached;
- The manner in which the rule of natural justice had been breached;
- Whether there was a connection between the breach and the making of the award; and
- Whether prejudice was caused to the plaintiff’s rights by the breach.
Court found that Tribunal had breached the fair hearing rule:
- The Tribunal adopted a chain of reasoning which had no nexus to the parties’ cases (in respect of particular claims)
- The Tribunal failed to apply its mind to an essential issue arising from the parties’ arguments
The Court of Appeal affirmed this decision in [2022] SGCA 1.
3. Short Key Ideas
Fair opportunity: Every party must be heard properly.
Focused tribunal: Tribunal must decide based only on what the parties presented.
Minimum reasoning: Awards must show the basic how and why of conclusions.
Natural Justice test (BZV case):
- What rule was breached?
- How was it breached?
- Was there a connection to the award?
- Was prejudice caused?
E. Novel Situations
While illegality and fraud are traditional grounds for setting aside awards based on public policy, other modern complexities are emerging.
1. Due Process as a “Catch-All”
Due process issues represent a “catch-all” ground for setting aside awards, distinct from classic grounds like:
- Illegality
- Fraud
While those are clear-cut, due process arguments are often more subjective and involve:
- Procedural fairness.
- Opportunity to be heard.
- Equal treatment of parties.
2. Examples of Modern Complexities
The jurisdictions’ consideration of what kinds of disputes may be arbitrable;
- Crypto disputes
- IP disputes
- Competition law?
Subject matter that is either illegal or immoral to enforce;
3. Negative Jurisdictional Awards
In Hong Kong, there is no appeal from a tribunal’s negative jurisdictional ruling (where the tribunal says it lacks jurisdiction).
Appeal is different from setting aside. Appeals allow de novo (fresh) review for positive jurisdictional findings but not for negative ones.
However, it’s undecided whether a party can set aside a negative jurisdictional award on public policy or due process grounds. No case law currently answers this question directly. This could be a fertile area for research papers.
4. Practical Reality for Clients
Clients often want to set aside awards they are unhappy with. Lawyers must explain that setting aside an award is not a second appeal. Public policy challenges are rarely successful — less than 1% of awards are set aside on these grounds.
5. Key Cases
⚖️ Shanghai Fusheng Soya-Food Co Ltd v Pulmuone Holdings Co Ltd [2014] HKEC 825
Applicants argued the tribunal ignored a favorable PRC court judgment.
Tribunal had already closed proceedings and refused to accept new evidence.
Held:
- Only breaches affecting the structural integrity of arbitration (not substantive errors) justify setting aside under Article 34 of the Model Law.
- Finality principle: Errors by arbitrators do not automatically mean the award violates public policy.
- Courts retain a residual discretion to enforce even if a public policy ground is proven.
The applicants argued that the arbitral award should be set aside because the arbitral tribunal had failed to take into account an earlier PRC court judgment, which was partially in favour of the applicants. The tribunal had taken the position that no further submissions or evidence (including the judgment) could be produced as it had already declared the arbitral proceedings closed.
“Contrary to the fundamental conceptions of morality and justice of the law of the forum”.
Specifically, for setting aside an arbitral award under Article 34 of the Model Law, the court will only consider the public policy objection in terms of the structural integrity of the arbitration proceedings and not the substantive merits of the dispute or the correctness of the award.
By choosing arbitration, parties should be aware that arbitral awards are binding and final. The public policy’s bias towards enforcement cannot be counterbalanced by the mere fact that there was an error by an arbitrator.
Also noted that under the Model Law, Courts have a residual discretion to enforce awards despite the proven existence of a valid public policy ground.
⚖️ (2018) Yue 03 Min Te No. 719 or (2018) 粤03民特719号 (Shenzhen Intermediate People’s Court)
- Dispute: Cryptocurrency wealth management agreement.
- Tribunal awarded damages for breach of contract (failure to deliver Bitcoin).
- Held:
- Bitcoin does not have legal tender status under PRC law.
- Award ordering Bitcoin-related compensation contravened PRC policy and violated public interest.
- Court set aside the arbitral award on public policy grounds.
Dispute arose from agreement for cryptocurrency wealth management. Award rendered for breach of contract for failure to deliver cryptocurrency as agreed by parties, Tribunal awarded damages for breach.
Court found that Bitcoin does not have the same legal status as fiat currency, and cannot and should not be circulated in the market. Chinese law essentially prohibits redemption, trading and circulation of Bitcoin in PRC.
Court held that Tribunal’s order for compensation equated to redemption, which contravenes the spirit of PRC policies and violates the public interest. It therefore set aside the arbitral award.
F. Arbitration (Amendment) Ordinance 2017
Key Update:
- Passed on 14 June 2017, effective from 1 January 2018.
- Purpose:
- To confirm that disputes involving Intellectual Property (IP) rights are arbitrable in Hong Kong.
- To clarify that enforcing arbitral awards concerning IP rights is not contrary to Hong Kong public policy.
Before the amendment, there was uncertainty over whether IP disputes — especially involving issues like validity — could be settled by arbitration.
This change reinforces Hong Kong’s position as an arbitration-friendly jurisdiction, especially for technology and innovation sectors where IP is crucial.
IV. Other Practical Considerations
A. Ex Officio Review
Article V(1) vs Article V(2) of the New York Convention:
- Art V(1): Defenses must be raised by the party resisting enforcement.
- Art V(2): Court can refuse enforcement on its own initiative (ex officio) if enforcement would violate public policy.
English Court View:
Public policy defense has no express burden of proof under Art V(2).
Court can raise public policy concerns even if the parties do not.
The defence that enforcement would be contrary to public policy is stated without an express burden of proof […]. This is no doubt because it must always be open to the court to take a point of public policy of its own motion.
B. Burden of Proof
Burden of proof is on the party seeking to set aside the award.
Mere allegations are not enough — the challenging party must provide substantial and specific evidence.
C. Standard of Proof
Courts are highly reluctant to interfere with arbitral awards unless due process violations are clear and substantial.
Intervention only if due process violations are:
- Clear
- Substantial
- Fundamentally unfair
Heightened standard of proof:
- Cases like Gao Haiyan and Hebei Import & Export emphasize the need for actual bias (not just an appearance).
- Fraud allegations require “clear and convincing” evidence — suspicions or weak evidence are insufficient.
Class 7 - Interlocutory Proceedings: Part 1
I. Introduction
A. What are Interlocutory Proceedings?
Interlocutory Proceedings are applications at any stage, prior to trial, of existing (or contemplated) proceedings for an order or ruling of the arbitral panel (or the court) on a particular issue.
Interlocutory Proceedings can be made after the cause of action has been commenced but before its termination (but can also occur at a stage where the underlying substantive proceedings have not yet commenced).
While usually “interim” measures (sometimes, temporary or provisional in nature), certain types of interlocutory orders can effectively determine a case.
In summary, interlocutory proceedings are an important procedural tool in a litigant’s armoury. When used strategically, they can also create tactical advantages for a litigant.
1 | 💡 Examples of a litigation advantage / strategy? |
💬 Imagine you get a court order freezing your opponent’s bank account. Now, even before winning the case, your opponent is under huge pressure because they cannot use their money freely!
B. Different Types of Interlocutory Proceedings
1. Purpose
When considering interlocutory applications, they generally fall into two broad categories:
Procedural Applications: Requests to the tribunal intended to move the case forward, such as time extensions or requests for additional evidence.
Tactical Applications: Strategic moves aimed at securing an advantage for your client, such as injunctions that could significantly impact the opponent’s position.
Yesss, applications can be used strategically:
- To gain an advantage, such as tying up an opponent’s resources.
- To protect your own position, ensuring no harm occurs before the case is resolved.
If you are sitting as an arbitrator, it is crucial to assess what exactly is being sought through the interlocutory application and how it fits into the broader journey from the start to the end of the case.
2. Content
(1) Interim Measures
Goal: Protect the situation before the final decision.
Applications for orders that aim to preserve the party’s rights pending final resolution (e.g. interim injunction).
- Purpose: Preserve the status quo and protect rights pending the final decision.
- Example: Interim injunctions preventing a party from moving assets or taking harmful action.
(2) Jurisdictional Challenges
Applications raising judicial issues (e.g. application to challenge the arbitrator’s jurisdiction on various grounds).
Goal: Argue that the tribunal (or court) has no right to handle the case.
- Example: Where a party sues in court despite an arbitration clause, you may seek an anti-suit injunction to stop the improper court proceedings and compel arbitration.
- Impact: Success in such an application often terminates the court case entirely, though arbitration may still proceed separately.
(3) Procedural Applications
Applications for an order or direction to progress the case towards the hearing.
Goal: Keep the case running smoothly.
These are practical applications needed to keep the case on track, including:
Time Extensions:
Commonly needed when clients delay giving instructions or unforeseen events (like illness) disrupt the original schedule.
Applications to Introduce Additional Witness or Expert Evidence:
Usually, arbitration sets clear timelines for presenting evidence. However, in exceptional cases—such as a key witness being temporarily incapacitated—late submissions might be allowed in the interest of justice.
Applications to Change an Expert Witness:
Changing an expert can raise suspicions about the reasons behind the change.
Example: An expert moves employment and becomes unavailable, necessitating replacement.
Caution: Opposing counsel will likely probe the reasons for the change to uncover any strategic weaknesses.
Applications for Discovery of Specific Documents:
Even with standard discovery procedures, parties often believe that crucial documents are being withheld.
Applications for targeted discovery are very common, particularly when there’s suspicion that the opposing side either failed to search properly or intentionally withheld documents.
C. Surprising Facts
1. Applications Before the Case Officially Begins
Sometimes, procedural steps must be taken even before formally initiating a case:
- Injunctions: For example, to restrain an opponent from taking certain actions that might harm your position before the case starts. (Elizabeth will discuss injunctions in more detail later.)
- Evidence Gathering: If you believe you have a strong claim but lack necessary evidence (held by a third party), you may need to apply to obtain that information to get your case off the ground.
2. Interlocutory Applications Can Be Outcome-Determinative
Although interlocutory applications are often considered intermediate steps, some can effectively determine the outcome of the case.
For example, in cases involving fraud:
- You might seek an injunction to freeze assets held by a suspected fraudster.
- If successful, even though you must still formally pursue the case, capturing the asset leaves the defendant with little room to maneuver, making the application practically determinative.
D. Examples of procedural matters to be dealt with by way of Interlocutory Proceedings
Examples of procedural matters to be dealt with by way of Interlocutory Proceedings include:
- Applications for extension of time to serve pleadings, witness statements or expert report;
- Applications to adduce additional witness or expert evidence;
- Applications to change experts;
- Applications for amendment of pleadings;
- Applications for discovery of specific documents;
- Requests for further and better particulars;
- Requests for interrogatories; and
- Applications for security for costs.
E. Tactical Applications in Litigation: Discovery and Interim Measures
1. Discovery Applications
Tactic: Apply to get important documents the other side hasn’t shared.
In certain disputes, one tactical application that can be deployed is a request for discovery of documents. This involves identifying specific categories of documents that are relevant to the dispute but have not yet been disclosed. Alongside this request, you must provide reasons why these documents should be produced.
The goal is twofold:
- Obtain Key Information: You hope to uncover crucial evidence that could tip the balance of the case in favor of your client, increasing the likelihood of success.
- Exert Tactical Pressure: Discovery applications also compel your opponent to invest time, effort, and financial resources into responding. In litigation, it can be tactically advantageous to force the other side to expend costs, particularly if your client has greater financial resources.
💬 Imagine a scenario where you represent a major corporation or a high-net-worth individual with virtually unlimited litigation funds, while the opposing party struggles financially. By initiating multiple interlocutory proceedings like discovery applications, you can increase pressure on the opponent, potentially driving them toward a more favorable negotiated settlement.
2. Applications for Security for Costs
Goal: Protect your client from not getting back legal costs.
When used: If the party suing you is from a place where it’s hard to collect money (like offshore companies).
Tactical Advantage:
- Forces the claimant to pay money upfront.
- Creates financial pressure immediately.
Another strategic tool is the application for security for costs. We will explore this in greater detail next week, but in essence, this application asks the court or tribunal to require the opposing party to provide security—usually by paying funds into court or into a secured bank account.
Security for costs aims to protect your client from the risk of being unable to recover legal costs if they ultimately win the case.
For instance, suppose a company incorporated in an offshore jurisdiction, such as the British Virgin Islands (BVI), brings a claim against your Hong Kong-based client. Even if you successfully defend the claim and obtain a costs award, collecting that money from the BVI company could be difficult and expensive. A security for costs order helps to short-circuit this problem by ensuring funds are available upfront.
Moreover, requesting security places significant pressure on the claimant, as they are forced to allocate resources immediately—resources they would likely prefer to use elsewhere. Thus, a defendant who succeeds in obtaining security for costs can gain a powerful tactical advantage early in the proceedings.
3. Interim Measures
(1) Purpose and Nature of Interim Measures
Interim measures are a subset of interlocutory proceedings. They are primarily intended to preserve the status quo until final adjudication of the dispute.
It is important to note that while interim measures preserve the “status quo,” in practice, they can favor one party over the other, depending on the circumstances. Their fundamental role is to prevent one party from suffering significant or irreparable harm before the final decision is rendered.
(2) Examples of Interim Measures
- Safeguarding Fraudulently Obtained Funds: A classic interim measure would involve freezing funds sitting in a bank account following a fraud. At this stage, the court or tribunal does not determine whether fraud has indeed occurred but takes steps to ensure that the funds remain available pending final resolution.
- Preserving Perishable Goods: Consider a situation involving perishable goods, such as sweet corn. Party A has delivered the goods, but Party B refuses to accept them. Since sweet corn cannot be stored indefinitely, an interim measure may be necessary to determine how the goods should be handled or sold, with the proceeds held pending the dispute’s resolution.
- Preserving Evidence: If there is a legitimate concern that an opponent might destroy or hide evidence, a party can seek an interim order requiring the preservation of that evidence—such as by making and securing copies. While most legal systems require parties to preserve evidence, an interim application may be necessary if you have reason to doubt the opponent’s reliability.
- Appointment of a Receiver: In cases where a company is being mismanaged—perhaps its directors are disregarding court orders—a court may appoint a receiver to take over the company’s operations. This ensures the company acts properly and complies with legal obligations.
💬 Real Story: One real-world example involved a case in Hong Kong, where the directors of a company refused to comply with court orders. The court was persuaded to appoint a receiver over the company to ensure that the orders were properly addressed.
II. What are Interim Measures?
A. Interim measures
Interim measures are applications for remedies or relief targeted at safeguarding the “status quo” i.e. the rights of the parties pending final resolution of the dispute by final award.
Imagine: Two parties are fighting over a valuable painting. If we wait until the final judgment, the painting might be damaged or disappear. So the tribunal (or court) can order a temporary measure to keep the painting safe.
Interim Measures are orders aimed at safeguarding a party’s right which is otherwise damaged or affected irreparably due to acts or omissions of the other party before or during the adjudication.
Purpose:
- To keep the “status quo” — meaning, things stay the way they are now, so neither side is unfairly hurt while waiting for the final decision.
- To protect rights that might otherwise be seriously damaged or lost forever if nothing is done.
Sometimes called “provisional/conservatory measures”, “preliminary measures/injunctions” or “emergency/interim relief”. All these terms basically mean the same thing: a temporary solution to protect the parties’ rights.
B. Different Types of Interim Measures
Interim measures can be used in different ways, depending on what is needed. Here are some examples:
Evidence: Protect or collect important documents, witnesses, or proof, so they are not lost or destroyed.
(Example: Freezing emails or company records before someone deletes them.)
Property: Protect or control property that is part of the dispute.
(Example: Stopping the sale of a disputed building.)
Sale of Goods: Order the sale of goods that might spoil or lose value if they wait too long.
(Example: Selling perishable goods like fresh fruits before they rot.)
Interim Injunction: Temporarily stopping a party from doing something harmful.
(Example: Stopping a company from using a secret formula during the arbitration.)
Appointment of Receiver: Appointing someone (a “receiver”) to manage property or a business during the dispute.
(Example: Appointing a receiver to run a hotel while two business partners are fighting over ownership.)
III. Injunctions
A. Introduction
1. What is an injunction?
At a high level, an injunction is:
- An order from a court or a tribunal
- That requires or prevents a person or company from doing or not doing something.
An order restraining a person from beginning or continuing an action threatening or invading the legal right of another, or compelling a person to carry out a certain act.
There are two main types:
- A prohibitory injunction prevents the doing or continuation of an act that allegedly interferes with another’s legal rights.
- A mandatory injunction requires someone to take positive action.
Note: When granted by the Tribunal, an injunction only binds the parties to the arbitration agreement but not third parties. A court can hold a party that fails to follow an injunction in contempt of court. The Tribunal cannot do that.
Other types of injunctions include: freezing orders, “quia timet” injunctions (to stop threats before harm happens), and others.
- In arbitration, everything is consensual—parties have agreed to be bound by the arbitration process. Therefore, a tribunal-ordered injunction can only bind the parties to the arbitration agreement, not third parties.
- If you need to bind a third party (someone not bound by the arbitration agreement), you would likely need to seek relief from a court directly, rather than through the tribunal.
2. Court vs. Tribunal
A key distinction between court injunctions and tribunal injunctions lies in enforcement.
If a party disobeys a tribunal injunction, the tribunal has no power to hold the party in contempt.
In contrast, a court order, even though civil in nature, can be enforced through contempt proceedings, potentially resulting in imprisonment.
Thus, a court-issued injunction generally has more “bite” than one issued by a tribunal.
B. Requirements for Granting an Injunction
1. Discretionary Jurisdiction
- The power to grant an injunction is discretionary.
- The court or tribunal will weigh the elements and determine whether the applicant has justified the need for an injunction on the balance of probabilities.
- Standard: “On the balance of probabilities” (i.e., more likely than not).
2. Purpose: Preserving the Status Quo
The primary purpose of an injunction is generally to preserve the status quo until the final resolution of the dispute.
However, sometimes granting an injunction can actually decide the whole case early on.
Example: Preventing the convening of a directors’ or shareholders’ meeting could determine the final outcome (e.g., the PCCW saga years ago).
According to s. 36 Arbitration Ordinance – Art. 17A of UNCITRAL Model Law, the party applying for interim measures has to satisfy the Tribunal that:
Harm caused by counterparty:
- not adequately reparable by an award of damages;
- substantially outweighs the harm that is likely to result to the party against whom the measure is directed.
Reasonable possibility that applicant succeeds on merits of claim (however, the Tribunal retains full discretion).
3. Interim vs. Final Effect
- Some injunctions are clearly interim (e.g., freezing orders over assets pending litigation).
- Others, though formally interim, may effectively provide a final remedy.
C. Legal Test for Court-Granted Injunctions
Requirements for an interlocutory injunction are set out in the seminal case American Cyanamid Co v Ethicon Ltd (1975) AC 396 – three essential conditions must be satisfied:
Three Conditions to Satisfy
Serious Issue to be Tried
This is a low threshold. The court only examines if there is a serious question to be tried — not a detailed investigation of prospects of success. Courts cannot resolve factual conflicts at this stage, as there is no cross-examination.
Consequently, it is usually very difficult to oppose an injunction by arguing there is no serious issue.
Adequacy of Damages
Injunctions will not be granted if damages would be an adequate remedy.
Example:
If someone seeks an injunction to stop the sale of 2,000 HSBC shares, the court may refuse because:
- HSBC shares are readily available on the market.
- Damages could easily compensate for any loss.
In contrast:
- If a party breaches a contract to sell a unique item, such as a Ming dynasty vase, damages may not be adequate.
- The unique nature of the asset makes an injunction more appropriate.
Balance of Convenience
The harm caused to the applicant if the injunction is not granted must substantially outweigh the harm to the respondent if the injunction is granted.
This consideration often tips the balance in deciding whether or not to award the injunction.
In addition, the applicant usually has to provide an undertaking to pay damages if the injunction is found to have been improperly obtained.
1 | 💡 Contrast with final injunction – different tests – why? Consider sections 16-18 of the Arbitration Ordinance. |
D. Statutory Framework: Arbitration Ordinance
1. Section 36: Conditions for Tribunal-Ordered Interim Measures
- Under Section 36 of the Arbitration Ordinance: There must be a reasonable possibility that the applicant will succeed on the merits.
- It is crucial to understand that:
- This is merely a provisional view at the application stage.
- It does not bind the tribunal’s final adjudication on the substantive dispute.
⚡ Important:
- Section 36 criteria do not apply when interim measures are sought from the court under Section 5.
- Different legal tests govern court applications and tribunal applications — care must be taken to apply the correct standard.
2. Court-Ordered Interim Measures (Section 45)
Section 45 governs the Hong Kong Court’s ability to grant interim measures in support of arbitration proceedings.
These measures can be granted whether the arbitration is commenced or yet to be commenced, and whether inside or outside Hong Kong.
However, there are limits: The arbitral award must be one that can be enforced in Hong Kong—whether under the Arbitration Ordinance or other laws.
Section 45(5) of the Arbitration Ordinance
In relation to arbitral proceedings which have been or are to be commenced outside Hong Kong, the Court may grant an interim measure under subsection (2) only if—
(a) the arbitral proceedings are capable of giving rise to an arbitral award (whether interim or final) that may be enforced in Hong Kong under this Ordinance or any other Ordinance; and
(b) the interim measure sought belongs to a type or description of interim measure that may be granted in Hong Kong in relation to arbitral proceedings by the Court.
To seek assistance from the Hong Kong courts in aid of arbitration, two conditions must be satisfied:
- The arbitral proceedings must be capable of giving rise to an award that may be enforced under the Arbitration Ordinance or any other ordinance.
- The type of interim measure sought must be one that the court itself has jurisdiction to grant.
In simple terms:
You can only ask the Hong Kong courts for help in arbitration matters if the courts already have the power to grant that type of order. It must be a remedy recognized under Hong Kong law.
For example, if your arbitration is seated in a foreign jurisdiction that recognizes a very unusual type of property transfer, you cannot expect the Hong Kong courts to enforce that kind of order if it’s unfamiliar to Hong Kong law.
This is a jurisdictional limitation.
See: Onwel Sales Limited v Sketchers SARL [2021] HKCFI 790 at §16
Refer to paragraph 16 of the judgment to see how real-world facts can limit the seemingly broad scope of court assistance under Section 45.
The Onwel Sales case provides a real-life example of these limitations.
- It involved a dispute between joint venture parties concerning the Sketchers brand.
- Although Section 31 of the Arbitration Ordinance appears to be very broad, in practice there are limits.
- This case demonstrated that even if arbitration is possible (whether already commenced or contemplated), practical limitations still arise.
Another useful case is the Minerals case (2016, 3 HKC 444), decided by Madam Justice Chan, who specializes in arbitration matters.
In this case:
- Madam Justice Chan laid out a helpful checklist for applying Section 45.
- It clarifies what courts consider when deciding whether to grant assistance in arbitration-related matters.
Enforcement mechanisms include:
- Common Law Action on the Award: Recognizing an implied promise to perform according to the award (reference to the Eaton case and the Court of Final Appeal’s confirmation of this principle).
- Registration of an Award under the Arbitration Ordinance: A mechanistic procedure which, once complete, allows enforcement as if it were a court judgment, enabling remedies like garnishing bank accounts, etc.
Definition of “Court”:
- Under Section 21, “court” refers to the Court of First Instance (i.e., the High Court).
- Therefore, if seeking an injunction under Section 45, one must apply to the High Court, not the District Court.
E. Types of Injunctions
1. Mandatory Injunction
Definition: Mandatory injunctions compel a party to take positive action (e.g., “you must do X”).
Example: In the context of a shareholders’ agreement, requiring someone to sign documents or execute actions as stipulated in the agreement.
Courts apply a higher standard: The applicant must demonstrate a strong prima facie case or provide a high degree of assurance.
This higher threshold makes sense: Imposing positive obligations is more serious than merely maintaining the status quo.
2. Prohibitory Injunction
- Definition: Prevents someone from doing something.
- Example:
- If a neighbor plays piano at midnight, disturbing your sleep, you might seek a prohibitory injunction based on your right to the quiet enjoyment of your home.
- Apart from calling the police, you can ask the court for an order prohibiting the neighbor from continuing the disturbance.
3. Mareva / Freezing Injunctions
(1) What is a Mareva Injunction?
A Mareva injunction (named after a shipping case) is the court’s power to freeze assets to prevent them from being dissipated before a dispute is resolved.
- It can be granted before arbitration, before litigation, or after an award.
- After winning an arbitration, it becomes easier to obtain a freezing order because your entitlement has already been confirmed.
Court has the power to grant so-called Mareva injunctions freezing a party’s assets when there is a risk of dissipation (Mareva Compania Naviera SA v International Bulkcarriers SA (1975) 2 Lloyd’s Rep 509).
(2) Can be pre-arbitration and post-award
Applications for a Mareva injunction must be made in a timely manner
Applicant must demonstrate:
- Good arguable case on substantive claim;
- Assets within the jurisdiction;
- Balance of convenience is in favour of grant; and
- Real risk of dissipation of assets or removal of assets from the jurisdiction, which would render the plaintiff’s judgment of no effect.
4. Ex Parte Applications
When seeking ex parte injunctions (i.e., without notifying the other side), there is a heightened duty of full and frank disclosure.
Normally, justice systems like Hong Kong’s are adversarial and open—both sides appear in court and argue their case.
- Inter partes proceedings: Both sides are present.
- Ex parte proceedings: Only one party appears without informing the other.
Ex parte applications are exceptional and permitted only when giving notice would cause irreparable harm.
Important:
- Urgency alone is not enough to justify an ex parte application.
- Secrecy must be necessary to prevent harm.
Because only one party is present in an ex parte application:
- That party has a higher duty to be completely honest and transparent.
- This includes disclosing facts and possible defenses that might harm your case.
Example: If I go to court alone and accuse someone (say, Duncan) of breaching a contract, I must also inform the court about any possible defense Duncan might raise (e.g., that the contract was forged) — even though that could weaken my case.
If you fail to comply:
The court can set aside your injunction without even examining the merits of your case.
Breaching the duty of full and frank disclosure is treated very seriously
Case Study:
- A trade finance dispute where the applicant sought an ex parte injunction against a supplier and a bank.
- Problems:
- No notice was given to the opposing side when it should have been.
- Allegations of forgery were unsupported or exaggerated.
- Inaccurate or misleading presentation of facts.
Outcome:
- The injunction was barely maintained for one month.
- Applicant was forced to produce an affidavit explaining procedural failures.
- Likely significant cost liabilities (paying own costs, opponent’s costs, and bank’s costs).
Practice Tip:
- Be cautious: An improperly obtained injunction can backfire badly.
- Always prepare carefully, especially when making serious allegations (like fraud or forgery).
5. Chabra Jurisdiction (Third-Party Asset Freezing Orders)
Chabra jurisdiction – freezing injunction on assets over which Plaintiff has no cause of action – freezing assets held by nominees: Company A v Company D [2018] HKCFI 2240
Under the Chabra jurisdiction, courts can grant injunctions freezing assets held by third parties against whom the claimant has no direct cause of action, if those assets are effectively under the defendant’s control.
Key Point:
Court orders (such as freezing injunctions) can sometimes bind third parties who are not parties to the arbitration.
This is different from tribunal orders, which can only bind parties to the arbitration agreement.
Requirements:
- Evidence showing that the third party is not the true owner of the asset.
- The third party is merely holding assets as a nominee for the defendant.
- Good reason to suppose that the assets would be amenable to execution of a judgment against the defendant.
- Meaning: After obtaining a judgment, when enforcing it (e.g., garnishing bank accounts, seizing properties), the claimant could reach these assets, even if they are legally owned by another.
Examples:
- Property legally registered under a third party’s name, but beneficially owned or controlled by the defendant.
Purpose:
- To prevent defendants from shielding their assets by parking them under third-party names.
6. Anti-Suit Injunctions
A court order preventing a party from starting or continuing proceedings in a different forum (court or arbitration), in breach of an agreement (usually an arbitration agreement).
Legal Basis:
- Freedom of contract — parties must honor the arbitration agreement they entered into.
- Typically sought when a party breaches an agreement to arbitrate by initiating court proceedings elsewhere.
Relevant Case:
- Ever Judger case, summarized by Godfrey Lam J.
Key Points:
- Discretionary remedy: Granting an anti-suit injunction is not automatic even if there is a breach.
- Factors considered:
- Delay in making the application (e.g., if one participates in the foreign proceedings for years before objecting).
- Stage of foreign proceedings (how advanced they are).
- The balance of convenience and whether granting the injunction would be fair.
Parties may apply:
- to Court to restrain another party from bringing proceedings in other national courts in breach of an arbitration agreement;
- to Court to restrain another party from bringing or continuing arbitration proceedings (pursuant to an allegedly invalid arbitration agreement); or
- to the Tribunal (once constituted) for an injunction to restrain another party from bringing or continuing competing proceedings in courts in breach of an arbitration agreement.
Prevent other parties from commencing or continuing proceedings within the scope of the arbitration agreement in a foreign court.
Example:
- Waiting five years after arbitration has commenced abroad before seeking an anti-suit injunction is unlikely to succeed, because parties have invested significant time and costs.
7. Quia Timet Injunction
- Definition: Prevents threatened or imminent harm before it occurs.
- Example:
- If directors plan to convene a meeting in breach of a company’s articles of association, and you have credible evidence (such as a circulated notice), you can seek a quia timet injunction to prevent the meeting from taking place.
(“Quia timet” comes from Latin and refers to relief sought because of a threat of a wrongful act.)
⚖️ Relevant legal principles set out in Ever Judger Holding Co Ltd v Kroman Celik Sanayii Anonim Sirketi [2015] 2 HKLRD 866 §§36-45
The court should ordinarily grant an injunction to restrain the pursuit of foreign proceedings in breach of an agreement for Hong Kong arbitration, at any rate where the injunction has been sought without delay and the foreign proceedings are not too far advanced, unless the defendant can demonstrate strong reason to the contrary.
Whether a party can show strong reasons, sufficient to displace the other party’s prima facie entitlement to enforce the contractual bargain, will depend on all the facts and circumstances of the particular case.
See also Donohue v Armco Inc [2002] CLC 440 §24; Compania Sud Americana de Vapores SA v Hin Pro International Logistics Ltd (2016) 19 HKCFAR 586 §57; Dickson Valora Group (Holdings) Co Ltd v Fan Ji Qian [2019] 2 HKLRD 173 §18.
8. Final vs. Interim (Interlocutory) Injunctions
Final Injunction:
- Granted after a full trial.
- Plaintiff must establish:
- A cause of action, and
- That legal rights have been infringed.
- A higher threshold must be met compared to interim relief.
Interim (Interlocutory) Injunction:
- A temporary measure to preserve the status quo before trial.
- Does not involve full determination of the parties’ substantive rights.
IV. Injunctions in Contractual Disputes Involving Unique Goods
1. Damages May Be Inadequate Due to Scarcity
When a contract concerns a scarce commodity, such as a Ming Dynasty vase, damages may not be an adequate remedy for breach.
If, at trial, I successfully prove that Duncan breached his contract to sell me the Ming Dynasty vase, merely receiving monetary compensation would not allow me to easily purchase another similar item on the open market — because of the rarity of such goods.
Thus, in these circumstances, a court may be more inclined to grant an injunction to prevent Duncan from selling, disposing of, or otherwise dealing with the vase while the dispute is being resolved.
2. Balance of Convenience
The “balance of convenience“ is a discretionary and nebulous concept.
Courts must weigh up the relative hardships:
- If complying with an injunction would be very difficult or onerous for the respondent, that may weigh against granting the injunction.
- The court will engage in a practical, case-by-case assessment of what is fair and reasonable.
3. Undertaking as to Damages
When applying for an injunction, it is almost always expected that the applicant must provide an undertaking to pay damages if it later turns out that the injunction was wrongfully granted.
Example:
- Suppose I apply for an injunction claiming Duncan breached our contract over the vase.
- The court, without Duncan having had the chance to argue, grants me the injunction — but only after I provide an undertaking to pay damages if it turns out the injunction was wrongly obtained.
- If, after the trial, it is discovered that the contract was forged and Duncan actually suffered significant losses (e.g., he lost a sale opportunity), I would be liable to compensate Duncan under my undertaking.
The purpose is to ensure fairness: if the injunction turns out to have been improperly granted, the harmed party (here, Duncan) will still be compensated.
4. Fortification of Undertaking
In some cases, especially where the applicant is a foreign party without significant local assets, the court may require fortification of the undertaking.
- Fortification means giving the court — and the opposing party — assurance that the undertaking is meaningful.
- This could involve:
- Showing proof of ownership of assets (e.g., shares in listed companies), or
- Paying a sum of money into court as security.
The goal is to ensure the applicant can genuinely meet any damages award if required.
V. Practical Issues
xample: Binance Case:
- A confidential investment negotiation under a term sheet.
- Applicant breached confidentiality by not anonymizing the parties when filing for an injunction.
- Result: Public exposure of sensitive information.
- Allegation: Applicant deliberately used the court process to cause economic harm (e.g., media reporting an injunction against Binance immediately after it was granted).
Lesson:
- When filing court proceedings related to confidential arbitration matters:
- Anonymize party names if necessary.
- Be aware of the risks of strategic misuse of injunctions.
Provisions below aim to preserve the confidentiality traditionally associated with arbitration.
- Section 16:
Applications related to arbitration must generally be heard in closed court (i.e., not open to the public). - Section 17:
Sets out reporting restrictions during closed court proceedings to maintain confidentiality. - Section 18:
Prohibits disclosure of information relating to arbitral proceedings or awards without agreement between the parties.
Thus, Sections 16–18 provide the administrative and practical mechanisms to ensure the confidential nature of arbitration proceedings is respected even when matters spill over into court.
2. Court vs Tribunal Applications for Emergency Relief
Court Applications Advantages:
- Speed: Courts can hear ex parte applications within a day if necessary.
- Enforceability: Breach of a court injunction can lead to contempt of court proceedings (potential criminal sanctions).
- Emergency situations: If harm will occur very quickly (e.g., by tomorrow), court is often faster than tribunal.
Tribunal Applications:
- Useful if the tribunal is already constituted and familiar with the dispute.
- Some rules (e.g., in arbitration) allow emergency arbitrators to grant relief, but may still be slower than court.
Consideration of Confidentiality:
- Going to court may breach confidentiality obligations under arbitration agreements unless precautions (like anonymization) are taken.
3. Technical Pitfalls and Procedural Rigidities
Example:
- Late service of summons by a few minutes (e.g., 5:33 p.m.) was held insufficient to satisfy the “two clear days” rule.
- Judge treated it as an ex parte on notice application instead of inter partes.
Practice Tip:
- Strict compliance with procedural rules is critical, especially in injunctions.
- Small mistakes (even by minutes) can derail applications.
Judicial Discretion:
- Different judges may exercise discretion differently — experience helps to anticipate how strictly a particular judge may enforce procedural rules.
Class 8 - Interlocutory Proceedings: Part 2
I. Should relief be sought from the Tribunal or from a court?
A. International Arbitration Rules
Nearly all international arbitration rules grant the Tribunal the power to provide interim measures and relief, see:
- HKIAC Administered Arbitration Rules 2018
23.2 At the request of either party, the arbitral tribunal may order any interim measures it deems necessary or appropriate.
23.3 An interim measure, whether in the form of an order or award or in another form, is any temporary measure ordered by the arbitral tribunal at any time before it issues the award by which the dispute is finally decided (…)
- Article 28(1) of the ICC Rules
- Article 25.1 of the LCIA Rules
- Article 26(1) of the UNCITRAL Rules
- Appendix II, Article 1 of the DIAC Rules
B. Are national laws relevant?
National laws (laws at the seat of arbitration / lex arbitri) also provide for the arbitrator’s powers to grant interim relief:
Section 35 Arbitration Ordinance (Art. 17 of UNCITRAL Model Law) (Power of arbitral tribunal to order interim measures)
- Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant interim measures.
- An interim measure is any temporary measure, whether in the form of an award or in another form, by which, at any time prior to the issuance of the award by which the dispute is finally decided (…).
C. Relief from the Tribunal or a Court?
In some scenarios, interim relief granted by the Tribunal might be viewed as insufficient. Examples include:
- The relief does not have sufficient teeth
- The Tribunal’s order is not enforceable in a particular overseas jurisdiction
- The Tribunal cannot provide the relief sought
- The relevant arbitral rules do not allow for the making of ex parte applications
- The Tribunal’s order is not enforceable against third parties
- The Tribunal cannot provide the requested relief sufficiently quickly
D. Do arbitral rules permit applications to Court?
Most arbitral rules respect and recognize these concerns by allowing for applications for interim relief to be made to the national courts:
- Article 28(2) of the ICC Rules
- Articles 25.3 to 25.4 of the LCIA Rules
- Article 26(9) of the UNICITRAL Rules
- Appendix II, Article 1.13 of the DIAC Rules
E. Beware of limiting conditions in Tribunal rules
1. No Limiting Conditions
Some arbitration rules do not restrict the ability of parties to approach national courts for interim measures (temporary measures to preserve the status quo or prevent harm) at any stage.
UNICITRAL: If one party asks a court for interim measures (such as freezing assets), it does not interfere with the agreement to arbitrate the dispute. It also does not mean the party is giving up their right to arbitrate.
A request for interim measures addressed by any party to a judicial authority shall not be deemed incompatible with the agreement to arbitrate, or as a waiver of that agreement.
DIAC: Similar to UNICITRAL, this rule says that seeking help from national courts for interim relief, or asking a court to enforce the tribunal’s interim measures, does not violate the arbitration agreement.
A request for interim measures addressed by any party to a judicial authority or a request to a judicial authority to enforce an interim measure or a preliminary order issued by the Tribunal, shall not be deemed incompatible with the agreement to arbitrate or as a waiver of that agreement.
1 | 💡 Is the right to seek relief from the national courts unlimited? |
The right is not unlimited. While the arbitration rules (like UNICITRAL and DIAC) allow seeking interim relief from national courts without waiving arbitration, there may still be restrictions in other arbitration rules or local laws. For example, some rules might have conditions (like “before the Tribunal is formed”) that restrict when you can go to court for interim relief.
2. Limiting Conditions
ICC: The ICC allows parties to go to court for interim measures before the Tribunal is formed. After the Tribunal is set up, they can go to court if the situation is right (“appropriate circumstances”).
Before the file is transmitted to the arbitral tribunal, and in appropriate circumstances even thereafter, the parties may apply to any competent judicial authority for interim or conservatory measures (emphasis added)
1
💡 What constitutes appropriate circumstances?
“Appropriate circumstances” generally mean urgent situations where the Tribunal cannot act quickly enough, such as if there’s a risk of damage, loss of evidence, or harm that cannot be undone later. This could involve extreme cases of urgency or the inability to reach the Tribunal in time.
LCIA: Like the ICC, the LCIA allows requests for interim relief from national courts before the Tribunal is set up. However, after the Tribunal is formed, the rule becomes stricter. You can only apply to national courts for interim relief in “exceptional cases,” and you need the Tribunal’s authorization to do so.
The power of the Arbitral Tribunal under Article 25.1 shall not prejudice any party’s right to apply to a state court or other legal authority from interim or conservatory measures to similar effect: (i) before the formation of the Arbitral Tribunal; and (ii) after the formation of the Arbitral Tribunal in exceptional cases and with the Arbitral Tribunal’s authorisation, until the final award (emphasis added)
1
💡 What constitutes an exceptional case? Does the requirement to seek authorization from the Tribunal preclude ex parte application?
An “exceptional case” could be a situation where immediate action is necessary, but the Tribunal cannot act in time. For example, if there is a serious risk of harm to one party that needs urgent court intervention. It is not common, and would typically require very strong reasons.
1
💡 Does the requirement to seek authorization from the Tribunal preclude ex parte application?
Yes, typically, the requirement to seek the Tribunal’s authorization would mean that you cannot apply to national courts without informing the other party (ex parte). Ex parte applications (where one party goes to court without informing the other) would only be allowed in situations where there is an emergency and it is impossible to get authorization in time.
F. Should Relief Be Sought from the Court?
1. Introduction
When deciding whether to seek relief from the court or from an arbitration tribunal, the answer is not straightforward. It depends on the specific circumstances of each case. Here are some factors to consider when evaluating where to seek relief.
2. Power to Grant Relief: Arbitration vs. Court
Most international arbitration rules provide the arbitration tribunal with the power to grant interim measures. For example, under the 2018 Hong Kong Arbitration Rules, Article 23.2 allows either party to request the tribunal to order any measures it deems necessary or appropriate.
In addition to the arbitration rules, national laws also play a role. The place where the arbitration tribunal is seated (e.g., Hong Kong) will often have its own legal provisions that can impact the availability of relief. The Hong Kong Arbitration Ordinance, under Article 17 of the Model Law, permits the tribunal to grant interim measures unless the parties agree otherwise.
While the tribunal generally has the power to grant interim measures, there are cases where the court might be the better option.
3. When Might You Need to Seek Court Relief?
Here are a few reasons why one might consider seeking relief from the court rather than from the tribunal:
Lack of Enforcement Power:
A tribunal’s order may lack the enforcement strength that a court order has. For example, if a tribunal issues an order and the counterparty fails to comply, there are fewer sanctions or legal consequences compared to a court order, which could be backed by penalties.
Enforceability Issues in Jurisdiction:
Even if an interim order is issued by the tribunal, it may not be enforceable in the jurisdiction where you need it to take effect. For example, the Hong Kong International Arbitration Centre (HKIAC) may issue an order, but if the counterparty’s assets are in a jurisdiction that does not recognize the tribunal’s order, it may be ineffective.
Tribunal’s Limitations:
Some orders simply fall outside the tribunal’s scope. For example, certain types of orders, like a search and seize order (where you are allowed to enter a location and seize evidence), may be beyond the tribunal’s authority. In these cases, you might need to approach the court, which may have the power to issue such orders.
Party-Application Restrictions:
Arbitration tribunals might not allow certain types of applications. For instance, some tribunals may not allow an application to surprise the other side with an order before they can react. In such cases, seeking court intervention may be necessary to gain an advantage in the proceedings.
Lack of Jurisdiction:
Arbitration is a consensual process. The tribunal can only issue orders related to the parties that are bound by the arbitration agreement. If the subject of the dispute involves third parties not bound by the arbitration agreement, the tribunal may not have the jurisdiction to issue an order regarding those parties.
For example, in a recent matter involving battery units in the United States, our client had sold these units to customers. The dispute concerned whether the batteries were faulty. The opponent wanted to apply to the tribunal for jurisdiction over these units in the hands of the customers. However, the tribunal had no jurisdiction over the customers because they were not parties to the arbitration agreement.
Urgency and Speed:
Emergency situations may require faster action than the arbitration process can provide. For example, an emergency arbitrator under the ICC, CAC, or HKIAC rules might take 14 to 15 days to render an order. In urgent cases, this delay could be too long, especially if you need immediate relief.
In contrast, the court can often act much faster. For example, if there is an emergency, the court might be able to issue an order on the same day, whereas the arbitration process might take significantly longer.
4. Conclusion: When to Go to Court
The decision to seek relief from the court or the tribunal depends on various factors:
- Urgency: If immediate relief is necessary, the court may be the better option.
- Enforceability: If the tribunal’s order may not be enforceable in the relevant jurisdiction, the court could provide stronger support.
- Scope and Limitations: If the tribunal cannot grant the necessary order due to jurisdictional or procedural limitations, the court may be the only option.
Ultimately, the choice should be made based on the specific needs and context of your case.
G. Why Choose Court Relief Over Tribunal Relief?
1. Introduction
While courts offer many advantages when seeking interim measures, there are important considerations that may make arbitration preferable in certain situations. Let’s explore why, despite the benefits of court orders, you might still choose to go before an arbitration tribunal.
2. Arbitration vs. Court: The Rules You Operate Under
In most international arbitration frameworks, there are provisions that allow for interim relief through national courts. These rules generally recognize the possibility of seeking interim relief from courts in appropriate circumstances.
For example:
- ICC Rules allow for court applications before arbitration begins, but the circumstances under which you can do so are subject to interpretation. What constitutes “appropriate circumstances” may vary, and disagreements can arise between the parties.
- LCIA Rules similarly provide for court applications, but only in exceptional cases and with the tribunal’s permission. This adds an extra layer of complexity, as the tribunal’s authorization is required, which might lead to challenges in maintaining surprise or urgency.
3. Why Not Always Go to Court?
If there are clear advantages to going to court, why would one still seek relief from the tribunal? Here are some factors to consider:
- Surprise Factor and Speed:
- Going to court can sometimes alert the other party prematurely, which may undermine the strategic advantage of surprise. In contrast, tribunals can be more flexible and, in some cases, less formal, which may be crucial for urgent matters.
- Tribunal’s Familiarity and Procedural Flexibility:
- Tribunals are familiar with the arbitration process and may offer more streamlined, specialized relief tailored to the needs of the case, compared to the sometimes rigid approach of national courts.
- Jurisdictional Considerations:
- When seeking relief from the court, you must also consider the jurisdiction in which the court is located. This can create complications if the assets or parties involved are not within that jurisdiction. For example, a Hong Kong court order may not be effective against assets in Saudi Arabia. In this case, seeking relief from a Saudi Arabian court might be more effective.
4. Key Rules to Be Aware Of
- ICC Rules:
- According to the ICC rules, before the arbitration is transmitted to the tribunal, parties may apply for interim measures to any competent judicial authority. However, the interpretation of “appropriate circumstances” can vary and is not always clearly defined. Caution is needed when making a court application in such circumstances.
- LCIA Rules:
- The LCIA rules provide that the tribunal’s power to issue interim measures does not prejudice a party’s right to approach a state court. However, this right is contingent on exceptional circumstances and tribunal authorization. This means that after the tribunal is formed, parties generally need to seek permission from the tribunal to apply to the court.
- National Court Jurisdiction:
- Different jurisdictions have different attitudes towards enforcement. In Hong Kong, the law permits courts to provide interim measures alongside arbitration proceedings, without conflicting with the arbitration agreement. However, if the order is made in Hong Kong, its enforcement may be limited to Hong Kong’s jurisdiction. In cases involving cross-border issues (e.g., freezing orders on bank accounts in Saudi Arabia), the efficacy of the Hong Kong court order may be limited without cooperation from local authorities.
5. Strategic Considerations: Tribunal vs. Court
The decision to go to court or to the tribunal isn’t always clear-cut:
- Court vs. Court: If assets or parties are located in multiple jurisdictions, the decision could involve multiple courts, making the process more complex. The choice may not be simply between the tribunal and one court, but between different national courts based on the enforcement and jurisdictional rules in each.
- Practical Considerations: If urgent relief is needed and a tribunal cannot act quickly enough, seeking interim measures from the court may be necessary. However, if the tribunal is already engaged, it may be more efficient to work within its framework to avoid complications or delays.
6. Conclusion
Choosing whether to go to the tribunal or the court for interim relief depends on various factors, including jurisdiction, urgency, and the specific rules governing the arbitration process. While courts offer powerful enforcement, tribunals may offer quicker, more specialized relief, especially if you can keep the proceedings confidential or surprise the opposing party. It’s essential to balance these considerations based on the specific circumstances of your case.
II. If a court, which court?
A. Hong Kong
Interim measures are also available from the Hong Kong courts in support of arbitration.
The Arbitration Ordinance (Cap. 609) makes it clear that the jurisdiction of the courts to grant interim measures exists in addition to the jurisdiction of the Tribunal and requesting such measures from court does not invalidate the arbitration agreement.
Section 21 of the Arbitration Ordinance (Art. 9 UNCITRAL Model Law) (Arbitration agreement and interim measures by court):
It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant such measure.
B. Overseas arbitrations
The availability of interim measures before the Hong Kong courts extends to arbitrations taking place outside of Hong Kong.
Section 45(2) of the Arbitration Ordinance:
On the application of any party, the Court may, in relation to any arbitral proceedings which have been or are to be commenced in or outside Hong Kong, grant an interim measure.
Article 17J of Model Law
A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures in consideration of the specific features of international arbitration
Jurisdictions based on the model law: Australia, New Zealand, Germany, Greece, Norway, Singapore and Hong Kong.
Care required A jurisdiction may only enact parts of the model law. See section 45(1) of the Arbitration Ordinance.
C. Jurisdiction by jurisdiction approach required
| Jurisdiction | Court Support for Interim Measures | Conditions |
|---|---|---|
| Hong Kong | Strong, permissive environment for interim measures. | Hong Kong courts can issue interim measures even if the arbitration is seated elsewhere. |
| Ireland | Unclear. | Uncertainty over whether Irish courts will support foreign arbitration. |
| PRC | Limited. | Only allows interim measures if the arbitration is seated in Hong Kong. |
| Australia/New Zealand | Supportive (Model Law applies). | Courts generally uphold interim measures under the Model Law. |
| Germany | Supportive (Model Law applies). | Same as Australia/New Zealand; favorable to international arbitration. |
| England and Wales | Restricted. | Requires urgency or tribunal permission for court intervention. |
1. Challenges in Seeking Court Orders in Different Jurisdictions
The choice of jurisdiction is crucial when seeking interim measures, especially in cases where the arbitration is seated in one country, but you need to seek relief in another jurisdiction. The relationship between the arbitration and the location of the relief needed can create complications.
- Hong Kong Example:
- Hong Kong law provides permissive language (Section 452 of the Arbitration Ordinance) that allows the Hong Kong courts to issue interim measures for arbitrations seated elsewhere, like in LCIA arbitration.
- This is beneficial if you want to obtain relief in Hong Kong, even though the arbitration itself is seated elsewhere. However, this permissive language is not universally available in all jurisdictions.
- Irish Example:
- In a case involving Ireland, the question arose whether Irish courts would grant interim measures in support of a seat of arbitration located elsewhere.
- The situation was unclear, and whether relief could be granted before the arbitration was even initiated remained ambiguous. This highlights the importance of understanding the specific legal environment of the jurisdiction involved.
- PRC Example:
- The People’s Republic of China (PRC) provides another challenge. The PRC will only entertain an application for interim relief if the arbitration is seated in Hong Kong. This illustrates how certain jurisdictions may only support measures when the arbitration is conducted under specific conditions (such as Hong Kong’s status as the seat of arbitration).
2. Global Support for Interim Measures: The Model Law
The UNCITRAL Model Law (Article 17J) plays a significant role in jurisdictions that have adopted it. It grants courts the same powers to issue interim measures as they would in domestic proceedings.
- Countries that support interim measures under the Model Law:
- Jurisdictions such as Australia, New Zealand, Germany, and others that have adopted the Model Law are generally more permissive about granting interim relief in support of international arbitration.
- However, the effectiveness of interim relief is still jurisdiction-specific. Even within Model Law jurisdictions, local legal advice is essential to understand the full scope of what is possible.
3. Jurisdictions with Ambiguities or Restrictions
Some jurisdictions, such as England and Wales, have more restrictive conditions regarding interim measures.
England and Wales:
Section 43(3) of the Arbitration Act allows the court to issue orders to preserve evidence in arbitration-related matters, but this is not the same as the Model Law’s broad approach.
Section 44 Arbitration Act 1996 (England & Wales)
s. 44(3)
If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets.
Section 44(4) further restricts the circumstances under which court orders can be sought. If the matter is not urgent, permission from the tribunal is required, or the consent of the other parties is needed.
s. 44(4)
If the case is not one of urgency, the court shall act only on the application of a party to the arbitral proceedings (upon notice to the other parties and to the tribunal) made with the permission of the tribunal or the agreement in writing of the other parties.
In practice, obtaining the consent of the opposing party can be nearly impossible, as they are typically the target of the relief. Hence, permission from the tribunal becomes crucial.
Courts may be reluctant to grant relief without urgency, which is often subjective. What one party considers urgent, the court might not.
4. Practical Considerations for Seeking Court Orders
- Urgency:
- Urgency plays a key role in determining whether a court will issue interim measures. However, urgency is often subjective, and it may be compared to how quickly a tribunal could act.
- If the tribunal can act more quickly than the court, the party seeking relief may need to reconsider whether court intervention is necessary.
- Perception by the Tribunal:
- Seeking interim relief from a court instead of the tribunal may negatively affect the tribunal’s view of the party’s commitment to arbitration. This could be perceived as bypassing the tribunal and could potentially harm the party’s position.
Jurisdiction | Usually law of the seat | Arbitration agreement |
|---|---|---|
Governing laws | Arbitration laws; | Arbitration agreement; |
Binding Power | Parties + 3(rd) parties | Only parties to arbitration agreement |
Advantages | Ex parte“emergency” relief | Ex parte“emergency relief available under most institutional rules; |
III. Considerations for Choosing Court vs. Tribunal Relief
A. Key Considerations for Seeking Relief in Court
When considering whether to seek relief from a tribunal or a court, several factors must be considered, including:
- Jurisdiction of the Court:
- You must consider the relevant law of the jurisdiction where the court is located. This could be the law of the country where the arbitration is happening, or it could be the law of a third-party country.
- The court must accept jurisdiction based on the arbitration agreement, and you’ll need to follow the civil procedure rules in that jurisdiction for how applications are made.
- Binding Power:
- One significant advantage of seeking relief from a court is its binding power, which extends not just to the parties involved in the arbitration, but potentially to third parties as well.
- Courts can also issue injunctions, and other specific interim measures that may be difficult to obtain from a tribunal.
- Emergency Relief:
- Courts can often provide emergency relief more quickly than tribunals. Examples of this include freezing orders or injunctions.
B. Tribunal Relief: A Different Approach
While tribunals can provide relief, especially under institutional rules, there are some limitations:
Speed of Relief:
Tribunals may not always be able to act as quickly as courts, particularly in emergency situations.
Confidentiality:
One key advantage of going before a tribunal is that arbitration proceedings are typically confidential. If confidentiality is a critical factor, the tribunal may be the preferred venue for interim relief.
Tribunal vs. Court After the Tribunal is Established:
Once the tribunal is up and running, seeking relief from the tribunal might be more straightforward. However, obtaining relief from a court might become more difficult, especially if the tribunal is already in the process of handling the case.
Court reluctance may also arise if the arbitration has already commenced, and the matter could be handled by the tribunal.
IV. Interim Measures of Protection
A. Interim Measures of Protection
Under the Arbitration Ordinance, the following interim measures of protection are available:
- the preservation, custody or sale of “relevant” property subject to the arbitration: ss.56(1)(d)(i), 56(6), 60(1)(a) and 60(2) AO;
- the inspection, photographing, preservation or detention of “relevant” property subject to the arbitration: ss.56(1)(d)(i), 56(6), 60(1)(a) and 60(2) AO;
- directing samples to be taken from, observations to be made of, or experiments to be conducted on “relevant” property: ss.56(1)(d)(ii), 56(6), 60(1)(b) and 60(2) AO; and
- interim injunctions or other interim measures of protection (ss.35 and 45 AO).
These powers are vested in the arbitral tribunal. However, for some of these measures there is concurrent power of the courts (ss. 45, 60(1), (3), (4)).
Where a party’s claim is for the enforcement of rights to property, the Tribunal can make an order under ss.56(1)(d) or 60(1)(a) AO.
To make an order under s.56(1)(d) the “relevant” property must be owned by or be in the possession of a party to the arbitral proceedings and not in the possession or custody of a third party.
If the property is in the custody of a third party, application should be made to the court under s.60(1).
When a court makes an order under s.60(1)(a), it is the Tribunal, party or expert that executes the order (at the court’s “direction”).
An order under ss.56(1)(d) or 60(1)(a) may be made together with an interlocutory injunction ordered under ss.35 or 45 AO.
B. Tribunal Powers in Arbitration: Preservation of Property
1. Objective of Arbitration: Empowering the Tribunal
One of the primary objectives of arbitration is to vest as much authority as possible in the arbitral tribunal, while limiting the need for recourse to the courts. This underlying principle is reflected in various sections of arbitration legislation.
Under Section 56(1), the tribunal’s powers are defined, but they remain subject to any contrary agreement made between the parties through their arbitration agreement. In contrast, the powers of the courts are not subject to such restrictions, meaning there is no equivalent limitation on court jurisdiction.
When considering the powers available, it is important to understand which powers are concurrent between the tribunal and the court, and which are not.
2. Preservation Measures: Tribunal vs. Court
Moving forward, we discuss measures available to preserve property in arbitration.
- Section 56 outlines the powers of the tribunal.
- Section 6 defines the powers of the court.
Under Section 56, the tribunal’s powers to preserve property are limited to situations where the relevant property is either owned by, or in the possession of, a party to the arbitration.
In contrast, the court’s jurisdiction under Section 6 is broader: it allows the court to grant injunctions even over assets held by third parties who are not directly involved in the arbitration.
Thus, when a court orders the preservation of property, it is still the tribunal that ultimately executes the order.
📌 Key Difference:
- A court order requires execution through the tribunal.
- A tribunal order does not require separate execution.
3. Concurrent Jurisdiction and Conditions
The powers to preserve property can be exercised concurrently under Sections 56 and 164. However, two conditions must be satisfied for the tribunal to exercise such powers:
- The property must be in the possession of a party to the arbitration.
- The property must have a connection with the subject matter of the arbitration proceedings.
Merely having some relationship with the proceedings is not sufficient to trigger these preservation powers.
C. Measures to Preserve Evidence
1. Introduction
The Tribunal may make orders for the inspection, photographing, preservation or detention of “relevant” property (s.56(1)(d)(i) AO). It may also make orders directing samples to be taken from, observations to be made of, or experiments to be conducted on “relevant” property (s.56(1)(d)(ii) AO).
These powers of the Tribunal are aimed at preserving property as evidence or facilitating the process of obtaining evidence.
Orders made under s.56(1)(d) may be enforced in court (s.61 AO).
Where an order has to be enforceable against a third party, applications have to be made to court under s.60(1).
Example of the wide reaching powers of court: Anton Piller orders (O.29 / PD 11.2 with PD 11.1 (ex parte application)):
An Anton Piller order is a court order that provides the right to search premises and seize evidence (without warning to the counterparty) in order to prevent destruction of relevant evidence. Court’s powers are developed out of trademark, copyright or patent infringements cases but are now applied more widely.
2. Taking Evidence and Search Orders
An important tool related to the preservation of evidence is the search order, available under both Section 56 and Section 6.
Recall from last week: a search order allows one party (usually through solicitors) to enter the premises of the opposing party—commercial or domestic—to search for and secure relevant documents or property.
- Such an order may be necessary if there is reason to believe that:
- The respondent holds documents or property relevant to the arbitration.
- There is a risk that the respondent may destroy or conceal such documents.
This remedy is particularly powerful: it allows one party in civil proceedings to search the other party’s computers, premises, and documents to preserve vital evidence.
3. Rationale Behind Search Orders
The very nature of a search order is that prior notice would defeat its purpose. If the opposing party is alerted to the order, they might immediately destroy or hide the evidence.
For example:
- You might suspect that a warehouse contains counterfeit goods infringing your intellectual property rights.
- If you warned the opponent, they might quickly destroy the goods before you can collect evidence.
Search orders are therefore especially critical in cases involving intellectual property infringement but are not limited to IP cases.
They can also be used in commercial disputes, for instance where:
- A party is withholding sensitive trade information.
- A party refuses to return important documents belonging to you.
V. Security for Costs
A. What is Security for costs?
1. Overview
Security for costs refers to the power of the arbitral tribunal to order that the claimant (or counterclaiming respondent) shall provide adequate security for any costs which may be awarded against him in the event of a dismissal of his claim or counterclaim.
It is intended to ensure that the respondent (usually the party defending the arbitration) does not face financial loss in case the claimant’s case is unsuccessful.
In litigation or arbitration, a defendant who successfully defends against an unmeritorious claim may be awarded legal costs. However, there’s a risk that the claimant may not have the assets to pay these costs, even if they lose. The concept of security for costs helps mitigate this risk by requiring the claimant to provide a form of financial guarantee to cover potential legal costs. This ensures that if the defendant wins, they are more likely to recover their costs without having to chase after the claimant for payment.
2. Why Security for Costs Is Important?
In a litigation context, security for costs is often necessary when the claimant’s ability to pay is uncertain. For example:
- If a claimant is based in a jurisdiction where assets are hard to access or enforce against (e.g., a Cayman-based company), the court may require the claimant to provide security for costs. This guarantees that if the defendant wins, they will be able to recover the costs of defending the case.
In arbitration, the situation is slightly different:
- Arbitration is a consensual process, meaning both parties have voluntarily agreed to arbitrate their dispute. Thus, the location of the opposing party is often less relevant, as arbitration agreements typically specify where proceedings will take place.
- The primary concern in arbitration is ensuring that if a cost award is granted, the successful party can recover those costs, especially when the losing party’s financial capacity is uncertain.
3. What is the position at common law?
This concept originates from common law systems, where the general rule is that costs follow the event—the losing party is usually required to pay the legal costs of the winning party.
In many common law jurisdictions (like England or Hong Kong), if a party wins the case, they can expect not only to have their legal costs covered, but also potentially to be awarded the legal fees of the other party.
4. Why Does the Security for Costs Rule Exist?
The rule of security for costs primarily exists to protect respondents from the financial burden of defending against a claim, especially when the claimant is unlikely to be able to cover the costs if the claim is unsuccessful.
Without this provision, a respondent could face the risk of not only paying their own legal fees but also being required to cover the legal fees of the claimant, should the claimant lose.
5. Common Law vs. Civil Law
In common law systems, the concept of costs following the event is generally applied, making the issue of security for costs more relevant.
Civil law systems, however, may not have the same automatic expectation of costs following the event, but security for costs can still be applied under specific circumstances, depending on the arbitration rules and local laws.
6. Comparison between Court Proceedings and Arbitration Regarding Security for Costs
Under Section 95 of the relevant legislation in Hong Kong:
- The court may order security for costs whether the party is a limited company incorporated in Hong Kong or a foreign company incorporated outside Hong Kong.
- Credible testimony (i.e., credible evidence) must show that there is a reason to believe the claimant would be unable to pay the defendant’s costs if ordered to do so.
Key comparison:
- In court proceedings, the fact that a company is a foreign entity can be a strong reason for ordering security for costs.
- In arbitration, however, the mere fact that a company is foreign should not by itself be sufficient to justify an order for security.
- This reflects a higher threshold for obtaining security for costs in arbitration compared to court litigation.
7. Application in Arbitration
In arbitration, a tribunal can order the claimant to provide security for costs at the outset of the case or during the proceedings if there is a concern that the claimant may not be able to pay costs if the case is dismissed.
This typically happens if there is doubt about the claimant’s ability to cover the financial consequences of an adverse decision, such as in cases where the claimant is not domiciled in the jurisdiction of the arbitration or has limited assets.
Although the concept of security for costs operates similarly to litigation, but with some key differences:
- Jurisdiction and Location: Unlike in court, where jurisdiction plays a significant role in determining where you can enforce orders, in arbitration, both parties typically know where their assets are located and where the proceedings will occur.
- Defensive Measure: Security for costs is often considered a defensive measure, protecting a defendant from the financial burden of an unmeritorious claim. It’s a way of ensuring that costs are covered upfront, rather than the defendant having to chase the claimant after the arbitration concludes.
B. Questions for the arbitrator to ask:
- Do I have the power? If yes, is this a discretionary power?
- How should I exercise my discretion?
- What is the quantum of costs that I should order?
- In what form should security be given?
- What are the consequences for non-compliance?
C. Do I have the power?
First question: Do I (as the arbitrator) have the power to grant security for costs?
Legal Basis:
- In Hong Kong, the legal authority arises from Section 56(1)(a) of the Arbitration Ordinance.
- This section provides that, unless otherwise agreed by the parties, the tribunal may make an order requiring:
- A claimant, or
- A respondent (in the context of a counterclaim)
- to give security for costs in the arbitration proceedings.
s.56(1) Unless otherwise agreed by the parties, when conducting arbitral proceedings, an arbitral tribunal may make an order—
(a) requiring a claimant to give security for the costs of the arbitration…”
A negative stipulation under s.56(2)
“(2) An arbitral tribunal must not make an order under subsection (1)(a) only on the ground that the claimant is—
(a) a natural person who is ordinarily resident outside Hong Kong;
(b) a body corporate—
(i) incorporated under the law of a place outside Hong Kong; or
(ii) the central management and control of which is exercised outside Hong Kong; or
(c) an association—
(i) formed under the law of a place outside Hong Kong; or
(ii) the central management and control of which is exercised outside Hong Kong.
Without a statutory or contractual basis, the tribunal cannot grant such an order.
In Hong Kong, since the Arbitration Ordinance provides for this power, security for costs applications are permissible.
D. How can I exercise such power?
1. Discretionary Nature of Security for Costs
The tribunal’s power to order security for costs under Section 56(1)(a) of the Arbitration Ordinance is discretionary, not mandatory.
Therefore, in each case, the tribunal must evaluate whether it is appropriate to grant security.
2. Tribunal’s Thought Process
When sitting as an arbitrator, consider:
- Whether to exercise discretion to grant security at all.
- If yes, then how to determine the appropriate quantum (i.e., amount) of security.
3. Exercising Discretion: Statutory Framework
- Section 56(2) of the Arbitration Ordinance provides limitations on how discretion can be exercised:
- It prohibits tribunals from ordering security for costs solely because:
- The claimant is resident outside Hong Kong.
- The claimant is a foreign company.
- Thus, foreign status alone is not sufficient to justify security for costs under Hong Kong law.
- It prohibits tribunals from ordering security for costs solely because:
- Policy reason:
- To avoid discrimination against foreign parties and to support the neutrality of Hong Kong as an arbitration seat.
4. Sir Lindsay Parkinson & Co v Triplan Ltd (1973) 2 All ER 273
- Whether the claim is bona fide and not a sham;
- Whether the claimant has a reasonably good prospect of success;
- Whether there is an admission on the pleadings or elsewhere that the money is due;
- Whether there is a substantial payment into court or an open offer of a substantial sum;
- Whether the application was used oppressively;
- Whether the claimant’s want of means has been brought about by any conduct of the respondent such as delay in payment; and
- Whether the application is made at a late stage of the proceeding.
Applied in KJM Industries Ltd v JPM Resources Ltd [2005] 4 HKC 100 (CA)
E. Thought Process
1. Factors Supporting a Grant of Security
- Out of Jurisdiction:
- Not only is the claimant outside Hong Kong, but the difficulty of enforcement in their jurisdiction may also be a factor.
- For example:
- A jurisdiction not a New York Convention party.
- A jurisdiction where enforcement would be very difficult or uncertain.
- Nature of Security:
- Arbitration allows more flexibility compared to court proceedings.
- Traditional court practice: Cash deposit into a controlled account.
- Arbitration options:
- Bank guarantee instead of cash.
- Other forms depending on the case and tribunal discretion.
- Arbitration allows more flexibility compared to court proceedings.
- Quality of Security:
- A high-quality guarantee (e.g., from HSBC or a reputable Hong Kong bank) is almost as good as cash.
- Weaker guarantees:
- Guarantees from banks in less stable jurisdictions or smaller banks might be insufficient.
- Tribunal must assess the solvency and credibility of the guarantor.
- Risks in Requiring Security:
- If the security provided fails later, the arbitration could be derailed unfairly.
- Equally, if no security is provided, the respondent could be exposed to unrecoverable costs even if they win.
- Balancing fairness to both parties is key.
2. Core Questions for Tribunal or Advocate
First step:
- Confirm power to order security (Section 56(1)(a), Arbitration Ordinance).
Second step:
- Check negative stipulations (Section 56(2)) — foreign residence alone is not sufficient to justify security.
3. Factors from Leading Case Law (mainly under English Law)
Note: Applicability depends on whether English law governs the arbitration, but principles are generally persuasive.
The tribunal should consider:
| Factor | Explanation |
|---|---|
| Financial Position | Whether the claimant’s financial situation indicates a risk of non-payment. |
| Enforcement Difficulties | Whether the claimant is in a jurisdiction where enforcing an award would be problematic. |
| Nature of the Claim | If the claim appears weak or unmeritorious, this may weigh in favor of granting security. |
| Risk of Stifling the Claim | Tribunal must avoid security orders that would prevent a legitimate claim from proceeding simply because the claimant cannot afford security. |
| Prospect of Success | If there’s clear evidence the claim is weak, it supports ordering security. (However, merits assessment should be light-touch; no mini-trials.) |
| Timing of the Application | An application made too late (e.g., right before trial) might seem oppressive or tactical, undermining its credibility. |
4. Checklist
Not to be used as an instrument of oppression.
Tribunal must guard against security applications used:
- Oppressively to burden or exhaust the claimant.
- Tactically to block a meritorious claim.
Not to stifle a genuine claim.
Not to be used as a tactical device to intimidate a weaker party or delay the hearing on substantive issues.
Be made as early as possible in the proceedings.
Technically, security can be applied for at any time during proceedings.
However:
- Earlier applications are generally seen as more bona fide.
- Late applications could be perceived as tactical (e.g., to disrupt or delay the proceedings).
Unreasonable delay is an important factor against the making of an order.
Not to go into the merits in more details than is absolutely necessary.
While merits can be considered, the tribunal must avoid:
- Conducting a detailed inquiry into the merits at this stage.
- Turning the interlocutory application into a mini-trial.
Merits consideration should only arise if there is:
- Clear and obvious weakness in the claim.
- Not when the case depends on substantial disputed facts.
A balance of competing interest between the interest of preventing one party from getting an empty award and that of stifling a bona fide claim.
S.905 of the Companies Ordinance (Cap.622)
The Court may order security where (i) the plaintiff is a limited company or a company incorporated outside Hong Kong and (ii) by credible testimony there is reason to believe that the plaintiff will be unable to pay the defendant’s costs if the defendant succeeds in the defence.
2. Grounds for Granting Security: Beyond Foreign Residence
More compelling reasons are required, depending on the facts of the case.
Possible grounds could include:
- Financial difficulties:
- Evidence of a deterioration in financial position since the arbitration agreement was made.
- Concern that the claimant might not be able to pay the respondent’s legal costs if the claim fails.
- Risk of non-payment:
- Proof that the claimant has no substantial assets within the jurisdiction.
- Terms of the arbitration agreement:
- Clauses that imply or require that parties must be financially sound or must provide security under certain conditions.
Practical Tip:
- When making an application, you should identify multiple reasons (perhaps five or six) to support the request for security.
- Use a multi-pronged strategy:
- Financial insolvency.
- Lack of local assets.
- Deterioration of financial status.
- Terms of the arbitration agreement.
- Any delay or bad faith conduct by the claimant.
F. How to determine the quantum of costs?
The arbitrator must act judicially in fixing the amount.
Figures must not be nominal, nor on a full indemnity basis – should be assessed on a party and party basis.
“Sufficient” security does not mean “complete” security.
- Quantum is generally the easier aspect to approach first.
- Key considerations:
- Should security cover the entirety of the respondent’s expected legal costs?
- From the defendant’s perspective:
- It is preferable to seek as much security as possible to:
- Ensure full recovery of legal costs if successful.
- Increase the financial pressure on the claimant.
- Argue that the claim will involve complex and costly litigation to justify a higher security amount.
- It is preferable to seek as much security as possible to:
- From the tribunal’s perspective:
- A stage-by-stage approach might be fairer:
- Order security for early stages first (e.g., statement of case and defense).
- Later stages (e.g., document production, hearing) could trigger further security orders if necessary.
- This staged approach:
- Avoids overburdening the claimant.
- Ensures that security remains proportionate and responsive to the progress of the arbitration.
- A stage-by-stage approach might be fairer:
It is rare for a tribunal (or court) to order that the full legal costs be totally (i.e., dollar-for-dollar or pound-for-pound) recovered. For example, if a party believes that the litigation could cost USD 1 million, it is unlikely that they would be able to recover 100% of that amount.
More commonly, courts and tribunals will award “reasonable costs”, which typically represent about 50–60% of the actual costs incurred.
Consequently:
- The amount of security for costs ordered should also not be calculated on a full indemnity (dollar-for-dollar) basis.
- Instead, it should reflect what is reasonably recoverable, meaning a lower amount than the full legal costs incurred.
G. In what form should security be given?
Different forms of security can be ordered (e.g., bank guarantees, payment into escrow or court, etc.).
Consequences for non-compliance:
- If a party fails to comply with a security for costs order, the tribunal can:
- Stay the claim (i.e., temporarily halt the proceedings), or
- Dismiss the claim altogether.
However, from a practical perspective, tribunals are reluctant to dismiss claims purely for failure to comply with a security for costs order.
- Why?
- The fundamental purpose of arbitration is for parties to have their disputes resolved.
- Because security for costs should be harder to obtain in arbitration than in court, dismissing a claim solely on this ground would be a drastic step and generally unusual.
- Therefore, a stay is generally preferred over dismissal.
H. What are the consequences for non-compliance?
Imagine the client is currently involved in applications where the applicant does not pay security because the company is essentially already not a going concern (i.e., not operating properly as a business).
When to apply for security?
Dismissal vs Stay:
- Generally, stay is more appropriate if the concern is holding the line while waiting for security to be provided.
- Dismissal may be more appropriate in specific cases such as cancellation of stock exchange listings, where:
- The companies often argue that they have sufficient revenue or investments lined up.
- If their claim is credible (i.e., they truly have financial backing), then they should be able to pay the security without difficulty.
- If they cannot pay, it questions the credibility of their case itself.
s.56(4) of AO
(4) An arbitral tribunal may make an award dismissing a claim or stay a claim if it has made an order under subsection (1)(a) but the order has not been complied with within the period specified under subsection (3)(a) or extended under subsection (3)(b).
Golden Sand Marble Ltd v Hsin Chong Construction Co Ltd (2005) 1 HKLRD 598.
In some cases, even where parties reach an agreement on security for costs, courts may modify the agreed terms when approving the order.
Practical difficulty:
- If the proceedings are merely stayed, there is the problem of how long the stay should last.
- Prolonged stays could leave matters in limbo, complicating case management.
- Determining at what point a matter should be dismissed after an extended stay can also be challenging.
I. Timing of Security for Costs Application
1. Timing of the Application
Security for costs is not an emergency application.
- It is not necessary to take the opponent by surprise.
- It can be made on an inter partes basis (i.e., with notice to the other side).
When seeking security for costs in arbitration, timing is crucial. The earlier you make the application, the better:
- Early Application: It’s advisable to apply for security for costs at the very start of the arbitration. This is because costs are incurred from the outset, and early application minimizes exposure to those costs. Late applications could be perceived as tactical (e.g., to disrupt or delay the proceedings).
- Tactical Advantage: Making an application early can also put pressure on the claimant. If successful, the claimant may be required to provide security before proceeding with the case. This can disrupt their strategy, as they might be forced to pause their preparations while dealing with the security request.
2. Strategic Considerations
- Deterrent to Claimants: A well-timed application for security can act as a deterrent, particularly if the defendant’s arguments are persuasive. The tribunal may rule that the claimant must provide security before advancing their claim. This shifts the focus from the merits of the claim to the financial capacity of the claimant, which can be an effective strategy to challenge the claim’s viability.
- Preserving Financial Integrity: Security for costs ensures that the defendant does not bear the financial burden of defending against a claim if there’s a high risk that the claimant cannot pay any costs awarded to the defendant after a successful defense.
J. Practical Issues
1. Steps Before Making an Application
(1) Initial Step: Request Voluntary Security
- It is considered normal practice to first request the other party to provide security voluntarily.
- Engaging in correspondence may also help build supporting evidence for a formal application later.
(2) Evidence Gathering During Correspondence
- You might:
- Seek evidence of assets within the jurisdiction.
- Request confirmation if the other party does not have assets in the jurisdiction.
- Such information can be used to strengthen your application if the other side refuses to provide security voluntarily.
(3) Justification for the Application
- If voluntary provision is refused, you can proceed with a formal application.
- The process of earlier correspondence helps lay the groundwork and justify why security is necessary.
2. Agreement Between Parties on Security
1 | 💡 Is it possible for the parties to arbitration to reach an agreement regarding the amount or form of security for costs? |
Answer: Yes, it is entirely possible for both parties to reach an agreement on the issue of security.
Parties have complete freedom to agree on the amount, form, and terms of security.
However, if the parties wish for their agreement to have binding force within the arbitration proceedings, it is generally advisable to place the agreement before the tribunal.
If an agreement is presented, the tribunal would normally review it to ensure it is operable — meaning it is sensible, sound, and capable of being implemented.
Provided the agreement is practical and appropriate, the tribunal would typically endorse it without issue.
It should be further noted that:
- Sometimes a respondent may admit that some security should be provided but may dispute the quantum (amount) of the security required.
- In such cases, the parties might negotiate and agree on the appropriate quantum without requiring a contested hearing before the tribunal.
- Reaching such an agreement can be efficient and cost-effective.
3. Considerations for the Resisting Party
Another important question was raised: From the perspective of the party resisting an application for security, what should be considered?
The key factors for the resisting party include:
- Ability to Pay: If the resisting party can easily afford the security (e.g., a wealthy individual like Elon Musk with no assets in Hong Kong), it may not be worth the time and expense to resist the application. The focus would then be on progressing the case as efficiently as possible.
- Impact of Cash Flow: If paying security would tie up funds needed for other purposes, resisting may be more important.
- Existence of Assets: If the resisting party has tangible, readily enforceable assets in the jurisdiction (e.g., a local bank account, real estate), they could argue that security is unnecessary because enforcement risks are minimal.
- Strength of the Claim: A party may argue that its claim is strong and that the application for security is merely a tactic to stifle a genuine claim.
- Status Quo: If at the time the arbitration was initiated the parties were aware of the resisting party’s financial situation, and the claimant proceeded regardless, this could be a ground to resist a subsequent application for security.
Importantly, when deciding whether to resist, parties must ask themselves: Is resisting security truly necessary, or is it merely a tactical move with limited practical benefit?
4. Costs Covered by Security
1 | 💡 Does security for costs cover only legal costs, or also arbitrators' fees and other expenses? |
In principle, security can be structured to cover broader costs, including tribunal costs.
In arbitration, the tribunal typically allocates costs between the parties at the end of proceedings.
Thus, any reallocation of costs at the conclusion can factor in what security was provided earlier.
5. Strategic and Practical Considerations
When advising clients about security for costs applications, lawyers must carefully weigh strategic considerations:
- Materiality: Will the security truly protect the client’s interests in a meaningful way?
- Timing: If an application for security is delayed too long, the tribunal may be less inclined to grant it.
- Enforcement Planning: The logic underlying an application for security is closely tied to concerns about ultimate enforcement of the award. Clients must be advised early about the risk of proceeding through arbitration only to find the other side has no assets at the end.
- Client Communication: It is essential to keep security for costs on the radar throughout the arbitration. Failing to raise the issue early could lead to uncomfortable discussions with clients later, especially if costs cannot be recovered.
The overall message is: Always think carefully and early about security for costs, but apply judgment as to whether an application is necessary and advantageous in each particular case.
In practice, even after a hard-fought application for security for costs, the actual outcome may not always be materially significant:
- In a recent case, although the opposing party was ultimately ordered to pay security into court, the amount secured was relatively small.
- Some funds were obtained, providing a degree of protection for the client, but it was not a substantial sum.
- The case is continuing despite the security, and pursuing security required additional time and cost investment from the client’s legal team.
Key Takeaway: Seeking security for costs is something that should always be considered, but it is not necessarily appropriate or advantageous in every case.
6. Evaluating Whether to Seek Security
The decision to seek security should be framed by asking:
- Does this action move the client closer to the best possible outcome?
- Is this something necessary, or is it merely a tactical move?
- If tactical, does it provide a meaningful, material advantage? There are many possible applications and strategies available in arbitration, but being strategic — not just tactical — is crucial.
This becomes particularly important when dealing with companies that raise arguments (e.g., through judicial reviews or other delaying tactics) but may not ultimately have the financial strength to meet an adverse award. Lawyers must critically assess whether the effort spent seeking security is justified in view of the broader strategic objectives.
7. Importance of Keeping Security for Costs on the Radar
From a professional perspective, particularly as a practicing lawyer:
- It is critical to keep security for costs in mind throughout the lifespan of a dispute.
- Failure to consider it early on can lead to serious professional and client management issues.
- If, at the conclusion of the arbitration or litigation, a client is unable to recover costs because the opposing party is insolvent, and if security was never considered or pursued, the client may justifiably ask why no action was taken.
- This can result in difficult conversations and potentially even financial exposure for the lawyer or law firm if the client refuses to pay legal fees.
Even though there may be situations where:
- It was not reasonably foreseeable that the opposing party would be unable to pay, or
- It would not have been appropriate or strategic to pursue security,
it is still essential to demonstrate that security for costs was at least considered as part of sound case management.
8. Timing and Ongoing Assessment
- Early assessment is key: Consider applications for security at the earliest appropriate opportunity.
- Delay can be detrimental: If too much time passes, there may be no good basis left to justify a security application.
- Dynamic reassessment: Even if security was obtained earlier in the proceedings, it may later become inadequate or inappropriate. Security for costs is not an automatic or static process — it must be reassessed as the case evolves.
9. Parallel with Enforcement Planning
Security for costs parallels broader concerns about enforcement:
- Just as enforcement strategies must be considered from the outset (to avoid winning an award that cannot be enforced), security for costs is about ensuring the arbitration’s success is not hollow.
- Protection measures (whether through interim relief, security for costs, or enforcement planning) must be an integral part of the case strategy.
This perspective ties back to earlier discussions regarding relief measures available in the PRC, where interim orders (such as asset preservation orders) are more accessible than in many other jurisdictions:
- These remedies provide valuable certainty that assets will be available for enforcement at the end of the arbitration process if successful.
VI. HK/PRC Arrangement for Interim Relief in Support of Arbitration
A. Overview of the Arrangement
On October 1, 2019, the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings between the courts of Mainland China and Hong Kong came into effect. This arrangement allows the courts of each jurisdiction to award interim measures in support of arbitrations seated in the other territory.
This was a groundbreaking development, as no other jurisdiction had a similar framework until March 2022, when Macau implemented its own version of the arrangement. The unique mutual assistance between Mainland China and Hong Kong grants Hong Kong a distinct advantage as a seat for arbitration, providing protections not available in other jurisdictions.
The arrangement is applicable only to Hong Kong-seated arbitrations administered by certain recognized institutions, which include:
- Hong Kong International Arbitration Centre (HKIAC)
- China International Economic and Trade Arbitration Commission (CIETAC) Hong Kong Arbitration Center (HKAC)
- International Court of Arbitration of the International Chamber of Commerce – Asia Office
- The Hong Kong Maritime Arbitration Group
- South China International Arbitration Center (Hong Kong)
- eBRAM International Online Dispute Resolution Centre
Parties wishing to benefit from this arrangement must clearly identify Hong Kong as the seat of arbitration and specify that the proceedings are administered by one of the recognized institutions. It is important to note that PRC courts are generally cautious about granting relief beyond preservation measures related to assets or property.
The first application under this arrangement was granted on October 8, 2019, by the Shanghai Maritime Court, marking the successful implementation of these interim measures.
B. Practical Operation of the Arrangement
Under this Arrangement:
- Parties can apply directly to the courts of either Mainland China or Hong Kong for relief to support arbitration proceedings seated in the other jurisdiction.
In Mainland China, applications are limited to three types of preservation measures:
- Evidence Preservation
- Conduct Preservation
- Property Preservation
These measures are grounded in Article 100 of the PRC Civil Procedure Law.
C. Understanding the Types of Preservation
1. Property Preservation
This is very similar to a proprietary injunction. It involves freezing assets that are either the subject matter of the dispute or are at risk of dissipation before the arbitration is concluded.
2. Conduct Preservation
Conduct preservation orders are comparable to mandatory injunctions. They can compel a party to:
- Do something (positive obligation), or
- Refrain from doing something (negative obligation).
3. Evidence Preservation
These orders aim to secure evidence for use in proceedings, especially when there is a risk that the evidence might otherwise be destroyed or lost.
D. Preservation Measures in Hong Kong
In Hong Kong, interim measures include:
- Injunctions
- Other orders aimed at preserving the status quo pending the resolution of arbitration proceedings.
The goal is either to prevent imminent harm or avoid prejudice to the arbitration process.
As discussed, these concepts — injunctions, preservation of assets, maintaining the status quo — all fit within the broader scope of interim measures available in arbitration.
E. Requirements Under the Arrangement
1. Application Timing
Applications for interim measures can be made before the commencement of arbitration or during arbitration proceedings.
2. Institutional Requirement
- Important:
For an arbitration to qualify under the Arrangement, it must be administered by a recognized Hong Kong institution.
This requirement is found in Article 2 of the Arrangement. - As of last week, the list of qualifying institutions was expanded:
- Originally, a few institutions were recognized.
- Now, there are nine institutions included, with three new additions recently announced.
Examples include:
- The South China International Arbitration Center (Hong Kong) — a branch of the Shenzhen Court of International Arbitration.
- The Shanghai Arbitration Commission Hong Kong Center, which opened just last year.
F. Practical Insights: Usage and Impact
Since the Arrangement’s implementation:
- Around 150 applications for interim measures have been made.
- The majority have involved asset preservation.
In terms of scale:
- Over US$3.5 billion worth of assets have been frozen through applications under this Arrangement.
This underscores the significant practical impact of the Arrangement in real-world disputes.
G. Practicalities for Applicants
When applying for interim measures in Mainland China:
- You must specify clearly the proceedings and the relief sought.
- Applications must be made to:
- The intermediate court at the location of the party against whom the measure is sought, or
- The court where the property to be preserved is located.
The necessary documentation includes (according to Articles 4 and 5):
- The application for the interim measure,
- The arbitration agreement,
- Identity documents,
- Proof of acceptance of the arbitration case by a recognized arbitral institution.
Additionally, it is worth noting that PRC courts are generally cautious about granting preservation measures and require detailed supporting evidence.
H. Interim Measures in Hong Kong Arbitration: A Case Study
1. Introduction to the Interim Measure
In October, the Shanghai Maritime Court granted the first interim measure in the context of Hong Kong proceedings under a specific arrangement. This is a significant milestone in the region’s legal framework, marking the beginning of a practical application of this legal tool.
2. The Application Process: Initial Challenges
During the early stages of applying for this measure, there was some confusion within the courts regarding the exact procedures. In fact, when I was personally involved in one of these applications, we encountered a lack of familiarity with how the arrangement should function. At the outset, the courts were unsure of the process, as this was a new regime for them.
3. Strategic Planning in Arbitration
In our case, timing was crucial. We had already prepared our arbitration notes and were ready to proceed, but we needed to ensure that the counterparty was unaware of our intentions. Prematurely filing for arbitration could lead the other party to move assets or anticipate our legal actions, complicating the case.
We had already identified the assets and planned to file our application in the PRC. Before proceeding, we had several discussions with the local court. This is a common practice in the PRC—much different from the procedures here in Hong Kong. We reached out to the judge directly to clarify the arrangement, only to find that the local court was unfamiliar with the process. They had to consult provincial authorities for guidance.
4. Clear Requirements from the Court
Once the court had a better understanding of the arrangements, they were more confident in proceeding. They provided us with very specific requirements, which was immensely helpful. For example, the court insisted that we submit all documents in a sealed envelope from the HBIC (Hong Kong Business and Investment Center). This was an additional step we hadn’t anticipated, but it was crucial for ensuring the application proceeded smoothly.
Thankfully, the HBIC was incredibly cooperative. They helped us compile the necessary documents and ensure everything was in order. As a result, we were able to secure an order from the court relatively quickly, though not immediately. Still, the process was much faster than expected, which allowed us to bring the case back to the negotiation table.
5. Avoiding Arbitration: A Strategic Outcome
Ultimately, the interim measure meant that we didn’t have to proceed with a full arbitration process. This outcome illustrates the utility of these tools in legal strategy, offering an alternative to lengthy and costly proceedings.
(1) The Definition of Assets: A Key Difference
One interesting point to note is the definition of “assets” under the PRC’s regulations. In contrast to Hong Kong’s strict requirements—where you must be specific and provide detailed information about the location of assets (such as account numbers)—the PRC’s approach is slightly more flexible. In the PRC, you can make a more general claim that assets may exist in a particular location or with a specific financial institution. As long as you provide credible evidence to support this belief, the court is generally willing to entertain the application.
This flexibility makes the PRC’s asset preservation regime a valuable tool in cross-border disputes.
(2) Cross-Jurisdictional Differences: Hong Kong vs. Other Jurisdictions
It’s important to keep in mind that different legal systems may have different requirements. While we are accustomed to the common law approach in Hong Kong, the rules in other jurisdictions might be more flexible or different. Understanding these nuances is crucial when dealing with international arbitration.
6. Conclusion and Next Steps
As we move forward, we will review the key factors to consider when seeking an interim measure in arbitration. We will also look more closely at a specific type of security application that may arise in these contexts.
Class 9 - Costs
Cost is an issue that many people prefer to avoid dealing with, especially when it comes to arbitration or litigation. Typically, it is only at the end of long, protracted proceedings that the true cost concerns arise. However, it is crucial to address cost considerations early on, even when you are just beginning to outline your dispute strategy. At this stage, you should be thinking not only about how to minimize costs but also about how to potentially recover costs.
While it might seem like an afterthought, understanding and managing costs from the outset is essential. We’ll cover a variety of cost-related issues, so let’s dive right in.
I. Introduction
A. Overview of costs
Difference to substantial claim in arbitration.
1 | 💡 What falls under the broad term of costs? |
When we talk about “costs” in the context of arbitration or litigation, we are referring to everything that is incurred during the process, excluding the claims themselves. This includes all expenses related to the legal proceedings, except for the actual judgment amount awarded in terms of the claims or counterclaims.
- Legal Costs:
The most straightforward type of cost is legal costs—fees paid to lawyers for their services during the dispute resolution process. - Tribunal or Court Costs:
In arbitration, costs also cover the fees associated with the tribunal or arbitral institution. This is a significant difference between arbitration and litigation. In litigation, court costs are typically managed by the court system. However, in arbitration, parties are usually required to pay for the tribunal’s fees directly and often cover other institutional costs as well. - Other Related Costs:
Costs in arbitration go beyond just legal fees. They also include a range of other expenses:- Hearing Costs: Expenses related to organizing the hearing, including logistics, travel, and accommodations for participants.
- Expert Witness Fees: Costs for expert testimony or reports, which can be substantial, especially if experts need to travel for hearings.
- Travel Costs: If the arbitration or litigation involves travel between jurisdictions or to various locations for hearings, these costs are also part of the overall costs.
1 | 💡 Differences Between Arbitration and Court Litigation |
The distinction between arbitration and litigation is especially clear when it comes to managing costs. As we discussed earlier in the course, in arbitration, the parties bear more responsibility for organizing and paying for the proceedings. Specifically:
- Tribunal and Institutional Costs: In arbitration, parties typically pay for the fees of the tribunal and the institutional costs of the arbitration process.
- Hearing Arrangements: Parties must also make arrangements for the hearing itself, including venue, accommodation, and related logistics.
In contrast, in litigation, many of these costs are handled by the court system. The court will generally provide a venue, manage the scheduling of hearings, and handle many logistical aspects, which simplifies cost management for the parties involved.
1 | 💡 Timing: As counsel, when would you first consider the issue of costs vs when are costs usually calculated and decided? |
1 | 💡 What happens normally in terms of costs? |
- “Costs follow the event”
While arbitration offers flexibility and autonomy in managing the dispute resolution process, it also places a greater burden on the parties to manage and pay for all associated costs. Understanding what constitutes “costs” in both arbitration and litigation, as well as recognizing the differences in how these costs are handled, is essential for a successful and cost-effective dispute strategy. It is important to plan for these costs from the beginning to avoid surprises later in the process.
B. Types and Categories of costs
1 | 💡 What do the costs of arbitration include? |
The Arbitration Ordinance does not define arbitration costs (although many institutional arbitration rules do – see, for example, Article 34 of the HKIAC Rules)
Generally, costs are broad and include:
- Costs of the tribunal (including the charges for administration of the arbitration by any arbitral institution)
- Costs of the arbitration (including hiring the hearing rooms, interpreters, transcript preparation, among other things)
- Costs of the parties (including the costs of legal representation, expert witnesses, witness and other travel-related expenditure, among other things)
C. Common Costs Orders
- “Costs in the cause” : Usually at interlocutory stage, indicating the party that loses the overall action will have to cover costs of that stage.
- “[Party’s] costs in any event” : Usually at interlocutory stage, indicating that party awarded costs will recover such costs even if other party ends up winning the action.
- “Costs Reserved” : Usually at interlocutory stage, indicating that no cost order is made yet and costs will be decided together with the costs for the full action.
- “No Order As To Costs” : Each party pays their own legal fees.
- “Costs be to [Party]” : Final cost order entitling party awarded costs to recover same from other party.
D. Concerns in Legal Practice: Cost Considerations
One of the main concerns in legal practice, especially in arbitration, revolves around managing costs. This issue often comes up early in a legal discussion, particularly when a client first approaches a solicitor.
Timing is crucial when dealing with costs in arbitration. You need to address cost concerns as early as possible to avoid complications later in the process.
1. Client Concerns About Cost
When a client walks into a lawyer’s office, the very first question they often ask is: “How much will this cost me?” Even before diving into the specifics of the case, clients are primarily concerned about the financial implications. This concern is particularly evident in Hong Kong, where it remains the norm for clients to pay for legal services upfront, rather than working on a contingency basis or relying on third-party funding to cover the costs initially.
As a legal counsel, this question puts immediate pressure on you. Before fully understanding the details of the case, you’re expected to provide a cost estimate. This is tricky because you might not have a complete grasp of the situation yet, but you still need to offer some guidance.
The legal market is highly competitive, with many firms offering services. If you provide a conservative cost estimate, say $5 million USD, the client might immediately go elsewhere, looking for a lower figure, perhaps $100,000, even though that might not be realistic in the end. This creates a dilemma for lawyers in how they estimate costs and balance client expectations.
2. Estimating and Minimizing Costs
One of the challenges in legal practice is how to accurately estimate and minimize costs, especially in the context of arbitration. It’s important to make cost estimates that are as realistic as possible without underestimating or overestimating the expenses. A major aspect of this is to consider the potential outcome of the arbitration.
Arbitration often leads to an outcome where the awarded amount might not match the client’s expectations. Sometimes, despite the legal effort, the client might walk away with little or no compensation. In such cases, the legal fees that the client has paid out-of-pocket become a significant concern. These costs, the legal expenses incurred during the arbitration process, are often a major point of contention.
Clients are usually very keen on recovering legal costs, especially if the arbitration result does not go in their favor. For instance, even if the case is unsuccessful in terms of the claim, the client will still want to recover the costs of the legal services they’ve paid for. This makes the issue of recovering legal costs a critical part of any arbitration process.
If a lawyer provides incorrect advice regarding how to recover these costs or fails to adequately position the case for a favorable outcome regarding cost recovery, clients may be dissatisfied. They may feel that their legal counsel has not done enough to help them recover the costs or settle outstanding legal bills.
3. Legal Counsel’s Perspective
From a legal counsel’s perspective, it’s essential to ensure that your bills are covered, especially at the outset of arbitration. Ideally, you want to ensure that you’re not relying solely on the arbitration’s outcome to recover your fees. If you’ve agreed to a contingency fee arrangement, that’s a different story, but in most cases, lawyers cannot afford to wait until the arbitration outcome to cover their expenses.
E. Early Strategic Thinking
There’s an important strategic consideration mentioned during the session of interlocutory applications:
If you are thinking about applying for an injunction to freeze the other side’s assets, you should simultaneously consider two related questions:
- Which assets should you freeze? Ideally, they should be assets you could enforce a judgment against.
- Should you apply for security for costs at the same early stage?
Although the considerations behind freezing injunctions and security for costs applications overlap in some ways, they are not identical.
For now, it is important to recognize that as early as possible, you should think carefully about:
- What will my costs be over the full course of the arbitration?
- Is the other side financially able to pay my costs if they lose?
II. Controlling Costs
A. HKIAC Costs and Duration of Arbitration Data
The data below reflects all cases administered by HKIAC under the HKIAC Administered Arbitration Rules in which a final award was issued between 1 November 2013 and 30 April 2023
Costs of arbitration include the arbitral tribunal’s fees and expenses and HKIAC’s registration fee and administrative fee only.
Duration of arbitration refers to the period between the date of commencement of the arbitration and the date of the final award, inclusive of any stay periods.
Expedited Arbitration and Emergency Arbitration are also included.
See https://www.hkiac.org/arbitration/costs-duration
Median | Mean | |
Duration of Arbitration | 15 months | 17.7 months |
Costs of Arbitration (US$) | 75,458 | 161,984 |
B. Controlling Costs
1. Drafting the right arbitration clause
Having the right dispute resolution strategy + selecting the right lawyers and counsel
Selecting the right arbitral tribunal
https://iccwbo.org/dispute-resolution-services/arbitration/costs-and-payments/cost-calculator/
Important points to note:
A number of arbitral institutions use different ways to calculate costs. For instance:
- based on the value of the claim or fixed costs irrespective of amount in dispute; and
- fixed arbitrator fees or fees based on hourly or daily rates.
Higher degree of party autonomy means parties can work together to cut down costs significantly
2. Case management
Case management by parties
Case management by arbitrators
- See ICC Report on controlling time and costs: https://iccwbo.org/content/uploads/sites/3/2018/03/icc-arbitration-commission-report-on-techniques-for-controlling-time-and-costs-in-arbitration-english-version.pdf
3. Clear Articulation and Documentation of Legal Costs
When an arbitration runs for a significant period — say, over a year — and you are preparing for a multi-week hearing, it becomes crucial to clearly articulate the legal costs incurred. At the end of the arbitration, you do not want to simply present a lump sum, such as 1.5 million USD, without being able to explain the breakdown.
Instead, you must be precise:
- Identify who worked on the arbitration.
- Specify their hourly rates.
- Detail how much time was spent on different aspects of the process.
If needed, you should be able to convincingly demonstrate to the tribunal why each portion of the amount was necessary for the particular case.
4. Common Types of Cost Orders in Arbitration
(1) Cost Orders in Court and Arbitration
In Hong Kong courts, and similarly in arbitration proceedings, you often encounter short, somewhat “encrypted” cost orders at the end of interlocutory or substantive hearings. To an untrained ear, these orders might sound vague or unclear. However, it is important to understand their implications.
Typical phrases you may hear include:
- “Costs in any event”
- “Costs reserved”
- “No order as to costs”
- “Costs to [Party B]” (ideally, your client)
(2) Understanding the Key Terms
| Terms | Meaning |
|---|---|
| Costs in the Cause | This means that the decision on who bears the costs for the interlocutory stage will be deferred until the conclusion of the case. At that point, the court or tribunal will look back at what happened during the interlocutory phase and determine whether those costs should be included in the final cost allocation. |
| Costs in Any Event | Here, the successful party at the interlocutory stage will recover their costs for that stage, regardless of whether they eventually win or lose the overall arbitration. |
| Costs Reserved | This indicates that the court or tribunal has not made an immediate decision regarding costs and wishes to take more time to consider the matter later. |
| No Order as to Costs | Each party must bear its own legal costs for that stage — no costs are awarded to either side. |
(3) Practical Implications
If no immediate cost order is made at the interlocutory stage, it is essential for you (on behalf of your client) to:
- Keep detailed records of what occurred during that stage.
- Track any cost implications related to court or tribunal orders.
- Include these costs later in your final cost submissions.
Do not assume that judges or arbitrators will remember everything — it is your responsibility to document and clearly present the relevant costs when the time comes.
In some instances, a tribunal or court might order a party to pay costs immediately, for example, within 14 days. If that happens, prompt compliance is required.
5. Controlling Costs at Different Stages
(1) Choices Made at the Contract Stage
Some cost-control decisions are made before the dispute even arises — at the drafting stage of the arbitration clause.
However, if you are hired after the dispute starts, you may be “stuck” with whatever clause the corporate team drafted years ago.
Still, here are some considerations that can affect costs when drafting an arbitration clause:
Number of Arbitrators:
Do you really need a three-member panel, or would a sole arbitrator suffice?
Language of Arbitration:
Do you want a bilingual arbitration?
Translation costs can be significant, so sticking to one language could save money.
Governing Law and Seat:
Choosing a simple and familiar legal system may avoid complexity and reduce legal expenses.
Venue of Arbitration:
Specifying a convenient and cost-effective venue can also help manage costs.
(2) Choices Made During the Arbitration
Beyond the contract, how you manage the arbitration has a much greater impact on the overall cost:
Aggressiveness of Strategy:
If you take every possible opportunity to file interlocutory applications (i.e., procedural fights), your costs will skyrocket and the arbitration will drag on.
Conversely, a more focused and less aggressive approach — concentrating only on major issues — can significantly reduce time and expenses.
⚠️ However, sometimes being aggressive is necessary.
For example, you might need to take early actions like applying to freeze the opponent’s assets, which could end the dispute quickly.
(3) Role of Arbitrators in Managing Costs
Finally, case management by arbitrators is crucial:
- Experienced arbitrators tend to have established, practical procedures to control the timetable and costs.
- They can identify and resist delaying tactics by one party, preventing unnecessary escalation of expenses.
6. Powers of the Arbitrator and Cost Considerations in Arbitration
(1) Balancing the Interests of Both Parties
A fundamental responsibility of the arbitrator is to balance the interests of both parties carefully. While the arbitrator holds certain powers to control the proceedings, they must exercise these powers prudently and fairly. In particular, an arbitrator should avoid being excessively strict—for instance, by unduly rejecting requests for document production, additional submissions, or certifications. Overzealous restriction could risk compromising the fairness and integrity of the process.
Ultimately, the arbitrator’s powers are not absolute; they must act within certain limits, ensuring both parties are given a reasonable opportunity to present their case.
In institutional arbitration (such as cases administered by the HKIAC), there are standard costs that the parties must bear. As shown on the screen during the lecture, these costs typically include:
- Registration fees
- Administrative fees
- Arbitrators’ fees
- Costs related to hearings and travel expenses
When filing a request for arbitration, the claimant must be prepared to pay these initial fees, particularly the registration fee, to successfully commence proceedings.
This can pose a significant challenge for claimants with limited assets, an issue we will discuss further under the topic of security for costs. Nevertheless, it is crucial that any claimant seeking to initiate arbitration ensures they have sufficient financial resources at least to cover the basic initial costs.
(3) Responsibility for Advance Payments
The advance on costs is typically shared between both parties. However, if one party refuses or fails to pay their share, the other party must be prepared to cover the defaulting party’s portion temporarily. While this amount can usually be recovered later through a cost award at the end of the proceedings, clients may find it unexpected and burdensome to have to pay not only their own costs but also the other side’s share upfront.
Thus, it is important to advise clients in advance of this possibility, so they are not caught off guard during the arbitration.
III. Costs in Arbitration
How are parties made to pay costs?
Why does the issue of costs need to be covered in an award?
Intro: Understanding and Managing Arbitration Costs
1. Basic Principle: Who Pays the Costs?
Generally speaking, in arbitration, the losing party pays the costs of the winning party. However, this is not automatic. Tribunals have wide discretion when deciding on costs, and several factors can influence the outcome.
It is possible, for instance, that a losing party:
- Recovers some of its own costs, or
- Avoids paying the full amount of the winning party’s costs.
We will examine these factors in more detail later.
2. What Costs Are Included?
When we talk about “costs” in arbitration, it is a very broad term that covers multiple categories:
(1) Costs of the Tribunal
This includes:
- Fees and expenses of the arbitrators
- Administrative fees charged by the arbitral institution
(2) Costs of the Arbitration Proceedings
This is often an extensive list, particularly in complex or large hearings:
- Venue costs: Hotel bookings for participants
- Logistical costs: Catering, interpreters, transcription services
- Transportation of materials: Shipping boxes of documents or printing bundles locally
- Other services: Technical support, document management, etc.
Organizing an arbitration hearing can be a significant logistical operation. Throughout this process, it is critical to:
- Document all incurred costs carefully
- Assess whether each cost is reasonable
- Consider early agreements with the other party on shared costs where possible
(3) Costs Incurred by the Parties
This typically includes:
- Legal representation fees
- Expert witness fees
- Travel-related expenses (e.g., airfare, accommodation for counsel, witnesses, and experts)
3. The Importance of Cost Management
At the end of the arbitration, you will need to present a comprehensive list of all your costs.
While there is no guarantee that the tribunal will award you full recovery, proper documentation and reasonable justification for each cost will significantly strengthen your position. You must be able to clearly explain why each cost was necessary.
A. Institutional arbitration
In arbitration, the issue of costs is an important consideration, particularly after an application has been made and the tribunal decides on its jurisdiction. This process can already involve substantial submissions and hearings, resulting in costs up to that point. These costs may be incurred before any further proceedings, such as enforcement, occur, particularly when there is an amendment to the tribunal or a ruling regarding jurisdiction.
1. Tribunal and Administrative Costs Overview
Note that this discussion only covers the legal costs associated with the proceedings. It does not include institutional fees or tribunal fees.
A quick reference point: The average costs published by HKIAC (Hong Kong International Arbitration Centre) from 2013 and 2023 have not yet been updated to reflect the most recent changes over the past year.
If you visit the HKIAC website, you can get a clear impression of how much you typically pay for the tribunal and administrative services in an arbitration.
On average, the cost is around USD 161,000 to 162,000.
However, it’s important to understand that as the amount in dispute increases, these costs add up significantly. The higher the value of the dispute, the more expensive it becomes to pay for the services of the HKIAC and the tribunal.
At first glance, USD 160,000 may sound like a relatively high amount.
But in reality, this figure usually represents only a small fraction of the overall costs involved in running a large, complex arbitration.
To illustrate:
- A partner at an international law firm often charges around USD 500 per hour.
- A complex arbitration typically requires a team, not just one senior lawyer.
You might need:- Two or three partners
- Two counsel
- Five associates
- In addition to lawyer fees, there are expert fees and travel costs to consider.
When you add all these elements together, it becomes clear that the costs for the tribunal and the HKIAC are relatively minor compared to the total expenses of the arbitration.
- Advance/Deposit on costs
- Why is advance/deposit on costs required?
Fee/Cost | Amount | Description |
|---|---|---|
HKIAC Registration Fee | HK$ 8,000 | One-off non-refundable fee paid by the claimant upon commencement of the arbitration. A case will be deemed not to have commenced if this fee is not paid. |
HKIAC’s Administrative Fee | Unless in exceptional circumstances, calculated based on the sum in dispute | Calculated based on the amount in dispute and in accordance with Schedule 1 of the HKIAC Rules. |
Advance/Deposit required by HKIAC | HK$100,000 (sole arbitrator) | HKIAC will ask each side to advance deposits to cover the fees and expenses of the Tribunal. |
2. High-Value Disputes: Costs Scale Up but Proportion Remains Small
For very complex cases, such as those involving hundreds of millions of US dollars, the tribunal and administrative costs will, of course, be higher than USD 160,000.
Even then, their share remains small compared to the overall cost of conducting the arbitration.
➡️ Key point:
Although clients often worry about tribunal and administrative costs, they are usually not the main financial burden in arbitration proceedings.
B. Europe
- Losing party can be compelled to pay the legal costs of the winning party.
- E.g., English Arbitration Act, 1996 §61(2) Act provides that, absent contrary agreement, “the tribunal shall award costs on the general principle that costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.”
- UK Arbitration Act 2025 allows tribunals to make a cost order even if they or a court have decided the tribunal has no jurisdiction.
C. United States
- Principally in the context of domestic arbitrations, a number of U.S. courts have held that arbitrators lack the power in an US-seated arbitration under the U.S. Federal Arbitration Act to award legal fees unless the parties have expressly conferred this authority on the tribunal – the so-called “American Rule” against fee-shifting.
- Recently however, a number of U.S. courts have concluded that arbitrators have implied authority to award attorneys’ fees.
- Moreover, as a practical matter, the “American Rule” should generally have little influence on the standards adopted by international arbitral tribunals seated in the United States.
D. International commercial arbitration
- Tribunal can assess the legal costs between the two parties as it finds appropriate.
- Most institutional arbitration rules expressly grant arbitral tribunals the power to award the costs of the arbitration (including legal costs).
- Even where applicable institutional rules are silent on costs, the parties’ arbitration agreement should be interpreted to impliedly grant such authority to the tribunal.
- 2021 ICC Rules Article 38(4) “The final award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.” The “costs of the arbitration” are defined to include “reasonable legal and other costs” (Article 38(1))
- 2020 LCIA Rules provide for the arbitral tribunal to “decide the proportions in which the parties shall bear” the costs of the arbitration (as fixed by the LCIA Court) (Article 28.2), as well as to “have the power to decide by an order or award that all or part of the legal or other expenses incurred by a party (the “Legal Costs”) be paid by another party.” (Article 28.3) Absent contrary agreement, “costs should reflect the parties’ relative success and failure in the award or arbitration or under different issues, except where it appears to the Arbitral Tribunal that in the circumstances the application of such a general principle would be inappropriate under the Arbitration Agreement or otherwise.” (Article 28.4)
- 2018 HKIAC Rules provide that the arbitral tribunal may apportion all or part of the costs of the arbitration (Article 34.3). The arbitral tribunal shall determine the costs of the arbitration in one or more orders or awards (Article 34.1). “Costs of the arbitration” include legal costs (Article 34.1).
- 2025 SIAC Rules Tribunal has the power to order in the award that all or a part of a party’s legal or other costs shall be paid by another party. In exercising its power, the Tribunal shall take into account such circumstances as it considers relevant including the conduct of the parties during the proceedings. (Article 58.1).
IV. Costs estimation and allocation
A. Costs Allocation
1. Principles Governing the Allocation of Costs
(1) The General Rule: Costs Follow the Event
In most jurisdictions, the general principle is that the losing party bears the costs of the winning party. This principle aims to compensate the successful party for the expenses they incurred in pursuing or defending the arbitration.
(2) Fee Shifting in Arbitration
A notable point is the rule against fee shifting, which is often present in jurisdictions such as the United States. This rule essentially means that each party is responsible for its own legal costs, even if they lose the arbitration. In international arbitration, this concept is not widely accepted. In many international commercial arbitrations, the tribunal typically has the power to assess legal costs between the parties and make an appropriate order regarding who bears those costs.
Generally, the prevailing party is entitled to recover its costs from the losing party, but this is not a hard and fast rule. There are exceptions where the tribunal may determine a different cost allocation based on the circumstances of the case.
2. Overall Considerations for Cost Allocation
When allocating costs, the tribunal considers the overall fairness of the proceedings. If one party has access to significant resources, such as a large international law firm, while the opposing party may be represented by a local solicitor, the tribunal must ensure that the less-resourced party is not unfairly penalized for taking a more economical approach. Additionally, the complexity and necessity of expert involvement will also influence the tribunal’s decision.
Considerations for Fair Cost Allocation:
- The relative financial resources of the parties
- The necessity of expert involvement and the complexity of the case
- Ensuring that the less-resourced party is not unfairly penalized
B. Judicial Discretion to Depart from the General Rule
Arbitration statutes generally do not provide specific guidance on the method of cost allocation, leaving the decision primarily to the tribunal, though they emphasize the importance of the parties’ agreement. Section 74 of the Arbitration Ordinance grants tribunals significant discretion in awarding and allocating costs.
International arbitration rules typically grant tribunals broad discretion regarding the award of costs, including who should bear them and in what amount. For example, the ICC Rules (37.4 & 37.5), the HKIAC Rules (34.2 & 34.3), and the ICSID Convention (Article 61(2)) all provide tribunals with the authority to decide cost allocation based on the case’s specific circumstances.
The allocation of costs is ultimately a matter of discretion, with tribunals having flexibility to depart from default rules when necessary. Several factors can influence the tribunal’s decision, including:
- The conduct of the parties during the proceedings
- The complexity of the case
- Whether either party acted unreasonably or unnecessarily increased the costs
While the “costs follow the event” principle is commonly applied, it is not absolute, and each case must be evaluated individually.
Some arbitration rules, however, such as those of UNCITRAL, CIETAC, LCIA, and the PCA, include a rebuttable presumption that the successful party may recover costs from the unsuccessful party. For instance:
Article 42 of the 2013 UNCITRAL Rules: The unsuccessful party generally bears the costs of the arbitration, but the arbitral tribunal has the discretion to apportion costs based on the circumstances of the case.
Article 42 of 2013 UNCITRAL Rules
The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.
Section 74 of the Arbitration Ordinance also provides tribunals with similar powers:
- Awarding costs: The tribunal may include provisions regarding the costs of the proceedings in its award, including the fees and expenses of the tribunal itself.
- Discretion: The tribunal can allocate costs in a manner it deems appropriate, considering all relevant circumstances, including whether a party made a settlement offer.
- Additional costs: The tribunal may also order one party to bear additional costs incurred from requests for interim measures or other directions.
- Assessment of costs: Tribunals are required to assess the costs to be awarded, except for the tribunal’s own fees, and ensure that they are reasonable, considering the circumstances.
- Limits on cost recovery: Provisions requiring parties to bear their own costs are generally void, unless the arbitration agreement pertains to disputes arising before the agreement.
section 74 AO
- Arbitral tribunal may award costs of arbitral proceedings
(1) An arbitral tribunal may include in an award directions with respect to the costs of arbitral proceedings (including the fees and expenses of the tribunal).
(2) The arbitral tribunal may, having regard to all relevant circumstances (including the fact, if appropriate, that a written offer of settlement of the dispute concerned has been made), direct in the award under subsection (1) to whom and by whom and in what manner the costs are to be paid.
(3) The arbitral tribunal may also, in its discretion, order costs (including the fees and expenses of the tribunal) to be paid by a party in respect of a request made by any of the parties for an order or direction (including an interim measure).
(4) The arbitral tribunal may direct that the costs ordered under subsection (3) are to be paid forthwith or at the time that the tribunal may otherwise specify.
(5) Subject to section 75, the arbitral tribunal must—
(a) assess the amount of costs to be awarded or ordered to be paid under this section (other than the fees and expenses of the tribunal); and
(b) award or order those costs (including the fees and expenses of the tribunal).
(6) Subject to subsection (7), the arbitral tribunal is not obliged to follow the scales and practices adopted by the court on taxation when assessing the amount of costs (other than the fees and expenses of the tribunal) under subsection (5).
(7) The arbitral tribunal—
(a) must only allow costs that are reasonable having regard to all the circumstances; and
(b) unless otherwise agreed by the parties, may allow costs incurred in the preparation of the arbitral proceedings prior to the commencement of the arbitration.
(8) A provision of an arbitration agreement to the effect that the parties, or any of the parties, must pay their own costs in respect of arbitral proceedings arising under the agreement is void.
(9) A provision referred to in subsection (8) is not void if it is part of an agreement to submit to arbitration a dispute that had arisen before the agreement was made.
The HKIAC 2024 Administered Arbitration Rules (Article 34.4) similarly grants tribunals discretion in determining the reasonableness of costs and the manner in which costs are apportioned. Factors such as the relative success of the parties, the complexity of the dispute, the conduct of the parties, third-party funding arrangements, and environmental impacts may be considered.
34.4 In determining (i) whether the costs of the arbitration referred to in Article 34.1 are reasonable and (ii) whether and how to apportion the costs of the arbitration in accordance with Article 34.3, the arbitral tribunal shall take into account the circumstances of the case. The arbitral tribunal may take into account any factors it considers relevant, including but not limited to:
(a) the relative success of the parties;
(b) the scale and complexity of the dispute;
(c) the conduct of the parties in relation to the proceedings;
(d) any third party funding arrangement;
(e) any outcome related fee structure agreement; and/or
(f) any adverse environmental impact arising out of the parties’ conduct in the arbitration.
The tribunal’s discretion extends not only to the allocation of costs but also to determining the reasonableness of the costs incurred. Considerations include:
- The number of issues determined in favor of each party
- The amount claimed versus the amount awarded
- The resources allocated to specific issues in pleadings and evidence
- Any interlocutory applications made
- The parties’ behavior during the proceedings
- A comparison of the parties’ respective costs
This process is essentially a balancing exercise aimed at achieving a fair allocation of costs based on the totality of the circumstances.
A recent development in the Arbitration Act 2025 has introduced an amendment that allows tribunals to make a costs order even if they lack jurisdiction over the dispute. This means that even if the tribunal finds it does not have the power to hear the case, it retains the authority to determine and allocate costs. This amendment ensures procedural fairness, allowing a party that has been involved in defending against an improper or improperly initiated arbitration to recover its legal expenses.
C. Factors Affecting the Award of Costs
The allocation of costs in international arbitration is ultimately guided by the principles of fairness and reasonableness. While the general rule favors the prevailing party recovering its costs, various factors, including the complexity of the case, the conduct of the parties, and the relative success of the parties on the claims, can influence the final decision. Tribunals are granted significant discretion in this area, ensuring that each case is assessed on its individual merits.
1. Relative Success of the Parties
Determining the “winner” or “loser” in an arbitration case is not always straightforward. Unlike a clear-cut win in a sports game, one party may succeed on several points but fail on a key issue that impacts the overall outcome. For instance, a party might win on minor claims but lose on a major issue, significantly affecting the party’s ability to recover funds. In such cases, the tribunal must carefully assess whether the successful party should be entitled to recover all legal costs or if a more equitable distribution is appropriate. In some instances, the tribunal may decide that both parties should bear their own costs or that the losing party only covers part of the costs.
2. Complexity of the Dispute
The scale and complexity of the dispute play a major role in cost allocation. In some cases, high costs may arise from the use of expert witnesses. A party might argue that the dispute requires expert evidence, while the opposing party may claim that the dispute is relatively straightforward. Ultimately, the tribunal will assess whether expert evidence was genuinely necessary or if it unnecessarily inflated the costs. If the tribunal finds that certain complexities, such as lengthy expert testimony, were not essential, it may adjust the cost allocation accordingly.
3. Conduct of the Parties
The conduct of the parties during the arbitration is a crucial factor in determining cost allocation. If one party is found to have introduced unnecessary complexity or acted in bad faith, the tribunal may be less inclined to award that party full reimbursement for its costs. For instance, engaging in overly technical arguments that complicate the proceedings without significantly advancing the resolution of the dispute may lead the tribunal to view the party unfavorably when allocating costs.
Similarly, a party’s lack of cooperation in disclosing evidence or causing delays in the proceedings can impact the cost allocation. This includes failure to respond to requests, submitting contradictory statements, or introducing expert evidence late in the process, which can lead to additional time and costs. In such cases, the tribunal may decide not to allow the party to recover costs, even if they ultimately prevail in the arbitration, due to their conduct.
Examples of Unhelpful Conduct:
- Failing to disclose requested evidence or documents
- Submitting contradictory statements
- Introducing expert testimony at a late stage, requiring further time for the opposing party to respond
These actions can be seen as unhelpful or as wasting time, which the tribunal will consider when allocating costs.
D. Costs allocation case example
1. The Renco Group Inc v The Republic of Peru (UNCT/13/1)
A notable case highlights how the tribunal handles cost allocation when the unsuccessful party has failed to meet procedural requirements. In this case, a party that acquired a mine in Peru brought a claim against Peru regarding environmental requirements. However, the waiver provided by the claimant, which was required under the governing law, was defective. As a result, the claim was dismissed, and the tribunal had to address the issue of cost allocation.
Tribunal decided to depart from the presumption that the unsuccessful party bears the costs of the arbitration, and instead ordered each party to bear its own costs and half of the arbitration costs.
Key Facts of the Case:
- The claimant submitted a defective waiver, which did not comply with the arbitration requirements
- Peru raised the issue of the waiver’s defect in 2014, after the arbitration had been ongoing for several years
- The tribunal dismissed the claim due to the defective waiver but had to determine the appropriate allocation of costs
1 | 💡 Why? |
The tribunal departed from the normal rule because both parties had some fault:
- Renco obviously made a big mistake by submitting a defective waiver.
- But Peru also did not act perfectly — it waited several years before officially complaining about the defective waiver.
(Maybe if Peru had acted earlier, time and money could have been saved.)
In short: The tribunal thought that both sides contributed to the waste of time and money, so it was fairer for each to bear their own costs and split the arbitration costs.
Even though Renco lost the case, because Peru delayed raising the defect issue, the tribunal thought it was fairer for both sides to share the burden of the costs.
(1) Background
Renco claimed damages from Peru after Peru failed to fulfil its promise to clean up contamination in the soil at a smelting and refining complex, which it had sold to Renco in 1997.
Article 10.18(2) of the US-Trade Promotion Agreement (“TPA”) contained a condition that no claim may be submitted to arbitration unless the relevant Notice of Arbitration is accompanied by a written waiver by the claimant of any right to initiate or continue before any administrative tribunal or court under the law of any party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 10.16 of the TPA.
(2) The Dispute
Renco filed an amended Notice of Arbitration in August 2011, which was accompanied by a written waiver. The final sentence of the waiver stated: “… the Claimant reserves the right to bring such claims in another forum for resolution on the merits.”
Peru challenged the tribunal’s jurisdiction and argued that Renco’s waiver did not conform to the requirements of Article 10.18(2) as it contained a reservation of rights. However, Peru did not raise this objection until March 2014, after Renco had filed its Memorial on Liability, including witness statements and expert reports.
The tribunal dismissed Renco’s claims, in a partial award on jurisdiction on 15 July 2016, on the basis that its waiver did not comply with the requirements of the TPA. The tribunal said that Article 10.18(2) did not permit any reservation of rights, which was exactly what Renco’s waiver was purporting to do.
The Tribunal reserved its decision on the question of costs
(3) The Parties’ Positions
Peru pointed to Article 42(1) of the UNCITRAL Rules, which establishes a presumption that the costs of an arbitration is to be borne by the unsuccessful party, and argued that Renco should therefore bear its costs. Peru also pointed to the fact that Renco had opposed every attempt Peru made to expeditiously determine the merits of its objection to the waiver.
Renco argued that Peru’s delay in raising its objection to the waiver caused Renco to incur substantial and unnecessary expense of a full merits filing, and that Peru should therefore bear its costs in this regard.
(4) The Award
The tribunal noted that Article 42(1) of the UNCITRAL Rules did establish a presumption that the costs of the arbitration shall in principle be borne by the unsuccessful party
Renco is to be regarded as the “unsuccessful party”.
Three circumstances which justified a departure from the presumption that the unsuccessful party must pay the costs
In particular, the tribunal stated that it was “troubled by the manner in which Peru’s waiver objection had arisen in the context of the arbitration” and that it considered that “the proceedings could have been conducted more efficiently if Peru had raised a clear and specific objection to the reservation of rights in Renco’s written waiver at the very outset of the arbitration”.
However, the Tribunal did note that Peru’s waiver objection had not been “tainted by any ulterior motive to evade its duty to arbitrate Renco’s claims”. Therefore, the tribunal considered that Peru should not be required to pay Renco’s costs, and an order that each party pays its own costs (and half of the arbitration costs) was appropriate in the circumstances.
(5) Conclusion
The way in which a party conducts an arbitration can be taken into account by an arbitral tribunal, and have significant consequences.
Parties should ensure that arguments that are potentially determinative of the dispute should be raised at the earliest opportunity. Delay in raising such arguments may result in adverse costs decisions.
See also duty to full and frank disclosure: Leidos Inc v The Hellenic Republic [2019] EWHC 2738 (Comm)
Case concerning enforcement of an arbitral award. Applicant failed to inform English court that defendant’s challenge of the award in Greece (the seat of the arbitration) might constitute a defence to enforcement in England. While application to enforce award ultimately successful, court held that this “serious” and “material” omission meant it would be unjust for the defendant to pay the claimant’s costs.
The allocation of costs in arbitration involves a nuanced consideration of various factors, including the conduct of the parties, third-party funding, environmental impact, and the overall fairness of the proceedings. Tribunals must balance these considerations to ensure that costs are allocated in a manner that reflects the actions and resources of the parties involved. The evolving nature of cost-related considerations, such as the growing role of third-party funding and the environmental impact of conduct, further complicates the allocation process, requiring tribunals to adapt to changing circumstances.
2. Buyer (Utopia) v. Seller (Germany) (Final Award), ICCCase No. ICC-FA-2021-068, 2021
“In general, both Parties proceeded reasonably and in good faith and had conducted the arbitration in a cost-effective manner. Quite a number of legal and factual issues had to be processed and there is no doubt that a substantial amount of time and effort had to be expended in preparation and presentation of the facts and implications. The Sole Arbitrator is of the opinion that also the costs of both Parties incurred in connection with Claimant’s Submission 3, which was granted to Claimant with the explicit consent of Respondent, are recoverable. The Sole Arbitrator does not share the opinion of Claimant that these costs have been incurred by inadmissible ‘new arguments’ and ‘new evidence’ in Respondent’s Submission 2 and should therefore be borne by Respondent.”
“The only costs on Respondent’s side, which seem not to be reasonable to the Sole Arbitrator, are the costs for the attendance of Ms. Greene to the hearing. While it is reasonable for the managing director of Respondent (Mr. Charles Grey) as representative of Respondent to attend the hearing despite the fact that he was not giving any testimony, it seems to be neither necessary nor reasonable for Respondent to have another employee attending the hearing.”
“On the basis of these considerations and regarding that Claimant was successful only with a very small amount of its claims (approximately 0.5 percent of the amount in dispute), the Sole Arbitrator decides that Claimant shall be liable to reimburse Respondent’s total legal and other costs incurred in this arbitration, as well as costs of arbitration […]”
3. Intel Capital (Cayman) Corp. v. Airway Communications Int’l Holding Co. (Final Award (Corrected)), HKIAC Case No. 13043, 17 November 2014
S.74(7) of the Ordinance provides that, in the absence of an agreement by the parties to the contrary, the award may include costs incurred in the preparation of the arbitral proceedings prior to commencement of the arbitration. There is no agreement precluding an award of those costs in this case.
In considering what reasonable sum to award for the Claimants costs, the Tribunal has taken account of a number of factors [specialist arbitration solicitors; years of accounting materials in evidence; large witness statements and voluminous documentation; expert evidence]
The Tribunal has carefully considered the material on the issue of costs submitted by the Claimants. It consists, without any statement of explanation, of billed and estimated costs and disbursements. The Tribunal is not in a position to judge to what extent the estimated figures are accurate although it notes that at least what is described as “estimated” Counsel’s fees are the subject of fee invoices from Mr Manzoni [well known barrister in HK] and Mr Lam. In the circumstances, it is reasonable to make a deduction to cater for the margin of error in any estimate, but otherwise see no basis for reducing the claim which appears to me to be reasonable in all the circumstances.
E. Proof of Costs
Generally no rules provide for what what is required to prove costs
Tribunal should be satisfied that such costs were incurred
- Whether costs are contested by parties
- Schedules of costs
- Invoices and other supporting documentation
- Allocation of costs per stage of arbitration
- Narratives / detailed statements of work
Contingency arrangements / unpaid legal fees
F. Environmental Impact Considerations
A relatively new development in the 2024 arbitration rules is the consideration of adverse environmental impacts due to party conduct. The tribunal may now account for factors such as unnecessary travel costs, particularly when virtual attendance (e.g., via Zoom) could have been a viable alternative. If a party insists on in-person attendance, leading to unnecessary environmental costs, such as expensive travel and accommodation, this could influence the cost allocation.
Example of Environmental Impact:
- The unnecessary travel of experts, particularly when virtual attendance is possible
- Excessive travel-related costs, such as flying experts in and booking five-star hotels, may be considered wasteful and taken into account by the tribunal
V. Security for Costs
Before moving deeper into the topic, it is helpful to quickly revisit what is crucial when considering a security for costs application.
Security for costs serves to protect a party from the risk that the other side might not be able to pay an adverse costs award. Thus, early cost forecasting and risk assessment are vital strategic steps.
A. Section 56(1)(a) and 56(3) of the Arbitration Ordinance.
- General powers exercisable by arbitral tribunal
(1) Unless otherwise agreed by the parties, when conducting arbitral proceedings, an arbitral tribunal may make an order-
(a) requiring a claimant to give security for the costs of the arbitration;
(3) An arbitral tribunal-
(a) must, when making an order under subsection (1)(a), specify the period within which the order has to be complied with; and
(b) may extend that period or an extended period.
Who brings an application for security for costs?
When/why/what?
Factors:
(1) Prospects of success of the claims, counterclaims and defences;
(2) Party’s ability to comply with an adverse costs award;
(3) Whether it is appropriate in all the circumstances of the case to order one party to provide security;
(4) Any other relevant circumstances.
Impecuniosity alone is not a ground; concerns of access to justice
Generally accepted that it is in “exceptional” circumstances
B. Third party funding’s implication on security for costs
Applicants have increasingly tried to rely on the use of third party funding by the opposing party to justify security for costs on the basis that (i) the claimant/opposing party is likely to be impecunious, and (ii) the third party funder who is not a party to the arbitration has no obligation to satisfy any costs award and will be able to walk away if unsuccessful.
Third-party funding has become more prevalent in arbitration, with the funder covering the costs of the arbitration. Although the actual party bringing the claim may not directly bear legal costs, as these are paid by the third-party funder, the tribunal may still consider these costs as part of the overall arbitration expenses and may allow them to be recoverable.
Impact of Third-Party Funding on Costs:
- The third-party funder incurs their own costs, including strategy development
- The party bringing the claim may not directly pay for legal services, but the costs still contribute to the arbitration process
- These costs may still be recoverable if deemed necessary for the proceedings
However, there is currently no consensus on whether the mere involvement of third-party funding is sufficient to justify ordering security for costs.
Examples include:
RSM v Saint Lucia (2014)
In this case, security for costs was ordered based on “truly exceptional circumstances,” including a claimant with a history of frivolous proceedings and failure to pay resulting costs awards. The tribunal was concerned that, due to third-party funding, the claimant might not comply with a costs award, as the funder would not be obligated to cover it without security.
Moreover, the admitted third party funding further supports the Tribunal’s concern that Claimant will not comply with a costs award rendered against it, since, in the absence of security or guarantees being offered, it is doubtful whether the third party will assume responsibility for honouring such an award.
Hyflux Ltd v Lum Ooi Lin [2023] SGHC 113
In this case, the plaintiffs, companies in liquidation or receivership, had obtained litigation funding. The court ruled that while the plaintiff was not restricted to any specific form of security, it had the burden to demonstrate that the proposed form of security was “adequate.” The court found that the funder had sufficient assets, and the proposed irrevocable and unconditional undertaking was deemed satisfactory.
Ps were companies in liquidation or under receivership who had obtained litigation funding. At issue was the form of the security to be given.
Court held plaintiff (i) is not restricted to any fixed form of security, but (ii) has the burden to demonstrate proposed form of security is “adequate”.
Undertaking was irrevocable and unconditional, and, based on public financial information, court satisfied the funder had sufficient assets.
In both cases, third-party funding played a significant role in the tribunal’s or court’s considerations regarding security for costs, although the approach and reasoning varied.
VI. Cost Deduction and Reduction in Court and Arbitration
A. General Approach to Cost in Court
In court proceedings, it is quite common for the court to apply deductions to the costs awarded. A party may be happy if they receive about 70% of their total claimed costs. This is partly due to the relatively low hourly rates used by courts in Hong Kong, which are significantly lower than what law firms may charge for their lawyers’ time. For example, while a law firm partner may charge around $1,500 per hour, the court’s hourly rate is typically in the range of $6,000, which is much lower.
Because of these lower rates, the court effectively applies a “discount” to the costs. Additionally, the court may review the reasonableness of the claimed hours and potentially deduct some of them. For example, if a party claims five hours for a particular task, the court may consider this excessive and reduce the hours claimed. Ultimately, parties should expect that there will always be some deductions to their claimed costs, even in situations where costs are awarded.
B. Security for Costs in Arbitration
In arbitration, the concept of security for costs is more complex and less automatic than in court. In some jurisdictions, such as Hong Kong, a court might be more inclined to grant security for costs if a claimant is from a foreign jurisdiction and has concerns about their ability to pay the costs. However, in arbitration, the granting of security is considered an exceptional order, dependent on the specific facts of the case.
One situation where security for costs might be considered in arbitration is when a claimant requires third-party funding. This is often seen as an indication that the claimant may lack the financial resources to pay the opposing party’s costs if they lose the arbitration. In such cases, a tribunal might be more likely to grant security for costs to protect the other party’s potential cost award.
However, there are also situations where a tribunal may not focus on the claimant’s need for third-party funding alone. For example, if the claimant has obtained insurance that covers up to $1 million in costs, this may reduce concerns about their ability to pay the opposing party’s costs, and the tribunal may be less inclined to award security for costs.
C. Security for Costs – Forms and Approaches
Typically, security for costs would involve a payment being deposited into a bank account or a similar secured arrangement. However, this is not the only form of security that may be required in arbitration. Tribunals may consider alternative forms of security depending on the circumstances of the case. These alternatives can vary, and the specific form of security will depend on the specifics of the arbitration and the parties involved.
D. Indemnity Costs in Arbitration
1. Overview
In exceptional circumstances, costs may be awarded on an “indemnity” basis, allowing the party claiming costs to recover nearly 100% of their expenses. This is a higher threshold than the typical “party and party” or standard cost award, where reductions are common. Under indemnity costs, the burden shifts to the opposing party to prove that the claimed costs are unreasonable, meaning they must demonstrate that the costs are “beyond reasonable.”
For example, if an expert claims 20 hours for research in their schedule of costs, and the opposing party believes this research was unnecessary, they might typically contest the hours. However, under an indemnity costs award, the opposing party would need to show that the claimed research hours were entirely unreasonable or irrelevant to the case. If the party claiming costs can justify the research—for instance, by demonstrating that it strengthened their claim—they are more likely to recover the full amount of their claimed costs.
Indemnity costs are more generous than the standard “party and party” costs, as they cover all the successful party’s expenses, including legal costs and expert fees. Unlike standard costs, indemnity costs are not limited by factors such as the complexity of the case and do not require proportionality.
This shift in burden means that the losing party must show that the costs claimed are unreasonable, and as a result, the successful party is more likely to recover a higher percentage of their costs compared to a standard cost assessment.
2. Circumstances Leading to Indemnity Costs
Indemnity costs may arise in certain situations, typically when a party takes an unreasonable step that results in additional costs. One common example is the application for setting aside an arbitral award. If an application to set aside an award is unsuccessful, it is often assumed that the application was unreasonable. In such cases, the court may award indemnity costs against the party who brought the unsuccessful application.
Another example of indemnity costs occurs when a party submits evidence that is later found to be falsified or misleading. If the court determines that the evidence was presented with the intent to deceive or mislead the tribunal, the party presenting the false evidence may be ordered to pay indemnity costs as a penalty for their conduct.
3. Case Study
⚖️ Dana Shipping and Trading SA v Sino Channel Asia Ltd [2016] HKEC 599
(1) Background
Dana commenced arbitration in London for Sino’s failure to perform contractual obligations.
The tribunal issued an award in Dana’s favour and granted Dana leave to enforce the award in Hong Kong.
Sino applied to set aside that enforcement order on grounds that Sino had not had proper notice of the appointment of the arbitrator nor of the arbitration proceedings.
In its application for enforcement of the award in HK, Dana applied for payment of the award amount as security.
At the same time, Sino applied to the English Courts to set aside the award.
Sino then argued before the court in HK that both Dana’s application for security and its own application to set aside the HK court enforcement order should be adjourned, pending the outcome of the set aside proceedings in London.
HK court applied the test adopted by the English Courts in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208 :
HK court found that Sino’s case for setting aside was not strong as its argument that it did not have notice of the arbitration was not strong and it had delayed the setting aside application for six months.
HK court found Sino’s tactics to use agents to enter into contracts and delayed engagement in legal actions as potentially concerning as to ability to pay award.
HK Court ordered security for award to be paid and also ordered indemnity costs – normal cost order in unsuccessful setting aside applications.
(2) Aftermath
Sino failed to make payment into court of the security ordered within the period of 21 days.. As a result, Sino’s application to set aside the Enforcement Order was dismissed.
On 13 May 2016, the English court set aside the award on the ground that it was made without jurisdiction and is of no effect (as Sino had not properly been served).
In purported reliance on the English Judgment, Sino applied again to set aside the Enforcement Order and to take steps to stop enforcement taken by Dana, including garnishee proceedings and a statutory demand.
English Court of Appeal later upheld award on the basis that in unusual circumstances of case service of Notice of Arbitration had been sucessful.
4. Key Takeaways
- Cost Deduction: In both court and arbitration, parties should expect some degree of cost deduction. The court’s lower hourly rate and scrutiny of reasonableness contribute to this.
- Security for Costs: In arbitration, security for costs is an exceptional measure, often linked to concerns over a claimant’s ability to pay costs. Third-party funding or insurance may affect the decision on security.
- Indemnity Costs: Indemnity costs can be awarded in exceptional circumstances, such as the failure of a setting-aside application or the submission of falsified evidence. This type of award allows the prevailing party to recover nearly all their costs, with the opposing party bearing a higher burden to prove unreasonableness.
- Strategic Considerations: Parties involved in arbitration must carefully consider their actions, such as the timing of applications and the reasonableness of their cost claims, as these factors can significantly influence the final cost award.
In certain cases, fee structures are tied to the outcome of the arbitration, such as contingency fee arrangements. Under such agreements, legal costs may not be incurred upfront but are contingent on the outcome. Despite this, the party may still seek to recover legal fees if they succeed in the arbitration. This situation introduces complexities regarding cost recovery, particularly in cases where no legal costs have been incurred until the contingency is met.
Contingency Fee Structures:
- Legal fees may be contingent on the outcome, with no upfront costs
- Even if no costs are incurred initially, a party may seek recovery of fees after a successful outcome
- The tribunal may allow recovery of fees based on the agreement and the result of the arbitration
The Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap. 609D) came into effect on 16 December 2022
The new rules were introduced following the Law Reform Commission of Hong Kong’s report published in December 2021. Recommended that the law in Hong Kong be amended to lift the prohibitions on the use of ORFS by lawyers in arbitration taking place in and outside Hong Kong
ORFS for arbitration are an exception to the common law rules of champerty and maintenance, which prohibit third parties from providing financial assistance to a litigant in return for a share of the proceeds
Refers to the three types of agreements which a lawyer may enter into with a client:
- Conditional fee agreements
- Damages-based agreements
- Hybrid damages-based agreements
VIII. Strategic and Procedural Considerations in Arbitration
In arbitration, the timing and conduct of the parties play a critical role in shaping the outcome of the proceedings. A delay in raising certain issues can have significant consequences, as seen in the example discussed.
A. Initial Procedural Flaws
The core issue in this case stems from the failure to raise an important objection immediately after the notice of arbitration was filed. Had the objection been brought at that time, it is likely that the tribunal would have made an early determination, potentially rejecting the claim outright. This failure to act promptly meant that the party involved wasted approximately two and a half years of the arbitration process, incurring both costs and time without achieving any substantial progress.
It is important to note that certain procedural requirements, such as the need for clear and unequivocal wording in the accompanying documentation, were not met. The party’s submission was conditional, which created ambiguity in the tribunal’s assessment. This lack of clarity could have been addressed much earlier in the proceedings, potentially preventing the need for further steps.
B. Cost Implications and Tribunal’s Approach
Despite the delays, the tribunal ultimately decided that neither party should bear the full cost of the other party. The losing party, who would typically be required to pay the costs, was relieved of this responsibility. The tribunal did not find evidence of bad faith or any ulterior motive to intentionally delay or inflate costs. As a result, both parties were directed to bear their own costs.
The tribunal’s decision highlights the importance of presenting a compelling and transparent case, as the absence of malicious intent and lack of evidence of improper conduct were key factors in the ruling. Nevertheless, the delay in raising the objection led to unnecessary costs and procedural complications, which could have been avoided with earlier action.
C. Jurisdictional Objections and Strategic Considerations
This situation serves as a reminder of the strategic considerations involved in raising jurisdictional objections in arbitration. As discussed in previous sessions, parties may decide to waive objections at the outset for strategic reasons. However, if these objections are raised later in the proceedings, especially after significant steps have already been taken, the party may be held liable for the additional costs incurred as a result of the delay. Raising objections too late could be seen as an attempt to delay proceedings or increase costs unnecessarily, potentially influencing the tribunal’s cost allocation decisions.
D. The Importance of Full Disclosure in Enforcement Applications
A similar issue arises in the enforcement of arbitral awards. For instance, if a party fails to disclose that there is an ongoing challenge to the award at the seat of arbitration, this omission may not directly affect the enforcement process, but it remains a material fact that must be disclosed. In such cases, courts expect parties to be fully transparent, even if the omitted information is detrimental to their position.
In an enforcement application, failure to disclose significant facts—such as an ongoing challenge to the award—can lead to serious consequences. Even if the challenge ultimately does not succeed, the court may consider the omission to be material and may refuse to grant the enforcement order. In this particular case, the failure to disclose the challenge resulted in the respondent being required to pay the applicant’s costs for the enforcement application.
E. Key Takeaways
- Timeliness Matters: Raising objections and addressing procedural issues at the earliest opportunity can prevent unnecessary delays and costs.
- Cost Allocation: Parties who cause delays by raising objections late may be held liable for the additional costs incurred.
- Full Disclosure in Enforcement Applications: Parties must disclose all material facts, including those that may not be favorable to their case, to avoid negative consequences in the enforcement process.
- Strategic Decisions: Strategic choices regarding when to raise objections or disclose information can significantly impact the outcome of the arbitration, both in terms of procedural efficiency and cost allocation.
This case underscores the importance of adhering to procedural timelines, maintaining transparency, and being mindful of the costs associated with delays and strategic decisions.
IX. Cost Recovery
The issue of cost recovery is often contentious in arbitration, particularly when the success of a claim is marginal. Courts and tribunals assess whether the costs incurred by a party are reasonable, and failing to provide sufficient evidence can lead to reduced recoverable costs or even the requirement to pay the other party’s costs.
A. Case Example: Minimal Success and Cost Allocation
In a particular case, the claimant succeeded in only 0.5% of the total amount in dispute, a very minimal success. While technically the claimant was considered the successful party, the tribunal found that this did not justify awarding the claimant full costs. Instead, the tribunal ordered the claimant to pay the respondent’s costs, with only minor reductions made for certain travel costs that were deemed unreasonable.
This decision underscores that success in an arbitration is not always directly correlated to the allocation of costs. Even a technically successful party may find itself bearing significant costs if the tribunal perceives that the success achieved was limited in scope and impact.
B. Importance of Detailed Cost Evidence
When submitting cost claims, it is essential to provide detailed and specific evidence of the costs incurred. While you are not required to group costs into categories, you must set out sufficient particulars for the tribunal or court to understand the justification for each cost. This may include explaining why certain expenses were necessary and directly related to the arbitration proceedings.
The tribunal’s decision in this case involved some minor reductions to the claimant’s costs, despite a lack of detailed evidence for every expense. This highlights the tribunal’s recognition that some costs may not have been fully justified, even if they were not explained in detail.
C. Contesting Costs: The Risks of Insufficient Detail
In most arbitration cases, costs are contested. It is rare that a tribunal or court will simply accept a schedule of costs without scrutiny. The opposing party will often challenge the reasonableness of the costs incurred, questioning whether certain expenses were necessary or whether the time spent on particular tasks was justified.
For example, the opposing party might argue that research hours should not be recoverable because the research was not sufficiently relevant to the issues at hand. Such challenges can result in a “mini-trial” on the costs, where both parties must justify the reasonableness of their claimed costs. This process can be time-consuming and complex, requiring careful preparation of cost schedules and explanations.
D. The Risk of Inadequate Cost Documentation
If a party fails to provide sufficient particulars for the costs claimed, the tribunal may not be able to assess the reasonableness of each item. In this case, the tribunal may decide not to go through each cost item in detail and could instead make a general reduction, such as awarding only 60% of the claimed costs. This could leave the party with a significantly reduced amount of recoverable costs, even if their overall claim was valid.
Key Takeaways
- Cost Allocation Is Not Automatic: Even if a party is successful, they may not automatically recover all of their costs, particularly if the success is marginal.
- Detailed Cost Evidence Is Crucial: Parties must provide detailed and clear evidence to justify each cost incurred, including explaining the relevance and necessity of each expense.
- Contested Costs Are Common: It is rare for costs to be accepted without challenge. The opposing party may scrutinize the costs in detail, and tribunals will expect justification for each item.
- Risks of Insufficient Detail: Failure to provide sufficient particulars or evidence for claimed costs can result in significant reductions, as tribunals may not have the time or information to assess costs on a line-by-line basis.
This case highlights the importance of meticulous preparation when it comes to cost submissions in arbitration. Providing clear, detailed evidence not only supports the reasonableness of the costs but also reduces the risk of arbitrary reductions by the tribunal.
Class 10 - Interest
I. Overview
A. What is interest?
Interest is the money paid as compensation for borrowing money or delaying payment. It’s like a “fee” for using someone else’s money.
Interest is calculated as a percentage of the amount borrowed (called the principal). It reflects the time-value of money, meaning money is worth more now than in the future.
Types of interest:
- Pre-award interest: This is the interest you can get before an award is made in arbitration.
- Post-award interest: This is the interest that starts after the arbitration award is made.
Simple vs. Compound interest:
- Simple interest is calculated only on the original amount borrowed (the principal).
- Compound interest is calculated on the original amount plus any accumulated interest.
B. Arbitration Ordinance Cap 609
This is the law that guides how interest works in arbitration in Hong Kong.
Section 79: Arbitral tribunal may award interest
- The tribunal can award either simple or compound interest, based on what they think is fair.
- This interest can be awarded on:
- Money that’s awarded by the tribunal.
- Money claimed before the arbitration starts but paid before the award is made.
- Costs awarded during arbitration.
Section 79 - Arbitral tribunal may award interest
(1) Unless otherwise agreed by the parties, an arbitral tribunal may, in the arbitral proceedings before it, award simple or compound interest from the dates, at the rates, and with the rests that the tribunal considers appropriate, subject to section 80, for any period ending not later than the date of payment—
(a) on money awarded by the tribunal in the arbitral proceedings;
(b) on money claimed in, and outstanding at the commencement of, the arbitral proceedings but paid before the award is made; or
(c) on costs awarded or ordered by the tribunal in the arbitral proceedings.
(2) Subsection (1) does not affect any other power of an arbitral tribunal to award interest.
(3) A reference in subsection (1)(a) to money awarded by the tribunal includes an amount payable in consequence of a declaratory award by the tribunal.
Section 80: Interest on money or costs awarded or ordered
- After the award is made, interest on the money owed is typically calculated at the judgment rate, unless the award says otherwise.
- Costs (like legal fees) can also attract interest.
Section 80- Interest on money or costs awarded or ordered in arbitral proceedings
(1) Interest is payable on money awarded by an arbitral tribunal from the date of the award at the judgment rate, except when the award otherwise provides.
(2) Interest is payable on costs awarded or ordered by an arbitral tribunal from—
(a) the date of the award or order on costs; or
(b) the date on which costs ordered are directed to be paid forthwith, at the judgment rate, except when the award or order on costs otherwise provides.
(3) In this section, “judgment rate” (判定利率) means the rate of interest determined by the Chief Justice under section 49(1)(b) (Interest on judgments) of the High Court Ordinance (Cap 4).
Under Section 80, except where the award provides otherwise, interest is payable at the judgment rate.
C. Judgment Rate
The judgment rate is the interest rate that applies to money owed after a judgment or award.
- Under Section 49 of the High Court Ordinance (Cap 4), this rate is decided by the Chief Justice.
High Court Ordinance Cap 4
Section 49 – Interest on judgments
Judgment debts shall carry simple interest-
(a) at such rate as the Court of First Instance may order; or
(b) in the absence of such order, at such rate as may be determined from time to time by the Chief Justice by order, on the aggregate amount thereof, or on such part thereof as for the time being remains unsatisfied from the date of the judgment until satisfaction.
(2) Interest under this section may be calculated at different rates in respect of different periods.
1 | 💡 What is the current judgment rate? |
The Chief Justice has ordered that the rate of interest on judgment debts from 1 April 2025 in the High Court and District Court shall remain at 8.276% per annum until further order.
The rate of interest on judgment debts can also be found at the Judiciary’s website through the following link:- https://www.judiciary.hk/en/court_services_facilities/interest_rate.html
II. National Housing Trust v YP Seaton & Associates Co Ltd ([2015] UKPC 43)
A. Summary
- The Privy Council ruled that the arbitrator’s award of compound interest was incorrect because the arbitrator didn’t have the authority to do so under the law of the seat (Jamaica).
- The case was sent back to the arbitrator for reconsideration.
- The Dispute: There was a joint venture project in Jamaica between the National Housing Trust (Trust) and YP Seaton & Associates Co Ltd (YPSA). It involved constructing housing units and related facilities.
- The Issue: The dispute was over project accounts, and some of the matters were settled through a compromise agreement.
- Arbitration: In 2004, the Trust and YPSA referred two unresolved issues to arbitration:
- The interest owed to the Trust.
- The contractor’s profit owed to YPSA (14.8% of the value of the works).
- First Award:
- The arbitrator didn’t award interest because YPSA hadn’t formally claimed it.
- The arbitrator ordered the Trust to pay YPSA the agreed profit (J$24,325,000).
- YPSA then applied to the Jamaican court to have the arbitrator reconsider the interest issue, claiming that it had already asked for 12% interest (compounded monthly) in its original claim.
- The court agreed, and the issue was sent back to the arbitrator to reconsider the interest.
- Supplementary Award:
- The arbitrator, after receiving further submissions, awarded compound interest of J$214,512,232.76 for the period from 1997 to 2007.
- The Trust asked the Jamaican Supreme Court to set aside this award, arguing the arbitrator had no power to award compound interest under Jamaican law.
- The Supreme Court agreed with the Trust and set aside the award, saying the arbitrator couldn’t award compound interest.
- YPSA’s Appeal to the Court of Appeal of Jamaica:
- YPSA appealed, and the Court of Appeal ruled in its favor, arguing the arbitrator had the discretion to award compound interest based on general law.
- The Court of Appeal said the arbitrator’s decision was based on fairness and equity.
- Trust’s Appeal to the Privy Council:
- The Trust then took the case to the Privy Council, which allowed the appeal and set aside the compound interest award, sending it back to the arbitrator.
- The Privy Council disagreed with the Court of Appeal, saying that the arbitrator couldn’t just award compound interest based on general fairness. The arbitrator had to follow Jamaican law.
- The law in Jamaica (The Law Reform (Miscellaneous Provisions) Act 1955) only allows simple interest to be awarded.
- The Privy Council ruled that the arbitrator had exceeded his jurisdiction by awarding compound interest.
- Lord Toulson’s Dissent: Lord Toulson disagreed with the majority of the Privy Council. He argued that the arbitrator should have the discretion to award compound interest, as it was necessary to put YPSA in the same position as it would have been if the dispute hadn’t happened.
B. Background
The dispute arose out of a joint venture between the National Housing Trust (“Trust”) –– and YP Seaton & Associates Co Ltd (“YPSA”)
Re-construction and development of housing units and related facilities in Jamaica.
The dispute concerned the joint venture’s project accounts, and was settled in part by a compromise agreement (the “Compromise Agreement”).
In April 2004, the parties referred two outstanding items to arbitration before a sole arbitrator to determine:
(i) the interest portion owed to Trust in respect of an 18 January 1999 statement (which had a value of J$27,255,919.92), and
(ii) the contractor’s profit owed to YPSA, which the parties agreed should be 14.8% of the value of the works.
C. The Arbitration
1. The First Award
Arbitrator awarded no interest because he said none had been claimed or pleaded by YPSA.
Arbitrator ordered that Trust pay YPSA J$24,325,000 as contractor’s profit, 14.8% of the total value of the works (the “First Award”).
Within six months of the First Award, the Trust made the payment of J$24,325,000 to YPSA, as agreed in the Compromise Agreement.
YPSA later applied to the Supreme Court of Jamaica to have the matter remitted to the arbitrator so that he could re-consider the question of interest.
YPSA’s position was that the arbitrator had been wrong to say that YPSA had not claimed interest because YPSA’s points of claim claimed interest at 12% annually compounded monthly from completion until payment.
On 22 January 2007, the Court remitted the matter to the arbitrator for him “to consider and arbitrate on the issue of interest on the profit awarded.”
2. The Supplementary Award
The parties made further written and oral submissions to the arbitrator on the issue of interest, if any, owed to YPSA on the profit awarded.
By a supplementary award, the arbitrator awarded J$214,512,232.76 to YPSA as compound interest for the period 30 October 1997 to January 2007 on the profits awarded (the “Supplementary Award”).
In response, the Trust applied to the Supreme Court of Jamaica to have the Supplementary Award set aside and the matter remitted to the arbitrator “to reconsider and arbitrate on the issue of interest in accordance with the laws of Jamaica”.
The Court granted Trust’s applications. It found that the arbitrator had no power to award compound interest in this case.
Award was therefore set aside.
3. YPSA’s appeal to the Court of Appeal of Jamaica
YPSA then appealed to the Court of Appeal of Jamaica (the “Court of Appeal”), which allowed the appeal.
The Court of Appeal accepted YPSA’s alternative argument that the arbitrator awarded compound interest not on the basis of any right by contract but rather by relying on a general common law power to award damages.
The Court of Appeal concluded that the arbitrator’s jurisdiction to make an award of compound interest was
“in accordance with the general law applicable to the dispute submitted to him. He was required to utilise his experience and expertise and to exercise his discretion to do what was just and equitable in resolving the dispute between the parties.”
4. Trust’s appeal to the Privy Council
Trust appealed to the Privy Council, which allowed the appeal and set aside the Supplementary Award, remitting it to the arbitrator as originally ordered by the lower court.
The Privy Council found that the Court of Appeal was mistaken in treating the arbitrator’s award of compound interest as based on a substantive legal right, such as a contractual right under the loan agreement or a claim in damages for breach of contract or equity. The Privy Council also disagreed with the Court of Appeal’s view that the arbitrator had the discretion to make such an award under those circumstances.
The Privy Council ruled that arbitrators do not have a general discretion to award compound interest. Instead, they should follow the law of the seat concerning the power to award interest. In this case, Section 3 of The Law Reform (Miscellaneous Provisions) Act 1955 of Jamaica limits interest awards to simple interest. By awarding compound interest, the arbitrator exceeded his jurisdiction and the powers impliedly granted by the parties through the Compromise Agreement and the terms of reference.
Lord Toulson gave a dissenting opinion, agreeing with the Court of Appeal on the compound interest issue. He highlighted that the arbitrator had awarded compound interest because he believed it was necessary to restore YPSA to the same position it would have been in had the breach not occurred. Lord Toulson therefore found no sufficient reason for the court to disturb the award.
D. Takeaway from this case
This case confirms the position that whether a tribunal can award compound interest is first and foremost a matter of the parties’ agreement, and in the absence of such agreement, is then a function of the law of the seat of the arbitration.
For UK, see Section 49 of the English Arbitration Act 1996: in the absence of any agreement by the parties to the contrary, an arbitral tribunal has jurisdiction to award simple or compound interest as it considers is appropriate.
III. Interest vs. Penalty Clause
A. Law Ting Pong Secondary School v Cheng Wai Wah [2021] HKCA 873
This case discusses how to distinguish between an interest clause and a penalty clause.
Key Point:
- The court’s test for whether a clause is a penalty or not involves looking at the legitimate interest of the party that benefits from the clause.
- Legitimate Interest: The court will first ask what the party was trying to protect with the clause. For example, were they trying to ensure they were compensated for losses caused by a breach, or was the clause mainly designed to deter the other party from breaching?
- The court will also consider the circumstances when the contract was made to understand if the clause is fair and proportional to the loss expected.
- Penalty Clause: A clause becomes a penalty if it imposes a sum that is out of proportion to the legitimate interest of the innocent party. In other words, it’s a penalty if it’s designed to punish or deter, rather than compensate for loss.
- Not a Penalty Clause: If the clause is about a primary obligation (like agreeing to pay a fixed amount of money), it’s not a penalty.
In applying the test, the court should first identify the legitimate interest of the innocent party that is being protected by the clause, and then assess whether the clause is out of all proportion to the legitimate interest by considering the circumstances in which the contract was made. Notions of whether the clause has a deterrent purpose or whether it is a genuine pre-estimate of loss would be subsumed by the broader enquiry into the legitimacy of the interest that supports the provision.
It is not applicable to contractual provisions which stipulate to pay a certain amount of money by way of a primary obligation. This means a clause can only be a penalty if, as a matter of substance, it operates upon a breach of contract.
B. Interest / penalty clause
Chengdu Zhongtai Transportation Construction Development Co Ltd v Neo China Land Group (Holdings) Ltd [2013] HKCFI 551
This case involves a contract clause that provided a 15% interest rate for late payments and a 20% fixed sum if the payment wasn’t made within 120 days after the due date.
Key Points:
- The court found that the provisions were penalties because they were not genuine pre-estimates of loss. They were not designed to compensate for actual loss, but rather to deter Neo-China Group from breaching the contract.
- The clauses were seen as fixed amounts designed to make the contract more intimidating (in terrorem) rather than compensating Zhongtai for any real loss caused by the late payment.
- As a result, penalty clauses like these are not enforceable. Instead, Zhongtai could only claim for the actual loss (like the shortfall in the share transfer price) and normal commercial interest.
The STA provided for a 15% interest rate in the case of late payment and a fixed sum equivalent to 20% of the outstanding balance if the payment was not made within 120 days after the due date. In the absence of any evidence showing that the liquidated damages and interest provided for in the STA are genuine pre-estimates of Zhongtai’s loss, I am of the view that those are penalties as they are sums fixed in terrorem. The predominant contractual function of the provision was to deter Neo-China Group from breaking the STA and not to compensate Zhongtai for the breach. Hence, if Neo-China is liable, Zhongtai should only be able to claim the sum of RMBY40,000,000, being the shortfall in the shares transfer price, against Neo-China together with normal commercial interest.
C. Takeaway
- Interest Clause: If it reflects a genuine attempt to compensate the innocent party for the delay (a pre-estimate of loss), it’s typically enforceable.
- Penalty Clause: If the clause is intended to punish or deter the other party (and doesn’t genuinely relate to the actual loss suffered), it may be deemed an unenforceable penalty. The focus is on the legitimate interest of the party enforcing the clause and ensuring it isn’t disproportionate.
In short, interest clauses are often valid as long as they relate to real loss, while penalty clauses are unenforceable if they are simply meant to deter breaches or impose disproportionate sums.