Before agreeing to arbitrate legal disputes, it’s important to understand how its unique procedural and award system make it a popular (but potentially risky) means of alternative dispute resolution.
What is arbitration?
As court systems around the world become increasingly overwhelmed with the sheer volume of cases being filed each day, it’s no surprise that more attention is being given to arbitration as a flexible method of dispute resolution which can provide a quick, inexpensive, confidential, and final solution to a dispute. The process involves the determination of the dispute by one or more independent third parties rather than by a court. The third parties, called arbitrators, are appointed by, or on behalf of, the parties in dispute. The arbitration proceedings are conducted in accordance with the terms of the parties’ arbitration agreement, which is usually found in the contract between the parties.
What law regulates arbitrations conducted in Hong Kong?
Arbitrations conducted in Hong Kong are governed by the Hong Kong Arbitration Ordinance (Cap. 609) (“HKAO”), which provides the basic legal framework. When the current ordinance was enacted in 2011, it removed the different procedures that were used depending on whether the arbitration was considered “international” or “domestic” and replaced them with a single, unified system based on the UNCITRAL Model Law. The changes brought Hong Kong’s regime more in line with international standards and made the arbitration laws clearer, more certain, and more easily accessible to arbitration users and practitioners both in Hong Kong and abroad.
Who can arbitrate? What are the requirements for a valid arbitration clause?
The HKAO states that arbitration can only be commenced if there is a written agreement between the parties indicating their intent to submit to arbitration should disputes arise between them in respect of a defined legal relationship. This is usually in the form of an arbitration clause in a contract or by way of a separate agreement. Absent this written agreement, arbitration cannot be forced on one party by another.
While there is no prescribed form of arbitration clause, the most important terms that should be dealt with in the clause include the place of arbitration, the applicable arbitration rules, the number of arbitrators and how they are to be appointed, and the language in which the proceedings will be conducted.
A valid arbitration clause also prevents parties from commencing court proceedings against each other for disputes which are covered by the agreement. In such circumstances the court should normally stop the proceedings and decline to hear the dispute. The peace of mind that comes with knowing that, in the event a dispute occurs, you should be able to avoid the often complicated, slow, and expensive litigation process makes arbitration a very enticing alternative.
It is also possible to separate and define which potential disputes will be dealt with via arbitration and which will fall within the jurisdiction of the courts. This is very helpful when the remedy for particular disputes may be injunctive relief that can only be granted by the courts.
Is arbitration cheaper and faster than traditional litigation?
Generally speaking, the greatest expense in any type of dispute resolution is usually the cost incurred by the parties and their lawyers in working through the stages of the proceedings. As such it makes sense that the longer it takes to complete each stage, the more expensive the action becomes.
By design, arbitration procedures are meant to be less formal and more flexible than traditional ligation. For example, unlike court proceedings, there is no automatic right to wide-ranging discovery in arbitration proceedings (though the arbitrator may order discovery at his discretion). Also, arbitrators are not bound to the strict rules of evidence that apply to court proceedings. As such, arbitrators have great latitude to decide what evidence to admit and how the evidence is evaluated in determining the finding of facts. This flexibility and informality of arbitration proceedings tend to make the dispute resolution process faster, cheaper, and overall more efficient when compared to traditional litigation.
However, while parties are generally able to achieve resolution of their disputes faster and cheaper by way of arbitration over traditional litigation, such results are far from guaranteed. Increasingly, arbitrators are allowing more and more features of litigation to be included in the proceedings (for example, allowing parties to depose witnesses, serve interrogatories, etc.) that in turn can add considerable time and costs.
Moreover, as the parties themselves must pay for the arbitrator’s time (in addition to the costs for legal advice, administrative/institutional fees, etc.) the potential for the cost of arbitration to exceed that of traditional litigation is a very real possibility that should be carefully considered before deciding to engage in arbitration. While the cost of filing claims in the courts is fixed and generally fairly low, the cost of commencing arbitration directly relates to the value of the claim. In certain high value cases, it can cost hundreds of thousands of dollars just to commence the proceedings.
Our team at Hugill & Ip has extensive experience in dealing with Dispute Resolution issues – so if you need further advice on this subject, get in touch with us.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.