Background

Prior to the commencement of the Arbitration Ordinance (Cap 609) (“Ordinance”) on 1 June 2011, there were separate legal regimes for domestic and international arbitrations in Hong Kong. The Ordinance removed this distinction and established a unified regime based upon the UNCITRAL Model Law.

However, in order to alleviate concerns from the construction industry, Schedule 2 of the Ordinance preserved a number of key provisions which previously applied under the domestic regime. These include the appointment of a sole arbitrator, the consolidation of different arbitrations by the Court, the referral of preliminary questions of law to Court, the ability to challenge arbitral awards for serious irregularity and the ability to appeal against arbitral awards on questions of law.

The change

Up until now, many have automatically enjoyed the benefit of the Schedule 2 provisions by simply providing that their arbitration is a “domestic arbitration” in their arbitration clause.

This changes from 1 June 2017. Unless the parties expressly provide to the contrary:

  • for arbitration agreements signed before 1 June 2011 which provide that the arbitration is a “domestic arbitration”, the Schedule 2 provisions will apply;
  • for arbitration agreements signed between 1 June 2011 and 1 June 2017 which provide that the arbitration is a “domestic arbitration”, the Schedule 2 provisions will apply; but
  • for arbitration agreements signed from 1 June 2017 which provide that the arbitration is a “domestic arbitration”, the Schedule 2 provisions will not apply.

In other words, from 1 June 2017, the reference to “domestic arbitration” in your arbitration clause will no longer be sufficient to automatically attract the benefit of the Schedule 2 provisions.

The lapse of the automatic opt-in to Schedule 2 is of particular relevance to the construction industry, as the arbitration clauses in a number of standard forms for main contracts refer to “domestic arbitration” – see, for instance, the Hong Kong Institute of Architects Building Contract (2005 and 2006 editions) and the Government of Hong Kong Special Administrative Region General Conditions of Contract for Building Works (1999). Going forward, as Schedule 2 will no longer automatically apply, parties to such standard forms should consider whether they wish to expressly provide for the application of Schedule 2 or any of the provisions therein.

What should you do from 1 June 2017 if you want the benefit of Schedule 2?

If you want to take advantage of some or all of the Schedule 2 provisions, you must expressly state this in your arbitration agreement pursuant to section 99 of the Ordinance. For example, if parties wish to include the entirety of Schedule 2, wording along the lines of, “the parties agree that all the provisions contained in Schedule 2 of the Arbitration Ordinance apply” should be used. The reference to “domestic arbitration” should be avoided.

Construction subcontracts – an exception

In our view, section 101 of the Ordinance allows for one important exception that subcontractors in Hong Kong must be aware of. Where the Schedule 2 provisions automatically apply to a Main Contract signed before 1 June 2017 because the Main Contract contains the term “domestic arbitration”, the Schedule 2 provisions will be deemed to automatically apply to subcontracts (of any tier) under the Main Contract, even if entered into from 1 June 2017, unless:

  1. there is no arbitration agreement in the subcontract;
  2. the parties agree or the subcontract arbitration agreement provides that sections 100 or 101 of the Ordinance do not apply;
  3. the subcontract arbitration agreement provides that any of the provisions in Schedule 2 do or do not apply;
  4. the subcontractor is not based in Hong Kong (as described in the Ordinance); or
  5. a substantial part of the subcontract work is to be performed outside Hong Kong.

Key Points

  • The Schedule 2 provisions will continue to apply to contracts in existence before 1 June 2017 where the parties expressly agree or the arbitration is described as a “domestic arbitration” in the arbitration agreement.
  • If entering into a contract from 1 June 2017 the parties can no longer rely on the automatic opt-in of the Schedule 2 provisions. If the parties want all or some of the Schedule 2 provisions to apply, they must expressly say so in their arbitration agreement.
  • If entering into a subcontract from 1 June 2017, but where the Main Contract was entered into before 1 June 2017, parties must be aware of the possibility that the Schedule 2 provisions may apply. It is best to expressly state in the subcontract whether Schedule 2 is to apply.
  • The most important question for parties is to decide whether they want any or all of the Schedule 2 provisions to apply.