Innovation in Asia

With the Hong Kong International Arbitration Centre (HKIAC) winning GAR’s innovation award of 2014,¹ Asia is emerging as a pioneer iof innovation in international arbitration. This chapter examines innovative arbitration practices introduced by various arbitral seats and institutions in Asia and discusses how Asia’s forward-thinking mindset has placed it at the forefront of international arbitration best practice.

Why innovate and how did it happen?

The first question is why does it matter to be innovative? Leading business publication Entrepreneur has a direct answer as follows:

Innovators push the boundaries of the known world. They’re change agents who are relentless in making things happen and bringing ideas to execution. In many ways, innovation is key to your success no matter what your business is. The minute you stop innovating is the minute you become mediocre.²

In the business world, companies have to be innovative to meet the evolving needs of their clients.  Similarly, arbitration practices need to be evolved, with innovative ideas to address any gaps in the business market and any problems faced by commercial parties.

 To this end, leading arbitral seats in Asia, such as Hong Kong and Singapore, have been the key driving forces for innovative practices in the region. With world-class legal infrastructures and judicial systems, the government and arbitration community in these jurisdictions have taken innovative steps to further refine their arbitration framework and to push international arbitration practices to a new level.

The background to this is the impressive growth in the number and size of disputes that are being referred to the leading arbitration centres in Asia. Over the past few years, the total number of arbitration cases handled by arbitral institutions in Hong Kong and China together has exceeded that of their Western counterparts.³ The growth has also attracted leading international arbitral bodies to make arrangements to facilitate their dispute resolution services in Asia. For example, the International Chamber of Commerce (ICC) opened its first overseas secretariat office in Hong Kong in November 2008. More recently the Permanent Court of Arbitration (PCA) entered into a host country agreement with China to provide a legal framework for PCA-administered proceedings in Hong Kong.⁴

The growing caseload in Asia brings more legal talent into the region and fosters a culture of innovation to keep Asia at the leading edge of thinking in international arbitration. This thinking has driven many arbitral seats and bodies in the region to innovate and to customise their arbitration offerings for their users. Leading arbitral institutions in Asia have ignited waves of innovative activity and are the trendsetters in pushing forward arbitration revolutions. Most arbitral institutions in Asia are relatively new and young entrants in arbitration. In many instances, this also means that these institutions are less bureaucratic and can operate at a higher level of efficiency. This enables these institutions to respond swiftly to any need for improvement and can take quick actions to perfect their arbitration systems in a creative manner. As a result, Asia is transitioning from a ‘follower’, emulating traditional arbitral jurisdictions, to a ‘mover’ that develops innovative arbitration practices to shape the future of arbitration.⁵

Innovative arbitration rules

The last several years have seen innovative procedures introduced by major arbitral institutions in the region with a view to promoting diversity of institutional choices for users of arbitration.

For example, HKIAC has consolidated best arbitration practices into its latest set of rules – 2013 HKIAC Administered Arbitration Rules (HKIAC Rules). Recognised by GAR as one of the best developments in 2013,⁶ the HKIAC Rules create a sophisticated system which offers parties the following innovative tools to enhance cost-effectiveness and efficiency of arbitration.

Choice of method to remunerate arbitral tribunal⁷

HKIAC is the first institution to offer parties a choice to pay the arbitral tribunal based on the amount in dispute or hourly rates. If parties choose the latter, the arbitrator’s rate must not exceed a fee cap⁸ unless the parties agree or HKIAC determines otherwise. This choice allows the parties to select the most economical way to pay the tribunal. For example, if a party claims a significant amount in a straightforward dispute, the parties can opt for an hourly arrangement to save costs. Equally, if the amount in dispute is small but the dispute involves complex factual and legal issues which would take the tribunal a long time to decide, it would make sense for the parties choose to pay the tribunal based on the sum in dispute. The uniqueness of this mechanism has earned HKIAC a GAR nomination for best innovation of 2013.⁹

Standard terms of appointment¹⁰

All arbitrators appointed under the HKIAC Rules must use the standard terms of appointment (subject to any variations through party agreement or by HKIAC). The uniformity created by these standard terms will lead to a transparent and efficient appointment process. HKIAC is the only institution that has introduced such terms. Parties to arbitrations under other institution rules will have to negotiate specific terms and conditions with their arbitrators – a process that often results in dissatisfaction.

Multi-party and multi-contract provisions¹¹

The HKIAC Rules contain comprehensive and far-reaching provisions to maximise the ability of HKIAC and arbitral tribunals to manage complex disputes involving multiple parties or multiple contracts. In this regard, the HKIAC Rules are the first set of rules that offer a complete system to deal with complex arbitrations by joinder, consolidation and single arbitration under multiple contracts in the Asia-Pacific region.¹² The joinder provision allows an existing or additional party to submit a request for joinder at any stage of the arbitration. The consolidation provision empowers HKIAC to consolidate several arbitrations if they involve a common question of law or fact, claims arising out of the same transaction or a series of transactions, and compatible arbitration agreements. An innovative feature is that the HKIAC consolidation provisions cover situations where the parties to each arbitration are different. This is particularly useful for finance, construction, insurance/reinsurance, M&A and supply train disputes where the relevant contracts often involve different parties. Alternatively, under the HKIAC Rules a party may commence a single arbitration under multiple contracts from the outset to avoid seeking consolidation later.

These trend-setting provisions have prompted many other institutions in the region to include similar provisions in their rules. Both the 2014 version of the Japan Commercial Arbitration Association (JCAA) Commercial Arbitration Rules and the 2015 version of the China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules now include a suite of provisions regarding joinder, consolidation and single arbitration under multiple contracts. CIETAC’s Hong Kong Arbitration Center now also offers parties a choice to determine the arbitral tribunal’s fees based on either the amount in dispute or hourly rates.

In Kuala Lumpur, the Kuala Lumpur Regional Centre for Arbitration (KLRCA) has developed an innovative set of rules tailored for disputes arising from commercial transactions based on Islamic principles of shariah.¹³ Known as the i-Arbitration Rules, the rules are largely based on the UNCITRAL Arbitration Rules with some modifications. The most notable modification is the addition of a provision to refer shariah issues to a shariah advisory council or a shariah expert. This is a useful innovation to meet the specific need of Islamic finance parties and is a helpful contribution to the arbitration options in Asia. The introduction of the i-Arbitration Rules won KLRCA the GAR innovation award of 2012.

Designation of governing law of the arbitration agreement

A revolutionary development in international arbitration last year was the introduction of HKIAC’s new model clauses, which for the first time have included a provision to prompt parties to designate an appropriate law to govern their arbitration agreement.¹⁴

The law of the arbitration agreement generally deals with the formation, existence, scope, validity, interpretation and enforceability of the arbitration agreement. This is to be distinguished from the law of the substantive contract and the law of the seat. The former determines the substantive dispute and the latter governs the procedural conduct of the arbitration. In practice, parties often fail to recognise the importance of the law of the arbitration agreement and do not specify the law in their contracts. This creates uncertainty as to which law will apply to the arbitration agreement, especially where the law of the contract and the law of the seat are not the same.

The uncertainty is manifested by inconsistent court decisions from different jurisdictions as to what law should govern the arbitration clause where there is no express choice. The English courts will engage in a three-stage inquiry to apply the law that has the closest and most real connection with the arbitration agreement, absent an express or implied choice.¹⁵ In Sulamérica v Enesa Engenharia,¹⁶ the English Court of Appeal created a rebuttable presumption that the law of the substantive contract will apply in this situation.

The Hong Kong courts have adopted a similar approach emphasising the need to examine the particular terms of the arbitration agreement and the surrounding circumstances. In Klöckner v Advance Technology,¹⁷ the Hong Kong Court of First Instance (CFI) concluded that the law of the substantive contract was intended to govern the arbitration agreement.

However, a different approach has been taken by the Singapore and Indian courts. In FirstLink v GT Payment,¹⁸ the Singapore High Court held that, by default, the arbitration agreement would be governed by the law of the seat, rejecting the presumption that parties would want the same law to govern their performance of the contract and the resolution of their disputes. Similarly the Indian Supreme Court has held that the law of the seat would apply to an arbitration clause with an unclear choice of governing law.¹⁹

Given the lack of international consistency, HKIAC updated its model clauses in August 2014 to include a choice-of-law provision. Such a provision can prevent disputes concerning which law should govern the arbitration agreement. Many law firms have now advised their clients to include the suggested provision in their contracts.

The HKIAC model clause is also a useful addition to China or India-related contracts. Since Chinese law does not recognise ad hoc arbitration, parties to China-related transactions can adopt HKIAC’s model clause and choose a different law to govern their arbitration agreement. This can avoid any adverse impact of Chinese law that would potentially render the agreement invalid. For India-related contracts, the use of HKIAC’s model clauses can avoid the risk of any interference of the Indian courts to determine the law of the arbitration agreement.

This innovative provision of the HKIAC model clauses has received worldwide recognition and has led to HKIAC winning the GAR award for ‘innovation by an individual or organisation in 2014’.²⁰

Use of tribunal secretaries

As international arbitration cases have generally grown more complex, there is a clear demand for tribunal secretaries to manage administrative tasks in arbitration, allowing the arbitral tribunal to focus on deciding the merits of the dispute. The trend is reflected in the results of a 2012 ICCA survey which indicated an overwhelming 95 per cent approval of the use of tribunal secretaries.²¹ However there are also concerns of such a secretary going beyond his or her mandate and improperly influencing the tribunal’s decisions. The concerns are highlighted in the recent Yukos v Russia case, where Russia has sought to challenge the award based on, among other things, an allegation that the tribunal secretary played in excessive role in the tribunal’s decision-making process.

Two arbitral institutions in Asia have quickly responded to the trend of using tribunal secretaries and the associated concerns by introducing measures to regulate the role of these secretaries.

HKIAC is the first institution to address the use of tribunal secretaries in the Asia-Pacific region. On 1 June 2014, HKIAC issued the Guidelines on the Use of a Secretary to the Arbitral Tribunal (the Guidelines),²² providing detailed provisions regarding the appointment, removal, remuneration and duties of tribunal secretaries. To address the controversy surrounding the role of tribunal secretaries, the Guidelines define the tasks that can be performed by a secretary in a comprehensive manner while allowing the parties to agree or the tribunal to direct otherwise. The Guidelines have also established a system to determine the fees and expenses of a tribunal secretary. The Guidelines can be used by parties in arbitrations administered by HKIAC under any version of the HKIAC Administered Arbitration Rules or the UNCITRAL Arbitration Rules or any other cases after consultation with HKIAC.

In addition to the Guidelines, HKIAC has also introduced a tribunal secretary service giving tribunals the opportunity to appoint a member of the HKIAC Secretariat as secretary.²³ This service allows the HKIAC Secretariat to save time and costs for parties, to provide useful insights into the HKIAC arbitral procedures, and to assist the tribunal in managing the arbitral process more efficiently. HKIAC has recently provided such service to an emergency arbitrator who was appointed to decide an application for emergency relief arising out of a US$1.9 billion M&A dispute. With the assistance of an HKIAC Secretariat member, the emergency arbitrator rendered an emergency award within just a few days after the hearing. HKIAC is the only institution that has provided a tribunal secretary service in the region. This innovation contributes to HKIAC’s winning of the GAR award for best innovation of 2014.²⁴

Eight months after HKIAC introduced the Guidelines, the Singapore International Arbitration Centre (SIAC) issued a brief Practice Note on the Appointment of Administrative Secretaries (the Practice Note).²⁵ The Practice Note applies to all secretaries appointed in SIAC-administered cases on or after 2 February 2015. In an effort to control arbitration costs, the Practice Note provides for different methods to remunerate a tribunal secretary for cases below and above S$15 million (approximately US$11 million). For cases where the amount in dispute is below S$15 million, the parties will not bear any fees of a secretary. However, where the amount in dispute is S$15 million or above, the parties may be asked to pay the fee of the secretary. Such fee shall not exceed S$250 (approximately US$180) per hour.²⁶

Specialist arbitration schemes

Concomitant with Asia’s fast-paced economic and technological developments, arbitration in Asia has evolved as a viable forum for resolving highly specialist and technical disputes. Several arbitration schemes have been created in Asia to deal with technically complex disputes arising in specialist areas such as aviation and payment of land premium.

In response to the increasing need for institutional arbitration of aviation disputes in China, in August 2014 the International Air Transport Association (IATA), the China Air Transport Association (CATA) and the Shanghai International Arbitration Center (SHIAC) established the world’s first body to provide aviation arbitration services – the Shanghai International Aviation Court of Arbitration (SHIACA).

Aviation disputes are commonly dealt with by ad hoc arbitration under the IATA Rules. This presents an issue for aviation disputes in China, because Chinese law does not recognise ad hoc arbitration and requires the designation of an arbitral institution to administer arbitration disputes. SHIACA was created to fulfil this requirement and to provide an onshore forum for contractual aviation disputes, which cover those in relation to procurement, sales and financial leasing of aircrafts, as well as air transport, insurance, fuel supply and ground service.²⁷ This is a noteworthy innovation which creates an unprecedented specialist arbitration system supported by a list of aviation arbitrators.²⁸

Another novel arbitration scheme in Asia is the Pilot Scheme for Arbitration on Land Premium, announced by the Hong Kong government in 2014. The Scheme provides an arbitration procedure for disputes between the government and land developers in relation to land premium payable for lease modification or land exchange applications. The Scheme has begun to run for an initial period of two years since October 2014 and will be subject to further fine-tuning.²⁹

An arbitration under the Scheme can be triggered upon proposal by either the government or the developer after they have failed to agree on the relevant land premium amount. A three-member tribunal comprising an experienced legal professional and two surveyors will be appointed to decide the dispute. HKIAC acts as the appointing authority to appoint arbitrators if there is any failure to appoint by the parties. The developer has to pay 15 per cent of the premium last assessed by the government as security to deter the developer from abandoning the arbitration. To ensure that the assessed value does not become out of date, in straightforward documents-only proceedings, the tribunal is expected to issue an award approximately 10 weeks after it is constituted.³⁰

The Scheme is the first of its kind and demonstrates the creative use of arbitration for land premium disputes between a government and private developers.

Combination of mediation and arbitration

Med-arb or arb-med (collectively, med-arb) is a dispute resolution mechanism that combines mediation and arbitration into a single process. This practice typically involves the same person acting both as mediator to facilitate settlement and as an arbitrator to render a final and binding award.

Various forms of med-arb have long been practised in Asia, because many Asian jurisdictions have a strong preference for mediation as part of their legal tradition. As a result, many Asian arbitral institutions have incorporated med-arb procedures into their rules.³¹ While med-arb is perceived by some as an effective means of dispute resolution, it is not without pitfalls. The common criticism appears to focus on the ability of the arbitral tribunal to perform the dual role of arbitrator and mediator in a fair and impartial manner.

The criticism was manifested in the CFI’s decision in Gao Haiyan v Keeneye.³²In that case, the court was asked to decide an application to refuse enforcement of a mainland Chinese award issued under an arb-med procedure. Reyes J of the CFI had serious reservations regarding the conduct of the arb-med process which took place over dinner at the Xi’an Shangri-La Hotel without the presence of the parties and all members of the arbitral tribunal. The Court of Appeal disagreed and found that the arb-med procedure did not cause sufficient concerns of bias having given due weight to the arb-med practice in China. Although the award was ultimately not refused enforcement in Hong Kong, the case shows that the Hong Kong courts will scrutinise med-arb procedures vigorously.³³

To address the concerns about med-arb, many arbitral institutions in the region have introduced innovative measures to regulate the practice. The 2015 CIETAC Rules allow CIETAC to mediate with the parties’ consent in circumstances where the parties are not comfortable with mediation being conducted by the arbitral tribunal.³⁴ The China (Shanghai) Pilot Free Trade Zone Arbitration Rules have introduced a pre-tribunal mediation procedure. Under the procedure, the Chairman of SHIAC will appoint a mediator within three days of the parties’ request and the mediator will not act as arbitrator in the subsequent proceedings unless the parties agree otherwise.³⁵ In Singapore, SIAC and the Singapore International Mediation Centre (SIMC) have launched an arb-med-arb procedure, which contemplates the constitution of an arbitral tribunal under the SIAC or UNCITRAL Rules, followed by a mediation under the SIMC Mediation Rules which is to be completed within eight weeks. The tribunal will decide any unresolved dispute or record any settlement in the form of a consent award depending on the outcome of the mediation.³⁶ A similar procedure also exists under the 2015 Beijing Arbitration Commission (BAC) Arbitration Rules.³⁷

Future trends

While Asia’s desire to innovate continues, more needs to be done to maintain a consistent pattern of excellence in arbitration practices in the region. For example, uniform application of the UNCITRAL Model Law remains a work in progress in Asia. The divergence between the Hong Kong and Singapore courts in relation to the enforcement of five SIAC awards in Astro v Lippo³⁸ is a recent example in this regard. The Hong Kong Court of First Instance enforced the awards despite the Singapore Court of Appeal’s decision to refuse enforcement. A key area of difference between the two courts was whether a party could raise a jurisdictional objection at the enforcement stage if it failed to do so in the arbitration. The Singapore court found that a party was entitled to object to the tribunal’s jurisdiction before an enforcement court under the UNCITRAL Model Law, while the Hong Kong court took issue with a party keeping a jurisdictional objection in reserve to be deployed in the enforcement court depending on the outcome of the arbitration.

Notwithstanding the necessary steps to further improvement in Asian arbitration, many jurisdictions in the region have made continuous efforts to introduce best innovations in policing and enhancing global arbitration standards. Through these innovations, coupled with Asia’s growing economic power and industry expertise, the arbitration community in the region is on track to build Asia as an arbitration haven to provide relevant practices and expertise that are unmatched in any other region in the world. These innovative developments suggest a trend among arbitral institutions in Asia to lead the development of international arbitration practice. The result is that, in the words of Australian arbitrator Doug Jones AO, ‘Asia as a whole is ahead of the game.’³⁹

Notes

1. See HKIAC News Flash ‘And the GAR Innovation Award goes to … HKIAC’, 27 February 2015. Available online at www.hkiac.org/en/news/526.
2. See www.entrepreneur.com/innovators/.
3. Michael Moser, Arbitration in Asia, 2nd Edition, JurisNet, LLC, 2013, p xix.
4. See ‘PCA enters into Host Country Agreement with China’, Available online at: www.pca-cpa.org/shownews.asp?ac=view&pag_id=1261&nws_id=471.
5. See Joongi Kim, ‘International Arbitration in East Asia: From Emulation to Innovation’, The Arbitration Brief 4, No. 1 (2014), 1-30.
6. ‘Vote now for the GAR Awards 2014’, 24 Jan 2014. Available online at https://globalarbitrationreview.com/news/article/32341/vote-gar-awards-2014/.
7. The HKIAC Rules, art 10.
8. At the date of writing, the fee cap is HK$6,500/hour (approximately US$830).
9. GAR, (Note 6, above).
10. The HKIAC Rules, schedules 2 and 3.
11. The HKIAC Rules, articles 27-29.
12. ICC is another leading arbitral institution that has offered a similar breadth of multi-party and contract provisions.
13. The text of the i-Arbitration Rules is available online at http://klrca.org/rules/i-arbitration/.
14. The HKIAC model clauses are available online at www.hkiac.org/en/arbitration/model-clauses.
15. See eg, Sulamérica Cia Nacional De Seguros SA and others v Enesa Engenharia SA [2012] EWCA Civ 638.
16. Ibid.
17. Klöckner Pentaplast Gmbh & Co Kg v Advance Technology (HK) Company Limited, 14/07/2011, HCA1526/2010.
18. FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12, 19 June 2014.
19. See eg, NTPC v Singer, AIR 1993 SC 998; Enercon India v Enercon GMBH, Civ. App. 2086/7, 2014.
20. GAR, ‘GAR Awards 2015 – the winners’, 26 February 2015. Available online at https://globalarbitrationreview.com/news/article/33584/gar-awards-2015-winners/.
21. Young ICCA Guide on Arbitral Secretaries, the ICCA Reports No. 1, 2014, p 2.
22. HKIAC, ‘Guidelines on the Use of a Secretary to the Arbitral Tribunal’, 1 June 2014. Available online at www.hkiac.org/images/stories/arbitration/HKIAC%20Guidelines%20on%20Use%20of%20Secretary%20to%20Arbitral%20Tribunal%20-%20Final.pdf.
23. More details about HKIAC’s tribunal secretary service are available online at www.hkiac.org/en/arbitration/tribunal-secretary-service.
24. GAR, (Note 20, above).
25. ‘Tribunal secretaries: now SIAC issues guidance’, 10 February 2015. Available online at https://globalarbitrationreview.com/news/article/33384/tribunal-secretaries-siac-issues-guidance/.
26. SIAC, ‘Practice Note on the Appointment of Administrative Secretaries’, PN-01/15, 2 February 2015. Available online at https://globalarbitrationreview.com/cdn/files/gar/articles/SIAC.pdf.
27. SHIAC, ‘The First Seminar Held by International Shipping and Air Transport Research Group of SHIAC’. Available online at www.shiac.org/English/EventsDetails.aspx?tid=8&nid=781.
28. SHIAC, ‘SHIAC Appoints 71 New Foreign and Domestic Arbitrators’. Available online at www.shiac.org/English/NewsDetails.aspx?tid=7&nid=803.
29. Hong Kong government press release, ‘Government announces implementation framework of Pilot Scheme for Arbitration on Land Premium’, 24 October 2014. Available online at www.info.gov.hk/gia/general/201410/24/P201410240936.htm.
30. See HKIAC News Flash, ‘HKIAC Designated as Appointing Authority in the Pilot Scheme for Arbitration on Land Premium’, 13 August 2015. Available online at www.hkiac.org/en/news/2014.
31. See eg, ariclet 47 of the 2015 CIETAC Rules; rules 54 and 55 of the 2014 JCAA Rules; articles 42, 43 and 67 of the 2015 BAC Rules; chapter VI of the 2015 China (Shanghai) Pilot Free Trade Zone Arbitration Rules; the SIAC-SIMC Arb-Med-Arb Protocol.
32. Gao Haiyan v Keeneye Holdings Ltd [2011] HKCFI 240, 12 April 2011.
33. See Fei Ning, Joe Liu, ‘Mediation meets arbitration – the experience of med-arb in Mainland China and Hong Kong’, Australian Alternative Dispute Resolution Law Bulletin, 2014, Vol 1 No 5, pp 97-100.
34. See the 2015 CIETAC Rules, article 47(8).
35. See the 2015 China (Shanghai) Pilot Free Trade Zone Arbitration Rules, article 50.
36. See the SIAC-SIMC Arb-Med-Arb Protocol.
37. See the 2015 BAC Rules, article 43.
38. Astro Nusantara International B.V. v PT First Media TBK, HCCT 45/2010, 17 Feb 2015; PT First Media TBK v Astro Nusantara International B.V. et al, [2013] SGCA 57, 31 October 2013.
39. GAR, ‘Is Asia ahead of the game?’ 20 Oct 2014. Available online at https://globalarbitrationreview.com/news/article/33083/is-asia-ahead-game.