Enhancing Hong Kong’s position as the leading international arbitration centre in Asia-Pacific Hong Kong Trade Development Council Report November 2016 ` IMPORTANT NOTICE In preparing this Report, our primary sources include some publicly available market data and information provided by the Hong Kong Trade Development Council. We do not accept responsibility for such information. Details of our principal information sources are set out in this Report and we have satisfied ourselves, so far as possible, that the information presented in this Report is consistent with other information which was made available to us in the course of our work in accordance with the terms of our Engagement Letter. We have not, however, sought to establish the reliability of the sources by reference to other evidence. The research and field work underlying this Report was completed in October 2015. In consultation with the Hong Kong Trade Development Council, the conclusions and recommendations were updated to February 2016, and a limited set of revisions were made in August 2016 and November 2016. This engagement is not an assurance engagement conducted in accordance with any generally accepted assurance standards and consequently no assurance opinion is expressed. This Report is addressed to the Hong Kong Trade Development Council and no other person or entity should rely on the Report. This Report contains our empirical research data (survey and consultations) and is the propriety work product of KPMG. KPMG will accordingly accept no responsibility or liability in respect of it to persons other than the addressee of the Report. 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P age | 2 NOMENCLATURE AND ABBREVIATIONS 2006 Model Law Original Model Law as amended by UNCITRAL on 7 July 2006 2015 QMU Survey 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration conducted by QMU AAA American Arbitration Association ADR Alternative dispute resolution ADNDRC Asian Domain Name Dispute Resolution Centre ADR Moot International ADR Mooting Competition AIIB Asian Infrastructure Investment Bank Arbitration Arbitration Ordinance (Cap. 609) Ordinance Basic Law The Basic Law of Hong Kong BJ Beijing BIT Bilateral investment treaty CAS Certificate of Advanced Studies CEF Continuing Education Fund from the Hong Kong Government CEPA Mainland and Hong Kong Closer Economic Partnership Arrangement Central The Central People’s Government of the People’s Republic of China Government China People’s Republic of China CIArb Chartered Institute of Arbitrators CIArb Survey CIArb Cost of International Arbitration Survey 2011 CIETAC China International Economic and Trade Arbitration Commission CIETAC Hong Kong China International Economic and Trade Arbitration Commission Hong Kong Arbitration Center CityU The City University of Hong Kong CMAC China Maritime Arbitration Commission CMAC Hong Kong China Maritime Arbitration Commission Hong Kong Arbitration Center CMAC Rules CMAC Arbitration Rules 2015 CUHK The Chinese University of Hong Kong DoJ Department of Justice, The Government of the Hong Kong Special Administrative Region F&B Food and beverage P age | 3 FDI Foreign direct investment FIE Foreign investment enterprise FTE Full-time equivalent GDP Gross Domestic Product GVA Gross Value Added Hague Convention Convention on Choice of Court Agreements (2005) HKIAC Hong Kong International Arbitration Centre HKIArb The Hong Kong Institute of Arbitrators Hong Kong The Government of the Hong Kong Special Administrative Region Government/ Government HKMAG Hong Kong Maritime Arbitrators Group HKTDC Hong Kong Trade Development Council HKU The University of Hong Kong HKU SPACE School of Professional and Continuing Education of the University of Hong Kong Hong Kong Hong Kong Special Administrative Region of the People’s Republic of China IAMA Institute of Arbitrators & Mediators Australia ICC International Chamber of Commerce’s International Court of Arbitration ICCA International Council for Commercial Arbitration ICC Asia The Secretariat of the International Court of Arbitration of the International Chamber of Commerce - Asia Office ICDR International Centre for Dispute Resolution ICSID International Centre for Settlement of Investment Disputes IP Intellectual property IPR Intellectual property rights KL Kuala Lumpur Korea Republic of Korea LLM Masters of Laws LLMArbDR Masters of Laws in Arbitration and Dispute Resolution LMAA The London Maritime Arbitrators Association LROs Law-related organisations Macao Macao Special Administrative Region of the People’s Republic of China Mainland China/ The People’s Republic of China, excluding the Hong Kong Special P age | 4 PRC Administrative Region, Macao Special Administrative Region and Taiwan MIArb Malaysian Institute of Arbitrators MICE Meetings, incentives, conferences and exhibitions Model Law UNCITRAL Model Law on International Commercial Arbitration New York The United Nations Convention on the Recognition and Enforcement of Convention Foreign Arbitral Awards (New York, 1958) NPCSC Standing Committee of the National People’s Congress Original Model Law Model Law as adopted by UNCITRAL on 21 June 1985 PCA Permanent Court of Arbitration PRC Arbitration Arbitration Law of People’s Republic of China Law QMU Queen Mary University of London, UK Relevant Period January 2012 to December 2014 SIAC Singapore International Arbitration Centre SEL Seoul SG Singapore Toronto Study Arbitration in Toronto: An Economic Study prepared by Charles River Associates (2012) TPP Trans-Pacific Partnership UK United Kingdom UNCITRAL The United Nations Commission on International Trade Law USA United States of America UNCITRAL Rules UNCITRAL Arbitration Rules as revised in 2010 (with new article 1, paragraph 4, as adopted in 2013) VA Value added Vis East Moot Willem C. Vis (East) International Commercial Arbitration Moot WFOE Wholly foreign-owned enterprise P age | 5 EXECUTIVE SUMMARY Arbitration is a method of dispute resolution, used as an alternative to litigation in the courts of a country or jurisdiction, whereby the parties voluntarily agree to refer their disputes to a private arbitral tribunal (involving one or more neutral third parties) for adjudication and the outcome of which is binding and enforceable between them. Over the past decades, Hong Kong has developed as one of the leading centres for international arbitration in the world due to an open market approach supported by pro- arbitration policies, and it now comprises a significant part of Hong Kong’s legal sector economy. However, Hong Kong is facing mounting competition throughout the broader Asia-Pacific region as a venue for international arbitration. Other cities in the region are emerging rapidly, with Singapore, Seoul, Kuala Lumpur, and Beijing all taking steps to actively promote their respective centres as venues for arbitration. It is in this context that KPMG was commissioned by the Hong Kong Trade Development Council (and supported by the Department of Justice, The Government of the Hong Kong Special Administrative Region) to assess the role played by the arbitration sector in Hong Kong’s legal sector and the economy generally, and to assess its competitiveness within a broader international and regional context. Ultimately, KPMG was instructed to consider the extent to which the arbitration sector could be expected to develop over time in Hong Kong, and what could be done to encourage and support this development. In preparing this Report, we undertook an extensive survey and numerous consultations with members of Hong Kong’s arbitration community. Specifically, our empirical research included: • A survey of 223 users and service providers was conducted between 6 May 2015 and 29 September 2015 to determine their current Hong Kong arbitration activity and preferences; • Consultations were held with 113 stakeholders, both in Hong Kong and internationally, to gain the views of users and providers about the perceived strengths and weaknesses of Hong Kong’s arbitration sector; and • Two round-table focus groups on education and training were held in Hong Kong comprising legal sector stakeholders, whereby the key findings of our survey in this area were discussed in confidence and the legitimacy of these findings considered and commented by practitioners. As a result of these activities, this Report concludes that Hong Kong is a leading centre for international arbitration, with more international commercial arbitration cases heard in the city than in its regional peers. Further, this international arbitration activity brought with it significant economic activity to Hong Kong. In 2014, the total Gross Value Added of arbitrations (both direct and induced contribution) in Hong Kong was approximately HK$ 1.964 billion, which contributed to 13% of the legal sector’s GDP, or around 0.09% of Hong Kong’s total GDP. This economic activity also supported over 2,600 FTE jobs in Hong Kong and contributed over HK$ 170 million to the Hong Kong Government in 2014 fiscal receipts. Significantly, this Report identified Hong Kong’s competitiveness in arbitration arose from the following factors: • Arbitral awards made in Hong Kong are widely enforceable; • Its political stability and the high quality of Hong Kong’s political and legal environment; • Hong Kong’s highly arbitration friendly government and courts; • Presence of reputable arbitration bodies such as HKIAC, ICC Asia, CIETAC Hong Kong, and CMAC Hong Kong; • Geographically convenient and accessible; P age | 6 • Excellent quality and accessible arbitration facilities; • Extensive pool of professionals; • Its position as an international financial centre; • Its economically free market; • High English and Chinese language proficiency and use; • The high profile Vis East Moot competition held annually in Hong Kong; and • The abundance, quality and flexibility of arbitration education and training-related events in Hong Kong. The growth enjoyed by Hong Kong in the number of international arbitration cases has been slowing in recent years, notwithstanding the competitive advantages it possesses. This is due to intensified competition in the regional arbitration market as other centres improve their arbitration offerings and the development of other dispute resolution methods, giving users more choice than ever before in terms of both where and how they resolve their disputes. These developments pose threats to Hong Kong’s position and require positive action to be taken to continually improve Hong Kong’s competitiveness and to adapt to new opportunities in a changing landscape. In that regard, this Report also identified four key areas of opportunities for Hong Kong to further develop its arbitration sector, namely: • Growth in demand for dispute resolution services in Asia; • Regulatory changes in other markets; • Increasing China related opportunities; and • The Trans-Pacific Partnership. The growing regional competition and changing trends in dispute resolution require the Hong Kong Government to take more pro-active steps to support market participants if Hong Kong is to maintain its leading position and market share. Therefore, we recommend that the following actions be taken: • Create a single peak body or council to lead and co-ordinate efforts to promote Hong Kong as a leading dispute resolution hub; • Maintain and further promote Hong Kong’s institutions and openness; • Promote Hong Kong’s neutrality as a seat of arbitration; • Enhance Hong Kong’s position as a financial and business centre; • Establish voluntary associations to encourage specialisation and self-promotion; • Give a permanent home to the Vis East Moot; • Create “pupillage” opportunities for aspiring arbitrators; • Explore and expand schemes that provide for arbitration of consumer disputes; • Promote Hong Kong through the institutions; • Establish more arbitration facilities and encourage other international institutions to set up in Hong Kong; • Promote to overseas market intermediaries; • Promote Hong Kong arbitration in “non-traditional” markets; • Leverage opportunities from Mainland China’s outbound investments; • Leverage Hong Kong’s pre-eminence in education and training; P age | 7 • Provide clarity for IP disputes; • Implement a mutual recognition and enforcement mechanism with Taiwan; and • Explore preferential access to Mainland China market for Hong Kong’s arbitral institutions. By taking these recommended steps, Hong Kong will be better equipped to further enhance its leading position and exploit the opportunities that will arise from the changes in commercial disputes resolution which we have identified in this Report. P age | 8 CONTENTS Important notice 2 Nomenclature and abbreviations 3 Executive summary 6 CONTENTS 9 1 INTRODUCTION 11 1.1 Scope of the Report 11 2 APPROACH AND METHODOLOGY 12 2.1 Empirical research undertaken 12 3 DEVELOPMENT OF ARBITRATION IN HONG KONG 14 3.1 The first Arbitration Ordinance (Cap. 341) 14 3.2 The Arbitration Ordinance (Cap. 609) 15 4 EDUCATION & TRAINING 17 4.1 University courses 17 4.2 Training for aspiring arbitrators 18 4.3 Future areas for development 19 5 ARBITRATION SURVEY 20 5.1 Survey responses 20 5.2 Results and analysis 20 6 ECONOMIC CONTRIBUTION OF ARBITRATION TO HONG KONG 34 6.1 Overview of the arbitration sector 34 6.2 Projected future economic benefits of the arbitration sector 39 6.3 Arbitration events 39 6.4 Education & training 45 6.5 Summary of current economic benefits 46 P age | 9 6.6 Potential further benefits 46 7 THE COMPETITIVENESS OF HONG KONG AS A SEAT OF ARBITRATION 49 7.1 Hong Kong’s competitiveness as a seat of arbitration 49 7.2 Hong Kong’s opportunities 59 7.3 Hong Kong’s challenges 62 8 CONCLUSION AND RECOMMENDATIONS 66 8.1 Create a single peak body or council to lead and co-ordinate efforts to promote Hong Kong as a leading dispute resolution hub 66 8.2 Promote Hong Kong’s institutions and openness 66 8.3 Promote Hong Kong’s neutrality as a seat of arbitration 67 8.4 Enhance Hong Kong’s position as a financial and business centre 67 8.5 Establish voluntary associations to encourage specialisation and self-promotion 67 8.6 Give a permanent home to the Vis East Moot 68 8.7 Create “pupillage” opportunities for aspiring arbitrators 68 8.8 Explore and expand schemes that provide for arbitration of consumer disputes 68 8.9 Promoting Hong Kong through the institutions 69 8.10 Establishing more arbitration facilities and encouraging other international institutions to set up in Hong Kong 69 8.11 Promote to overseas market intermediaries 69 8.12 Promote Hong Kong arbitration in “non-traditional” markets 70 8.13 Leverage opportunities from Mainland China’s outbound investments 70 8.14 Leverage Hong Kong’s pre-eminence in education and training 70 8.15 Provide clarity for IP disputes 71 8.16 Implement a mutual recognition and enforcement mechanism with Taiwan 71 8.17 Explore preferential access to Mainland China market for Hong Kong’s arbitral institutions 71 8.18 Relative cost-effectiveness analysis of recommendations 73 P age | 10