Commercial Arbitration Clauses in Hong Kong: Drafting Best Practices

Introduction

Arbitration is the preferred dispute resolution mechanism for cross-border commercial contracts in Hong Kong and throughout Asia. As a leading international arbitration hub with a modern legal framework, experienced arbitrators, and access to the New York Convention’s global enforcement network, Hong Kong consistently ranks among the world’s top arbitration seats.

Yet the effectiveness of arbitration depends fundamentally on a well-drafted arbitration clause. A poorly drafted or “pathological” clause can result in jurisdictional disputes, delays, and unenforceable awards. This guide sets out best practices for drafting commercial arbitration clauses under Hong Kong law.

Hong Kong’s Arbitration Framework

The Arbitration Ordinance (Cap. 609)

The Arbitration Ordinance (Cap. 609), which came into force in 2011 and was updated in subsequent years, is based on the UNCITRAL Model Law on International Commercial Arbitration. It governs both domestic and international arbitrations seated in Hong Kong and provides a pro-arbitration framework including:

• Minimal court intervention in arbitral proceedings;
• Recognition and enforcement of foreign arbitral awards under the New York Convention;
• Enforcement of Mainland China arbitration awards under the Arrangement Concerning Mutual Enforcement of Arbitral Awards between Mainland China and Hong Kong;
• Power to grant interim measures in support of arbitration;
• Confidentiality provisions for arbitral proceedings.

The Hong Kong International Arbitration Centre (HKIAC)

The HKIAC is Hong Kong’s pre-eminent arbitral institution, administering international commercial disputes under the HKIAC Administered Arbitration Rules (the “HKIAC Rules”, currently in their 2018 edition). The HKIAC also administers investment treaty arbitrations and appointment of arbitrators in ad hoc proceedings. Key features of the HKIAC Rules include:

• Emergency arbitrator procedure (for urgent interim relief before tribunal constitution);
• Early determination of manifestly inadmissible claims;
• Consolidation of related arbitrations;
• Joinder of third parties;
• Publication of redacted awards (promoting transparency and precedent).

Core Elements of an Effective Arbitration Clause

1. Agreement to Arbitrate

The clause must contain a clear and unambiguous agreement to resolve disputes by arbitration. The use of mandatory language (“shall be referred to” rather than “may be referred to”) is essential to avoid arguments that arbitration is optional.

2. Scope of the Clause

The arbitration clause should be drafted as broadly as possible to capture all disputes arising out of or in connection with the contract, including:

• Disputes about the existence, validity, or termination of the contract;
• Tortious claims closely connected to the contract;
• Disputes about the right to rescind or avoid the contract.

A common formulation: “Any dispute, controversy, or claim arising out of or relating to this Agreement, including the validity, invalidity, breach, or termination thereof, shall be settled by arbitration.”

3. Seat of Arbitration

The seat of arbitration determines the law of the arbitral procedure (lex arbitri) and the supervisory courts. Specifying Hong Kong as the seat means:

• Hong Kong courts have supervisory jurisdiction;
• The Arbitration Ordinance applies;
• Awards are made at the seat and are enforceable under the New York Convention in over 170 countries.

The seat should be expressly stated. Confusing “seat” with “venue” (place of hearings) is a common drafting error that can lead to jurisdictional uncertainty.

4. Institutional Rules or Ad Hoc

Most commercial contracts designate an arbitral institution and its rules. Institutional arbitration offers administrative support, default procedural rules, and a roster of arbitrators. The most common choices for Hong Kong-seated arbitrations include:

• HKIAC Administered Arbitration Rules – the default choice for commercial contracts in Hong Kong;
• ICC Rules – widely used in international joint ventures and M&A transactions;
• SIAC Rules – occasionally used for disputes with Singapore nexus;
• UNCITRAL Rules – for ad hoc arbitration where the parties prefer no institutional involvement.

The clause should specify the institution and expressly incorporate its rules: “… in accordance with the HKIAC Administered Arbitration Rules (the ‘Rules’), which are incorporated by reference into this Agreement.”

5. Number of Arbitrators

Most commercial contracts specify either one or three arbitrators:

• Sole arbitrator – cost-effective for disputes under USD 5 million; appointed by the institution if parties fail to agree;
• Three arbitrators – appropriate for complex, high-value disputes; typically each party appoints one co-arbitrator and the two co-arbitrators or the institution appoints the presiding arbitrator.

If the number is not specified, most institutional rules (including HKIAC) provide default mechanisms.

6. Language of Arbitration

The language of the arbitration determines the language of proceedings, written submissions, and the award. English is the most common choice for international commercial arbitrations in Hong Kong, though Chinese language arbitrations are also available.

7. Governing Law

The arbitration clause may specify the governing law of the arbitration agreement separately from the governing law of the main contract. In most cases these are aligned (e.g., Hong Kong law governs both), but it is good practice to state this expressly to avoid disputes about applicable law of the arbitration clause itself – particularly relevant after the UK Supreme Court’s decision in Enka v Chubb (2020), which addressed applicable law of arbitration agreements in the context of separability.

Multi-Tier Dispute Resolution Clauses

Many commercial contracts adopt a tiered approach to dispute resolution, requiring the parties to attempt negotiation or mediation before proceeding to arbitration. A typical multi-tier clause provides:

1. Tier 1 – Escalation to senior management: The parties’ senior representatives must meet to attempt resolution within a specified period (e.g., 30 days) after written notice of dispute;
2. Tier 2 – Mediation: If unresolved, the parties refer the dispute to mediation (e.g., HKMAAL or HKIAC mediation) within a further 30 days;
3. Tier 3 – Arbitration: If mediation fails or is not completed within the prescribed period, either party may commence arbitration.

Multi-tier clauses require careful drafting to ensure each step is a condition precedent (not merely an option) and that clear trigger dates apply. Ambiguous multi-tier clauses have been found to be pathological in some jurisdictions, so legal advice is recommended.

Common Drafting Errors (“Pathological Clauses”)

Pathological arbitration clauses are those that are defective or ambiguous and may render the clause unenforceable or ineffective. Common errors include:

• Naming a non-existent institution (e.g., “the International Chamber of Commerce of Hong Kong”);
• Contradictory language (e.g., “disputes shall be settled by arbitration or the courts of Hong Kong at the option of either party”);
• Failing to specify the seat, leading to uncertainty about governing procedural law;
• Inconsistent references (e.g., specifying HKIAC rules but ICC as the institution);
• Vague scope (“disputes about this contract” may fail to capture tortious or pre-contractual claims);
• Poorly drafted conditions precedent in multi-tier clauses that create ambiguity about when arbitration can commence.

Enforcement of Hong Kong Arbitral Awards

Awards made in Hong Kong-seated arbitrations benefit from:

• New York Convention enforcement in over 170 contracting states – courts in contracting states must enforce foreign arbitral awards except on limited specified grounds;
• Mainland China enforcement under the bilateral Arrangement, which allows Hong Kong awards to be enforced in Mainland China courts and vice versa – a significant advantage for commercial contracts with Chinese parties;
• Hong Kong court enforcement under section 84 of the Arbitration Ordinance, treating awards as judgments of the Hong Kong courts.

Specialist Arbitration Clauses

Investor-State Disputes

Investment treaty arbitration (ITA) clauses in foreign investment agreements or joint ventures may incorporate ICSID, UNCITRAL, or HKIAC rules. Hong Kong is a party to numerous bilateral investment treaties (BITs) through China’s treaty network.

Financial Contracts

ISDA Master Agreements and LMA loan agreements typically specify English court jurisdiction rather than arbitration, reflecting the preference of financial institutions for precedent-setting court decisions. Where arbitration is preferred, bespoke arbitration schedules to ISDA agreements are available.

HKIAC Model Clause

The HKIAC recommends the following model arbitration clause for contracts:

“Any dispute, controversy, difference or claim arising 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. The law of this arbitration clause shall be Hong Kong law. The seat of arbitration shall be Hong Kong. The number of arbitrators shall be [one/three]. The arbitration proceedings shall be conducted in [language].”

Parties may add additional provisions such as a governing law clause for the main contract, confidentiality enhancements, or a choice of emergency arbitrator procedure.

How Alan Wong LLP Can Assist

Alan Wong LLP’s dispute resolution and commercial teams advise clients on all aspects of arbitration in Hong Kong, including:

• Drafting and reviewing arbitration clauses in commercial contracts, joint ventures, and M&A agreements;
• Advice on institutional selection (HKIAC, ICC, SIAC, UNCITRAL) and procedural rules;
• Representation in HKIAC and ad hoc arbitrations;
• Enforcement and challenge of arbitral awards in Hong Kong and Mainland China;
• Emergency arbitrator applications and interim relief.

Contact us for expert advice on dispute resolution strategy and arbitration clause drafting.