In 2011, the most important development in arbitration in Hong Kong was the introduction of the new Arbitration Ordinance (2011 ordinance), which came into effect on 1 June 2011 after more than 10 years of deliberation (see Legal update, Hong Kong's new Arbitration Ordinance comes into effect).

The 2011 ordinance introduces a number of changes, the most noteworthy being the removal of the distinction between domestic and international arbitration that existed under the previous regime. Instead, a unitary system for arbitration has been created, based on the UNCITRAL Model Law. These reforms aim to further align the arbitration regime in Hong Kong with international practice and to maintain Hong Kong's position as a regional centre for international arbitration.

The following are some of the key changes under the new ordinance:

Although the courts' reduced power of intervention under the new ordinance raised some concerns among users of domestic arbitrations, these have been addressed by including the opt-in provisions and their automatic application to domestic arbitrations for the six years following the commencement of the ordinance. On the other hand, the unified regime of domestic and international arbitrations and the adoption of the Model Law will likely further promote Hong Kong's status as a leading arbitration centre in the Asia-Pacific region.

In Democratic Republic of the Congo and Others v FG Hemisphere Associates LLC (Final appeal nos 5, 6 and 7 OF 2010 (Civil) (8 June 2011), the Court of Final Appeal (CFA) decided that absolute state immunity applies in Hong Kong, clarifying the position since Hong Kong's handover (see Legal update, Court of Final Appeal holds that absolute immunity applies in Hong Kong).

Prior to its handover to the PRC, Hong Kong law adopted the common law doctrine of "restrictive immunity", which provides that a sovereign state would enjoy immunity from jurisdiction and execution in the courts of Hong Kong, except in relation to commercial transactions. The PRC, in contrast, is believed to adopt the doctrine of absolute immunity, which provides that a state will enjoy immunity from jurisdiction and execution in the courts of another country, even in relation to commercial transactions entered into by such a state.

This case arose out of an alleged breach of financing agreements between the Democratic Republic of Congo (Congo), a Congolese state-owned electricity company (SNE), and a construction company (Energoinvest). Two arbitral awards were made in favour of Energoinvest. Energoinvest later assigned the benefit of the arbitral awards to FG Hemisphere Associates LLC (FG). FG subsequently commenced proceedings to enforce the awards against monies that were payable to the Congo, in Hong Kong. The case eventually went to the CFA.

The issues before the court were:

As regards the question of state immunity, the court found that Hong Kong, as a Special Administrative Region of the PRC, lacks the very attributes of sovereignty that might enable a state to establish its own practice of state immunity. Hence, Hong Kong was bound to follow the practice of the PRC and to recognise the doctrine of absolute immunity.

The court further found that Congo had not waived its state immunity merely by submitting to arbitration, because submission to an arbitral tribunal was distinct from submission to a Hong Kong court. It held that for a waiver to be effective, the waiving state must voluntarily submit to the exercise of jurisdiction by the courts of the forum state over the waiving state's governmental entities or property. In addition, the waiver is only effective when it is made before the court in proceedings currently being heard.

The CFA's decision on absolute immunity was subsequently confirmed by the Standing Committee of the National People's Congress on 26 August 2011.

Until this decision, it was uncertain which doctrine of state immunity Hong Kong law would adopt following the handover. It is now clear that absolute immunity applies in Hong Kong and a state cannot, by contract made prior to a dispute arising, agree to waive its immunity from court jurisdiction. Instead, any such waiver can be made only when the state appears before the Hong Kong courts.

More significantly, this restriction does not affect Hong Kong arbitration agreements, and it remains the case that by agreeing to arbitration, a state party is consenting to the jurisdiction of the tribunal over the dispute.

In Gao Haiyan v Keeneye Holdings Ltd HCCT 41/2010, the Court of Appeal (CA) allowed the enforcement of a Chinese arbitration award, reversing a decision of the Court of First Instance (CFI) to refuse enforcement on public policy grounds, due to apparent bias (see Legal update, Chinese arbitration award refused enforcement due to apparent bias).

The dispute concerned the validity of a transfer of shares from the applicants to the respondents. Arbitration proceedings were commenced in Xian, China. The arbitration was apparently conducted in the form of "arb-med", in which the arbitrators acted as mediators during the course of the arbitration. In this case, however, the mediation was apparently conducted over dinner in a hotel, during which the Secretary General of the Xian Arbitration Commission and one of the arbitrators on the tribunal proposed to an individual (Z), closely linked to the respondents, that the parties settle the case, by the respondents paying a sum to the applicants. Z was allegedly asked to "work on" the respondents. The respondents refused the proposal and the tribunal eventually made an award in favour of the applicants.

Finding that the unorthodox way in which the mediation was conducted and the fact that the award was made in the applicants' favour, following the respondents' refusal to settle, would cause a fair-minded observer to apprehend a real risk of bias in the award, the CFI refused to enforce the award on grounds of public policy. The applicants subsequently appealed to the Court of Appeal (CA).

The appeal was allowed. The CA held that whether the way in which the mediation was conducted would give rise to an apprehension of apparent bias would depend on how mediation is normally conducted in the forum of the mediation. In this regard, the court gave considerable weight to the Xian court's earlier decision to refuse an application to set aside the award.

The CA also noted that enforcement of an award in Hong Kong should only be refused on the ground of public policy if to enforce it "would be contrary to the fundamental conceptions of morality and justice of the forum". The mere fact that the mediation was conducted differently from how mediation is normally conducted in Hong Kong is insufficient to justify a refusal.

Further, the CA reversed the CFI's ruling and held that, by failing to raise any objection to the mediation process during the arbitration itself and continuing to participate in the arbitration, the respondents had waived their rights to do so in the enforcement proceedings.

The Court of Appeal placed considerable importance on context when deciding whether the mediation process gave rise to apparent bias, including cultural differences between China and Hong Kong which may help explain differences in the way in which mediation is conducted in the two jurisdictions.

The concept of waiver is common in various institutional arbitration rules. The Court of Appeal has reinforced the importance of making a timely complaint against the tribunal for any impropriety or bias, apparent or real, lest such right to complain be lost by a failure to act.