[co-author: Monique Woo]

Arbitration (Amendment) Ordinance 2017 comes into effect

The long-awaited Arbitration (Amendment) Ordinance 2017 (the “Amendment Ordinance“) is finally applicable to arbitrations commenced on or after 1 January 2018 or to arbitrations commenced prior to this date if the parties themselves choose to apply the amendments to their arbitrations.

By introducing sections 103A to 103J into the Arbitration Ordinance (the “Arbitration Ordinance“),  the amendments make clear that disputes involving Intellectual Property Rights (IPRs), including issues of validity, are arbitrable under Hong Kong law. The amendments also clarify the following issues:

• it would not be contrary to public policy to enforce an ensuing award solely because the award involves questions of IPRs
• any awards in arbitration proceedings involving IPRs will only be binding between the parties
• legal rights of third parties not a party to the arbitration proceedings (including licensees) will not be affected.

Should I include an arbitration clause in my IPR agreements?

Whether to include an arbitration clause in a given IPR agreement will require an analysis of the benefits and risks involved.

In particular, it would be useful to consider the following factors when making a decision:

(a) Are multiple jurisdictions involved?

Depending on the locations of the parties to the dispute, and where the IPRs are being used, parties could end up in a situation where disputes are being fought in multiple jurisdictions in courts of varied levels of sophistication. Decisions from multiple concurrent proceedings may also be potentially conflicting, which may result in your IPRs or enforcement strategies being inconsistent across different jurisdictions. This could affect your ability to maintain a uniform brand image or product offering across regions. In this scenario, including an arbitration clause would likely have the advantage of allowing parties to settle all aspects of the dispute in a single set of proceedings, which is conducted in accordance with the law, procedures and language in the place chosen by the parties.

(b) Will an arbitral award be enforceable in the jurisdictions that matter?

An issue central to arbitration is whether the award can be enforced. Hong Kong is generally considered an arbitration friendly jurisdiction. There are only limited grounds for setting aside an arbitral award, such as lack of jurisdiction of the tribunal, improper constitution of the tribunal, serious procedural irregularity, or if enforcement of the award is in conflict with public policy. The Hong Kong courts generally interpret the grounds for setting aside or refusing to enforce arbitral awards in a restrictive manner.

As Hong Kong is a party to the New York Convention, Hong Kong arbitral awards are enforceable in other New York Convention countries and vice versa. Between Hong Kong and Mainland China, arbitral awards are enforceable based on the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and Hong Kong signed in 1999.

However, of interest is that while the validity of an IPR is arbitrable in Hong Kong, it is not arbitrable in accordance with Chinese Arbitration Law, and as such, a Hong Kong arbitral award concerning the validity of an IPR is unlikely to be enforceable in China.

(c) Party autonomy – Do I want to have a say in what I think is important?

If arbitration is chosen as the route to resolve disputes, the parties will have a say on the types of disputes that are subject to arbitration, effectively carving out certain issues which are to be arbitrated and leaving the rest to be decided by a court if necessary. This could be useful in jurisdictions where the validity of an IPR cannot, by law, be arbitrated, but the parties agree to arbitrate all other types of disputes, although this bears the risk that disputes can arise with respect to the scope of application of the arbitration agreement.

Parties to arbitral proceedings are also generally free to choose the procedures (such as language, timing, extent of discovery) which apply to their arbitration, although many choose to be subject to the rules of an arbitral institution. The Amendment Ordinance also allows parties to agree to limit the types of remedies that the arbitral tribunal may grant in respect of IPR disputes. By contrast, the courts’ jurisdiction is generally unfettered and the parties are not able to restrict the orders which can be made by the courts.

Parties to court proceedings are also bound by the rules and timetables of the court, which may be inflexible. Further, court proceedings are conducted in the official language(s) which may not be the preferred language of proceedings and translations will increase the costs of litigation.

(d) Do I want a potential dispute to be adjudicated by a specialist?

In arbitrations, the parties are free to choose the constitution of the arbitral tribunal. This means that they are able to choose persons with an appropriate legal background and the right technical expertise to decide the issues in dispute. For example, the parties may choose an engineer to decide a patent dispute, or an experienced intellectual property lawyer to decide whether there is trademark infringement. Arbitration institutions such as the Hong Kong International Arbitration Centre have a specialised panel of intellectual property arbitrators from which parties can choose their arbitrator.

On the other hand, in court proceedings, the parties are not able to choose their judge, and may end up with a judge who is inexperienced in the relevant type of IPR-related issues.

(e) Speed

As long as the parties and the arbitrators are available, cases can be conducted relatively quickly. The parties can also agree on certain procedures such as limiting document production to speed up the process. As stated above, there are also limited grounds on which arbitral awards can be appealed or set aside.

On the other hand, court proceedings can take up to several years, depending on whether either party appeals the decision.

(f) Confidentiality

Arbitrations are confidential which means the public will not have access to the documents considered or the hearing itself. Also, in accordance with s.17 of the Arbitration Ordinance, information relating to the arbitral proceedings must not be published unless with the agreement of all parties to the arbitration.

On the other hand, writs, judgements, and hearings in respect of court litigation are generally available to the public in Hong Kong.

As such, if the subject matter of the dispute is sensitive, such as a trade secret or a new design, an arbitration will enable the parties to keep such sensitive information from reaching the public domain and therefore offers additional protection.

Furthermore, legal rights of third parties (including licensees) will not be affected and there will be no requirement for disclosure or recordal of arbitral awards involving IPRs with the respective Registries of the Hong Kong Intellectual Property Department.

The downside to this however is that arbitral decisions can only bind the parties to the arbitration, and cannot be enforced against third parties.

(g) Cost

Contrary to what some might think, arbitrations are not necessarily cheaper than litigation in court. In addition to the legal fees which would be paid regardless of the procedure chosen, parties to an arbitration will also incur additional costs such as the fees of the arbitrator and costs of the venue.

However, costs in an arbitration may also be lower in some cases due to the limited ways in which an arbitral decision can be set aside or appealed, and because there is likely to be only a single set of arbitral proceedings rather than concurrent proceedings in multiple jurisdictions.

If arbitration of IPR disputes sounds appealing – the next question might be how to draft the right kind of arbitration clause / agreement. To find out, watch this space!