Understanding the HKIAC’s New Practice Note on Compatibility of Arbitration Clauses: Practical Observations and Tips

On 20 January 2025, the Hong Kong International Arbitration Centre (HKIAC) published its much-anticipated Practice Note on Compatibility of Arbitration Clauses under the HKIAC Administered Arbitration Rules.

This Practice Note offers vital guidance on navigating multi-party and multi-contract disputes under the 2018 and 2024 HKIAC Administered Arbitration Rules. Drawing from the Practice Note and our own experience, this article provides practical observations and guidance for parties drafting arbitration clauses and handling multi-contract disputes.

Understanding Compatibility: Moving Beyond Identical Clauses

The HKIAC has clarified that arbitration agreements across related contracts do not need to be identical to be deemed compatible. Instead, differences must be “surmountable” by the parties, the tribunal, or the HKIAC itself. For example, the HKIAC has deemed arbitration agreements governed by different, but aligned, legal systems such as English and Hong Kong law to be compatible. Similarly, situations where respondents agree on a co-arbitrator despite clauses granting different respondents the right to appoint have also been found compatible.

However, while identical clauses are not mandatory, simplicity and consistency remain best practices. Parties should avoid unnecessary variations in governing law, seat, language, or tribunal appointment mechanisms across related contracts. Even minor differences can lead to procedural inefficiencies or objections, jeopardising the enforceability of awards.

Common Pitfalls: Avoiding Incompatibility

The Practice Note highlights several scenarios where arbitration clauses were deemed incompatible. For instance, clauses were found incompatible when one contract required a sole arbitrator while others required three arbitrators, or when contracts provided for different languages of arbitration such as Chinese and English. Conflicting mechanisms for appointing the presiding arbitrator also rendered clauses incompatible.

These examples underscore the risk of including bespoke arbitration provisions in contracts. For instance, specifying different languages of arbitration may create challenges unless absolutely necessary. Even if bilingual proceedings are an option, the cost implications and limited pool of qualified arbitrators should be carefully considered. To minimise such risks, the HKIAC’s model arbitration clause is strongly recommended, particularly for tribunal appointment mechanisms. Where bespoke provisions are unavoidable, it is essential to ensure that the arbitration clauses are carefully aligned across related contracts.

Drafting for Multi-Contract Scenarios: A Holistic Approach

When drafting arbitration clauses for multi-contract transactions, parties should adopt a holistic approach that considers all aspects of compatibility. Key features such as the seat, number of arbitrators, governing law, and language of arbitration should be consistent across all related contracts. Parties should also avoid granting specific parties the right to appoint arbitrators, as this introduces complexity and the potential for incompatibility. Instead, it is preferable to defer to the HKIAC Rules for tribunal constitution. Where possible, consolidating related contracts into a single overarching agreement with a unified arbitration clause is an effective way to eliminate the risk of conflicting clauses altogether.

Managing Arbitrator Appointments in Multi-Party Disputes

Articles 28.8 and 29.2 of the HKIAC Rules empower the HKIAC to appoint the tribunal in consolidated or single arbitrations involving multiple contracts. The Practice Note confirms that, while the HKIAC respects party autonomy, it may override party designations in cases where nonparticipating parties are involved or where overriding designations is necessary to ensure the integrity and equal treatment of the proceedings.

In these scenarios, it is crucial for parties to proactively engage with the HKIAC to ensure fair and efficient tribunal appointments. For multi-party contracts, parties should consider including provisions requiring joint arbitrator designations by parties on the same side to simplify the appointment process.

Lessons from Recent Hong Kong Court Cases

The Practice Note aligns with the Hong Kong Court’s Approach to Single Arbitration under Multiple Contracts. Two notable Hong Kong court decisions were handed down in 2024, both of which highlighted the risks of incompatible arbitration clauses. In SYL and LBL v. GIF [2024] HKCFI 1324, the issue of compatibility has broader implications beyond requests for claims to be heard in a consolidated or single arbitration the Hong Kong Court of First Instance as the Court set aside a jurisdictional award due to conflicting arbitrator appointment procedures. Similarly, in AAA, BBB, CCC v. DDD [2024] HKCFI 513, the court found arbitration agreements under a loan agreement and a promissory note to be incompatible due to significant differences in procedural requirements.

These cases emphasise the importance of rigorous compatibility analysis during both drafting and dispute resolution. Parties should avoid procedural discrepancies, such as differing arbitrator appointment mechanisms or pre-arbitration negotiation periods, which may undermine the tribunal’s jurisdiction or jeopardise the enforceability of awards.

Balancing Efficiency with Clarity

The HKIAC’s pragmatic approach to compatibility emphasises procedural and cost efficiency. However, the burden is on the parties to demonstrate that differences in arbitration clauses do not hinder practical feasibility or undermine consent. While procedural efficiency is desirable, it should not come at the expense of clarity or enforceability. Parties must strike a balance between efficiency and robust dispute resolution mechanisms, ensuring that arbitration clauses are clear, enforceable, and aligned with the parties’ intentions.

Conclusion

The HKIAC’s Practice Note on Compatibility of Arbitration Clauses provides invaluable guidance for managing multi-contract disputes. However, the ultimate responsibility lies with parties and their counsel to draft clear, aligned, and enforceable arbitration agreements. By adopting best practices and carefully considering compatibility from the outset, parties can unlock the full potential of HKIAC arbitration, mitigating risks and maximising efficiency. For more information on drafting arbitration clauses or managing multi-contract disputes, feel free to reach out to our arbitration specialists.

Anson Cheung, Trainee Solicitor, assisted in the preparation of this briefing.