Navigating Challenges in International Construction Disputes: The Hong Kong Advantage – Part 1

Arbitration in Hong Kong has come a long way. It can be traced back to 182 years ago, when a dispute between two Englishmen about the quality of ships’ biscuits was referred to arbitration on 9 March 1843.[1] Following the enactment of the Arbitration Ordinance (Cap. 341) in 1963 and the rising number of construction arbitrations in the late 1970s,[2] Mr John Griffiths KC, the then Attorney General of Hong Kong, considered whether Hong Kong could develop into an international arbitration centre and, in particular, ‘the leading arbitration centre in this part of the world’.[3] To that end, tremendous efforts were put in by a steering committee chaired by the late Mr Justice David Hunter, and with the support of both the public and private sectors, the Hong Kong International Arbitration Centre (‘HKIAC’) was established in September 1985.[4]

Since then, Hong Kong has developed into a highly reputable international arbitration centre. As Mr Neil Kaplan CBE KC SBS, who is widely regarded as ‘the father of Hong Kong arbitration’, remarked in his article published in 1996, Hong Kong ‘boasts a modern and effective statutory framework for arbitration, a supportive judiciary, a thriving international arbitration centre and, what is more important, a great deal of arbitral and alternative dispute resolution (ADR) activity’.[5]

29 years after Mr Neil Kaplan’s remark, with Hong Kong’s adherence to the common law system, the city’s supportive independent judiciary and its business acumen, international arbitration in Hong Kong has continued to thrive. In 2021, a survey conducted by Queen Mary University of London ranked Hong Kong as one of the top most preferred seats of arbitration in the world, recognising Hong Kong as a ‘safe seat’ for international arbitration and an ‘obvious choice of established quality’.[6]

Thus, Hong Kong stands exceptionally well-positioned to resolve disputes arising from international construction projects. The landscape of international construction disputes has grown increasingly complex, with challenges arising from supply chain disruptions, geopolitical tensions, and increasing project complexity. In this challenging time for the global construction industry, Hong Kong has the potential of continuing to play an important role as a major dispute resolution hub, both as a seat of arbitration for international construction arbitrations and as a ‘super connector’ providing legal services and solutions to resolve disputes.

This two-part article summarises the insights gathered from 14 highly experienced international arbitrators, lawyers and experts participating in a roundtable discussion hosted by Des Voeux Chambers, Hong Kong on 22 October 2024 as part of Arbitration Week in Hong Kong and from subsequent written submissions provided by two of the speakers. A complete list of the distinguished guest speakers who contributed to the roundtable discussion and this article is available in the acknowledgements section.

The construction market is vibrant in the Middle East, particularly in Qatar and Saudi Arabia. The size and complexity of the projects are unprecedented and ‘off the scale’. A speaker raised as an example that whilst ‘The Line’ is an ambitious and revolutionary project, Saudi Arabia has announced an even more ambitious plan to build a football stadium on top of ‘The Line’ and 350 meters above ground.

As the speaker further remarked, ‘supply chain has always been a challenge in the Middle East, but Saudi Arabia is outdoing anyone in the region at the moment’. The available construction resources are often considered on a worldwide basis, and the challenges for global supply chains will intensify as multiple giga projects in the Middle East compete for limited labour, plant and other resources. Other speakers also pointed out that the imposition of sanctions and the presence of other geopolitical tensions create additional unexpected restrictions, making delivery of materials more difficult and exacerbating the risk of supply chain disruptions. Thus, contractors face longer lead times for materials, increased costs, and potential delay.

The complexity of the projects and the novelty of the ideas cause further problems. Even where contractors have the expertise, ‘these are things that have never been done before’ in that country. A speaker mentioned a railway project in Qatar with tunnels as an example in this regard. The local conditions may not be completely known to the contractors, and certainly the employer’s representatives have no significant experience.

Besides, examples were given by the speakers about the changes in long term projects that can come about from unexpected and unpredictable events. The COVID pandemic for example has resulted in ‘a lot of contracts being terminated in the power sector’. Given that contractors have to pour massive amounts of resources into such long-term projects, contractors are at risk of suffering huge losses in the event of termination, particularly if their contracts contain a termination for convenience clause by which the employment of the contractor can be terminated without the need for a proof of default. The presence of a termination for convenience clause increases contractors’ exposure to risk, as it creates uncertainty and typically offers minimal or no financial compensation to contractors.

In fact, international contractors are not always fully aware or appreciative of the risks and difficulties they are going to face in international construction projects. As several speakers explained, contractors may be unfamiliar with the specific market situation of the host country where the project takes place, e.g. the fluctuating material prices, labour rates or currency exchange rates, or the difficulties in ‘getting quality subcontractors to deliver on the ground’. They may also be unaware of all the relevant local law and regulations, e.g. environmental regulations, employment law, or tax law. These have a significant bearing on their budgeting and may lead to an underestimation of costs. Whilst these problems are common in international projects and can be resolved by (for example) forming joint ventures with local contractors, engaging local suppliers/subcontractors at an early stage, or seeking local legal/tax advisors, these are not problems that contractors have necessarily come across working domestically or working on projects where all the subcontractors are from the same country.

Further, lessons learned from previous contracts and projects may not always be useful as the approaches to contracting change, and attitudes of infrastructure developers and governments change. For example, a speaker shared that ‘a number of governments have started to use [NEC type contracts] more’, and this requires contractors to change their ‘contracting mind set’. In addition, different countries use different forms of contracts. In this regard, the speakers talked about how some governments heavily amended standard form contracts, thereby creating misalignments and conflicts between the main contract and subcontract provisions, and how some governments made the contracts ‘one-sided’ and ‘difficult’ for contractors to make claims or otherwise seek contractual remedies when circumstances change.

Thus, international contractors are often found to be unfamiliar with executing, administering and interpreting the contracts they enter into. They might also overlook or underestimate the significance of certain critical contractual requirements in relation to claims (e.g. notice requirements). For example, as a speaker spoke from his experience, whilst Chinese state-owned enterprises have done many international projects, ‘few are familiar with the interpretation of international contracts like NEC’. This poses multiple problems in relation to contract administration.

More problems arise when a contractor from a civil law jurisdiction enters into a contract which is governed by the law of a common law jurisdiction (or vice versa). A contractor from a civil law jurisdiction might not understand how common law principles operate (and vice versa). One example is in relation to the requirement of ‘good faith’, which is of general application in many civil law systems but not in common law systems. A speaker gave examples about how difficult issues might arise where the contract contains ‘draconian’ notice provisions but the civil law concept of ‘good faith’ applies, or how the way in which concurrent delay operates under the terms of the contract might conflict with the governing law of the contract which provides for the sharing of responsibility. He further explained that there may also be conflict between the agreed applicable law of the contract and the law of the country in which the project takes place (such as labour law, environmental law or laws in relation to local customs and culture, etc.) so that one can never fully exclude the operation of local laws.

Such differences and conflicts cause issues in many international projects including those under the Belt-and-Road initiative, as contractors have to administer and interpret contracts in accordance with a foreign law that they are not familiar with, and many disputes arise as a result of misinterpretations and misapplications of contractual requirements. Moreover, if the procedure for dispute resolution under a contract or under a set of agreed arbitration rules clashes with a domestic law obligation binding on one of the parties, this can give rise to procedural difficulties in arbitrations.

The differences in culture present further challenges to collaboration and dispute resolution in international construction projects. For example, Asia-based contractors (including Chinese, Japanese and Korean) tend to focus on completing the project in time, but pay less attention to ‘how to claim their rights in accordance with the contract’. Language barriers also create problems. Documents may be prepared in different languages. Communication between a contractor’s head office and its site office might be conducted in one language, and communication between the site office and the local work office might be conducted in another language. This frequently results in miscommunication, which not only hinders the administration and operation of the project but also leads to disputes.

Further, as the disclosure of certain personal information may be restricted by local data protection laws, contractors may encounter difficulties in claim preparation when disputes arise. An example was given by a speaker about how auditors would face significant challenges in verifying staff costs in prolongation claims without proper data and documentation.

In addition, some jurisdictions impose unexpected restrictions on companies. An example was given by a speaker about how ‘Saudization’, which requires companies to maintain a certain ratio of Saudi national employees, creates a ‘massive burden’ for professional consultancy companies. Another example was that companies are, in some circumstances, required to move their base operation to Saudi Arabia. This impacts the structuring of business operations and increases the administrative costs.

As a seat of arbitration

All speakers agreed that Hong Kong meets ‘all the key parameters’ required of an excellent seat of arbitration. The key parameters include: a robust and modern legal framework, anchored by the Arbitration Ordinance (Cap. 609) (which adopted the UNCITRAL Model Law), a generally pro-arbitration judiciary, world-class legal infrastructure, lack of bribery, and safety.

First of all, as a speaker emphasised, Hong Kong Courts have a consistent respect for party autonomy and adopt a minimalist intervention policy. Hong Kong Courts’ approach, as reiterated in a recent case of CNG v G & G [2024] HKCFI 575, is as follows:[7]

‘Lest it should be unclear, parties should be reminded that arbitration is a consensual process of final dispute resolution to which they voluntarily agree, with whatever inherent defects and risks there may be, and there are only limited avenues of appeal and challenge to the award. The limited recourse parties have under the Arbitration Ordinance is not intended to afford them with an opportunity to ask the Court after the event to go through the award with a fine-tooth comb, to look for defects and imperfections under the guise that the tribunal had failed to act in accordance with its remit or the agreed procedure. Nor is any party entitled to rehearse once again before the Court arguments already made before the tribunal, or to have different counsel reargue its case with a different focus, in the hope that the Court may be persuaded to come to a different conclusion. First and foremost, the Court does not sit on appeal against the tribunal’s findings of fact or law. Further, the Court must not only respect the autonomy of the tribunal, but also leave the tribunal free to decide the dispute with the proper exercise of its case-management powers, when the tribunal is clearly in the best position to manage its own proceedings and procedure in the light of the issues put before it, the complexities of the case, and the time-table which best suits the tribunal, the parties and their legal representatives, with the aim of achieving a speedy resolution without unnecessary legal expense. Matters which should have been raised with the tribunal, on procedure, pleadings, and timing, but were not so raised or objected to, should not be brought before the Court as a matter of complaint at the time of resistance to enforcement or by way of setting aside of the award.’

As the Court further emphasised, ‘Hong Kong has long been striving to establish and uphold a policy of being supportive of arbitration and awards’, and challenges against arbitral awards under section 81 of the Arbitration Ordinance (Cap. 609) are of an ‘exceptional nature’.[8] These dicta clearly illustrate the pro-arbitration stance and the minimalist intervention policy adopted by Hong Kong Courts.

In Part 2 of this series, we will explore Hong Kong’s specific strengths as an arbitration centre, examining its high standards for due process, robust approach to upholding arbitration agreements, and its unique position as a ‘super connector’ between East and West. We will also discuss how Hong Kong can enhance its advantages through technological innovation and strategic initiatives to maintain its position as a premier international arbitration hub.

The authors would also like to thank the following distinguished guest speakers (in alphabetical order by last name) for their contributions to the roundtable discussion and this article: Mike Allen of Secretariat, David Bateson of 39 Essex Chambers, Geoffrey Chan of Johnson Stokes & Master, Glenn Haley of Bryan Cave Leighton Paisner LLP, Timothy Hill of Arbitra International, Stanley Lo of Deacons, James Taylor of Kroll, Michael Tonkin of HKA Global, Alfred Wu of Dentons Hong Kong LLP, and Zhihe Xu of Shanghai International Arbitration Center.