New arbitration rules for Hong Kong

IN 1995, a committee was appointed to improve the UNCITRAL Model Law so that the differences between domestic and international arbitrations in Hong Kong could be narrowed.

Domestic arbitrations followed the English arbitration acts of 1959-1979, but international arbitrations fell under a different regime of the Model Law.

As a result, the Arbitration (Amendment) Ordinance 1996 was created and became law in Hong Kong at the end of last year. It took much from the new English Arbitration Act 1996 - as can be seen in the nine points listed below. The following provisions specifically state that they are applicable to both domestic and international arbitration and need no further elaboration. They are:

  1. General responsibilities of arbitral tribunal (section 2GA)
  2. General powers exercisable by arbitral tribunal (section 2GB)
  3. Special powers of court in relation to arbitration proceedings (section 2GC)
  4. Power to extend time for arbitration proceedings (section 2GD)
  5. Delay in prosecuting claims i.e., striking out for want of prosecution (section 2GE)
  6. Arbitral tribunal may award interest (section 2GH)
  7. Parties to be jointly and severally liable to pay the reasonable fees of the arbitrator (section 2GK)
  8. Arbitral tribunal may limit amount of recoverable costs (section 2GL)
  9. Immunity from suit given to the arbitral tribunal & appointors (section 2GM & 2GN)

There are two further new provisions worth mentioning. They are:

1. In section 2AC, a wide definition is given to the form of the arbitration agreement.

Once again, this is taken directly from the English Arbitration Act 1996, but the reason for doing so is because, under the Model Law, the requirement of the form of arbitration had been extremely narrow. It had to be contained in a document signed by the parties or in an exchange which provided a record of the agreement (article 7[2]).

This had led to unsatisfactory decisions by the Hong Kong High Court such as Hissan Trading Co v Orking Shipping Corp (1992) and H Small Ltd v. Goldroyce Garment Ltd (1994). The first decision held that there was no valid arbitration clause in a bill of lading, notwithstanding the fact that there had been an expressed incorporation of "Arbitration at Tokyo". The second decision had to do with a sale of goods dispute where the parties could not show evidence of exchange.

2. The second provision concerns the power of making the appointment of an arbitrator.

Under Model Law, the power used to lie with the high court. This proved to be time-consuming and expensive when serving the originating summons out of jurisdiction. Now, in section 34C, the power goes to the Hong Kong International Arbitration Centre (HKIAC). HKIAC can now also decide on the number of arbitrators if the parties have not previously agreed this. The Model Law provided for three arbitrators unless agreed otherwise. In a defaulting case by the respondents, and when the amount in dispute is small, the claimant can now apply to the HKIAC promptly and economically (at HK$4,000) to appoint an arbitrator. In addition, the claimant can apply to cut the number of arbitrators from three to one.

The Arbitration (Amendment) Ordinance 1996 was passed by the Legislative Council on December 18, 1996. The HKIAC’s new rules on the appointment of arbitrators and umpires first obtained the approval of the chief justice and were then passed by the Legislative Council on June 27, 1997. So it is the law now.

(Source: Philip Yang, Philip Yang & Co, Ltd, Hong Kong)

Taxing times in the US

IN August, President Clinton signed into US law the Taxpayer Relief Act of 1997. This includes a provision that treats income of non-US seamen earned while in US territorial waters as foreign-source income and thus exempt from US withholding requirements.

In recent years, the US Internal Revue Service had insisted on the withholding of seamen’s wages based on the proportional length of a seaman’s presence in US waters. The IRS had required that thirty per cent of each foreign seafarer’s wages be withheld and paid to the US Treasury pending the seafarer’s filing of a tax return and refund request.

This practice had become increasingly burdensome to owners/operators and crew members of ships calling in the United States. The great majority of foreign seafarers subject to these withholding requirements owed nothing, or trifling amounts of federal tax, and were generally entitled to a refund. It was highly questionable whether the administrative costs imposed on shipping and the IRS in processing refunds had been offset by federal tax revenues actually owed by these seafarers.

A second tax issue resolved to the benefit of the international shipping community was the deletion of proposed language that would have imposed penalties for failing to file tax returns or exemption claims for US gross transportation law. This measure was directed against maritime and aviation interests. In recent months, several shipowners had received from US tax authorities substantial assessments for back taxes and, in some cases, penalties for failure to file. One line of defence to these claims has included arguments that the US lacked statutory authority to require filing of returns in instances where there would ultimately be no tax liability. The proposed revision appeared to be an effort by the US government to counter these defences and to clarify that owners were subject to a filing requirement, regardless of whether ultimate tax liability existed.

Some owners and operators with regular and frequent US business have been filing returns in any event, even though the tax treaties or practices of their country of registry support ultimate exemption from application of the gross transportation tax. For owners with more episodic service patterns, the filing requirement was viewed as unduly burdensome. The deletion of the filing requirement does not affect underlying liability for the gross transportation tax itself.