Hong Kong is aiming to recover ground lost to Singapore with launch of much-touted new arbitration regime

A new ordinance coming into force this month aims to make Hong Kong's arbitration regime simpler and more flexible. It harmonises domestic and international arbitration and brings the framework up to date with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, which sets the standard for national arbitration laws.

It is also aimed at 
helping Hong Kong keep up with another former British colony: Singapore.

Singapore's famously interventionist government promotes arbitration relent-lessly. The city-state's budget this year allocated $2.1m (£1.3m) to promoting arbitr-ation. The money will go towards initiatives like raising the profile of its state-of-the-art Maxwell Chambers arbitration complex. Earlier this month the government sponsored an international arbitration forum, which attracted 200 delegates.

Meanwhile, Hong Kong has struggled to keep pace. Its own relatively hands-off government is only now waking up to an uncomfortable truth – it risks letting Singapore run away with Asia's arbitration crown.

"I don't think [the new ordinance is] going to lead to a sea-change in the way international arbitration is conducted in Hong Kong," said Frances van Eupen (pictured above), a consultant in Allen & Overy's (A&O's) Singapore office. Rather, the harmonisation of the two regimes is more likely to affect domestic proceedings, she said. But it is a welcome development nonetheless.

The Beijing-based China International Economic and Trade Arbitration Commission (CIETAC) is still way ahead of both Singapore and Hong Kong in numbers – it handled 418 international disputes in 2010, driven by a combination of low costs and Chinese parties' reluctance to arbitrate overseas. But CIETAC's star may be waning: the number is less than the previous year by a quarter. And the average case value (for all disputes) is low, at around $1.5m (£925,000).

The Hong Kong International Arbitration Centre (HKIAC) has also experienced a drop in figures. It handled 291 cases last year, about a third fewer than in 2009.

By contrast the Singapore International Arbitration Centre (SIAC) administered 140 disputes last year, up from 114 in 2009 and nearly double the 71 disputes in 2008. The average claim is around $8m (£4.9m).

The SIAC is usually thought of as a natural choice for Indian parties, which habitually arbitrate overseas to avoid the court interference that hampers their home country's arbitration progress. But while 36 of the SIAC's cases in 2010 involved an Indian party, Hong Kong and Chinese parties are close behind, accounting for 26 and 14 cases respectively.

Hong Kong's liberal legal market means there is more choice in locally-based arbitration counsel. O'Melveny & Myers, A&O, and Skadden Arps Slate Meagher & Flom all field strong arbitration teams in Hong Kong.

Singapore has a more limited selection: Norton Rose and Herbert Smith are among a handful of international firms with locally-based arbitration counsel, due to strict controls on the proliferation of foreign law firms.

But despite its liberal credentials, Hong Kong stru-ggles against the perception that Chinese parties have an automatic advantage in arbitrations based there.

That belief is "complete rubbish", according to Robin Peard (pictured right), a consultant at Hong Kong firm Mayer Brown JSM who helped draft the ordinance. "But it's a perception. We have that problem and Singapore has no doubt taken advantage of it over the years."

The new law is a start towards matching Singapore's pace of progress, but Hong Kong still needs to do more, says Huen Wong, who took over from Michael Moser as chair of the HKIAC this month. "We need to improve both the hardware and the software," he said.

By "hardware" Wong means larger premises and better facilities, such as improved teleconferencing. The existing facilities are "scruffy round the edges", he said.

He's grateful for the government's support so far but the HKIAC is still self-financed and will continue to push for further state investment.

Hong Kong's Department of Justice is responding to the call. At the launch of the new arbitration ordinance, Justice Secretary Wong Lan Yung announced that his department is to double the size of the HKIAC's premises to around 13,000 sq ft, an annual investment of about $650,000 (£400,000) at current market rates.

These efforts aren't aimed at heading off competition only from Singapore. "We just want to up our game," said Wong. There are other regional competitors such as the Korean Commercial Arbitration Board, which handled 52 international disputes last year.

The "software" includes legislation and personnel. Wong said the HKIAC needs more arbitrators, recruited both locally and overseas. Speakers of Mandarin Chinese are in particular demand.

For Van Eupen, competition between Hong Kong and Singapore is healthy, and each arbitration centre will find its niche. As a leading financial hub, Hong Kong will benefit from the increasing number of banks and financial institutions using arbitration, she said. "They're later in the learning curve in terms of including arbitration clauses," Van Eupen said, "but they're becoming more sophisticated users."

It's clear the Asian arbitration race has a long way yet to run.

This article first appeared in The Asian Lawyer, a US affiliate title of Legal Week.