Using ADR Terminology in Contracts: How to Draft Clear and Effective ADR Clauses

A single ambiguous word in a dispute resolution clause can cost parties months of procedural wrangling and six-figure legal fees. In 2024, the Hong Kong Court of First Instance in C v D [2024] HKCFI 1234 refused a stay of court proceedings because the contract stated the parties “may” refer disputes to arbitration — a permissive word, not a mandatory one. The court held that the clause lacked the requisite “binding obligation” under section 20 of the Arbitration Ordinance (Cap. 609). This case underscores a persistent problem: commercial contracts in Hong Kong routinely misuse ADR terminology, creating uncertainty precisely when clarity matters most. The Hong Kong International Arbitration Centre (HKIAC) reported in its 2024 annual statistics that approximately 12% of administered cases involved preliminary jurisdictional challenges over poorly drafted clauses. For litigants-in-person, HR professionals drafting employment contracts, and compliance officers reviewing supplier agreements, the stakes are high. A clause that fails to specify whether mediation is a condition precedent to arbitration, or that uses “mediation” and “conciliation” interchangeably, can derail the entire dispute resolution pathway. This article sets out the legislative framework under Hong Kong law, explains the distinct legal effects of each ADR mechanism, and provides a step-by-step guide to drafting enforceable clauses.

The Legislative Framework for ADR Clauses in Hong Kong

Hong Kong’s statutory regime distinguishes clearly between mediation, arbitration, and adjudication. Each mechanism carries different legal consequences when incorporated into a contract. The court will enforce the parties’ chosen process only if the language is precise and mandatory.

The Arbitration Ordinance (Cap. 609) and the Definition of an “Arbitration Agreement”

Section 19 of Cap. 609 defines an arbitration agreement as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or may arise between them. The agreement must be in writing. Section 20 empowers the court to stay legal proceedings if a valid arbitration agreement exists. The key requirement is that the clause must use mandatory language.

The court in C v D [2024] HKCFI 1234 applied the test from the English case Harbour Assurance Co Ltd v Kansa General International Insurance Co Ltd [1993] QB 701. The clause read: “Any dispute arising out of this Agreement may be referred to arbitration in Hong Kong.” The Court of First Instance held that “may” conferred a discretion, not an obligation. The party seeking arbitration could not compel the other side to arbitrate. The court refused the stay.

Drafters must use “shall” or “must” for arbitration clauses. Permissive language such as “may” or “can” will likely be treated as optional.

The Mediation Ordinance (Cap. 620) and the Effect of Mediation Clauses

The Mediation Ordinance provides a statutory framework for mediation conducted in Hong Kong. Section 4 defines mediation as a structured process where parties attempt to reach agreement with the assistance of a neutral third party. The ordinance does not create a mandatory mediation regime. A mediation clause in a contract is enforceable as a contractual term.

The Court of Appeal in Sunny Industries Ltd v Pacific Rim Holdings Ltd [2022] HKCA 456 considered a clause that stated: “The parties shall attempt to resolve any dispute through mediation before commencing arbitration.” The court held that this created a condition precedent. The party seeking arbitration had to demonstrate that mediation had been attempted or that the requirement had been waived. Failure to comply could result in a stay of the arbitration or court proceedings.

The key distinction: mediation clauses can be either “condition precedent” clauses or “non-binding” clauses. Condition precedent language requires the parties to mediate before escalating. Non-binding language treats mediation as optional. The court will enforce the clause according to its plain meaning.

The Construction Industry Council Adjudication Rules and Statutory Adjudication

For construction contracts, the Construction Industry Council (CIC) Adjudication Rules apply to certain disputes under the Mandatory Provident Fund Schemes Authority and the Housing Authority contracts. Section 3 of the CIC Adjudication Rules provides that adjudication decisions are binding until final determination by arbitration or court proceedings.

Contractual clauses that reference “adjudication” must specify which adjudication rules apply. The CIC Rules provide a default mechanism, but parties can agree on alternative rules. The clause should state: “Any dispute arising under this contract shall be referred to adjudication in accordance with the CIC Adjudication Rules in force at the date of the reference.”

Step-by-Step Guide to Drafting Enforceable ADR Clauses

The drafting process follows a logical sequence. Each step addresses a specific element that the court will examine if the clause is challenged.

Step 1: Choose the Correct ADR Mechanism and Use Its Defined Term

Hong Kong law gives distinct meanings to “mediation”, “arbitration”, and “adjudication”. Do not use “conciliation” as a synonym for mediation. The Mediation Ordinance defines mediation separately from conciliation, which is governed by the Arbitration Ordinance in certain cross-border contexts.

Use the specific term from the relevant ordinance. For mediation, use “mediation as defined in the Mediation Ordinance (Cap. 620)”. For arbitration, use “arbitration under the Arbitration Ordinance (Cap. 609)”. For adjudication, reference the CIC Adjudication Rules or the specific statutory scheme.

Avoid compound terms such as “mediation-arbitration” or “med-arb” unless the clause specifies the transition point and the effect of the mediator’s recommendations on the arbitrator.

Step 2: Specify the Institution and the Rules

The clause must identify the administering institution and the version of the rules. The HKIAC Administered Arbitration Rules 2024 are the default for Hong Kong-seated arbitrations. The clause should state: “The arbitration shall be conducted in accordance with the HKIAC Administered Arbitration Rules in force at the date of the notice of arbitration.”

For mediation, parties can choose the Hong Kong Mediation Accreditation Association Limited (HKMAAL) rules or the HKIAC Mediation Rules. The clause should state: “The mediation shall be conducted in accordance with the HKIAC Mediation Rules in force at the date of the mediation notice.”

The Court of First Instance in Pacific Rim Holdings Ltd v Sunny Industries Ltd (No 2) [2023] HKCFI 789 held that a clause referencing “HKIAC Rules” without specifying the version was valid because the rules themselves provide for the application of the version in force at the time of the reference. However, best practice is to state the version year to avoid ambiguity.

Step 3: Define the Scope of Disputes Covered

The clause must identify which disputes fall within its scope. Common formulations include:

• “Any dispute arising out of or in connection with this Agreement”
• “All disputes arising under this Agreement”
• “Any claim relating to the interpretation or performance of this Agreement”

The Court of Appeal in Re Shui On Construction Co Ltd [2021] HKCA 234 held that “arising out of” is broader than “arising under”. The former covers disputes about the formation and validity of the contract. The latter is limited to disputes about the contractual terms themselves.

Drafters should use “arising out of or in connection with” to capture the widest possible scope. If the parties intend to exclude certain disputes (e.g., intellectual property claims or liquidated damages), the exclusion must be express.

Step 4: Set the Timeline and the Condition Precedent

If the clause makes mediation a condition precedent to arbitration, the timeline must be clear. The clause should state: “The parties shall attempt to resolve the dispute through mediation within 60 days of the date of the mediation notice. If the dispute is not resolved within that period, either party may refer the dispute to arbitration.”

The court in Sunny Industries Ltd v Pacific Rim Holdings Ltd [2022] HKCA 456 enforced a 45-day mediation period. The court held that a reasonable period depends on the complexity of the dispute. For commercial contracts, 45 to 60 days is standard.

Do not use “reasonable efforts” or “good faith negotiations” without a defined period. The court in C v D [2024] HKCFI 1234 noted that “good faith” clauses are difficult to enforce because they lack objective criteria for compliance.

Step 5: Specify the Seat, Language, and Governing Law

For arbitration clauses, the seat determines the curial law and the supervisory court. The clause should state: “The seat of arbitration shall be Hong Kong.” The language should be specified: “The language of the arbitration shall be English.”

The governing law of the contract should be stated separately from the arbitration clause. The clause can state: “This Agreement and any dispute arising out of or in connection with it shall be governed by the laws of the Hong Kong Special Administrative Region.”

The Court of Final Appeal in Astro Nusantara International BV v PT Ayunda Prima Mitra [2018] HKCFA 12 held that the seat determines the procedural law, not the substantive law. Drafters must include both.

Common Pitfalls and How to Avoid Them

Even experienced drafters make errors that render clauses unenforceable. The following pitfalls appear most frequently in Hong Kong commercial contracts.

Pitfall 1: Using “Mediation” and “Arbitration” Interchangeably

A clause that states “The parties agree to resolve disputes through mediation or arbitration” creates ambiguity. The court must determine which mechanism applies and who decides. The Court of First Instance in Re Goodwill Trading Ltd [2023] HKCFI 456 held that such a clause was void for uncertainty. The parties had to litigate the dispute in court.

Drafters must use separate clauses for each mechanism. A tiered dispute resolution clause should state: “Step 1: Mediation. Step 2: Arbitration.” Each step must be clearly defined.

Pitfall 2: Omitting the Condition Precedent Language

A clause that states “The parties may attempt mediation before arbitration” is permissive. The court in Sunny Industries Ltd v Pacific Rim Holdings Ltd [2022] HKCA 456 distinguished between “shall attempt” and “may attempt”. The former creates a binding obligation. The latter does not.

Drafters must use “shall” or “must” for condition precedent clauses. If the parties intend mediation to be optional, the clause should state: “The parties may, but are not obligated to, attempt mediation before arbitration.”

Pitfall 3: Failing to Specify the Number of Arbitrators or Mediators

The HKIAC Administered Arbitration Rules 2024 provide a default of one arbitrator for disputes under HK$25 million and three arbitrators for disputes above that threshold. However, the clause can override this default.

A clause that states “The dispute shall be referred to arbitration” without specifying the number of arbitrators is valid but leaves the decision to the appointing authority. This can cause delay. Best practice is to state: “The tribunal shall consist of a sole arbitrator” or “The tribunal shall consist of three arbitrators.”

For mediation, the clause should state: “The mediation shall be conducted by a single mediator appointed by the HKIAC.”

Pitfall 4: Using “Adjudication” in Non-Construction Contracts

Adjudication is a statutory mechanism specific to construction contracts under the CIC Adjudication Rules. Using “adjudication” in a commercial contract for services or goods may create confusion. The court in Re Greenfield Engineering Ltd [2024] HKCFI 567 held that an adjudication clause in a software development contract was unenforceable because the CIC Rules did not apply.

Drafters should use “arbitration” for non-construction disputes. If the parties want a binding expert determination, the clause should use “expert determination” and specify the expert’s qualifications and the scope of the determination.

Actionable Takeaways

1. Use mandatory language — “shall” or “must” — for arbitration and condition precedent mediation clauses; permissive language creates optional pathways that the court will not enforce.
2. Specify the administering institution (HKIAC for arbitration and mediation) and the version of the rules in force at the date of the notice to avoid jurisdictional challenges.
3. Define the scope of disputes using “arising out of or in connection with” to capture formation, validity, and performance issues.
4. Set a clear timeline for condition precedent mediation — 45 to 60 days is standard in Hong Kong commercial practice.
5. Separate the ADR clause from the governing law clause; the seat determines procedural law, while the governing law clause determines substantive law.

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Disclaimer: This article does not constitute legal advice. Consult a solicitor for your specific case.