Two recent judgments from the Delhi High Court affirm the court's pro-enforcement stance on foreign arbitral awards and offer welcome guidance on the exit rights of foreign investors in Indian companies, an important subject for many companies looking to invest in India. In the dispute between Tata Sons and Tata Teleservices ("Tata") and NTT Docomo Inc ("Docomo"), the court ruled that the Reserve Bank of India did not have standing to prevent enforcement of a foreign award between two private parties on grounds of Indian public policy. In a similar case (Cruz City 1 Mauritius Holdings v Unitech Limited), the court dismissed a challenge to enforcement by an award debtor arguing that a foreign award was contrary to Indian foreign exchange regulations.
As discussed in our previous blog posts here and here, the EU has introduced a new system to resolve disputes arising between investors and states which may herald the beginning of a move away from the traditional use of investor-state arbitration. In a recent article contributed to the Law Societies' Joint Brussels Office Newsletter, Vanessa Naish and Hannah Ambrose consider whether the EU's proposed multilateral investment court system is compatible (either practically or legally) with EU law.
For more information, please contact Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant or your usual Herbert Smith Freehills contact.
Laurence Franc-Menget, Avocat à la Cour and Of Counsel in Herbert Smith Freehills' Paris office, has published an article in the International Business Law Journal, examining the impact of the Arab Spring on international arbitration. The article considers a tentative classification of arbitrations relating to the Arab Spring, followed by an analysis of the possible consequences of the revolutions on the use of arbitration as a dispute resolution mechanism in the region. The article is published in French and English. To read the full article, please click here.
This article was first published in the International Business Law Journal (La Revue de Droit des Affaires Internationales), No. 2, 2017, and is reproduced by kind permission of Thomson Reuters (Professional) UK Limited.
For further information, please contact Laurence Franc-Menget.
+33 1 53 57 73 70
Live audio webinar: Protecting your investments from political risk in a volatile world – 21 June 2017 – 1.00pm UK time
In this webinar, we will offer a disputes perspective on how to protect your investments from political risk in the current economic and political climate. Disputes lawyers are often brought on board when things have already gone wrong, tasked with limiting the fallout, managing a crisis or resolving a dispute formally or informally. However, we know what can go wrong and can therefore offer insight into what might have been done at the outset to reduce the chance of a dispute arising in the first place. We know what we need to build a solid claim and what would or could have made our client's position in any dispute stronger.
In this webinar our panel will explore what we mean by "political risk" before looking at ways that risk can be mitigated. The topics our speakers will explore include:
- Looking beyond the transaction: protecting your future position whilst negotiating
- Contractual protections
- Investment structuring to benefit from investment treaties
- Political risk insurance: coverage, wordings and maximising policy response
- Steps to protect yourself when an investment turns sour
Finally, we will talk through some practical points which can really aid a client’s position if and when a dispute does arise.
Andrew Cannon, Partner, International Arbitration, Paris
Sarah McNally, Partner, Insurance Disputes, London
Iain Maxwell, Of Counsel, International Arbitration, London
To register for this event please click here.
Hong Kong has now enacted amendments to its Arbitration Ordinance (Cap. 609), clarifying that disputes over intellectual property rights (IPRs) may be resolved by arbitration and that it is not contrary to Hong Kong public policy to enforce arbitral awards involving IPRs.
The bill effecting the amendments, Arbitration (Amendment) Bill 2016 (Bill), was first introduced in December 2016 and was passed in substantially the same form on 14 June 2017. For more detail, see our previous blog post containing a summary of the main provisions of the Bill here. The amendments are due to come into operation on 1 October 2017.
This is a positive development that should progress the Hong Kong Government's stated aim of achieving an edge over other jurisdictions in the Asia-Pacific region as a venue for settling IPR disputes.
Hong Kong's Legislative Council today passed a law allowing third parties to fund arbitrations seated in the territory, as well as work done in Hong Kong for arbitrations seated elsewhere, and for mediations. This development has been long anticipated, and will be widely welcomed by Hong Kong's thriving arbitration community, which views it as essential to Hong Kong maintaining its status as one of the world's most popular arbitral seats.
Hong Kong court upholds execution against PRC State Owned Enterprise, rejecting claim of crown immunity
In TNB Fuel Services SDN BHD v. China National Coal Group Corporation HKCFI 1016, the Hong Kong Court of First Instance ("HKCFI") rejected a claim of crown immunity by a PRC State Owned Enterprise ("SOE") and upheld an order for execution against assets located in Hong Kong.
Whilst crown immunity does not apply to arbitrations seated in Hong Kong, it may become relevant where an Award creditor applies to enforce or execute an Award (whether obtained in Hong Kong or elsewhere) against a PRC State entity in Hong Kong.
The judgment provides important clarity on the approach the Hong Kong courts will take in such cases, in particular where SOEs controlled by the State Asset Supervision and Administration Commission ("SASAC") of the PRC Central People's Government ("CPG") are concerned. Claims by such entities of crown immunity from the jurisdiction of the Hong Kong courts or from enforcement and execution in Hong Kong are unlikely to be supported by the CPG or upheld by the Hong Kong courts, other than in exceptional circumstances.
TNB Fuel Services SDN BHD ("TNB"), a Malaysian private company, obtained an arbitral Award for approximately US$2.5 million against China National Coal Group Corporation ("China Coal"), a PRC coal conglomerate wholly owned by the SASAC. The HKCFI granted an order for enforcement of the Award. By way of execution, TNB then applied for a charging order in respect of shares held by China Coal in a Hong Kong company.
China Coal resisted execution on the basis of crown immunity, which may be invoked by the CPG as a bar to the jurisdiction of the Hong Kong courts, as confirmed by the HKCFI in 2010 in the leading case of The Hua Tian Long (No. 2)  HKLRD 611 (the concept of crown immunity is similar to but different from sovereign immunity, which may be invoked in the Hong Kong courts by foreign States rather than the PRC). Because it was wholly owned by SASAC, China Coal argued that it should be considered part of the CPG and therefore entitled to assert crown immunity, such that the HKCFI lacked jurisdiction to order execution against its assets.
On the basis that the case raised issues of constitutional importance and public interest, the Hong Kong Secretary for Justice ("SJ") intervened in the proceedings at the invitation of China Coal.
Judgment of the Court of First Instance
Justice Mimmie Chan rejected China Coal's plea of crown immunity and granted execution pursuant to the share charge.
First, as a threshold point, the HKCFI found that China Coal had failed to show that it had authority to assert crown immunity on behalf of the CPG and that no such claim had validly been made on behalf of the CPG. Of crucial importance in this decision was a letter obtained by the SJ from the Hong Kong and Macao Affairs Office of the State Council of the CPG, which stated that an SOE was an independent legal entity carrying out activities on its own with no special status or interests superior to other enterprises, and that SOEs should not be considered to be part of the CPG save for in "extremely extraordinary circumstances" where they were acting on behalf of the State. The HKCFI considered that the letter "signally defeat[ed]" the crown immunity claim.
Second, the HKCFI found that China Coal was entitled to independent autonomy in its business operations pursuant to its lex incorporationis (law of incorporation), PRC law. The HKCFI reached this decision based upon a review of numerous provisions of PRC law, the Articles of China Coal, and the evidence of expert witnesses on PRC law, concluding that China Coal had operational autonomy and extensive independence in carrying out its business, and that the powers of SASAC were akin to those of a normal shareholder. The case was therefore "totally distinguishable" from Hua Tian Long (No. 2), in which the HKCFI had upheld the entitlement in principle to crown immunity of a public salvage board which was not a separate legal entity and was under the direct control of the Ministry of Communications (albeit the entity was held to have waived the immunity on the facts of the case).
Third, the HKCFI applied the "control test" which Hua Tian Long (No. 2) had confirmed was the material consideration in assessing the entitlement of a corporation to crown immunity, taking into account the position under PRC law described above. Bearing in mind the nature and degree of control which could be exercised by SASAC on behalf of the CPG over China Coal, China Coal's ability to exercise independent powers, and that its business and operational autonomy was enshrined in and guaranteed under PRC law, the HKCFI concluded that China Coal was not entitled to invoke crown immunity.
This is the first judgment of the Hong Kong courts to address the concept of crown immunity since the leading case of Hua Tian Long (No. 2) in 2010. It provides valuable guidance on the application of the "control test" to assess when a PRC State entity will be entitled to crown immunity before the Hong Kong courts (this is particularly important because, where crown immunity is available, it will be "absolute" in nature, with no exception for given activities simply because they are commercial in nature). In particular, whilst this case related to a specific entity, the reasoning provides a strong indication that PRC commercial SOEs under SASAC supervision are very unlikely to be entitled to crown immunity before the Hong Kong courts, and the CPG is unlikely to support claims of immunity by such entities, unless exceptional circumstances apply.
In Israel Sorin (IZZY) Shohat v Balram Chainrai  HKEC 1118, the Hong Kong Court of First Instance considered that enforcement of arbitral awards should be subject to the same regime as governs the stay of execution of an ordinary court judgment, and ruled that the Court had jurisdiction to stay execution of an arbitral award enforcement order.
However, in the circumstances of this case, the Court refused to grant a stay of execution, despite a pending action commenced by the respondent before the High Court.
The Applicant, a businessman resident in Israel (Applicant), regularly introduced the Respondent, a businessman from Hong Kong (Respondent), to business ventures in Israel. One business venture involved loans advanced by the Respondent to Kushnir Family (Holdings) Ltd (Borrower), for the latter's purchase of a 35% shareholding in Nachushtan Investment Company Limited. The loan was secured by a pledge of the shares by the Borrower to the Respondent (Share Pledge).
In December 2007, the Applicant sought a declaration from the Israeli courts that he was entitled to a half interest in the loan and a lien of half the shares under the Share Pledge. In its counterclaim, the Respondent argued that the Applicant had breached its fiduciary duties as a trustee of the Respondent's funds and investments regarding other joint ventures between them.
In May 2011, the parties agreed to convert the legal proceedings before the Israeli courts into an arbitration. The arbitrator upheld the Applicant's claim and dismissed the Respondent's counterclaim. On 2 February 2016, the Applicant applied to the Hong Kong court to enforce the award as a judgment of the court, pursuant to Section 87 of the Arbitration Ordinance and Order 73, rule 10(1) of the Rules of the High Court. In the meantime, however, the Respondent had commenced legal proceedings in the Hong Kong High Court, claiming damages for negligence and breach of fiduciary duties against the Applicant (High Court Action).
On 3 May 2016, the Applicant applied to strike out the High Court Action, on the basis that the Respondent was seeking to relitigate the "same issues and subject matter". The Applicant argued this constituted an abuse of process.
On 15 September 2016, with the court's decision on the strike out application still pending, Justice Mimmie Chan rendered an enforcement order (Enforcement Order) "granting leave to the Applicant to enforce the [a]ward in the same manner as a judgment of the court". As the Respondent did not apply to set aside the Enforcement Order, the Court of First Instance considered the Enforcement Order valid and binding on the Respondent.
The legal issue that arose was whether, considering that the award was enforceable in the same manner as a court judgment, the Court had the same discretion to grant a stay of execution of the award as it would have for a court judgment, and whether, in the circumstances, it should do so.
Counsel for the Applicant submitted that there had been no application to set aside the Enforcement Order, and that the application for stay was therefore misconceived. He also argued that, because the award itself had not been challenged, the general policy of facilitating the enforcement of arbitral awards should prevail and prevent delaying the enforcement of the award.
The Respondent submitted that he was entitled to obtain a stay of execution, relying on the fact that the Respondent had paid the equivalent of HKD 33.5 million into court pursuant to the Enforcement Order as a condition for granting an interim stay of execution. Counsel for the Respondent also referred to the fact that the Respondent was likely to have to face difficulty enforcing the Hong Kong court's judgment in Israel.
In its decision of 26 May 2017, the Court reiterated that it had discretion to grant a stay of execution of an ordinary judgment where the circumstances would justify such a stay. In light of the fact that the effect of the Enforcement Order is to enable enforcement of the award in the same manner as a judgment of the court, Justice Anderson Chow felt that as a matter of principle, there was no reason why the court would lack jurisdiction to grant a stay in the execution of the award. Chow J considered conflicting English decisions on this matter, but considered that he was not bound by these authorities.
Addressing the Applicant's argument on the "ethos of enforcement of awards", Chow J made a distinction between enforcement of arbitral awards on the one hand, which indeed should be an inexpensive and expeditious procedure, and the question whether to stay execution of the Enforcement Order. He concluded that the enforcement of the arbitral award should be subject to the same regime as governs the stay of execution of a court judgment. Therefore, the Court had jurisdiction to grant a stay of execution of the Enforcement Order.
In deciding whether to stay execution of the Enforcement Order, the Court considered Burnett v Francis Industries Plc  1 WLR 802, in which the Court listed a number of factors relevant to stay of execution of a court judgment. These are: the nature of the claim, the strength of the cross-claim, the size of the claim relative to the size of the cross-claim, any delay before the cross-claim will be disposed of, the extent of the prejudice to the creditor if it is denied the fruits of the judgment until the cross-claim is determined and the risk of prejudice to the debtor if it makes payment under the judgment.
Chow J considered certain circumstances to be particularly relevant in the case at hand. First, the Applicant had an award for a substantial sum of money against the Respondent; second, the Respondent had, at most, an "arguable" claim against the Applicant before the High Court; and third, there would be a significant delay before the Respondent's action would be finally disposed of.
In light of these, Chow J refused to grant the stay of execution of the Enforcement Order sought by the Respondent.
He ordered the Respondent to pay costs on the indemnity basis, "in accordance with the Court's usual practice regarding unsuccessful applications to challenge the enforcement of arbitration awards", a practice which is extended yet further by this decision.
The Hong Kong Court has indicated that it will apply a flexible interpretation of section 84 Arbitration Ordinance and Order 73, rule 10(1) Rules of the High Court, bringing the regimes applicable to the stay of execution of awards and court judgments closer. While the flexibility is welcome, this decision also extends the scope of the court's powers to delay enforcement of an arbitral award. However, it is likely that the power will be exercised sparingly, in keeping with Hong Kong's usual practice of encouraging enforcement and the arbitral process overall.
Singapore High Court holds mandatory arbitration agreement in company constitution operative despite earlier litigation
The Singapore High Court ("Singapore Court") has clarified a number of issues concerning the content, scope and operability of arbitration agreements. Of particular note is the Singapore Court's view on the extent to which a party's choice to subject a dispute, which may otherwise be the subject of an arbitration agreement, to litigation may act as a bar to that party subsequently choosing to refer the dispute to arbitration as a result of the doctrines of waiver or promissory estoppel. The Singapore Court also considered a number of additional issues which serve as a useful reminder as to best practice in drafting and enforcing arbitration agreements. We discuss the case and the practical issues flowing from it in detail below.
In BMO v BMP  SGHC 127 the underlying dispute concerned the ownership of shares in a Vietnamese subsidiary of BMP (the "Subsidiary"). The Defendant, BMP, alleged that its shareholding in the Subsidiary had been substantially reduced by a series of unauthorized and unlawful share transfers which had eventually resulted in the Plaintiff, BMO, becoming the Subsidiary's majority shareholder. The share transfers were purportedly effected by two individual shareholders in the Plaintiff, with the assistance of the Plaintiff itself.
In July 2014, the Defendant commenced litigation against the Plaintiff and the two individual shareholders in the courts of the British Virgin Islands in relation to the share transfers (the "BVI Litigation"). The Plaintiff acknowledged service of the claim and the parties made a series of interlocutory applications and filings in the courts of the British Virgin Islands. Subsequently, in May 2015, the Defendant commenced arbitration against the Plaintiff alone (the "Arbitration"), pursuing the same cause of action and relief as it had sought against the Plaintiff in the BVI Litigation.
In March 2016, the BVI Litigation came to an end after the Defendant's claim was struck out. In the Arbitration, the Plaintiff challenged the jurisdiction of the Tribunal to determine the Defendant's claims, on the basis that the Defendant had lost the right to arbitrate by its decision to pursue the BVI Litigation. In April 2016, the Tribunal held that it had jurisdiction and ordered the Arbitration to proceed on the merits of the case. The Plaintiff applied to the Singapore Court to set aside the Tribunal's ruling on its jurisdiction.
Decision of the Singapore High Court
The Singapore Court dismissed the Plaintiff's application and upheld the Tribunal's determination on jurisdiction. In giving its decision, the Singapore Court discussed a number of important issues.
- Governing law where no express choice is made
The arbitration agreement in this case was contained in the Subsidiary's company charter (i.e. the Subsidiary's constitution), which included no express choice of governing law. The Court therefore had to determine the proper law of the charter and the arbitration agreement within it.
The Singapore Court considered the historically divergent case law on this topic, specifically the English case SulAmérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others  1 WLR 102 and the Singapore case FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others  SGHCR 12. In short, while SulAmérica stands for the proposition that there is a rebuttable presumption that an implied choice of governing law of the arbitration agreement is the law of the substantive contract, FirstLink took the position that in a competition between an expressly chosen substantive law and the law of the chosen seat of arbitration, it is the law of the chosen seat that prevails. Both of those decisions have been recently considered by the Singapore Court in BCY v BCZ  SGHC 249 and Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd  3 SLR 267. In both BCY and Dyna-Jet, the Singapore Court preferred the approach taken in SulAmérica. Those decisions were discussed previously on this blog (see posts on BCY and Dyna-Jet).
In this case, the Singapore Court determined that the parties had impliedly chosen Vietnamese law to govern the charter on the basis that the charter included references in certain clauses to the requirements of Vietnamese law and it is unlikely that that the parties would intend for different laws to govern different parts of the charter. Thus, the Singapore Court again adopted the logic of SulAmérica and applied it to the facts of the case holding that, as the parties' impliedly chose Vietnamese law for the substance of the charter, Vietnamese law also governed the arbitration agreement contained within it.
- Scope of the arbitration agreement contained in a company constitutional document
The Plaintiff argued that the Defendant's claims in the Arbitration did not fall within the scope of the arbitration agreement in the charter. The Singapore Court reaffirmed the broad approach to interpreting the scope of arbitration agreements, holding that arbitration agreements "should be generously construed such that all manner of claims, whether common law or statutory, should be regarded as falling within their scope unless there is good reason to conclude otherwise".
The Singapore Court also noted that the arbitration agreement used the phrase "all arising disputes" which could refer to all disputes "arising under", "arising out of", "in connection with", "connected with" or "relating to" the charter. The arbitration agreement was therefore wide enough to extend to disputes between the members of the Subsidiary that were not directly premised on the rights and duties created by the charter.
- Had the Defendant lost the right to arbitrate?
In advancing its case that the Tribunal did not have jurisdiction, the Plaintiff relied on the fact that the Defendant had commenced the BVI Litigation to support three legal arguments:
- first, the Defendant had elected not to proceed to arbitration and had thereby waived its right to arbitrate;
- second, the Defendant had committed a repudiatory breach of the arbitration agreement; and/or
- third, the Defendant was estopped from relying on the arbitration agreement.
The Plaintiff argued that by commencing the BVI Litigation, the Defendant had elected not to proceed to arbitration and had thereby waived its right to arbitrate. The Singapore Court considered this issue and made the following key observations:
- The terms "waiver" and "election" share an immediate and intimate link: the consequence of election, if established, is the abandonment (i.e. the waiver) of a right.
- It follows that there can be no "election" when there is no choice to be exercised. There is only election when a party with knowledge of its rights chooses between two inconsistent rights.
- In the context of a breach of contract, waiver by election focuses on the conduct of the innocent party after the wrongdoing party's breach. The choice between the two inconsistent rights belongs to the innocent party: namely, affirmation or termination of the contract.
Applying these principles, the Singapore Court held that there was no election available to the Defendant, as the party which had breached the contract by starting the BVI Litigation in breach of the arbitration agreement. It was the Plaintiff, which then faced a choice between two inconsistent rights (to affirm or terminate) and which, if/when it exercised one of those rights, would be said to have made a waiver by election. The Plaintiff's argument on waiver by election therefore failed.
The Singapore Court noted that if the arbitration agreement had given the Defendant a choice between arbitration and litigation, and if the Defendant had then initiated the BVI Litigation instead of choosing to arbitrate, this would have amounted to a different type of waiver, namely the unilateral waiver of one of two valid but inconsistent rights. However, that was not the situation in this case. Here, it was not correct to argue that a simple breach of contract could amount to a waiver by election.
The Plaintiff argued that the Defendant's commencement of the BVI Litigation was a repudiatory breach of the arbitration agreement, which the Plaintiff had accepted through its participation in the BVI Litigation. The Singapore Court also rejected this view, finding that breach of an arbitration agreement is not necessarily repudiatory in nature if there was some reason for the breach, such as confusion as to the correct course of action to take to purse a claim. As in any other case of repudiation, it is necessary to analyse the facts in order to understand whether they indicate an intention not to be bound by the contract. If not, the breach is not repudiatory.
In this case, the Singapore Court accepted that the reason for the Defendant's decision to commence the BVI Litigation was that it was simply not aware of its obligation to arbitrate and, therefore, that there was no repudiatory breach. In reaching this decision, the Singapore Court was mindful that after the Arbitration commenced, the Defendant had applied for a stay of the BVI Litigation in favour of the Arbitration and, therefore, this was not a case where the Defendant was maintaining parallel proceedings in breach of the arbitration agreement.
Finally, the Singapore Court considered whether the Defendant, by commencing the BVI Litigation, had represented that it would no longer be relying on the arbitration agreement, such that it was precluded by promissory estoppel from taking a contrary position.
The Singapore Court clarified that the doctrine of promissory estoppel is applicable only in relation to a promise not to enforce legal rights. The Defendant's commencement of the BVI Litigation was not a forgoing of any right and therefore the doctrine of promissory estoppel did not apply. Estoppel, like waiver by election, is an argument that may be raised against a party seeking to enforce its rights in response to another party's breach. The position here was reversed: the argument was raised by, not against, the party seeking to enforce its rights.
Conclusions and practical guidance
The decision in BMO v BMP provides a detailed legal analysis of a number of important issues with considerable practical impact. Specifically, this case serves as a reminder of the following points:
- There is now a trend of the Singapore Courts preferring to adopt the position in SulAmérica in relation to the applicable choice of governing law for arbitration agreements. However, it remains to be seen what position the Singapore Court of Appeal will take. In any event, specifying – in addition to the chosen seat of the arbitration – what law should govern the arbitration agreement, will help avoid uncertainty. Parties should therefore take great care to consider carefully what law should govern the arbitration agreement, regardless of whether the arbitration agreement is contained in a commercial contract, a shareholders' agreement or a company's constitutional documents.
- The Singapore Courts will continue to interpret arbitration agreements broadly so as to give maximum effect to parties' decision to arbitrate. Parties should therefore carefully consider the precise scope of disputes which are intended to be the subject of an arbitration clause. Where the scope is to be restricted, clear and effective language should be used to achieve any such restriction.
- When determining the most appropriate forum in which to commence proceedings in relation to a dispute, clients should carefully review all relevant documentation and obtain advice as whether the dispute is required to be commenced by arbitration or litigation. Commencing a dispute in the wrong forum can result in wasted time and costs and, potentially, the loss of substantive as well as procedural rights.
For further information about this case or arbitration in general, please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate, or your usual Herbert Smith Freehills contact.
Hong Kong's status as a leading international dispute resolution hub is well-known. It enjoys a strong, independent judiciary as well as world class international arbitration services. Mediation and other forms of ADR are heavily supported by a myriad of institutions. Although not a compulsory requirement, mediation in the context of civil litigation tends to be interpreted by commercial parties as a mandatory step. Against this backdrop, delegates voted at the recent Global Pound Conference Hong Kong, which saw over 200 delegates from across Hong Kong's disputes market congregate to discuss their approach to commercial dispute resolution. Hong Kong's Secretary for Justice, Chief Justice and Solicitor General headlined the conference.
Click here to download the aggregated results from the first 18 Global Pound Conference events, which have taken place in 12 countries in Africa, the Americas, Asia, Europe and the Middle East. This includes the very first analysis of the overall trends set to shape the future of dispute resolution globally.
The above provide insights for all stakeholders – commercial parties, lawyers, experts, judges, arbitrators, mediators and government – on the areas of focus for Hong Kong as it seeks to maintain – and expand – its position as a leading dispute resolution centre.