Anticipated arbitration reforms in Australia

The Australian International Arbitration Act 1974 (Cth) (Act) applies to all international arbitration proceedings in Australia. The Civil Law and Justice Legislation Amendment Bill 2017 (Bill) is an omnibus bill which proposes to make certain amendments to the Act (as well as other various Australian legislation).

The International Arbitration Act incorporates the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration (Model Law) and, much like other Model Law jurisdictions, contains additional provisions supplementing the Model Law. The proposed amendments to the Act are another effort by Australia to improve and clarify the provisions of the Model Law by addressing issues which have arisen in jurisprudence.

The key proposed change will make it easier for foreign awards to be enforced in Australia. A number of other less significant amendments are also proposed.

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LCIA Facts and Figures for 2016: another strong caseload

The LCIA has recently released its Facts and Figures for 2016. This report (Facts and Figures – 2016 A Robust Caseload.pdf), which is produced annually, provides an overview of and insights into the LCIA's caseload. It includes detailed statistics concerning aspects of the caseload ranging from the industry sectors concerned, to arbitrator appointments, and the frequency of use of different procedures under the LCIA's Arbitration Rules (the "Rules").The statistics demonstrate that the LCIA caseload continues to grow, attracting disputes from across a number of industry sectors and involving parties from across the world.

Some of the main points from this year's report are set out below.

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Hong Kong Court Stays Proceedings to Arbitration

Overview

In Polytec Overseas Ltd and another v. Grand Dragon International Holdings Co Ltd and others [2017] HKCFI 604, the Hong Kong Court of First Instance upheld the defendant's application under s. 20 of the Arbitration Ordinance to stay court proceedings issued by the plaintiffs in favour of arbitration.

Notwithstanding that the relevant contracts between the parties appeared to contain incompatible dispute resolution provisions, the Court confirmed the existence of a valid and operative arbitration clause binding on the plaintiffs and defendants and prima facie encompassing the substantive claims advanced.

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Background

The dispute opposed Polytec Overseas Limited (POL) and Polytec Holdings International Limited (PHIL) against Grand Dragon International Holdings Company Limited (LHK), Guandong Longhao Group Limited (LG) and an individual shareholder of both LHK and LG (X).

POL and LHK entered into a Cooperation Framework Agreement (BOT), setting out the terms and conditions of their joint project to develop, construct and operate highways in Mainland China. The BOT contained an arbitration clause providing that "any dispute between the parties in the implementation or performance of the BOT may be submitted to CIETAC in Hunan for arbitration, if the dispute cannot be conciliated". Pursuant to the BOT, X signed written guarantees under which it undertook obligations in relation to the project.

Various supplemental agreements were concluded. PHIL was joined as a party to the first supplemental agreement (1st Supplemental), which purported to clarify the terms of the relationships between the parties. The 1st Supplemental contained a jurisdiction clause, designating the courts of Hong Kong as competent courts. The second supplemental agreement (2nd Supplemental), concluded between POL, PHIL, LHK and LG, set out the terms of the parties' continued involvement in the projects and stated expressly that it represented the "final and comprehensive settlement of matters" between the parties. The 2nd Supplemental did not include a dispute resolution clause.  

POL and PHIL claimed that LHK and LG were in breach of the BOT, as amended by the 2nd Supplemental, notably by failing to inject sufficient funds into the project companies, which led to the suspension of the project works, and by preventing POL and PHIL from exercising their right of control and management of the project companies. POL and PHIL further claimed that X was in breach of the Guarantee by failing to properly manage and organise the project works and supervise the project companies. The defendants applied for a stay of proceedings. In response, the plaintiffs argued that the defendants could not rely on the arbitration agreement to stay the proceedings in court due to an alleged inconsistency between the BOT arbitration clause and the jurisdiction clause in the 1st Supplemental.

Decision

Pursuant to s. 20 of the Arbitration Ordinance, the Hong Kong court must stay its proceedings and refer the parties to arbitration if a party so requests and the action is brought in a matter which is subject of an arbitration agreement, unless the arbitration agreement is invalid, inoperative, or incapable of being performed.

Justice Mimmie Chan based her decision whether to allow a stay of proceedings on the four-stage process established in Tommy CP Sze v Li & Fung (Trading) Ltd [2003] 1 HKC 418, namely: (1) is there an arbitration agreement between the parties, (2) is the clause capable of being performed, (3) is there a dispute or difference between the parties and (4) is the dispute between the parties within the ambit of the arbitration agreement.

Regarding the existence of an arbitration agreement covering the claims made by the plaintiffs, Chan J noted that the claims against LHK and X as to the amounts due from LHK and its obligation to cooperate were inextricably based on obligations established under the BOT, as supplemented by the 1st Supplemental and the 2nd Supplemental. Therefore, the dispute between POL, PHIL and LHK fell within the ambit of the arbitration clause contained in the BOT.

In relation to the inconsistency between the dispute resolution clauses contained in the BOT and the 1st Supplemental, the Court pointed out that regard should be given to the context of the parties' dealings and the circumstances of the case. In fact, it was expressly stated in the 1st Supplemental that it had equal effect as the BOT. Therefore, in the Court's view, the 1st Supplemental could not be said to supersede the BOT.

The Court concluded that the test laid out in PCCW Global Limited v Interactive Communications Service Ltd [2006] HKCA 434; [2007] 1 HKLRD 309, that is the existence of a valid arbitration agreement on a prima facie basis, was satisfied.

The plaintiffs had also argued that the defendants had waived their right to arbitration by commencing court proceedings in the Higher People's Court of Hunan. However, according to the judgment of Lord Goff in Kanchenjunga [1990] 1 Lloyd's Rep 391, such waiver should have been "clearly or unequivocally" expressed to be effective. Chan J could not establish that the defendants had abandoned their right to arbitration, as it was not clear whether the Hunan proceedings had been commenced before or after the application to stay the Hong Kong proceedings.

Ultimately, the Court granted the mandatory stay under s20 of Arbitration Ordinance as requested by the defendants.

With regards to the claims made against X, the Court decided the liability of X under the Guarantee depended on whether LHK was liable under the BOT and the 2nd Supplemental. Accordingly, and in order to avoid waste of costs and risking conflicting outcomes, the Court exercised its inherent discretion to stay the plaintiff's claims against X.

Discussion

As we have come to expect, the Hong Kong Court has applied the provisions of the Arbitration Ordinance robustly. While the judgment confirms that the application of s. 20 Arbitration Ordinance will depend on the facts of each case, the threshold for ordering a s.20 stay is relatively low. The Court must merely be satisfied on a prima facie basis that there is a valid arbitration clause, and that it encompasses the disputes before the court. As such, Chan J's decision is consistent with the overarching aim of the Arbitration Ordinance (and the Model Law) that courts should intervene in a dispute that is subject to arbitration only insofar as necessary, and shall defer to the arbitral tribunal wherever possible, to determine its own jurisdiction on a final basis.

 

May Tai
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All Australian States and Territories are now Model Law jurisdictions

By introducing the new Commercial Arbitration Act 2017 (ACT), the Australian Capital Territory is the last Australian State to adopt the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration (the Model Law). At the Federal and State level, the Model Law now applies to both international and domestic arbitrations seated in Australia.

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Hong Kong Court confirms pro-arbitration stance

In U v A [2017] HKEC 468, the Hong Kong Court of First Instance dismissed an application to set aside an Order for enforcement of an ICC award rendered in Hong Kong. In her judgment, Mimmie Chan J reiterated that Hong Kong courts will refuse challenges to enforcement based on unmeritorious technical points or minor procedural complaints. An error will only be considered sufficiently serious if it undermines due process.

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The arbitration

The dispute related to a Preliminary Assignment Contract (PAC) between the parties in which U, the applicant, agreed to purchase 51% of a JV company in the PRC. In addition to the purchase of shares, the contract also provided that U would control the majority of the board of the JV. Several months later, in order to finalise the deal, the parties signed a separate Share Transfer Agreement (STA). Only the STA, and not the PAC, was submitted to the relevant PRC authorities for approval. Thus, the PAC was considered a so-called "Black Contract", while the STA was considered a "White Contract". The issue in dispute concerned the fact that the provisions in the PAC regarding control of the JV board were not contained in the government-approved STA.

The Respondents asserted that under PRC law the PAC, as a contract for the transfer of shares of a foreign-invested enterprise, can be legally valid and effective only with the approval of the competent Chinese authorities. Without that approval, they claimed that the PAC was not valid and that they therefore were not bound by the obligations therein.

While the arbitration was already underway, the Respondents obtained a PRC judgment confirming that the PAC was indeed ineffective. However, the Arbitrator refused to accept the PRC judgment as evidence because the Respondent had submitted it out of time. She also considered the judgment irrelevant in the determination of the dispute submitted to arbitration, since the parties to the judgment were not identical to the parties to the arbitration. Moreover, the PRC proceedings were tortious in nature, in contrast to the contractual claims referred to arbitration.

In the award, the arbitrator held that the PAC should be regarded as a framework contract, which was given effect by the supplemental STA. Consequently, she held that the PAC was valid, despite the lack of governmental approval.

The set aside application

The Respondent applied to set aside the Order on the following grounds:

  1. the Respondents were unable to present their case (s 86(1)(c)(ii) of the Arbitration Ordinance (Cap 609));
  2. the Award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission (s 86(1)(d));
  3. it would be contrary to public policy and unjust to enforce the Award (s 86(2)(b)&(c));

i. Refusal to allow belated evidence does not breach due process

The Respondents complained that the arbitrator had unjustifiably refused to admit the PRC Judgment as evidence in the arbitration, such that the Respondents were deprived of a full opportunity to present their case on the key issue of the invalidity of the PAC.

The Court rejected the Respondents' submissions on two grounds. First, an arbitrator is fully entitled to impose time limits for the filing of evidence in the proper exercise of her case management powers (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd, FAMV 18/2012). Second, the Respondents were able to present expert evidence on the interpretation of PRC law on the required government approvals for foreign-invested enterprises. Thus, due process was respected and the parties were given a fair hearing.

ii.Only clearly unrelated decisions fall beyond the scope of the submission to arbitration

The award included a decision on the procedure for the election of the JV's board Chairman. The Respondents argued that this decision was beyond the scope of the submissions since this relief was not explicitly sought in the Request for Arbitration. Only later, in the Statement of Claim, had U requested an order to confirm its right to elect the Chairman.

Only decisions which are clearly unrelated to, or not reasonably required for, the determination of the subject dispute, matters or issues submitted to arbitration fall beyond the scope of the submission to arbitration (Grant Thornton International Limited v JBPB & Co (A Partnership), HCCT 13/2002). The Court went on to examine (i) the contract language, which did not contain any special requirements as to the form of the claims brought; (ii) the ICC Arbitration Rules, which merely require the request for arbitration to contain "a description of the nature and circumstances of the dispute giving rise to the claims and of the basis upon which the claims are made", and a "statement of the relief sought"; (iii) s 51 of the Arbitration Ordinance, which states that the claimants must bring the relief sought in his Statement of Claim. None of these provisions limits the relief sought in the arbitration to the claims brought in the Request for Arbitration.

iii.Error in (PRC) law is not contrary to Hong Kong public policy, nor is it unjust

The arbitrator allegedly made an error in PRC law in holding that the PAC is effective and valid despite lacking governmental approval. However, in enforcement proceedings in Hong Kong, the public policy to be considered is that of Hong Kong, not that of the PRC (Hebei Import & Export Corp v Polytek Engineering Co Ltd, (1999) 2 HKCFAR 111). To justify refusing enforcement, the violation of public policy must be "contrary to the fundamental conceptions of morality and justice" of the forum – i.e. Hong Kong.

The Court held that Hong Kong is not the correct forum to decide whether the award would violate PRC public policy, nor can it review the decision of the arbitrator that the PAC did not require approval under PRC law. To the extent that enforcement of the award is sought in the PRC, the Respondents are free to resist enforcement there.

The Court rejected the application on each ground and ordered the Respondents to pay costs on the indemnity basis.

Comment

Chan J has again reinforced the long-standing position of the Hong Kong courts that they will reject challenges to enforcement of arbitral awards based on unmeritorious technical points or minor procedural complaints.

May Tai
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Filed under Asia, Awards, Challenges to awards, Enforcement, Hong Kong & China

New Zealand considers further amendments to its Arbitration Act

On 9 March 2017, the Arbitration Amendment Bill (Bill) was introduced to the New Zealand Parliament. The Bill proposes to amend the Arbitration Act 1996 (Act), and follows recommendations by the Arbitrators’ and Mediators’ Institute of New Zealand (AMINZ).

The proposed changes include:

  1. permitting the inclusion of arbitration clauses in trust deeds;
  2. greater confidentiality of arbitration-related court proceedings; and
  3. narrowed grounds for the set-aside of an arbitral award.

Other amendments to the Act came into effect on 1 March 2017, which we earlier reported on here.

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Filed under Arbitration clauses, Arbitration laws, Confidentiality, Court intervention

Should I stay or should I go? Singapore High Court declines to stay arbitration pending review of jurisdictional ruling

Overview

In a recent ex tempore judgment in the case of Loblaw Companies Limited v Origin & Co Ltd & Another [2017] SGHC 59 ("Loblaw v Origin"), the Singapore High Court declined to exercise its discretion under s10(9) of the International Arbitration Act ("IAA"), and refused to stay an arbitration pending final determination by the Singapore courts of a separate application by Loblaw to review the Tribunal's finding on its jurisdiction.

In its decision the High Court acknowledged the lack of authority on when and how a court shall exercise its discretion under s10(9) of the IAA, finding that "[u]ltimately, very much depends on the unique facts and circumstances of each case". However, an applicant would generally be required to show "special circumstances" justifying a stay, over and above the (alleged) merits of the jurisdictional objection or the obvious risk of wasted time and costs.

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Filed under Asia, Court intervention, Jurisdiction, Stays

HERBERT SMITH FREEHILLS’ GLOBAL ARBITRATION PRACTICE RANKED TOP THREE IN THE WORLD FOR SECOND YEAR RUNNING

For the second-year running, Herbert Smith Freehills' Global Arbitration Practice has been showcased as being the third busiest in the world as part of the prominent annual Global Arbitration Review (GAR) 30 rankings.

The firm's new GAR 30 ranking appears in the tenth edition of the GAR 100, which was unveiled on 29 March 2017 at the seventh annual GAR Awards at the Palazzo Parigi Hotel, in Milan.

Highlighted by the publication as a "force to be reckoned with", GAR reports a significant spike in high-value work for the firm, with 14 cases worth more than US$1 billion (including one worth US$18 billion).

The firm also achieves a large number of peer-recognised specialists across the global network, having a total of 15 people featured in Who’s Who Legal: Arbitration, the highest figure of any firm in the GAR 30.

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Astro prevails again against First Media (Lippo) in Hong Kong

In the long running Astro/First Media (also known as Lippo) enforcement dispute, First Media has failed to obtain leave to appeal to the Court of Final Appeal in Hong Kong in respect of First Media's recent loss in the Court of Appeal (Astro v First Media CACV 272/2015).  As a result, First Media must pay to Astro sums due under five Singapore arbitration awards.  Having failed to obtain leave from the Court of Appeal on 29 March 2017, it is not yet known whether First Media will seek leave to appeal directly from the Court of Final Appeal.

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Filed under Asia, Challenges to awards, Enforcement, Hong Kong & China, Jurisdiction

ICSID issues first award involving China as Respondent, finding in host state’s favour

In an award dated 9 March 2017, the Tribunal in an ICSID arbitration between Korean investor Ansung Housing Co., Ltd and China dismissed all claims as time-barred. The Claimant's attempt to circumvent the limitation period by relying on the most favoured nation (MFN) clause did not succeed. The Tribunal came to this conclusion at an early stage of the proceeding, "with relative ease and despatch".

This is the first ICSID arbitration to involve China as the respondent state that has proceeded to a substantive hearing and resulted in an award.

See our previous blog on the case here

Click here for a copy of the Award.

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Background

The dispute related to the Claimant’s investment in a golf course and condominium development project in Jiangsu Province, China. On 12 December 2006, Ansung entered into an Investment Agreement with the local government, relating to a two-phase development of an 18-hole golf course and related facilities. In the course of 2007, Ansung observed a competing golf course nearby under construction and felt reluctance from the local government to grant Ansung the land necessary for the second phase of its development. Various rounds of communications took place between 2008 and 2011, but Ansung was not granted the land required for phase two, despite phase one having been completed. By mid-2011, it became clear that the local government would not honour its obligations under the Investment Agreement and Ansung would not be able to repay its loan without sufficient returns from its investments. In October 2011, Ansung was forced to dispose of all its assets at a significant loss, in order to avoid further losses.  On 17 December 2011, Ansung entered into a share transfer agreement for the purpose of the disposal, which was completed on 19 December 2011.

The dispute was submitted to ICSID under the Agreement between the Government of the Republic of Korea and the Government of the People’s Republic of China on the Promotion and Protection of Investments that entered into force on December 1, 2007 (BIT) and the ICSID Convention. Ansung submitted the Request for Arbitration electronically on 7 October 2014 and physically on 8 October 2014. The Secretary-General of ICSID registered the Request on 4 November 2014.

Limitation period

China filed an objection under Rule 41(5) of the ICSID Arbitration Rules, asserting that the Claimant’s claim was "manifestly without legal merit". Article 9(7) of the BIT bars an investor from making a claim if more than three years have elapsed from the date on which "the investor first acquired, or should have first acquired, knowledge that the investor had incurred loss or damage". China submitted, with authority, that the starting point for the purpose of limitation period is when the investor has knowledge of the fact of loss, not knowledge of the quantum of such loss. Ansung necessarily knew that it had incurred loss prior to the disposal of its investment in October 2011. The completion date of the transfer, when the quantum crystallised, is irrelevant. Ansung's claim was not registered by ICSID until 4 November 2014. China therefore argued that Ansung submitted the arbitration more than three years after it first acquired knowledge that it had incurred loss or damage, rendering the claim time-barred under Article 9(7) of the BIT.

The Tribunal agreed that Ansung must have known, well before October 2011, that its golf course project had suffered loss. Indeed, as the Claimant itself repeatedly pleaded, the purpose of the October 2011 disposal was to "avoid further losses". The Tribunal did not agree with Ansung's attempt to characterise 17 December 2011 as the date on which time started running, as that was the time when Ansung crystallised its loss, not the first date on which it knew it was incurring loss. The Tribunal also held that the day on which the Request for Arbitration was submitted, i.e. 7 or 8 October 2014, was the date on which Ansung made its claim for the purposes of tolling the limitation period. The Tribunal rejected China's argument that the relevant date was the date on which ICSID registered the claim, as that date is out of the control of the Claimant.

Taking all of this into consideration, the Tribunal concluded that the three-year limitation period had elapsed, and the claim was therefore "manifestly without legal merit".

MFN Clause

In the alternative, Ansung argued, the MFN Clause in Article 3(3) of the BIT saved the claim from being time-barred. Ansung contended that Article 3(3), which allows investors to import substantive rights from other treaties, should be interpreted to include procedural protections and rights in relation to dispute settlement procedures. The investment and business activities under Article 3(3) include "expansion, operation, management, maintenance, use, enjoyment, and sale or disposal of investments" as well as admission of investment. Ansung submitted that most Chinese BITs do not have any limitation period provisions, and that it should therefore enjoy the more favourable protection in such BITs to be free from the restriction of the three-year limitation period.

The Tribunal held that, upon a plain reading, Article 3(3) of the BIT does not extend to a state's consent to arbitrate with investors. The Tribunal considered that the limitation period in Article 9(7) pertains to the state's consent to arbitration, as a matter of international law. The Tribunal also drew a comparison with Article 3(5) of the BIT, which specifically extends MFN protection to an investor's access to domestic courts of justice, administrative tribunals and authorities. In marked contrast, such express reference to international dispute resolution is "conspicuously absent" in Article 3(3) of the BIT.

Consequently, the Tribunal did not consider that Article 3(3) of the BIT assisted Ansung in preventing its claim from being time-barred.

Award

The Tribunal was able to determine that China had established its Rule 41(5) objection "clearly and obviously, with relative ease and despatch" and its determination proved not to be "difficult". Even accepting the facts as pleaded by the Claimant to be true, the Tribunal found the claim was time-barred under Article 9(7) of the BIT and not protected by operation of the MFN clause. As such, the Tribunal found the claim to be "manifestly without legal merit" under the ICSID Arbitration Rules, Rule 41(5).

Having found in China's favour, the Tribunal awarded China its share of the direct costs of the proceeding, in the amount of US$69,760.55, plus 75% of its legal fees and expenses, plus interest.

The Tribunal consisted of Prof Lucy Reed (President), Dr Michael Pryles and Prof Albert Jan van den Berg.

Comment

Whilst each investment arbitration claim is particular to its underlying BIT, the limitation language in Article 9(7) of the BIT is reflected in a number of other bilateral investment treaties, including other Chinese treaties. In this case, the Tribunal held that time starts running when the investor first knows of the fact of its loss, not the quantum of such loss. This decision serves as a reminder to involve legal advisors early in any potential investor-state dispute, not least for the purpose of preserving the claim against any applicable limitation period.

Ansung also raised the hotly-debated question of whether MFN clauses extend to the dispute settlement provisions in BITs. ICSID tribunals in previous cases have accepted that applicability of the MFN clauses to dispute settlement concerned procedural obstacles, such as the requirement to resort to domestic courts for 18 months before instituting arbitration (see e.g. Siemens v Argentina, cited by Ansung). In the current case, the Tribunal viewed the limitation period as part of the state's consent to arbitrate. The Tribunal also contrasted Article 3(3) of the BIT (silent on the issue of international dispute resolution) against Article 3(5) of the same treaty, which expressly states that the investor is entitled to MFN treatment in terms of domestic dispute resolution.

This is the first ICSID arbitration to involve China as the respondent state that has proceeded to a substantive hearing and resulted in an award. However, it is not unlikely that we will see more treaty arbitrations involving Asian states in future, as disputes begin to arise out of the numerous inbound and outbound Asia-related transactions that have taken place over the last decade, and going forward.

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