Register to attend London International Disputes Week 2023: International Arbitration Day (15 May 2023)

This year’s London International Disputes Week (LIDW)’s International Arbitration Day will ‘follow the arbitration sun’ across key regions and jurisdictions, featuring keynote speeches and panels from some of the leading global figures from across the dispute resolution community. Herbert Smith Freehills are delighted to be a co-host of LIDW’s inaugural International Arbitration Day,  hosting a number of panels and networking events at our offices. This event is free to attend and offers both in person and virtual attendance for some sessions. Click here to find out more about all of the events on offer at LIDW’s International Arbitration Day or here for more information about the full programme for LIDW.

 

Our speakers from Herbert Smith Freehills across the day include:

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English Court sets aside award on the ground that the arbitral tribunal lacked substantive jurisdiction

In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co., Ltd [2022] EWHC 181 (Comm), the Commercial Court has set aside an arbitral award under s67 of the Arbitration Act 1996 (the “Act“) on the basis that the arbitral tribunal lacked substantive jurisdiction.

The case concerned a “subjects” provision which required “shipper/receiver’s approval“. The Court found that:

  • the “subjects” provision was a pre-condition to the effectiveness of both the contract and the arbitration agreement contained within it;
  • as “shipper/receiver’s approval” was not in fact obtained, the “subjects” provision was not satisfied, and so neither the contract nor the arbitration agreement became binding on the parties; and
  • the arbitrator therefore had no jurisdiction to decide the dispute, and the Award was set aside.

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GAFTA RULES PERMIT CLAIMS UNDER MULTIPLE CONTRACTS IN SINGLE NOTICE OF ARBITRATION, SAYS ENGLISH COURT (THIS TIME)

In the recent decision in LLC Agronefteprodukt v Ameropa AG [2021] EWHC 3473 (Comm), the English Commercial Court (the ‘Court’) dismissed a jurisdictional challenge under section 67 of the Arbitration Act 1996 (the ‘Act’), finding that a single Notice of Arbitration validly commenced separate arbitration proceedings. The decision is of particular interest given that the Court reached a different outcome from the earlier decision of A v B [2017] EWHC 3417 (Comm) (blog post available here), in which the Court upheld a section 67 challenge in similar circumstances.

Background

The Underlying Contracts and Disputes

Under two separate contracts of sale (the ‘Contracts‘), LLC Agronefteprodukt (the ‘Sellers‘) agreed to sell quantities of Russian Milling Wheat to Ameropa AG (the ‘Buyers‘). The Contracts both contained an arbitration clause which provided for arbitration under the GAFTA rules, seated in London.

The Buyers commenced arbitration in August 2018 under both Contracts in a single Notice of Arbitration (the ‘Notice‘). This Notice included a paragraph (the ‘Final Paragraph‘) which read “On a separate note, [the Buyer wondered] if, for efficiency and economy, [the Sellers] would accept the two contracts/disputes be adjudicated under a single arbitration and by the same Tribunal“. The Sellers did not respond, and an arbitrator for the Sellers was appointed by GAFTA.

In September 2018, the parties entered into negotiations and concluded an agreement (the ‘Washout Agreement’) under which the Sellers would pay a sum to the Buyers (the ‘Settlement Sum‘) to terminate the claim. The Sellers failed to make payment, and the Buyers continued the arbitration.

The Underlying Awards and S67 Challenge

The Sellers contended that the Tribunal lacked jurisdiction on the basis that the Buyers had failed to validly commence arbitration proceedings under each contract. They argued that the Notice was invalid as it illegitimately purported to commence a single arbitration in respect of claims under separate Contracts. Under the GAFTA Rules, the Sellers would have to consent to any such consolidation, which they did not. This jurisdictional challenge was rejected by the First Tier GAFTA Tribunal and the Appeal Board in their awards (the ‘First Tier Tribunal Award‘ and ‘Appeal Board Award‘ respectively).

The Sellers proceeded to challenge both the First Tier Tribunal Award and the Appeal Board Award under section 67 of the Act (the ‘Section 67 Challenge‘).

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Hong Kong Court holds inconsistent award in parallel arbitration manifestly invalid

In a “highly unusual case“, the Hong Kong High Court has held an award rendered in HKIAC arbitration proceedings “manifestly invalid” on the basis that the tribunal’s findings were inconsistent with an earlier award rendered in a separate arbitration but involving the same parties and one of the same arbitrators.

The dispute in W v AW [2021] HKCFI 1707 arose from two related agreements, each containing HKIAC arbitration clauses. Two separate arbitrations were commenced involving the same parties and overlapping issues of fact, with one of the parties appointing the same arbitrator to both tribunals. An award in the first arbitration was handed down in March 2020. An award in the second arbitration followed 4 months later in July 2020. The two awards reached different conclusions on an identical claim for misrepresentation.

W, as the successful party in the first arbitration, applied to the Hong Kong court to set aside the second award on the basis that it was in conflict with the public policy of Hong Kong. Amongst other things, it was argued that the second tribunal had ignored findings on common issues made in the first award, and had in fact reached inconsistent findings notwithstanding that one of the arbitrators had been involved in both cases. AW, in turn, applied for leave to enforce the second award together with an order that W pay security for the sums owed under that award.

The Court rejected AW’s application for security. In reaching this decision, the Court acknowledged that in the particular circumstances of this case, the second award was invalid, could not be enforced, and it was likely that W’s application to set aside the second award on public policy grounds would succeed. The fact that AW had nominated the same arbitrator in both proceedings, but that this arbitrator had made contradictory findings, was a material factor in the court’s decision. The inconsistency of the arbitrator’s approach called into question the overall integrity of the process and was a matter of “grave unfairness” to W.

This is a rare instance of the courts in Hong Kong considering an arbitral award invalid. Although the facts of the case are somewhat extreme, the decision does illustrate the pitfalls of running parallel arbitration proceedings under related contracts involving the same parties. Many arbitral institutions, including the HKIAC, introduced consolidation and joinder provisions several years ago to avoid precisely this scenario where separate tribunals might reach inconsistent decisions on common issues of fact. This case therefore provides a practical example of why parties to multi-party disputes should give early consideration to the use of consolidation provisions at the outset of the dispute, or the appointment of common arbitrators between parallel proceedings to minimise the risk of inconsistent decisions.

Background

In late 2015, W and AW entered into two related agreements, a Share Redemption Agreement and a Framework Agreement, as part of a broader transaction involving the acquisition of AW’s interests. W and AW were the only parties to the Share Redemption Agreement, whereas the Framework Agreement also involved four other parties. Both contracts contained HKIAC arbitration agreements.

A series of disputes subsequently arose. W commenced arbitration against AW under the Framework Agreement and, in response, AW filed a counterclaim in the proceedings and commenced a separate arbitration under the Share Redemption Agreement. In both proceedings, AW appointed the same arbitrator and made identical claims of misrepresentation. The remaining arbitrators in both sets of proceedings were different.

On 13 March 2020, the first tribunal issued an award in W’s favour, dismissing AW’s claim for misrepresentation. Just a few months later, however, on 13 July 2020, the second tribunal issued an award in AW’s favour in which it essentially upheld the same misrepresentation claim. Both awards were unanimous decisions.

W applied to set aside the second award arguing (amongst other things) that the discrepancy between the two decisions ran contrary to Hong Kong public policy. In turn, AW applied for leave to enforce the second award and sought an order that W pay security. The decision of Mimmie Chan J was made in the context of the security application, although in rejecting that application she made clear that W had a strong case to set aside the second award on the basis that it was “manifestly invalid“.

Decision

W’s claim that the second award should be set aside was based on the principle of issue estoppel, which arises where a particular issue forming a necessary ingredient in a cause of action has been already decided, but then that same issue is re-opened in subsequent proceedings between the same parties involving a different cause of action.

In the present case, Mimmie Chan J found that it was “clear” that the arbitrators in the two sets of proceedings had “made inconsistent findings, on the same issue of fact and law forming a necessary ingredient in the cause of action of misrepresentation“. Although the two proceedings had ultimately been concerned with different causes of action arising from two distinct contracts, the common issues relating to the alleged misrepresentation were necessary and essential to the reasoning of both arbitral tribunals. Their findings, however, were contradictory and could not be reconciled.

Crucially, the Court found that W was entitled to expect the second tribunal to have dealt with the question of issue estoppel after the first award had been handed down. The fact that AW had appointed the same arbitrator in both sets of proceedings was an important point of distinction in this case. The arbitrator should have been alive to the potential for inconsistent decisions once he had seen the reasoning adopted in the first arbitration, such that “fairness and justice of the case required him to invite submissions to be made by W and AW in Arbitration 2 as to the effect of Award 1 on the issues to be decided in Arbitration 2“. Instead, the arbitrator himself made inconsistent findings across the two arbitrations, because he did not issue a dissenting decision in either case even though the findings of the tribunal were contradictory.

Importantly, the Court noted that it was not an answer to say that the two arbitrations were confidential. Specifically, this did not prevent AW’s appointed arbitrator from disclosing the first award to the other members of the second tribunal. Citing previous authority on this issue, Mimmie Chan J noted that: “the legitimate use of an earlier award in a later arbitration between the same parties would not raise the mischief against which confidentiality rules are directed“.

The Court therefore found the failure to deal with and explain these inconsistencies constituted “injustice and grave unfairness to W“, which fell short of fairness and due process underpinning the arbitral process. Accordingly, the Court held that the second award was “manifestly invalid“.

Comments

As noted above, and as acknowledged in the decision, this is a highly unusual case. The fact that AW had appointed a common arbitrator in both proceedings – and that this arbitrator should have been able to deal with the potential inconsistency in the two awards – was a material factor in the court’s reasoning. This heightened the sense of unfairness to W. This was not simply a case where two separate tribunals had reached inconsistent decisions. Rather, in this case, the same arbitrator in two proceedings had reached findings which were plainly contradictory. It was this point in particular which appears to have tipped the scales.

The practical significance of the judgment is that it highlights the risks of running separate, parallel proceedings on matters arising from the same underlying suite of contracts. As indicated above, most institutional rules now provide comprehensive mechanisms for the consolidation of arbitrations, or the joinder or parties, to prevent this sort of difficulty arising. There may also be advantages in this situation from appointing the same arbitrators in related proceedings to mitigate the risk of inconsistent findings. That being said, the Court noted expressly in this case that it did not consider W to be “at fault” for having appointing different arbitrators in the two proceedings, even though it knew that AW had appointed the same co-arbitrator in both cases: “It is the right of a party to appoint any arbitrator of its choice. It is entitled to expect that whoever it appoints, the candidate would discharge his/her duty to act fairly and impartially“.

For more information, please feel free to get in touch with any of the contacts below, or your usual Herbert Smith Freehills contact.

Simon Chapman QC
Simon Chapman QC
Partner, Regional Head of Practice - Dispute Resolution, Asia
+852 21014217
Peter Chen
Peter Chen
Senior Associate, Hong Kong
+852 21014235
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales)/Professional Support Consultant, Hong Kong
+852 21014214
Joyce Chan
Joyce Chan
Trainee Solicitor, Hong Kong
+852 21014115

Hong Kong court refuses enforcement where due process denied

In a rare move, the Hong Kong Court of First Instance has refused to enforce an arbitral award, rejecting an appeal from its earlier decision to set aside the enforcement order.

X v Y  [2020] HKCFI 2782

Background

The dispute arose between X, a Taiwanese life insurance company as investor and pledger, and the Bank as investment manager and the pledgee. The parties’ dealings involved a three-tier investment structure, encompassing X’s subscription of the “AB Trust”, the Bank’s management of assets deposited in a trust account, and X’s pledge of the managed assets as security for loans by the Bank.

The Bank’s management of assets was governed by an investment management mandate (Mandate) entered into by X and the Bank in April 2008. The Mandate provided for Taiwanese governing law and for arbitration as the dispute resolution mechanism. On the security side, in March 2008 the trustee of AB Trust executed, in favour of the Bank, a Pledge for Assets (Pledge) over the trust assets as continuing security for current or future obligations due to the Bank. The Pledge was governed by the laws of Singapore and submitted disputes to the non-exclusive jurisdiction of the Singapore courts.

The dispute arose when X was put into receivership in 2014, which prompted the receiver to demand the Bank to return the balance held in the trust account. The Bank relied on the Pledge to retain the balance, which represented the outstanding loans due to the Bank. In July 2016, the Bank instigated court proceedings in Singapore against X and other parties pursuant to the jurisdiction clause of the Pledge. In August 2016, X commenced arbitration against the Bank under the arbitration clause of the Mandate.

In the Request for Arbitration, X claimed that the Pledge was void under the laws of Singapore for lack of consideration, and as such that the Bank was liable to return the balance in the trust account. The Tribunal rendered an award in favour of X on 4 January 2018, ordering the Bank to return the balance of the trust account to X. X obtained an order to enforce the award in Hong Kong. On 24 October 2018, the Bank applied to set aside the enforcement order and  the Court granted the application in a decision dated 5 November 2020 (Decision).

The Decision

At first instance, the CFI was invited to rule on two issues:

  1. Whether the award dealt with matters falling outside the terms of the submission to arbitration; and
  2. Whether the Bank had been unable to present its case in the arbitration.

The Tribunal’s jurisdiction

The parties’ dispute revolved around whether the Tribunal had jurisdiction to find that the Pledge was invalid, so as to deprive the Bank of its property interests. X argued that, after the Tribunal had found X’s subscription of trust and deployment of assets invalid under Taiwanese insurance law, the validity and enforceability of the Pledge did not arise. The Bank argued that the real dispute between the parties had always been the validity of the Pledge, particularly whether the Bank could rely on the Pledge to retain the assets.

Applying the English Court of Appeal’s decision in Trust Risk Group SpA v AmTrust Europe Ltd [2017] 1 CLC 456 (see our previous post), the Hong Kong Court held that, where the parties have entered into multiple interlinked commercial contracts to deal with different aspects of their relationship, “the proper test in ascertaining the parties’ intention on how their disputes should be dealt with is to identify the nature of the claim, and the agreement which has the closest connection with such dispute and claim”. In this respect, the Court highlighted that the one-stop-shop presumption in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40 has limited application where the parties’ agreements contain competing jurisdiction clauses.

Applying the “closest connection” test, the Court agreed with the Bank that the Pledge was undisputedly the “centre of gravity of the dispute”. The Tribunal’s finding that the Pledge was illegal under Taiwanese law did not by itself invalidate the Pledge and the security interests under the Pledge. Since the parties’ dispute brought into question the validity of the Pledge, the question must be referred to the Singapore Court.

The Bank’s opportunity to present its case

Two issues were material to the Bank’s argument that it had been unable to present its case in the arbitration.

First, prior to the post-hearing submissions, X’s pleaded case had always been that the Pledge was invalid under Singapore law for lack of consideration. It was only in its post-hearing submissions that X argued, for the first time, that contravention of the relevant Taiwanese law provision (i.e. Article 146 of Taiwan Insurance Act) would render the Pledge void under Taiwanese law. This timing gave the Bank no opportunity to deal with X’s change of position.

Second, it was common ground between the parties’ experts that Article 146 did not have the effect of invalidating X’s transactions. Given that such evidence was unchallenged, the Bank did not further its case regarding Article 146. Contrary to the experts’ shared view, however, the Tribunal accepted X’s position that the pledge of X’s assets was void.

As a matter of law, the Court emphasised that the conduct complained of must be “serious or even egregious” before the Court can take a view that a party had been denied due process. Here, the Court sided with the Bank in finding that the Tribunal’s decision on Taiwanese law constituted a departure from the cases presented by the parties, and that the Bank had not been given a reasonable opportunity to present its case and to meet the case of X. The Court specifically cautioned that “in respect of matters which have never been in issue between the parties, and which do feature significantly in the arbitrators’ decision, great care should be taken to ensure that the parties are given a fair and ample opportunity to comment and deal with such matters.”

In light of the Tribunal’s jurisdictional overreach and the “substantial injustice” suffered by the Bank, the Court concluded that it would be a breach of rules of natural justice to enforce the award.

Leave to Appeal

Following the Decision, X sought leave to appeal on three grounds:

  1. the Court had misconstrued the nature of X’s claim in the arbitration;
  2. the Court had erred in finding that the legality of the Pledge was an issue that fell to be determined; and
  3. the Bank had been given a fair opportunity to present its case.

Applying the “reasonable prospect of success” threshold, Mimmie Chan J found that, in relation to the first two grounds, “[t]here are arguably some merits in the intended appeal which ought to be heard”.

However, the third ground was deemed to have no reasonable prospects of success. Chan J considered that the Court of Appeal would be unlikely to interfere with the first instance judge’s assessment of procedural fairness, which is a broad and multi-factorial exercise dependent on the Court’s analysis of the documentary evidence.

As such, even if the appeal were to succeed on the first and second grounds, the Court’s finding that the Bank had been denied due process would render the Award unenforceable. For this reason, the Court concluded that to allow the appeal would be against the object of the Arbitration Ordinance to facilitate the fair and speedy resolution of disputes without unnecessary expense.

Comments

This is a rare example of a Hong Kong court refusing to enforce an arbitral award, in spite of its long-established pro-arbitration and pro-enforcement reputation. The Decision highlights that the courts may be slow to apply the “one-stop-shop” presumption in commercial dealings involving different – and potentially competing – jurisdiction clauses. In such situations, the courts may revert to the “closest connection” test, out of respect for commercial realities and party autonomy. As a result, careful drafting is essential if parties intend to apply different dispute resolution mechanisms to different aspects of their relationships .

The Decision also reminds parties and arbitrators alike of the importance of due process. The Court reiterated that, in deciding whether to exercise its discretion not to enforce an award, it must consider standards of due process under Hong Kong law. Interference with due process, if sufficiently serious or egregious, may render an arbitral award unenforceable.

For more information, feel free to get in touch with any of the contacts below, or your usual Herbert Smith Freehills contact.

May Tai
May Tai
Managing Partner - Asia
+852 21014031
Simon Chapman
Simon Chapman
Partner
+852 21014217
Kathryn Sanger
Kathryn Sanger
Partner
+852 21014029
Briana Young
Briana Young
Professional Support Consultant
+852 21014214

China’s top court publishes its first annual report on judicial review of arbitration-related cases

On 23 December 2020, the Supreme People’s Court (“SPC”) of China released its bilingual 2019 Annual Report on Judicial Review of Arbitration Cases in China (the “Report”). It is the very first report issued by the SPC summarising the courts’ approach for judicial review of arbitration-related cases.

The Report aims to promote the SPC’s efforts over the course of last year in standardising judicial review approach in dealing with arbitration-related matters. In particular, it includes the SPC’s summary of its approach for judicial review of arbitration-related matters in 2019, such as on issues of validity of arbitration agreements, enforcement or revocation of domestic arbitral awards, as well as recognition and enforcement of offshore arbitral awards. Whilst the full content of the Report itself has not been made available online at the time of our blog, we set out below the key highlights based on the press release and information provided at the press conference of the SPC.

The SPC “reporting system”

The SPC “reporting system” applies to enforcement of arbitral awards in Mainland China.[i] Under the reporting system, lower courts are authorised to confirm validity of arbitration agreements, and order enforcement of onshore and offshore awards (or a Mainland Chinese foreign-related award). However, if a lower court is minded to deny validity of an arbitration agreement or to refuse enforcement of an arbitral award, it must refer the case to a higher court to confirm the decision.

For domestic awards, the higher court will conduct the final review without involving the SPC unless where (1) the parties are from different provinces in Mainland China; or (2) the refusal to enforce the award is based on an “infringement of public policy”.

For foreign-related arbitration cases, the higher court must refer the matter to the SPC for a final decision if it agrees that enforcement should be refused.

In 2018, the reporting system was further supplemented by the establishment of the First and Second International Commercial Courts.[ii] These courts are empowered to hear revocation and enforcement cases of foreign-related arbitral awards with disputed amounts exceeding RMB300 million or awards of significance released by five arbitration institutions.[iii]

According to the statistics provided by the SPC at the press conference, PRC courts heard a total of 11,029 cases concerning revocation of arbitral awards in 2019, only 5.8% of which the courts decided to set aside or partially set aside arbitral awards. Among the 201 cases reviewed by the SPC in 2019, 32% of lower courts’ decisions were overruled.

Recognition and enforcement of offshore arbitral awards

Recognition and enforcement of offshore arbitral awards in China is governed by the New York Convention as well as the Civil Procedure Law of China.

The SPC mentioned during the press conference that in 2019, a total of 32 applications were made to recognise and enforce offshore arbitral awards in China, among which 20 applications were successful and 1 application was denied because the award exceeded the scope of the arbitration agreement. The other applications were either withdrawn by the parties or dismissed due to lack of jurisdiction.

Interim injunctions in support of arbitration

The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “Arrangement”) came into effect on 1 October 2019. Parties to Hong Kong-seated arbitrations administered by an eligible arbitration institution in Hong Kong have the right to apply for interim measures from Mainland Chinese courts.

According to the SPC, between 1 October 2019 and 31 October 2020, 32 applications for interim measures have been granted by Mainland Chinese courts in relation to Hong Kong arbitration, among which 29 cases concern property preservation measures, two cases concern evidence preservation and one case concerns action preservation.

Pro-arbitration principles in judicial review

SPC mentioned at the press conference that the Report summarises the criteria and principles that Mainland Chinese courts should take into account in their judicial review of arbitration-related cases.

Six general principles are emphasised:

  • Courts shall respect parties’ agreement to arbitrate and interpret the arbitration agreements/clauses in favour of validity;
  • The grounds for setting aside arbitral awards shall be strictly limited to those provided by law;
  • Arbitration awards are in principle final and binding and the judicial review of arbitral awards shall only be limited to the extent of necessity;
  • The public policy defence shall be interpreted stringently to avoid being abused;
  • Courts shall accurately identify foreign governing laws, recognise and enforce foreign arbitral awards accordingly to law and create an “arbitration friendly” judicial environment; and
  • Courts shall recognise and enforce Hong Kong, Macau and Taiwan arbitral awards according to law, and assist in interim measures in aid of Hong Kong arbitral proceedings in Mainland China.

According to the SPC, the Report also addresses recent development in arbitration practice, such as the formation of Belt and Road Mechanism for Resolution of International Commercial Disputes[iv] and China Pilot Free Trade Zone Arbitration Mechanism[v].

 

[i]           See the Provisions of the Supreme People’s Court on Issues concerning Applications for Verification of Arbitration Cases under Judicial Review (Fa Shi [2017] No.21).

[ii]          See Article 2 of Provisions of the Supreme People’s Court on Several Issues Regarding the Establishment of International Commercial Court (Fa Shi [2018] No.11).

[iii]         The five arbitration institutions are members of “One-stop” Diversified Settlement Mechanism for International Commercial Disputes in China, including China International Economic and Trade Arbitration Commission, Shanghai International Economic and Trade Arbitration Commission, Shenzhen Court of International Arbitration, Beijing Arbitration Commission, and China Maritime Arbitration Commission.

[iv]         Opinions of the Supreme People’s Court on the Provision of Judicial Services and Guarantee by People’s Courts for the Belt and Road Initiative (Fa Fa [2019] No.29) (Chinese text only).

[v]          Opinions of Supreme People’s Court on the Provision of Judicial Services and Guarantee by People’s Courts for the Construction of China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area (Fa Fa [2019] No. 31).

 

Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Celine Wang
Celine Wang
Senior Associate
+86 21 2322 2159
Stella Hu
Stella Hu
Senior Consultant
+852 2101 4248