PRC court clarifies enforcement of Mainland award made by foreign institution

On 6 August 2020, Guangzhou Intermediate People’s Court made a civil ruling that an arbitral award made in Guangzhou by the ICC should be regarded as a Chinese arbitral award with a foreign element. It follows that the award should be enforced under Article 273 of the PRC Civil Procedure Law, rather than under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

(2015) Sui Zhong Min Chu Si Zi No. 62 or (2015)穗中法民四初字第62号

Background

This case concerned a supply contract between Brentwood Industries (US) as the seller, Guangzhou Faanlong Machinery Engineering Co Ltd (PRC) as the buyer, and Guangzhou Zhengqi Trading Co Ltd (PRC) as the agent of the buyer. Article 16 of the contract provided that “any dispute arising from or in connection with this contract shall be settled through friendly negotiation. If no settlement can be reached through negotiation, it shall be submitted to ICC for arbitration in the place where the project is located in accordance with international convention and practice” (emphasis added). Article 17 provided that “the applicable law of this contract is PRC law”. In this case, the project was located in Guangzhou, Mainland China.

On 16 December 2010, Brentwood brought a claim against Faanlong and others (Respondents) in the Court. The Court declined to hear the case, as there was an arbitration agreement between the parties. On 9 May 2011, Brentwood applied to the Court to invalidate the arbitration clause. Brentwood was not successful. Subsequent to the Court’s ruling confirming the validity of the arbitration clause, on 31 August 2012, Brentwood commenced ICC arbitration against the Respondents. The arbitration was administered by the ICC through its Secretariat Asia Office based in Hong Kong. On 17 March 2014, the sole arbitrator made a final award in favour of Brentwood. On 13 April 2015, Brentwood applied to the Court for recognition and enforcement of the award.

The Court’s ruling on enforcement

Brentwood argued that judicial practice in Mainland China is that the nationality of the arbitral award is determined by the place where the arbitration institution is located. Accordingly, as the award was made by the ICC, which is headquartered in Paris, it should be recognised and enforced in Mainland China in accordance with the New York Convention. Alternatively, if the Court considered that the award was made by the ICC Secretariat Asia Office based in Hong Kong, the award is a Hong Kong arbitral award and should be recognised and enforced in accordance with the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region (Mainland and Hong Kong Mutual Arrangement).

The Respondents argued that (1) the award was not “made in the territory of a State other than the State where the recognition and enforcement of such awards are sought “ (Article 1 of the New York Convention), and thus should not be recognised and enforced under the New York Convention; (2) ICC was not an arbitration institution stipulated in the PRC Arbitration Law and it was not legal for it to administer arbitration in Mainland China; and (3) the validity of the arbitration clause and the enforceability of the arbitral award were two separate legal issues under different rules. The fact that the arbitration clause was held valid did not necessarily suggest that the award made pursuant to it was enforceable.

The Court ruled that the award, made in Guangzhou by the ICC, should be regarded as a foreign-related arbitral award made in Mainland China. Enforcement of the award should be brought under Article 273 of the PRC Civil Procedure Law. It rejected Brentwood’s arguments for recognition and enforcement under the New York Convention or the Mainland and Hong Kong Mutual Arrangement and directed Brentwood to re-apply for enforcement under the PRC Civil Procedure Law.

Comment

It is a long-standing question whether foreign arbitration institutions can administer arbitration seated in Mainland China under the current PRC Arbitration Law regime. The traditional view was no, because “arbitration commission” in the PRC Arbitration Law meant Chinese arbitration institutions only. However, with the increase in commercial dealings between Chinese and foreign parties, the strict interpretation of the law no longer sits well with the demands of commercial parties. China’s Supreme People’s Court has recently, in several cases and judicial interpretations, confirmed the validity of clauses providing for arbitrations administered by foreign institutions seated in Mainland China. This latest decision made by the Guangzhou Court took a further step,  supporting that the arbitral award made in arbitration seated in Mainland China and administered by a foreign arbitration institution can be enforced under PRC Civil Procedure Law. However, as Mainland China is not a case law jurisdiction, this latest decision by Guangzhou Court, even though it should have been vetted by the Supreme People’s Court via the internal reporting system, is not a binding authority in Mainland China.

Viewed in light of the fact that foreign arbitral institutions are now permitted to operate in Beijing and extended free trade zones in Shanghai (see here), we are hopeful that there will be a final clarification in the near future on the question of whether foreign arbitral institutions can administer arbitration seated in Mainland China. Legal practitioners in Mainland China have been calling for an amendment to the existing PRC Arbitration Law to address this issue. If that happens, it would be a significant step towards China further opening up its legal services market to foreign players. Having said that, before that final missing piece of the puzzle is complete, we would recommend that parties avoid agreeing to an arbitration clause that provides for arbitration seated in Mainland China to be administered by a foreign arbitral institution.

If you have questions or would like discuss any aspect of this post, please contact Helen Tang, Stella Hu or Briana Young of Herbert Smith Freehills, Weina Ye of Kewei Law Firm, or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner, Shanghai
+86 21 2322 2160
Weina Ye
Weina Ye
International Partner, Kewei
+86 21 2322 2132
Stella Hu
Stella Hu
Of Counsel, Beijing
+86 10 65355017
Briana Young
Briana Young
Professional Support Consultant, Hong Kong
+852 2101 4214

 

 

NOW OR NEVER: MALAYSIA CONFIRMS FAILURE TO OBJECT WAIVES RIGHT TO CHALLENGE

In Sunway Creative Stones Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd and Anor [2020] MLJU 658, the Malaysian High Court refused to set aside an arbitral award because the applicant had not challenged the arbitrator’s jurisdiction and conduct when the issues arose during the arbitral proceedings. The Court emphasised that such lack of protest can be deemed a waiver of a party’s right to set aside an arbitral award on the same grounds at a later date.

This decision serves as a helpful reminder that, notwithstanding regional arbitration trends, parties to Malaysia-seated arbitrations should actively ventilate their dissent as and when they believe the arbitral tribunal is thought to have misconducted itself, even if they understand that the tribunal’s mandate has lapsed.

Background

Yeoh Tiong Lay Sdn Bhd (YTL) was appointed as the main contractor for earthworks, piling works, and main building works for condominiums in Kuala Lumpur. YTL thereafter entered into a sub-contract with Sunway Creative Stones Sdn Bhd (SCS) on an amended PAM 1998 Agreement and Conditions of Building Sub-Contract (Private Edition) for the supply, delivery, and installation of stonework (Sub-Contract).

YTL terminated its engagement as main contractor over alleged non-payment of interim certificates, which, in turn, determined SCS’s employment under the Sub-Contract. SCS commenced an arbitration against YTL under the PAM Arbitration Rules 2003 seeking declaratory and pecuniary reliefs including interest and costs. The dispute was heard before a sole arbitrator (Arbitrator) with the participation of both parties. Following the arbitration hearing, parties exchanged post-hearing submissions, with the last submission being served on 1 June 2015.

Article 21.3 of the PAM Arbitration Rules 2003 – central to YTL’s challenge – required that:

the Arbitrator shall deliver his award as soon as practical but not later than three (3) months from his receipt of the last closing statement from the parties. Such time frame for delivery of the award may be extended by notification to the parties.” [emphasis added]

The Arbitrator neither issued the award by this three-month deadline nor notify both parties of any extensions to this timeline. Instead, the award was delivered on March 2019 – almost 3.5 years late – in which the Arbitrator found in SCS’s favour (Award).

Saliently, SCS’s solicitors reminded the Arbitrator on four occasions between February 2016 and December 2018 on the need to deliver his Award in a timely manner. These reminders were copied to YTL’s solicitors. YTL, however, did not send any such reminders nor raise concerns with the Arbitrator’s non-compliance with the deadline.

Following YTL’s non-payment of sums under the Award, SCS sought recognition and enforcement of the Award against YTL. In response, YTL applied to the Malaysian High Court to set aside the Award under Section 37 of the Arbitration Act 2005 (AA 2005), which largely mirrors Article 34 of the UNCITRAL Model Law.

YTL’s three main grounds for setting aside were:

  1. Procedural Ground: The Arbitrator failed to comply with the agreed arbitral procedure when he delivered the Award beyond three months of his receipt of the last closing submissions. This rendered the Award liable to be set aside under Section 37(1)(a)(vi) AA 2005.
  2. Jurisdiction Ground: The Arbitrator lacked jurisdiction to issue the Award when he did. YTL contended that the Arbitrator’s mandate lapsed on 1 September 2015, upon the expiry of the time limit to deliver the Award. Thus, there was no longer any subsisting arbitration when the Arbitrator delivered the Award on March 2019, which meant that the Award was issued without jurisdiction. It was therefore, void and to be annulled under Section 37(1)(a)(iv) and (v) AA 2005.
  3. Public Policy Ground: The Arbitrator’s delay in delivering the Award was a breach of natural justice, and should be set aside on the grounds of public policy pursuant to Section 37(2) AA 2005.

SCS opposed all three setting aside grounds on the basis of YTL’s failure to raise these complaints in the arbitration. The Court dismissed YTL’s setting aside application on each grounds and upheld the Award.

Procedural and jurisdiction grounds

The Procedural Ground failed as YTL did not protest the Arbitrator’s delay in issuing the Award when it arose. By its silence, YTL was understood to have waived its right to rely on this procedural defect as a ground for challenge. The Court viewed this consistent with the waiver principle under Article 20 of the PAM Arbitration Rules 2003 and Section 7(b) AA 2005, which require a challenging party to promptly raise procedural objections or lose the right to subsequently rely on them.

As regards the Jurisdiction Ground, the Court found that the waiver doctrine extended to jurisdictional challenges and that established Malaysian case law supported this view. Section 18(5) AA 2005, worded similarly to Article 16(2) of the UNCITRAL Model Law, required a party to challenge any excess of jurisdiction as soon as the alleged infraction arises during the arbitral proceedings. Analysing this, the Court held that if a party fails altogether to invoke the right to challenge an arbitrator’s jurisdiction whilst arbitration proceedings are ongoing, that party cannot thereafter apply to set aside the award on jurisdictional grounds under Section 37(1)(a)(iv) and (v) AA 2005.

The Court found further support in the shift in arbitral jurisprudence in Malaysia since the enactment of AA 2005.  It was previously the position under the Arbitration Act 1952 (repealed), as reflected in Bauer (M) Sdn Bhd v Daewoo Corp [1999] 4 MLJ 545, that a failure to raise a jurisdictional objection did not prevent an objecting party from later challenging the award on the same jurisdictional grounds in setting aside or enforcement proceedings. This, however, was inconsistent with the intention of Article 16 of the UNCITRAL Model Law and, in turn, Section 18 AA 2005. The Court sought to give effect to this new legislative intention.

Accordingly, YTL should have raised a plea to the Arbitrator that he lacked jurisdiction to deliver his Award soon after 1 September 2015, ie upon the expiry of the time limit to deliver the Award. Having failed to do so, YTL lost the right to rely on the same jurisdictional defect in setting aside proceedings.

Public policy ground

In the Court’s view, the late Award did not amount to a breach of natural justice satisfying the high threshold for public policy challenges under Section 37(2) AA 2005. The Court emphasised YTL’s failure to avail itself of the opportunity to remedy the Arbitrator’s misconduct before the Award was published, including an application to terminate the Arbitrator’s appointment pursuant to Section 16 AA 2005. Following its failure, YTL could not now argue that a fundamental notion of substantive or procedural justice was violated as a result of the delayed publication of the Award.

In the circumstances, the Arbitrator’s conduct was not “some matter which concerns the public good and public interest“, and did not demonstrate a “strong case has been made out that the arbitral award conflicts with the public policy of Malaysia“. Thus, the Award was not liable to be set aside on the ground of public policy.

Comment

The Malaysian High Court’s decision in Sunway Creative Stones emphasises that parties to Malaysian-seated arbitrations are expected to raise jurisdictional and procedural objections without undue delay. Failure to do so may amount to a waiver of the objecting party’s right to raise such defects at the setting aside stage.

The Malaysian position appears to stand in contrast with the Singaporean approach to jurisdictional objections. In Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Private) Limited [2019] SGCA 33, the Singapore Court of Appeal found that a non-participating respondent was entitled to stand by while the claimant proceeded with the arbitration without losing his right to challenge the jurisdiction of the tribunal in setting aside proceedings before the supervisory court. This was despite that the non-participating respondent declined to participate in arbitral proceedings on the belief that the arbitration had been wrongly started or continued due to a lack of jurisdiction. A salient finding of the Singapore Court of Appeal was that the law does not compel a respondent against whom arbitration proceedings have been started to take part in those proceedings and defend his position. Although it is a risky course of action to pursue, it lies within the respondent’s prerogative to do so where it has a valid objection.

Although it concerns a jurisdiction objection at a different stage of the arbitration, Rakna Arakshaka Lanka Ltd demonstrates the differing levels of judicial tolerance between the Malaysian and Singapore courts towards party delays or refusals to ventilate jurisdictional challenges. Notably, the Rakna Arakshaka Lanka Ltd line of cases was not put before the Malaysian High Court in Sunway Creative Stones. It may be a point of interest for many to see how the Malaysian courts will treat this regional jurisprudential difference in future cases. However, for now, the Sunway Creative Stones decision serves as a reminder that arbitrating parties should not delay in raising jurisdictional and procedural complaints.

An English version of the decision can be accessed here.

 

For further information, please contact Peter Godwin, Lim Tse Wei, or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Peter Godwin
Peter Godwin
Disputes & Managing Partner
+60 3-2777 5104
Tse Wei Lim
Tse Wei Lim
Associate (Malaysia)
+60 3-2777 5135

 

Hong Kong arbitration internship 2021 – applications now open

 

English High Court rejects application to remove the arbitrator named in the arbitration agreement on the grounds of apparent bias

The English High Court recently heard an application under s24(1)(a) of the 1996 Arbitration Act (the “Act”) to remove the arbitrator agreed in the arbitration agreement, on the grounds of apparent bias. The challenge was based on the fact that the arbitrator in question had, until recently, been an employee of one of the parties to the arbitration.

The Court was alive to the importance of honouring freedom of contract when the arbitrator had been identified and agreed in the arbitration agreement itself. On the facts of the case, there was no evidence of apparent bias and the application was accordingly refused.

Background

The disputes in question revolved around a family business in the transportation of oil and other commodities, with companies incorporated in both London (the “London Company”) and Nigeria.

In 2009, J, who was solely responsible for the Nigerian company’s trade, threatened to leave the family business. In an attempt to rescue the business and regulate the affairs of the family members, the family members and the companies controlled by them entered into an agreement expressed to be governed by English law (the “Agreement”). The Agreement contains a dispute resolution clause naming a “Mr Y as arbitrator and in the event of his unavailability Mr F”.

Mr F worked as the family accountant from about 1985 and was a full-time employee for the London company until 2002. Between 2002 and 2010, he worked part-time for the family. In 2010, Mr F returned to full-time employment for the London Company and reported directly to J only.

The family relationship became strained again and in September 2019, J commenced arbitration to resolve disputes relating to the interpretation of various provisions of the Agreement and stated in the notice of arbitration that “Mr [F] is the only other person entitled to sit as arbitrator”. Mr Y had died in 2015.

In November 2019, Mr F resigned from his employment with the London Company. He observed that the “family feud between the directors is getting nastier by the day and the employees…have been subjected to constant bullying, fabricated lies and allegations by some directors, for some time now… I, no longer wish to be dragged into this family dispute and with great regret, hereby submit my resignation with immediate effect.

Some of the family members objected to the appointment of Mr F as arbitrator, arguing that Mr F was conflicted and accordingly unable to act fairly and impartially. They pointed out that Mr F had reported only to J, and that Mr F would potentially be a witness in the dispute. They alleged that Mr F’s resignation might be a sham, or might lead to a claim for constructive dismissal against one of the parties. It was also alleged that Mr F’s refusal to provide some of the family members with information in relation to the company accounts before the commencement of the arbitration demonstrated bias. There were additionally said to have been secret conversations between Mr F and J. An application was made under s24 of the Act to remove Mr F.

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Malaysian High Court considers the legal test for obtaining subpoenas in aid of arbitration

In Coneff Corporation Sdn Bhd v Vivocom Enterprise (Originating Summons No. WA-24C(ARB)-26-06/2019) the Malaysian High Court for the first time considered the test for an application to subpoena a witness to produce documents for the purpose of an arbitration and give evidence in arbitration proceedings.

Background

The plaintiff (“Coneff”) appointed the defendant (“Vivocom”) to construct and complete a mixed commercial and residential development project in Kuala Lumpur. Disputes arose concerning the adequacy of piling works done by Vivocom’s piling sub-contractor, the latter having appointed Geonamics (M) Sdn Bhd (“Geonamics”), to conduct Pile Driving Analyser (“PDA”) tests to ascertain the integrity of a number of the constructed bored piles.

As a result of expert opinion obtained in the course of the arbitration which cast doubt on the integrity of the PDA test results, Coneff obtained a High Court subpoena against an employee of Geonomics (“Applicant”) to produce the PDA raw data to Coneff, and to give evidence in the arbitration.  On an application by the Applicant, the High Court set aside the subpoena to give evidence in the arbitration, but upheld the subpoena to produce documents. Given that the decision is currently under appeal, the High Court produced written grounds for its decision, being the first written judgment addressing the principles relating to the exercise of a Malaysian court’s power to assist in the taking of evidence for arbitration proceedings under the Arbitration Act 2005.

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HONG KONG: CFI REFUSES TO SET ASIDE EX PARTE ORDER ALLOWING SERVICE OUT ON BASIS OF DEFENDANT’S SUBMISSION TO JURISDICTION

In the recent case of Balram Chainrai v Kushnir Family (Holdings) [2019] HKCFI 2866, the Hong Kong Court of First Instance (CFI) refused to set aside an ex parte order allowing service out of the jurisdiction on the basis that the defendant had submitted to the jurisdiction.

Background to the dispute

See our previous discussion of this matter here and here. In the most recent developments, the Third Defendant, Mr Israel Sorin Shohat, in proceedings commenced by the Plaintiff, Mr Balram Chainrai, sought to appeal in the CFI an earlier decision of Master Eliza Chang in which it was held that the Third Defendant had submitted to the jurisdiction of the Hong Kong courts in relation to a matter related to an Israeli arbitral award issued in 2013 and had therefore waived his right to challenge jurisdiction.

Issues before the court

The Third Defendant made three principal arguments on appeal to the CFI:

  1. The Third Defendant had not submitted to the jurisdiction of the Hong Kong courts;
  2. The Plaintiff’s ex parte application obtaining permission to serve a writ of summons on the Third Defendant out of the jurisdiction in November 2015 (Ex Parte Order) should be set aside on the basis, amongst other things, that (1) there was no serious issue to be tried against the Third Defendant, (2) there was no good arguable case against the Third Defendant, and (3) Hong Kong was not the most appropriate forum on the basis that all events took place in Israel and all but one of the parties was from Israel; and
  3. Even if there has been a submission to the jurisdiction that submission is limited in nature and amounts only to an acceptance of jurisdiction and not acceptance of the exercise by the court of that jurisdiction. Consequently it is appropriate now to stay these proceedings on the grounds of forum non conveniens.

Decision

The CFI dealt first with the question of whether the Third Defendant had submitted to the jurisdiction of the Hong Kong courts. Master Eliza Chang had previously determined that the Third Defendant had submitted to the jurisdiction on the basis of two key events:

  1. His application under Order 3, Rule 5 of the Rules of the High Court dated 11 February 2016, requiring the Plaintiff to file and serve a Statement of Claim within 7 days or otherwise have their claim dismissed (Application for the Unless Order).
  2. His commencement of strike-out proceedings on 3 May 2016 (Application for Strike-Out).

In making its determination, the court cited the decisions in ABN Amro Bank NV v Fortgang [2008] 2 HKLRD 349 and Global Multimedia International Ltd v ARA Media Services & Others [2007] 1 All ER (Comm) 1160, and asked itself whether “the only possible explanation for the conduct relied on is an intention on the part of the defendant to have the case tried” in Hong Kong.

With regard to the Application for the Unless Order, the court took the view that the Third Defendant should be entitled to ask for further details of the claim against him, even if this meant using the procedures of the court. Understanding the nature of the claim was said to be important to various aspects of the test under RHC Order 11 Rule 1(1), and hence consistent with deciding whether to seek to set aside the Ex Parte Order. The court therefore disagreed with the conclusion of the Master, and held that the Application for the Unless Order was insufficient to show submission to the jurisdiction of the Hong Kong courts. Although it would have been advisable for the Third Defendant to reserve his rights when making the application, this was not held to be decisive.

With regard to the Application for Strike-Out, the court agreed with the Third Defendant that such an application did not necessarily amount to a submission to the jurisdiction. However, the issue was said to be very fact-dependent. Although there was no submission where the application was made on the basis of defects apparent in the Plaintiff’s original writ, the court noted that the application in this case had gone much further and asked the court to consider the merits of the case. This, the court said, demonstrated that the Third Defendant had accepted that the court had jurisdiction to do so. Although the Third Defendant had argued that the application had been made subject to a reservation of rights, the court noted that this express reservation was not made until two weeks after the Application for Strike-Out was made and was insufficient.

In these circumstances, the court held that the Third Defendant had submitted to the jurisdiction of the Hong Kong courts and dismissed his appeal.

The court’s conclusion on the issue of submission to jurisdiction made it unnecessary to address the other arguments. Nevertheless, the CFI outlined its views on each issue:

  1. With regard to the Third Defendant’s attempt to set aside the Ex Parte Order, the court indicated that it was in favour of the Third Defendant. It observed that although there was a serious issue to be tried between the Plaintiff and the Third Defendant, there was no good arguable case against the Third Defendant that falls under the Necessary or Proper Party Gateway of RHC Order 11, rule 1(1)(c). The court further noted that the extensive connections to Israel meant that Hong Kong was clearly not the natural forum.
  2. With regard to the Third Defendant’s argument that its submission was partial and only prevented him from challenging the existence of jurisdiction but not its exercise, the court acknowledged that in theory it was able to stay the proceedings on the grounds of forum non conveniens under RHC Order 12 rule 8, however it refused to do so. It stated that on the facts the nature of the submission to the jurisdiction was absolute, and so it was not open to the court to grant a stay. Although the court retained an inherent jurisdiction where circumstances arose subsequent to the time limits in that provision, that jurisdiction could not be exercised where the defendant had effectively debarred himself through submitting to the jurisdiction.

Comment

The case serves as a cautionary tale for any party wishing to challenge the jurisdiction of the Hong Kong courts and a useful reminder that a party wishing to do so should expressly and clearly reserve this right from the outset of the proceedings. The risks of not following this advice is a finding from the Hong Kong courts that the party has submitted to the jurisdiction which in turn will lead to delays in the resolution of the dispute and wasted costs.

It is important to note that this case does not serve to tarnish Hong Kong’s reputation as an arbitration-friendly jurisdiction. The fact that a prior arbitral award had been issued was unrelated to the CFI’s consideration of whether the Third Defendant had submitted to the jurisdiction.

 

May Tai
May Tai
Managing Partner, Greater China
+852 2101 4031

Simon Chapman
Simon Chapman
Partner, Hong Kong
+852 2101 4217

Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029

Madhu Krishnan
Madhu Krishnan
Registered Foreign Lawyer (England & Wales), Hong Kong
+852 2101 4207

Briana Young
Briana Young
Foreign Legal Consultant (England & Wales)/Profesional Support Lawyer, Hong Kong
+852 2101 4214

HONG KONG COURT GRANTS INTERIM ANTI-SUIT INJUNCTION IN FAVOUR OF ARBITRATION TO RESTRAIN COURT PROCEEDINGS INVOLVING THIRD PARTY

In GM1 and GM2 v KC [2019] HKCFI 2793, the Hong Kong Court of First Instance granted an interim anti-suit injunction restraining mainland Chinese court proceedings involving a third party, and clarified the jurisdiction basis for doing so.

The decision reflects the long-standing pro-arbitration approach of the Hong Kong courts and confirms that arbitration clauses are not to be interpreted narrowly, but may cover claims against the non-contracting affiliates or associates of a contracting party. The decision also reiterates that in considering an application for an anti-suit injunction, the question for the Court remains whether or not its jurisdiction is invoked, and the fact that the foreign Court would assume jurisdiction and refuse to stay the foreign proceedings is not relevant.

Background

GM1 and KC entered into a guarantee (Guarantee) which contained an arbitration clause in favour of arbitration in Hong Kong administered by the Hong Kong International Arbitration Centre.

KC later commenced legal proceedings in the Court of Suzhou (Mainland Proceedings) against GM1 and GM2, the latter being an affiliate of GM1 who was not a party to the Guarantee. In parallel, there were pending arbitration proceedings between GM1 and KC pursuant to the Guarantee, and related arbitration proceedings between GM1 and a wholly-owned subsidiary of KC.

GM1 and GM2 sought an anti-suit injunction from the Hong Kong Court to restrain KC from pursuing the Mainland Proceedings and commencing further proceedings in breach of the arbitration agreement, and an “interim-interim” injunction in the same terms pending the substantive hearing of the injunction application.

Decision on interim-interim injunction

The Court did not determine the substantive interim injunction application, only the “interim-interim” injunction.

In the present application, the questions before the Hong Kong Court were:

  1. whether the Court had power to grant an interim anti-suit injunction in favour of an arbitration in Hong Kong under section 45 of the Arbitration Ordinance (AO);
  2. whether the proper course would be to leave it to the Mainland Court to recognise and enforce the arbitration agreement (including determining the validity of the arbitration clause); and
  3. whether the Court can grant an anti-suit injunction in relation to proceedings commenced against a third party such as GM2.

On the first issue, the Court confirmed that it has power under AO section 45 to grant an interim anti-suit injunction. The objects of the AO are to facilitate fair and speedy resolution of disputes by arbitration without unnecessary expense and enforce arbitration agreements. Specifically, the Court has power under AO section 45 to grant interim measures which, pursuant to AO section 35, include an order to “maintain or restore the status quo pending determination of the dispute“. An anti-suit injunction is to enforce the positive promise of a party to arbitrate disputes and the negative right not to be vexed by foreign proceedings, and is therefore in line with AO section 35 to maintain such status quo pending determination of the dispute. The Court therefore had the power to grant an anti-suit injunction under AO section 45.

On the second issue, the Court held that the following grounds were not grounds to refuse the anti-suit injunction / not stay the Mainland Proceedings:

  1. that the Mainland Court may insist on its own jurisdiction and would not have granted a stay of the proceedings;
  2. that it may not be possible for KC to discontinue or withdraw from the Mainland Proceedings after its case had been accepted by the Mainland Court; and
  3. that the existence and validity of the arbitration clause was disputed.

As a matter of principle, the arbitral tribunal can decide on its own competence and jurisdiction, and, as the supervisory court, the Hong Kong Court has jurisdiction to review the findings of the tribunal on its own jurisdiction. The Court further noted that, if GM1 and GM2 later sought enforcement of the award in the Mainland, it would be open to the Mainland Court to review at that point in time the validity of the arbitration agreement and resist enforcement on that basis.

On the third issue, the Court held that anti-suit relief may be granted against a third party if the arbitration agreement can be construed to cover claims not only against the contracting party, but also against the non-contracting affiliates or associates of the contracting party. This is based on the principle in Giorgio Armani SpA v Elan Clothes Co Ltd [2019] HKCFI 530 that rational businessmen would have wanted the disputes with affiliates of the contract to be decided in the same forum in the same manner of dispute resolution. The Court did not decide decisively on the third issue, but it was satisfied that there was a serious question to be tried in the adjourned substantive hearing for the interim injunction application as to whether KC’s claims against GM2 in the Mainland Proceedings should be dealt with by the same arbitral tribunal based on the specific circumstances in relation to the existence, validity and binding effect of the Guarantee and its arbitration agreement.

For these reasons, the Court concluded that it was within the jurisdiction of the Court, and that it was just and fair to grant the interim injunction pending the conclusion of the substantive hearing of the injunction application.

Comment

This decision demonstrates the Court is prepared and equipped to grant an anti-suit injunction to restrain a party from pursuing non-arbitral proceedings even against a third party, to the extent that such proceedings are covered by the arbitration agreement. The fact that the foreign Court may insist on its jurisdiction and refuse to stay the foreign proceedings is no bar to the Hong Kong Court granting an anti-suit jurisdiction.

This case also serves as a helpful reminder that parties should carefully consider the implications of parallel proceedings and seek legal advice for each particular case if necessary.

May Tai
May Tai
Managing Partner, Greater China
+852 2101 4031

Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029

Simon Chapman
Simon Chapman
Partner, Hong Kong
+852 2101 4217

 

Will Halliburton be the final word on apparent bias?

Following the Supreme Court hearing in the Halliburton v Chubb case, Craig Tevendale of Herbert Smith Freehills in London considers the significance of the Supreme Court’s forthcoming judgment and whether the case will end the recent controversy on apparent bias.

In a decision that whipped up a storm in the international arbitration community, the Court of Appeal decided in 2018 that there had been no apparent bias where an arbitrator failed to disclose to one of the parties his appointment in multiple proceedings with different parties which arose out of the same incident.

This month’s Supreme Court hearing of Halliburton’s appeal against that decision was, without doubt, the most significant English court hearing in arbitration since the case of Jivraj v Hashwani on arbitrator status in 2011. The Halliburton judgment, anticipated to be delivered in the next four to six weeks, should give clarity on legal issues which are critical to the reputation of London arbitration.

It is important to emphasise that the Supreme Court is expected to provide guidance on the test for apparent bias, regardless of whether the appeal itself succeeds. Halliburton may well lose the appeal on the facts, given the English courts’ pro-arbitration and anti-intervention approach. If the court decides against Halliburton it is likely to be based on the specific facts relating to the overlapping references in question, the nature of the insurance arbitration market, and the Bermuda Form context. However, even if the appeal fails, it is expected to be defeated on different reasoning than the problematic approach in the Court of Appeal judgment.

The Halliburton case deals with a number of important legal issues on which the arbitration community needs clarity, including whether multiple overlapping appointments are in themselves an issue. The Court of Appeal’s lack of concern in relation to repeat and overlapping appointments is questionable, given that repeat-appointing parties are likely to know an arbitrator’s position in relation to particular issues from other cases.

This information will not be available to users new to arbitration, and therefore risks an inequality of arms. Where there are overlapping proceedings the common party may also hold a tactical advantage over other parties, by having the ability to test submissions in a way that flushes out the arbitrator’s position on particular points. The common party will potentially also have access to evidence unavailable to the other party and may influence the arbitrator’s decision making with submissions not seen by the other party. Even where an arbitrator makes every effort to confine his or her deliberations to material only from the relevant reference, this “compartmentalisation” may not prove entirely effective. It is expected that the Supreme Court judgment will address these problematic issues, and how they impact on the test for apparent bias, in more depth.

A further controversial gap in the Court of Appeal decision was the lack of guidance on why the non-disclosure itself did not meet the threshold for apparent bias. The Court of Appeal stated that an additional factor was needed, referred to as “something more”, but the judgment does not elaborate further. This is surprising. While it has been suggested that the duty of confidentiality placed upon an arbitrator prevents appointments being disclosed, it is widely accepted in the arbitration community that the duty of confidentiality does not trump the duty of arbitrator disclosure. It is expected that the Supreme Court will make it clear that overlapping appointments should be disclosed, and it is expected that the significance of non-disclosure will be addressed more clearly.

While it is well established that the perspective of the “fair-minded and informed” observer is the starting point from which to decide allegations of apparent bias, it is much less clear what that observer should be assumed to know. There is a compelling argument that the observer should be assumed to have knowledge of the international arbitration context, and that informed expectations should therefore differ from those in litigation. This is another area which was not explored in any detail in the Court of Appeal judgment, and where the Supreme Court’s judgment should clarify the position.

The Court of Appeal dismissed the issue of financial benefit resulting to arbitrators from multiple appointments. However, it is important to take this into account when considering the effect of repeat appointing. In the arbitration world (and indeed in previous judgments), it has long been recognised that there could be an (even if unconscious) incentive for arbitrators to avoid antagonising parties who frequently appoint them. It would be helpful if the Supreme Court judgment recognised this.

The case is notable for the multiple interventions from interested institutions. The LCIA and ICC have rightly emphasised the importance of ensuring that the English test for apparent bias is aligned with international norms. For their part, the LMAA and GAFTA have expressed concern that any decision which conflates repeat appointments with apparent bias may cause real problems for arbitration in their sectors. Specialist trade arbitrations, which frequently see strings of cases and for which there may be a limited pool of arbitrators with the requisite sector knowledge, may indeed fall to be treated differently. It is likely that the Supreme Court judgment will recognise this nuance, and that sector-focused arbitration communities may continue in accordance with their current practice.

Interestingly, while the arbitrators in the Halliburton case have been accorded confidentiality in these proceedings, at the hearing the Supreme Court expressed some scepticism on this and asked for submissions as to whether anonymity should be sustained. It is hard to justify the continued anonymity of the arbitrators in question, particularly in circumstances where the Court of Appeal referred to the eminent reputation of the arbitrator ‘M’ as a factor militating against apparent bias.

As to where this leaves us, while the arbitration community has called for clarity on apparent bias, the differing positions adopted by the interveners underlines that there is no consensus on how to address the issue of “frequent flyers”. Regardless of the ultimate decision on the facts in this particular case, it is to be hoped that certainty and clarity are delivered by the Supreme Court judgment – and that arbitrators, counsel and parties are better equipped to navigate the difficult territory of apparent bias.

A version of this article first appeared in the Global Arbitration Review.  

For further information, please contact Craig Tevendale, or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Australian Joint Standing Committee on Treaties approves new investment treaties between Australia, Hong Kong and Indonesia

The Joint Standing Committee on Treaties (“JSCOT“) of the Australian Parliament has just released Report No. 186 examining three treaties: the Free Trade Agreement between Australia and Hong Kong, China (“HK-FTA“), the Investment Agreement between the Government of Australia and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China (“HK-Investment Agreement“) and the Comprehensive Economic Partnership Agreement between the Government of Australia and the Government of Indonesia (“IA-CEPA“).  We have previously discussed the Hong Kong treaties in detail here and the IA-CEPA here.

The JSCOT’s role is to carry out a review of treaties to determine whether they are in Australia’s national interest. The JSCOT has concluded that each of these treaties are in Australia’s national interest and has recommended that “binding treaty action be taken as soon as possible.”  The treaties will now go before parliament for ratification.

JSCOT’s review process

This is a comprehensive process.  The JSCOT considers the Australian Government’s own assessment of each treaty’s merit (this is called the Australian Government’s “National Interest Analysis”) and also takes into account submissions which concern all aspects of the treaties.  Five public hearings were held in Melbourne, Sydney, Perth and Canberra.[1]  The JSCOT has heard from industry groups, academics, unions and other members of the public.

The ISDS ‘risk’?

There has been public concern in Australia (as elsewhere) about treaty mechanisms which enable arbitration proceedings to be commenced by investors against states (this is called “investor-state dispute settlement” or “ISDS”).  Some critics have argued that the ISDS system exposes the Australian government to an unjustified risk of costly and time-consuming arbitration proceedings being commenced against Australia by investors.

The JSCOT heard evidence for and against ISDS but was ultimately satisfied that the ISDS mechanisms in both the IA-CEPA and HK-Investment Agreement were not against the national interest.  The JSCOT observed that “it was repeatedly pointed out to the Committee that Australia has been a party to ISDS provisions for a considerable time and has not been subject to successful litigation.[2]  As one submission identified “neither of the claims against Australia was successful.  Philip Morris lost their case and costs were awarded against the company.[3]  The JSCOT also noted that “empirical evidence suggested that ISDS provisions increased bilateral investment flow.[4]

The short point is that the JSCOT appears to conclude that the risk of Australia being involved in and suffering loss as a result of meritless or frivolous claims by foreign investors is overstated.

Carefully crafted carve-outs

Both treaties contain a number of noteworthy carve-outs.  These carve-outs seek to limit the scope of claims that can be brought by investors against the states in respect of certain legislative or regulatory measures. They should therefore address concerns held by some about ISDS.

The IA-CEPA contains a carve-out which restricts investors from pursuing a claim relating to measures that are “designed and implemented to protect or promote public health.” A general exceptions clause further provides that claims cannot be made with respect to measures taken by the state parties to protect the public interest in sensitive sectors, such as education, indigenous rights, the promotion of essential security and certain taxation measures, provided that such measures are not arbitrary, discriminatory or a disguised restriction on investment.

The HK-Investment Agreement contains similar general carve-out provisions, but goes further by exempting specific measures including tobacco control measures and, in Australia’s case, measures relating to the Medicare Benefits Scheme, Pharmaceutical Benefits Scheme, Therapeutic Goods Administration and Office of the Gene Technology Regulator.

The impetus for the ‘tobacco carve-out’ in the IA-CEPA was Australia’s involvement as the Respondent state in an investment arbitration brought by Philip Morris in 2011 under the Australia-Hong Kong BIT, which challenged Australia’s introduction of plain packaging legislation.

It is interesting that the specific ‘tobacco carve-out’ has been included in the A-HKFTA but not in IA-CEPA.  Having considered expert evidence, the JSCOT concluded that it does not matter that the IA-CEPA has no tobacco carve-out on the basis that tobacco control measures would be covered under the general exceptions provision.[5]

Overlap with existing bilateral investment treaties

There are existing bilateral investment treaties between Australia and Hong Kong (the “Aus-HK BIT“) and between Australia and Indonesia (the “Aus-Indo BIT“).   The JSCOT noted: “the [Aus-HK BIT] will terminate with the introduction of the new investment treaty, while there is no proposal to terminate the [Aus-Indo BIT].  This has raised concerns over the overlap between the existing [Aus-Indo BIT] and the ISDS provisions in the [IA-CEPA].”

The JSCOT recommends that the Aus-Indo BIT should be terminated and that the ‘sunset clause’ (also known as a ‘survival clause’) in the Aus-Indo BIT should also be terminated.  The ‘sunset’ clause permits claims to be brought by investors for a period of 15 years following the termination of the Aus-Indo BIT.

As it stands, the termination of the Aus-Indo BIT seems to have bipartisan support.  The Australian Labor Party has indicated that it will push the coalition government to terminate the Aus-Indo BIT.  Trade Minister Simon Birmingham has indicated that he was not opposed to it and that the Australian Government “should be able to work through that issue.

What next?

The next stage is for the Australian Parliament to decide whether to pass legislation implementing the treaties in domestic law. This seems likely given that both major political parties have indicated that they support the treaties.

What should you do if you are an investor with a potential claim against Indonesia, Australia or Hong Kong?  The short point is that you need to carefully consider now whether that claim could be lost or affected due to the termination (and replacement) of the Aus-Indo BIT or the Aus-Hong Kong BIT.

 

[1] Para 1.10.

[2] Para 4.47.

[3] Para 4.48.

[4] Para 4.51.

[5] Paras 4.55-4.56.

 

Brenda Horrigan
Brenda Horrigan
Partner and Head of International Arbitration (Australia), Sydney
+61 2 9225 5536
Antony Crockett
Antony Crockett
Senior Consultant, Hong Kong
+852 2101 4111
Mitchell Dearness
Mitchell Dearness
Associate, Singapore
+65 6868 8061

Hong Kong court refuses enforcement of mainland award, rejects limitation arguments

In Wang Peiji v Wei Zhiyong [2019] HKCFI 2593; [2019] HKEC 3446, the Hong Kong Court of First Instance has set aside an order to enforce a mainland Chinese arbitration award, rejecting arguments that a twelve year limitation period applied because the award had been made under seal.

Background

The Plaintiff, the Defendant and a third party entered into a loan agreement, under which the Defendant  and the third party borrowed RMB 22 million. In case of default, the Defendant and the third party would pay interest at 2% per month, and the Defendant’s companies would guarantee the repayment. The Defendant, the third party and the Defendant’s companies failed to repay the loan, so the Plaintiff commenced arbitration at the Guangzhou Arbitration Commission, which made an award in the Plaintiff’s favour on 20 April 2009.

The Plaintiff commenced enforcement proceedings in the Panyu People’s Court where it recovered RMB 4,734,019.48, leaving RMB 3,353,496.92 plus interest outstanding under the award. The Plaintiff then commenced enforcement proceedings in Hong Kong to recover the remaining amount. On 14 May 2019 Madam Justice Mimmie Chan granted leave to enforce the award, holding that the Defendant should pay the outstanding sum plus interest. The Defendant appealed.

Decision

In setting aside the enforcement order, the court addressed two main issues.

The applicable limitation period

The first issue was the applicable limitation period under the Limitation Ordinance. The Plaintiff argued that the applicable provision was section 4(3) Limitation Ordinance (Cap. 347), which provides a limitation period of twelve years meaning that the Plaintiff was entitled to enforce the award until 20 April 2021. This was based on the fact that the award of the Guangzhou Arbitration Commission was executed under seal. The Defendant argued that the relevant period was six years under section 4(1)(c). The Court ultimately agreed with the Defendant. It rejected the Plaintiff’s argument, stating that the relevant consideration is whether the underlying contractual document, not the award, was executed under seal. As there was no suggestion of that in this case, the Court held that the default limitation period of six years applied.

Suspension of the limitation period

In the alternative, the Plaintiff argued that the limitation should be suspended for the period in which the Plaintiff was engaged in enforcement proceedings before the Chinese court. The Plaintiff sought to distinguish CL v SCG [2019] 2 HKLRD 144, in which the judge relied on the English case Agromet v Maulden Engineering Ltd [1985] 1 WLR 762 to reject the suspension argument. The judge in CL stated that there was no provision in the Limitation Ordinance or the Arbitration Ordinance that the limitation period should not run during the period a party is seeking to enforce an award abroad. The Plaintiff sought to distinguish the case on the basis that, unlike in CL, enforcement efforts in this case went on for considerable time and were successful, meaning that it could not be expected to have ceased its efforts in China.

Despite these arguments, the Court again found in favour of the Defendant. It held that the ruling in CL had been clear, and the fact that the Plaintiff had had more success in China than the plaintiff in CL was not a material difference which distinguished the two cases. The Court therefore allowed the Defendant’s application to set aside the enforcement order, and made a costs order in its favour.

Comment

The case serves as a reminder to pay close attention to limitation periods. In deciding where to bring enforcement proceedings, parties should consider not only the value of the defendant’s assets in a particular jurisdiction, but also the effect that the length of enforcement proceedings could have on their ability to enforce in other jurisdictions. Parties and their legal advisers must consider all relevant factors when assessing where to enforce.

May Tai
May Tai
Managing Partner, Greater China, Hong Kong
+852 21014031
Simon Chapman
Simon Chapman
Partner, Hong Kong
+852 21014217
Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 21014029
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales)/Professional Support Consultant, Hong Kong
+852 21014214