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

Hong Kong court: remission for reconsideration – not an automatic cure for substantial injustice

In P v. M [2019] HKCFI 1864; HCCT 6/2019 (24 July 2019), the Hong Kong Court of First Instance set aside parts of two arbitral awards which were found to be in breach of procedural fairness resulting in substantial injustice.

Background

This is the second of two set aside applications arising from the same underlying arbitration based on a construction contract (Contract) which provided for domestic arbitration in Hong Kong. M had claimed against P for monies to which it was entitled under the Contract. After a first hearing in November 2017, the tribunal issued an interim award against P, ordering it to pay damages for loss and expense (First Award).

Challenge to the First Award

P raised a challenge to the parts of the First Award relating to a sum in respect of site overheads and insurance costs (Disputed Sum).

  • P argued that M’s case on the Disputed Sum was that it was not required to give notice of the claim for the Disputed Sum, or that even if such notice were required, P had waived this requirement or was estopped from asserting M’s failure to do so.
  • While the tribunal had rejected M’s pleaded claims, it nevertheless awarded M the Disputed Sum by finding that certain letters from M to P constituted notice as required by the Contract. P argued that in doing so, the tribunal had exceeded its powers, or had failed to conduct the arbitral proceedings in accordance with the procedure agreed by the parties.
  • P thus sought to impugn certain paragraphs of the First Award pertaining to the Disputed Sum (Challenged Paragraphs), or alternatively, to set aside the First Award on the ground that P had been denied a reasonable opportunity to present its case in the arbitration.

P’s application was heard and granted by Mimmie Chan J.

  • Chan J found that P had been “deprived of the fair opportunity to present its case and to make submissions to the tribunal on the effect and adequacy of the [letters] as proper notices under the Contract”, given that P had not been informed of this argument during the arbitration proceedings.
  • While noting the need for finality of awards, and that only extreme cases would justify the court’s intervention, Chan J found that this was a case where a serious error had affected due process and the structural integrity of the arbitral proceedings, with the result that P had suffered substantial injustice.
  • Since the complaint was that P had been deprived of a fair opportunity to make relevant submissions to the tribunal, Chan J remitted the matter to the tribunal for reconsideration. In addition, she declared that the Challenged Paragraphs would have no effect pending the reconsideration, and ordered the parties to file further submissions to the tribunal on specific issues, including the meaning and effect of the letters and whether they constituted valid notification of claims as required under the Contract.

Challenge to the Second Award

Following Chan J’s decision, the parties filed further submissions and the tribunal issued a second interim award (Second Award), which reinstated the Challenged Paragraphs in the First Award. P then raised a challenge to the Second Award on the same grounds as its first challenge.

  • P again argued that the tribunal had exceeded its powers and/or failed to conduct the proceedings in accordance with the procedure agreed by the parties or as directed by Chan J by, among others:
    • summarily rejecting P’s submissions on “threshold issues” that injustice arising from matters not raised in the substantive arbitration could not be rectified by further submissions on remission in the absence of a further evidentiary hearing;
    • taking into account submissions made by M which were not “in reply” to P’s submissions on remission and had not been pleaded or dealt with in evidence in the arbitration;
    • directing further submissions on matters which could not properly and fairly be addressed by a further evidentiary hearing;
    • embarking on its own enquiry and making findings that were not contended by M.
  • P submitted that it was denied an opportunity to address such matters, of which P had had no prior notice.
  • P further submitted that there was no benefit in remitting such matters to the tribunal again.

Decision on the Second Award

Coleman J first canvassed the principles applicable to the challenge, which he regarded as “reasonably well-settled”:

  • it is for the applicant to establish both serious irregularity and substantial injustice. The test of a serious irregularity giving rise to substantial injustice requires a high threshold to be met, so as drastically to reduce the extent of intervention by the Court in the arbitral process;
  • the Court is concerned with the structural integrity of the arbitration proceedings, and not with the substantive merits of the dispute;
  • a balance has to be drawn between the need for finality of the award and the need to protect parties against unfair conduct in the arbitration. Therefore, only an extreme case will justify the Court’s intervention;
  • the effect of setting aside an award or declaring an award, or part thereof, to be of no effect is that the award, or the relevant part, is a nullity. The arbitration can revive or carry on as necessary to deal with the matters that were set aside or declared to be of no effect;
  • following a remission, the tribunal’s revived authority extends only to the matters that are so remitted; it cannot go beyond the scope of the revived jurisdiction.

On the evidence, Coleman J agreed with P that there had been a serious irregularity leading to substantial injustice.

  • Coleman J opined that “once it [was] identified and directed that parties are bound by their pleaded cases, and by the evidence already traversed at the arbitration hearing, and by the findings of fact made on that evidence, then there was really only one proper conclusion which the [tribunal] could have reached” – that the claim must fail.
  • If M had wished to advance a case on the suggestion of the tribunal that the letters constituted the required notice, then “it could only properly have done so by making an application to amend its pleadings, which if allowed would almost certainly have required re-opening the evidentiary hearing.”
  • While the tribunal was mindful of Chan J’s decision, and sought to provide proper opportunity for P to present its case by giving P the “final right of reply”, the defects “have not been cured, and could not have been cured, by the route taken by the Arbitrator”.
  • The Court had in fact already considered that intervention in this arbitration is justified and necessary. Despite the remission for reconsideration, the serious irregularity warranting intervention has not been cured.

Coleman J thus proceeded to set aside the paragraphs in the First Award that had been impugned by Chan J, as well as the relevant paragraphs of the Second Award that exceeded M’s pleaded case.

Conclusion

While Hong Kong courts are slow to set aside arbitral awards, they will do so where they consider that the high threshold of serious irregularity resulting in substantial injustice has been met. To avoid challenges based on serious procedural irregularities, arbitrators must resist any temptation to look beyond the case as set out in the parties’ pleadings.

 

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
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales) / Professional Support Consultant
+852 2101 4214

HONG KONG: COURT GRANTS ANTI-SUIT INJUNCTION TO RESTRAIN FOREIGN PROCEEDINGS IN BREACH OF AN ARBITRATION AGREEMENT UNDER AN INSURANCE POLICY

In the recent case of AIG Insurance Hong Kong Ltd v Lynn McCullough and William McCullough [2019] HKCFI 1649, the Hong Kong Court of First Instance (CFI) considered the effect of an arbitration agreement under an insurance policy and, in particular, the circumstances in which an anti-suit injunction may be granted to restrain a party from pursuing foreign proceedings.

The CFI held that, as a matter of Hong Kong law, a party is not entitled to found a claim on rights arising out of an insurance policy without also being bound by the dispute resolution provisions in the policy. The CFI went on to hold that an anti-suit injunction will ordinarily be granted to restrain such a claimant from pursuing proceedings in a non-contractual forum unless there are strong reasons to the contrary.

The full judgment is available here.

BACKGROUND

The underlying facts of the case relate to an accident which took place whilst Mrs Lynn McCullough and Mr William McCullough were on holiday in the Caribbean in 2015. During that holiday, Mrs McCullough suffered a fall from a zip line, owned and operated by Rain Forest Adventures (Holdings) Ltd, Rain Forest Sky Rides Ltd and Rain Forest Tram Ltd (together, Rain Forest), and was rendered permanently quadriplegic.

AIG Insurance Hong Kong Ltd (AIG) had previously issued a Directors’ and Officers’ Liability Insurance Policy to Rain Forest (the Policy). The Policy covered Rain Forest (as the policyholder) and its directors, including a Mr Harald Joachim von der Goltz. The Policy referred any disputes arising under the Policy to arbitration in Hong Kong under the rules of the Hong Kong International Arbitration Centre (HKIAC).

On 15 January 2016, the McCulloughs commenced a claim in the Florida courts against several defendants, including Rain Forest, alleging negligence in the operation of the zip line excursion. They sought damages for the injuries that Mrs McCullough sustained.

On 14 July 2016, the McCulloughs filed a Second Amended Complaint adding Mr von der Goltz as a defendant, who subsequently gave notice to AIG that he was seeking an indemnity under the Policy as a director of the policy holder. The claim was rejected by AIG on the basis that claims resulting from a bodily injury were excluded under the Policy.

On 24 April 2018, a dispute resolution agreement was entered into by the McCulloughs and the Rain Forest defendants now including Mr von der Goltz. This agreement was approved by the Florida court which referred the matter to arbitration. The arbitration award was subsequently issued on 28 May 2018 and judgment was entered into on 12 July 2018 in favour of the McCulloughs against, among others, Mr von der Goltz, in the sum of US$ 65.5 million.

On 20 August 2018, the McCulloughs filed the Third Amended Complaint adding AIG as a defendant. The Third Amended Complaint contained a “common law tort claim available under Florida law against [AIG] for having failed to act in good faith in handling, litigating, and settling the US Proceedings, resulting in an excess judgment (i.e. judgment in excess of Policy limits) being entered into against the insured, Mr. von der Goltz” (the Bad Faith Claim). The nature of the Bad Faith Claim was that if AIG had honoured the Policy and provided Mr von der Goltz with US$ 5 million in coverage (i.e. the Policy limit), it would have been possible for him to have settled the McCulloughs’ claim. It was submitted that this failure by AIG exposed Mr von der Goltz to a liability of US$ 65.5 million and as a result, he had a claim against AIG for this amount. The right to claim directly against AIG for the US$ 65.5 million was said to be based on the McCulloughs being judgment creditors of Mr von der Goltz.

In the instant case, there were two applications before the CFI:

  1. An application from AIG for a continuation of an ex parte injunction originally issued on 18 December 2018 by DHCJ Simon Leung restraining the McCulloughs from pursuing proceedings in the Florida courts against AIG on the basis that the Policy provides that all disputes regarding coverage under the Policy should be settled by arbitration in Hong Kong under the HKIAC Rules; and
  2. An application from the McCulloughs for, amongst other things, (1) a declaration that the CFI should not exercise any jurisdiction that it may have; and (2) an order staying the action in the Hong Kong courts in favour of the proceedings in the Florida courts.

AIG’s position was that the underlying issue of coverage under the Policy should be determined by arbitration in Hong Kong under the HKIAC rules, irrespective of whether or not the McCulloughs were the insured under the Policy.

The McCullough’s position was that their cause of action against AIG was a freestanding tortious claim and that, as non-parties to the Policy, they cannot be compelled to arbitrate it.

Accordingly, the principal question for the CFI to decide was whether the proceedings commenced by the McCulloughs in the Florida courts, despite the McCulloughs not being parties to the Policy, amounted in substance to a claim to enforce the Policy such that the McCulloughs were bound by the agreement to arbitrate as set out in the Policy.

DECISION

The CFI accepted the position of AIG that the dispute was to be resolved in accordance with the dispute resolution procedure provided for in the Policy, namely by arbitration in Hong Kong under the HKIAC rules, and exercised its equitable jurisdiction to grant an anti-suit injunction restraining the McCulloughs from pursuing proceedings in the Florida courts.

The CFI held that the relevant issue for the purposes of determining whether the anti-suit injunction should be granted was whether there was coverage under the Policy: “Such issue is clearly contractual, since it determines the liability of the insurer to the insured under the terms of the policy“. The CFI went on to hold that the establishment of coverage is a pre-condition to the Bad Faith Claim against AIG and, as a matter of Hong Kong law, the governing law of the Policy, AIG is entitled to have it determined in accordance with the contractual procedure.

In this regard, the CFI followed the principle applied in Qingdao Huiquan Shipping Company v Shanghai Dong He Xin Industry Group Co Ltd [2018] EWHC 3009 (Comm) that a party “is not entitled to found a claim on rights arising out of a contract without also being bound by the forum provisions of that contract“.

The CFI concluded that an anti-suit injunction will ordinarily be granted to restrain a claimant from pursuing proceedings in a non-contractual forum unless there are strong reasons to the contrary, whether the claimant is a party to the policy or not. The basis of the CFI’s decision was that a dispute resolution provision is an essential part of the contractual basis upon which coverage arises under an insurance policy, and a party seeking to enforce a policy cannot do so free of its contractual dispute resolution mechanism.

COMMENTS

This case serves as a useful reminder of the Hong Kong courts’ desire to give effect to an arbitration agreement wherever appropriate, albeit on this occasion in somewhat unusual circumstances. In so doing, the CFI has further reinforced Hong Kong’s reputation as a pro-arbitration jurisdiction.

In making its decision, the CFI has helpfully confirmed that an anti-suit injunction to restrain a party from pursuing proceedings in a non-contractual forum will ordinarily only be denied if there are strong reasons not to grant it. Accordingly, the Court has emphasised the high bar that the counter-party has to meet in order to resist such an injunction.

An article in which Simon Chapman and Naomi Lisney examined this decision, which was published on Lexis®PSL Arbitration on 15 August 2019, can be found here.

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)
+852 2101 4207

 

Herbert Smith Freehills – SMU Asian Arbitration Lecture

This year marks the ninth edition of the Herbert Smith Freehills – SMU Asian Arbitration Lecture Series.

We are delighted that The Honourable Justice Judith Prakash will deliver the lecture on Wednesday 2 October, on the topic “The Court’s role in arbitral proceedings: regulator or promoter?”

The Herbert Smith Freehills-SMU Asian Arbitration Lecture Series was established in 2010 through funding from Herbert Smith Freehills, and promotes collaborative forms of dispute resolution and access to justice. It also aims to promote Singapore as a leading centre for dispute resolution in Asia, particularly in arbitration and mediation. Each year, a distinguished jurist delivers the lecture, which is also published in a leading global arbitration journal.

Date:      Wednesday, 2 October 2019

Time:      4:30pm – Registration

5:00pm – Lecture

Cocktail Reception to follow

Venue:   Singapore Management University

Administration Building

Mochtar Riady Auditorium, Level 5

81 Victoria Street

Singapore 188065

Click here to register

The lecture will be a SILE accredited CPD activity.

No If, No But – Will an arbitration agreement always trump a winding-up petition?

In But Ka Chon v Interactive Brokers LLC [2019] HKCA 873, the Hong Kong Court of Appeal dismissed an appeal to set aside a statutory demand arising out of online forex futures trading debts. In doing so, Vice-President Kwan of the Court of Appeal made obiter comments on the circumstances in which a winding-up petition would be set aside where the parties to a contract had agreed to arbitration for dispute resolution.

Background

Mr But’s margin account with Interactive Brokers (“IB“) suffered a large loss when the Swiss Franc/Euro exchange rate was unpegged in 2015. IB issued a margin call but Mr But did not inject funds into his account to resolve the margin deficit. IB accordingly proceeded to liquidate Mr But’s assets and positions and served a statutory demand on Mr But for the balance of the deficit plus interest at margin interest rates.

Mr But sought to set aside the statutory demand on the basis of (i) a counterclaim for misrepresentation and (ii) that the dispute should be arbitrated pursuant to an arbitration clause in his contract with IB. The application failed and Mr But appealed to the Court of Appeal.

Decision in the High Court

The High Court noted that the judgment in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (known as the “Lasmos case“) had departed from previous authorities and had adopted a new approach. This was to generally dismiss winding-up petitions where three requirements were met:

  1. the company disputes the debt relied on by the petitioner;
  2. the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
  3. the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and demonstrates this to the Court.

The effect of the Lasmos case is that, where these three requirements are met, the company is entitled to have the petition dismissed without having to show that the petitioning debt is bona fide disputed on substantial grounds. Where there is an arbitration clause, it is sufficient to show that the debt is “disputed” and for that it is sufficient to show the debt is not admitted.

The High Court in But Ka Chon did not challenge the Lasmos approach, but simply found that the new approach was inapplicable to the instant case because the lower court judge had already adjudged on the dispute by way of Mr But’s claim that he had been induced by IB’s misrepresentations to enter into the contract. The misrepresentation claim was of no merit. There was therefore no genuine dispute to be arbitrated.

The judge also found that, even had the Lasmos approach been applicable, Mr But had not satisfied the third requirement in the Lasmos approach because he had not taken any steps to commence arbitration. The lower court judge therefore declined to set aside the statutory demand.

Decision in the Court of Appeal

The Court of Appeal agreed with the rationale of the judge below and found that it did not need to determine whether the Lasmos approach or previous approaches were applicable to the instant case. It held that, if the Lasmos approach was applicable, the third requirement of Lasmos would in any event not have been complied with based on the fact that Mr But had not demonstrated his genuine intention to arbitrate for more than two years after having first raised the possibility of commencing arbitration, and that no Notice of Arbitration was ever served on IB. The appeal was therefore dismissed.

Obiter commentary on the Lasmos approach

The Court of Appeal also made the following obiter observations on the Lasmos approach given the importance of this issue to insolvency proceedings:

  1. Insolvency petitions do not fall into Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration (which is adopted in section 20 of the Arbitration Ordinance). There is no automatic, mandatory or non-discretionary stay on insolvency petitions where there is an underlying arbitration agreement.
  2. The Court has a discretionary power under insolvency legislation whether to dismiss or stay a petition where the alleged debt arises out of a transaction containing an arbitration agreement. The Court will consider all relevant circumstances, including the financial position of the company, the existence of other creditors and the position taken by them.
  3. The creditor has a statutory right to petition for bankruptcy or winding-up on the ground of insolvency.
  4. The Lasmos case decided (following the English case Salford Estates (No 2) Ltd v Altomart Ltd (No2) [2015] Ch 589) that the discretion under the insolvency legislation should be exercised only one way (i.e. that the petition should “generally be dismissed” save in “exceptional” or “wholly exceptional” circumstances, upon satisfaction of the three requirements). It is settled law that the “petitioning debt not being admitted” means a dispute sufficient for the purpose of arbitration, without regard to the quality of the dispute or substantive merits.
  5. The Lasmos approach constitutes a substantial curtailment of the creditor’s statutory right to petition for bankruptcy. Separately, in the case of Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] HKCFI 920, it has also been held that an arbitration clause which purports to restrict or fetter a creditor’s statutory right to petition would not be allowed by the Court for public policy reasons.
  6. The Eastern Caribbean Court has refused to adopt the Salford approach, as the BVI Court’s statutory jurisdiction to wind up a company based on its inability to pay its debts as they fall due unless the debt is disputed on genuine and substantial grounds is too firmly a part of BVI law to now require a creditor exercising the statutory right to prove exceptional circumstances to establish his status to wind up a company. The statutory jurisdiction is satisfied once the creditor is applying on the basis of a debt that is not disputed on genuine and substantial grounds. The position is the same as regards the insolvency legislation in Hong Kong.
  7. The Court of Appeal therefore has reservations if the discretion under the insolvency legislation should be exercised only one way to substantially curtail the right of the creditor to present a petition.
  8. Considerable weight should be given to the factor of arbitration in the exercise of the Court’s discretion.
  9. Discretion should not be exercised in a way that would inevitably encourage parties to an arbitration agreement to seek to bypass the arbitration agreement/legislation by presenting a winding-up petition. The Court is not powerless to deal with such tactics. The discretion should also not invariably be exercised in favour of the creditor where the Court is satisfied that there is no bona fide dispute on substantial grounds.
  10. Possible ways of exercising this discretion include requiring the debtor to establish in the normal way that there is a bona fide dispute on substantial grounds, failing which, the debtor can only expect a short adjournment to enable it to commence arbitration.\
  11. The debtor cannot simply put up its hands and say: “You, the court, have no jurisdiction because of my contract.” That is not what the contract says, and the Court is entitled to be satisfied that there is a proper dispute

Comments

The Court’s obiter comments indicate the Court already has the tools it needs to deal with the tension between the creditor’s right to petition for a debtor’s bankruptcy and the parties’ rights to agree to arbitration in a contract. Vice-President Kwan’s analysis suggests that she believes that the Lasmos Case propounded an overly one-sided exercise of the Court’s discretion. She has reiterated that, where the Court is satisfied there is no bona fide dispute on substantial grounds, the discretion should not invariably be exercised in favour of the creditor.

Gareth Thomas
Gareth Thomas

Simon Chapman
Simon Chapman

Philip Lis
Philip Lis

Jacob Sin
Jacob Sin

 

 

Hong Kong – Mainland interim relief arrangement: full text and more detail

 

Following Tuesday’s announcement of 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 (Arrangement), the Supreme People’s Court of China has released the full official text (in Chinese).  The Hong Kong Government has also provided a courtesy English translation on its website.  We expect that the official English text will be released closer to the time when the Arrangement comes into force.

 

Application process

Readers of this blog may be very familiar with seeking interim orders in the Hong Kong High Court in aid of on-going or prospective arbitrations seated in Mainland China, under section 45 of the Hong Kong Arbitration Ordinance (Cap. 609).

The key distinction of the “mirror image” in Mainland China is that parties to a Hong Kong-seated arbitration do not apply directly to the competent Intermediary People’s Court.  Rather, the applicant should submit the interim relief application to the relevant arbitration institutions in Hong Kong, which would forward the application to the competent Intermediary People’s Court in Mainland China.

It is possible to apply for pre-arbitration interim measures in Mainland China via the Arrangement in the same procedure described above, although the People’s Court must receive proof of the institution’s acceptance of the arbitration within 30 days after the Court grants the interim measures.

 

General requirements

At the risk of stating the obvious, although parties first submit the interim relief application to an approved Hong Kong arbitration institution, the law of the application is Chinese law.  After the Court has accepted the application, the interim relief hearings must be conducted by Mainland-qualified lawyers.

The application shall include:

  • the application for interim measure;
  • the arbitration agreement;
  • identity/incorporation documents for natural persons and legal entities, respectively;
  • the request for arbitration, with exhibited evidence, and proof that the institution has accepted the case (for on-going arbitrations[1]); and
  • any other supporting materials required by the People’s Court.

There are some practical difficulties and uncertainties to bear in mind.  The Arrangement requires “documents of identity” issued outside the Mainland to be certified in accordance with PRC law.  This may require certification by a China-appointed attesting officer (in Hong Kong) or Chinese consulate/embassy notarisation and authentication procedures (overseas).  The Arrangement also requires “accurate Chinese translation” for all documents submitted to the People’s Court.  Parties must factor in the additional time and cost of meeting these requirements.  The catch-all requirement for “any other materials required by People’s Court” adds additional uncertainty to the process.

The Arrangement also provides a useful list of issues that must be covered in the application to a Mainland court (Article 5).  Applications must also refer to the PRC Civil Procedure Law and other laws or regulations, depending on the types of interim measures sought by the applicant.  Article 5 of the Arrangement lists the following:

  • basic information of the parties;
  • applied interim measures, including the applied amount of assets to be preserved and particulars of the conduct and the time period;
  • facts and justifications on which the application is based, together with the relevant evidence;
  • clear particulars of the property and evidence to be preserved or concrete threads which may lead to a chain of inquiry;
  • information about the property in the Mainland to be used as security or certification of financial standing; and
  • whether any application under this Arrangement has been made in any other court, relevant institution or permanent office, and the status of such application.

 

What are the approved Hong Kong arbitration institutions?

“Arbitral proceedings in Hong Kong” in the Arrangement refers to arbitrations seated in the Hong Kong SAR and be administered by institutions either headquartered, or with permanent offices, in the SAR. The list of such institutions or permanent offices will be provided by the Hong Kong SAR Government to the Supreme People’s Court, and will be subject to confirmation by both sides.

We anticipate that the list of approved arbitration institutions will include at least HKIAC, the CIETAC Hong Kong Center and ICC Hong Kong.  Ad hoc arbitrations seated in Hong Kong will not benefit from the Interim Measures Arrangement.

 

For further information on the Mainland China interim relief regime, please speak to May Tai, Kathryn Sanger, Helen Tang, Stella Hu or your usual Herbert Smith Freehills contacts.

[1] It is not entirely clear here for pre-arbitration applications, whether the applicants need to submit draft request for arbitration; and whether following the commencement of arbitration, the applicants need to provide the request of arbitration, on top of the letter confirming the acceptance of the case.

May Tai
May Tai
Managing Partner - Greater China
+852 2101 4031
Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029
Stella Hu
Stella Hu
Senior Associate, Hong Kong
+852 2101 4248

BEIJING COURT REJECTS APPLICATION TO SET ASIDE TRIBUNAL’S INSTRUMENT RECORDING MEDIATED SETTLEMENT TERMS, CITING LACK OF LEGAL BASIS

In Li Lian Dong and Others v Shen Yi (2018) Jing 04 Min Te 541, a first instance decision made earlier this year, the Beijing 4th Intermediate People’s Court considered whether the court’s power to set aside an arbitral award extends to setting aside the parties’ settlement formally given effect to by the arbitral tribunal in an instrument known under the Arbitration Law of the People’s Republic of China as a “conciliation statement”.

The Court decided that there is no legal ground for Chinese courts to set aside a conciliation statement issued by an arbitral tribunal.  Article 58 of the Arbitration Law provides only for the setting aside of an arbitral award, not a conciliation statement, despite Article 51(2) of the Arbitration Law expressly providing that a conciliation statement has the same legal effect as an arbitral award.

Background

On 12 January 2017, Shen Yi entered into an agreement with Xin Lv Ju (Shanghai) Enterprise Development Limited (Company), Mr Li Lian Dong (the Company’s legal representative) and two other companies to invest in the Company in exchange for the Company’s right to the proceeds from the operation of a certain project (First Transfer Agreement).  On the same day, other parties entered into similar investment agreements with the Company, Mr Li and the other companies.  In 2018, Shen Yi acquired the interests of all these other investors in the project under a second transfer agreement (Second Transfer Agreement).

Subsequently, a dispute arose in relation to the investment.  In April 2018 Shen Yi commenced an arbitration before the Beijing Arbitration Commission pursuant to the arbitration clause in the First Transfer Agreement, naming the Company and Mr Li as the respondents. An arbitral tribunal was constituted.  At the arbitral hearing, the parties agreed to mediation and reached a settlement. At the request of the parties, the arbitral tribunal issued a conciliation statement (No.0216) to confirm the terms of the mediated settlement reached and concluded the arbitration.

Later in 2018, the Company and Mr Li applied to the Court to set aside the conciliation statement, on the basis that (i) Shen Yi failed to produce in the arbitration the Second Transfer Agreement and thus had concealed evidence sufficient to affect the impartiality of the arbitration, and (ii) the arbitration was not in conformity with procedural requirements, both of which are grounds for setting aside an arbitral award under Article 58 of the Arbitration Law. They argued that (pursuant to Article 51(2) of the Arbitration Law) a conciliation statement issued by the arbitral tribunal has the same legal effect as an arbitral award, and can therefore be set aside by the courts on the same grounds as an arbitral award.

Decision

The Court rejected the application to set aside the conciliation statement. In particular, it found that the conciliation statement was not an arbitral award, and the Arbitration Law only provides for setting aside of the latter.

The Court went on to find that there was no factual basis to support the set aside application. In rejecting the applicants’ factual case, it referred to the formal transcript of the arbitration hearing, which it found to clearly record that Shen Yi had produced the Second Transfer Agreement in evidence during the hearing, and the authenticity of the same was not disputed by the applicants at the hearing.  The applicants therefore did not make out their case that Shen Yi had concealed evidence, nor was there procedural irregularity in the arbitration.

Discussion

In, effectively, rejecting Article 58 of the Arbitration Law as empowering the court to set aside a settlement given effect to by the arbitral tribunal through a “conciliation statement”, the Court in this case appears to have preferred similar approaches taken by a number of local Intermediate People’s Courts in the recent years, over the approach taken by the Supreme People’s Court’s (SPC) in at least one case (see SPC’s reply to the Guangdong Province Higher People’s Court in [2010] Min Si Ta Zi No. 45), which is that the grounds in Article 58 of the Arbitration Law can be referred to in dealing with an application to set aside a conciliation statement, but that the review should be limited to the procedure of the rendering of the particular conciliation statement in question and not the substance of the conciliation statement.  Whilst the Court’s decision is one of the latest on this issue, it remains to be seen whether more judicial clarity will be given by the SPC in a formal interpretation document, which may put the sometimes inconsistent approaches taken by local courts to rest.

Michelle Li
Michelle Li
Partner, Shanghai
+86 21 2322 2162
Helen Tang
Helen Tang
Partner, Shanghai
+86 21 2322 2160
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales)/Professional Support Consultant, Hong Kong
+852 2101 4214

HONG KONG COURT GRANTS ANTI-SUIT INJUNCTION TO BIND THIRD PARTY TO ARBITRATION AGREEMENT

In Dickson Valora Group (Holdings) Co Ltd v Fan Ji Qian [2019] HKCFI 482, the Hong Kong Court of First Instance has granted an anti-suit injunction restraining mainland Chinese court proceedings commenced by Fan Ji Qian on the ground that the dispute should be referred to arbitration. Although Fan was not a signatory to the contract containing the arbitration clause, he had nevertheless sought to enforce a contractual right under that agreement, such that he was also bound by any conditions integral to the exercise of this right (including the agreement to arbitrate).

This decision shows that an arbitration agreement can, in certain circumstances, bind third parties. This is something which should be considered when drafting agreements which purport to confer a benefit on non-signatories, particularly if it is intended that third parties exercising rights under the contract should also be bound by the arbitration provisions.

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CIETAC releases 2018 statistics

On 1 February 2019, CIETAC published its 2018 statistics and 2019 work plan. The statistics show a substantial increase in CIETAC’s caseload and the total amounts in dispute, as well as a growing diversity of cases administered by CIETAC.

CIETAC received 2,962 new cases during 2018, representing a 28.89% increase compared to the previous year. 522 of these cases are foreign-related, of which 36 are between non-Chinese parties: 9.66% more than 2017. CIETAC accepted 2,440 new domestic cases in 2018, an increase of 33.92% on the previous year.

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