INDIAN SUPREME COURT ALLOWS INDIAN PARTIES TO CHOOSE A FOREIGN SEAT OF ARBITRATION

Settling a much-litigated issue, the Supreme Court of India (“Court”) recently decided that two Indian parties can choose a foreign (non-Indian) seat of arbitration. Some courts had previously held that at least one party had to be a non-Indian person or company for such a clause to be effective. The Court clarified the position and held that an award issued by an arbitral tribunal in such circumstances would be enforceable in India and that the parties could also seek interim relief in India. The decision brings welcome certainty particularly for Indian subsidiaries of international companies that have negotiated contracts providing for offshore arbitration in jurisdictions like Singapore, London, Hong Kong and others.

Background

The judgment, in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited, followed from an appeal from a decision of the Gujarat High Court (which we covered here). It involved two Indian companies, one a subsidiary of a French company, that had entered into an agreement for the sale of converters. The agreement provided for arbitration in Zurich under the ICC Rules and was governed by Indian substantive law. The Tribunal issued an award and GE Power applied to enforce it in Gujarat. The Gujarat High Court held that the award was enforceable notwithstanding that the two Indian parties had chosen a foreign seat, but also held that parties to such an arbitration would not be entitled to interim relief in the Indian courts. PASL Wind Solutions appealed to the Court.

The Judgment

Meaning of ‘Foreign’ Award

Part II of the Indian Arbitration and Conciliation Act 1996 (the “Arbitration Act”) applies to the enforcement of foreign awards in India. One question before the Court was how the term ‘foreign award’ should be interpreted.

The appellant argued that the definition turns on the nationality of the parties, and that an award could not be considered ‘foreign’ because it involved two Indian parties. The Court rejected this argument and held that there were four criteria for an award to be considered a foreign award: (i) the dispute must be considered to be a commercial dispute under the law in force in India, (ii) it must be made pursuant to a written arbitration agreement, (iii) the dispute must arise between “persons” (without regard to their nationality, residence, or domicile), and (iv) the arbitration must be conducted in a New York Convention country.

The Court held that these criteria were met by the award in question. Section 44 of the Arbitration Act (which defines foreign awards) was “party-neutral” and the key factor is the place of arbitration.

The appellant also argued that the term ‘foreign award’ in Part II must be understood by reference to terms used in Part I (which deals with domestic or India-seated arbitrations). The Court rejected this argument and held that it was not possible to interpret the provisions of one part of the Arbitration Act using provisions of another part, following its earlier decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services.

Public policy

Another issue before the Court was whether an agreement between two Indian parties to arbitrate in a foreign seat was against the provisions of the Indian Contract Act 1872. In particular it was argued that this was against Section 23, which makes agreements against public policy void, and Section 28, which provides that agreements in restraint of legal proceedings are void.

On public policy, the Court found that on balance there was no harm to the public in allowing two Indian parties to resolve their disputes offshore: “The balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public…”. Where issues of fundamental Indian public policy where involved, the Court found that there were adequate safeguards in the Arbitration Act and under conflict of laws rules.

The Court also echoed its previous judgments which held that party autonomy was “the brooding and guiding spirit of arbitration” and that there were no grounds on which to restrict this autonomy by preventing Indian parties from arbitrating abroad.

Interim Relief

Finally, the Court overruled the Gujarat High Court’s finding that interim relief would not be available for arbitrations between Indian parties seated abroad. The Court found that this was based on an erroneous reading of the provisions of Parts I and II of the Arbitration Act.

Comment

The Court’s judgment will be a welcome clarification on an issue that has divided many High Courts in India including those in Delhi, Bombay and Gujarat. For contracts entered into before this question was widely litigated, parties will welcome the clarity. Looking ahead, for parties now negotiating contracts, the Court’s decision offers a wider menu of available forums in which to resolve their disputes, which is consistent with the global reach of Indian businesses.

For more information please contact Paula Hodges QC, Head of Global Arbitration Practice, Andrew Cannon, Partner, Nihal Joseph, Associate, or your usual Herbert Smith Freehills contact.

Paula Hodges QC
Paula Hodges QC
Head of Global Arbitration Practice
+44 20 7466 2027

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852
Nihal Joseph
Nihal Joseph
Associate
+44 20 7466 2212

Hong Kong court sets aside award for wrongful identification of party

In arbitral proceedings where the respondent was wrongly named, the Hong Kong Court of First Instance has set aside the arbitral award on the basis that the named respondent is not a party to the arbitration agreement and was not given proper notice of the proceedings. This rare example of a successful set-aside application demonstrates that the courts will be prepared to overturn an award where a statutorily prescribed ground is clearly established.

AB v CD [2021] HKCFI 327

Background

The dispute arose out of an agreement between AB Bureau and CD (Agreement). Pursuant to the arbitration clause in the Agreement, CD issued a Notice of Arbitration in April 2019. Consistent with the Agreement, the Notice of Arbitration named AB Bureau as respondent. However, after the Notice of Arbitration was issued, a series of events occurred which ultimately led to the set-aside application:

  • In July 2019, CD submitted an Amended Notice of Arbitration revising the name of respondent from “AB Bureau” to “AB Bureau also known as AB Bureau Co, Ltd”.
  • The critical event took place in November 2019, when CD applied to the sole arbitrator to “correct” respondent’s name from “AB Bureau” to “AB Engineering”. In support of its application, CD relied on AB Engineering’s website which, CD submitted, showed that AB Bureau was the predecessor of AB Engineering.
  • Following CD’s request, the sole arbitrator issued a procedural order giving effect to the name change and ordering that no further service of notice was necessary.
  • In March 2020, the final Award was issued, with AB Engineering named as the respondent. Neither AB Bureau nor AB Engineering participated in the arbitration.

AB Engineering, the award debtor, applied to set aside the Award on the basis that:

  • AB Engineering was not a party to the Agreement, and there was no valid arbitration agreement between AB Engineering and CD (Article 34 (2)(a)(i) of the UNCITRAL Model Law);
  • the Award contained decisions on matters beyond the scope of the submission to the Arbitration (Article 34(2)(a)(iii) of the Model Law); and
  • AB Engineering was not given proper notice of an arbitrator or of the arbitration proceedings (Article 34 (2) (a) (ii) of the Model Law).

It was not disputed that if AB Engineering succeeded on any of the above grounds, the Court could set aside the Award.

Decision

It became clear at the court hearing that AB Bureau and AB Engineering were at all times two separate and distinct legal entities. CD nevertheless sought to enforce the Award on the grounds that AB Engineering was a party to the agreement and was estopped from applying to set aside the Award. Mimmie Chan J rejected both arguments.

CD’s primary case was that AB Engineering was a party to the Agreement by virtue of the definition of AB. In the Agreement, AB is defined to mean “AB Bureau or any other Affiliated entity”. On a proper construction of the Agreement, the Court found that the Agreement was made between CD and AB Bureau only and there was no evidence that AB Engineering had had any role in the performance of the Agreement. This distinguished the case from Giorgio Armani SpA v Elan Clothes Co Ltd [2020] 1 HKLRD 354, where the underlying agreement was expressly made “by and between” the parent company, SpA, “together with its branch offices and Affiliates”. The Court disagreed with CD’s “self-drawn conclusion” and found that there was no statement on AB’s website capable of indicating that AB Bureau and AB Engineering were the same legal entity.

The Court further noted that, even if AB Engineering could be said to be a party to the Agreement, it had not been given proper notice of the arbitral proceedings. The two notices of arbitration were never sent to the proper registered address of AB Engineering and were in any case addressed to AB Bureau. As such, no adequate notice of the arbitration had been given to AB Engineering, the award debtor.

CD also contended that AB Engineering was estopped from applying to set aside the Award because its employees had misled CD to believe that AB Bureau and AB Engineering were the same entity. This argument was rejected by the Court on the grounds that CD had not relied on the employees’ statements. On the evidence, CD relied solely and erroneously on AB Engineering’s website rather than on the alleged misrepresentation. In this connection, the Court emphasised that “it is incumbent on a claimant and its legal advisers to identify the proper defendant/respondent and to verify its name, particularly after query has been raised. It is no excuse for CD and its legal advisers now to put the blame on employees of Bureau/AB Engineering for any misnomer in the name of the party CD seeks to bring proceedings against.

In light of the above, Chan J held that the Award should be set aside under Article 34(2)(a)(i) and (ii) of the Model Law.

Comment

It is rare for a Hong Kong court to set aside an arbitral award, but it will not hesitate to do so if the award debtor can clearly demonstrate a statutory ground for set aside and the court considers set aside is justified.

Here, the similarities in the names of companies involved, the non-participation of the named respondent, and CD’s reliance on online sources all contributed to CD naming the wrong party and, ultimately, persuaded the court that the Award should not stand.

The judgment turns heavily on its facts, rather than marking any general change to the courts’ pro-enforcement approach. However, it emphasises the need for claimants to identify each counterparty carefully before commencing arbitration, especially when a complex corporate structure is involved, or risk losing the benefit of their awards.

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

PRC court sets aside cryptocurrency award on public interest grounds

Shenzhen Intermediate People’s Court has ordered that an arbitral award made by Shenzhen Arbitration Commission (also known as Shenzhen Court of International Arbitration) be set aside on the ground that awarding damages in US dollars in lieu of crypto is against the public interest.

(2018) Yue 03 Min Te No. 719 or (2018) 粤03民特719号

Background

The 2nd Respondent (Li) commissioned the Applicant (Gao) to conduct cryptocurrency wealth management. Gao failed to return the relevant assets and profits to Li. Gao, Li and the 1st Respondent (Yunsilu Fund) then entered into a share transfer agreement (Agreement), whereby the parties agreed that: (1) Yunsilu Fund should transfer a 5% share in a company to Gao at a consideration of RMB 550,000 (Consideration); (2) Li should pay RMB 300,000 to Yunsilu Fund on behalf of Gao as part of the Consideration and Gao should pay the remaining RMB 250,000 to Yunsilu Fund directly; and (3) Gao should return the relevant crypto assets (20.13 Bitcoin, 50 Bitcoin Cash, and 12.66 Bitcoin Diamond) to Li.

Gao failed to perform his obligation under the Agreement. Yunsilu Fund and Li commenced arbitration proceedings against Gao at the Shenzhen Arbitration Commission. They asked the tribunal to order that (1) the shares be transferred to Gao; (2) Gao pay RMB 250,000 to Yunsilu Fund; (3) Gao pay the US dollar equivalent of the crypto assets to Li, plus interest; and (4) Gao pay damages of RMB 100,000.

The arbitral tribunal found that Gao had failed to deliver crypto as agreed by the parties (who considered that such crypto had property value). This constituted a breach of contract and merited an award of damages. The tribunal referred to public information about the closing price of Bitcoin and Bitcoin Cash at the agreed date of contractual performance, and estimated the loss at US$401,780. The tribunal ordered that (1) the shares be transferred to Gao, (2) Gao pay RMB 250,000 to Yunsilu Fund, (3) Gao pay US$401,780 to Li (to be converted to RMB at the exchange rate as of the date of the award); and (4) Gao pay damages of RMB 100,000 to Li.

Gao applied to the Shenzhen Intermediate People’s Court to set aside the award.

Decision

Since this is a Chinese domestic arbitral award, the Court reviewed it in accordance with Article 58 of the PRC Arbitration Law. The main issue for determination was whether the award was against the public interest. The Court held that, according to the Circular of the People’s Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission on Preventing Risks from Bitcoin (Yin Fa [2013] No.289), Bitcoin does not have the same legal status as a fiat currency, and cannot and should not be circulated in the market as a currency. In 2017 seven authorities, including the People’s Bank of China, jointly issued the Announcement on Preventing Risks relating to Fundraising through Token Offerings to reiterate the above provision. Meanwhile, from the perspective of preventing financial risks, the Announcement further provides that any so-called “token” financing and trading platform shall not:

  1. engage in exchange business between fiat currencies and tokens or between “virtual currencies”;
  2. trade tokens or “virtual currencies” for itself or as a central counterparty; or
  3. provide pricing, information agency or other services for tokens or “virtual currencies”.

The above documents essentially prohibit the redemption, trading and circulation of Bitcoin in Mainland China, as well as speculation in Bitcoin and other activities that may amount to engaging in illegal financial activities, disturbing the financial order or affecting financial stability.

The arbitral tribunal ruled that Gao Zheyu should compensate Li Bin for the US dollar equivalent of the Bitcoin, then convert the US dollars into RMB. The Shenzhen Court ruled that this amounted to redemption and trading between Bitcoin and fiat currency in a disguised form, which contravenes the spirit of the above documents and violates the public interest. It therefore set aside the arbitral award. The Court declined to review the other grounds raised by the Applicant Gao Zheyu.

Comment

This ruling sends a clear warning that enforcing a crypto-related arbitral award may be difficult in jurisdictions, such as Mainland China, which show little tolerance for the cryptocurrency business.

Despite the fact that some Mainland Chinese courts have recognised Bitcoin as a “virtual commodity” or “virtual asset” (see (2019) Hu 01 Min Zhong No. 13689), it is important to remember that trade and exchange of cryptocurrencies (especially trading with fiat currencies) is strictly prohibited in Mainland China.

Claimants in crypto-related arbitrations with any Mainland element must take great care when framing their requests for relief. For example, if a claimant is owed crypto currency, instead of asking the tribunal to convert the debt into a fiat currency for damage calculation, the claimant may consider asking for damages to be paid in the same crypto currency to avoid any uncertainty on enforcement.

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

Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Antony Crockett
Antony Crockett
Senior Consultant
+852 21014111
Briana Young
Briana Young
Professional Support Consultant
+852 21014214

Malaysian High Court clarifies limits of post-award court intervention

For the first time in recent years, the Malaysian courts have clarified the limits of judicial intervention under Malaysian law once an arbitral award has been issued.

The Malaysian High Court held that the powers of Malaysian courts in respect of arbitral awards are limited to their recognition and enforcement under Section 38 of the Arbitration Act 2005 (AA). It follows that Malaysian courts cannot grant relief or orders in respect of an award unless recognised in Malaysia pursuant to Section 38 AA. This may have implications for enforcement strategies with a Malaysian nexus.

Danieli & C Officine Mecchaniche SPA v Southern HRC Sdn Bhd (WA-24NCC-471-10/2020)

Background

The Plaintiff, an Italian company, entered into an agreement with the Defendant, a Malaysian company, for the construction of a hot rolled coil plant in Malaysia (Plant) and a related services agreement. Both contracts required disputes to be arbitrated in Singapore.

Disputes arose and were referred to arbitration, in which the parties cross-claimed for, among other things,  damages. They made submissions on the return of the Plant to the Plaintiff and the condition of the Plant in such event. The arbitrators found in the Defendant’s favour and awarded damages against the Plaintiff, which were reduced to reflect the diminution in the value of the Plant, sums previously paid by the Plaintiff and the Defendant’s previous use of the Plant.

The Plaintiff resisted demands for payment of the award and made payment conditional on the Defendant granting it access to the Plant to determine its condition and operability. This was rejected by the Defendant noting that site access would only be given once the Plaintiff had paid the award.

Court proceedings

Concurrently, the Defendant initiated Italian court proceedings to enforce the arbitral award. The Plaintiff resisted the Italian proceedings and applied to the Malaysian High Court for various declarations and orders allowing it to inspect the Plant and equipment referenced in the arbitral award. Neither party sought to enforce the award in Malaysia.

Notably, the Plaintiff was not seeking relief under the AA, but the Specific Relief Act 1950 and Rules of Court 2012 (ROC) instead. In its application, the Plaintiff noted that the inspection could have a material impact on the Italian recognition proceedings and asserted a genuine interest in having its rights declared and the condition of the Plant verified before making any payment of the award sum.

The Defendant resisted the Plaintiff’s application and, in turn, applied to the Malaysian High Court for a declaration that it lacked jurisdiction over the Defendant in respect of the Plaintiff’s relief (Order 28 rule 3B(f) ROC). The Defendant argued that, where an arbitral award has been rendered, the Court’s powers under the AA are limited to enforcing the award, therefore the Court had no jurisdiction to grant the relief requested by the Plaintiff. The Plaintiff disagreed, contending that the relief sought was not governed by the AA in which case the Court could invoke its inherent jurisdiction to grant such relief.

The Defendant also contended that arbitration was the proper forum to grant the Plaintiff’s relief. The Plaintiff, who had not invoked this right during the arbitration, denied that this was a relevant factor.

Malaysian High Court decision

The Malaysian High Court dismissed the Plaintiff’s application, finding that the Malaysian courts’ powers in respect of arbitral awards are limited to their recognition and enforcement under Section 38 AA – the equivalent of Article 35 of the UNCITRAL Model Law 2006 (ML).

The Court emphasised the restriction under Section 8 AA (which mirrors Article 5 ML) that “no court shall intervene in matters governed by this Act, except where so provided in this Act.” Section 8 AA, in the Court’s view, was intended to discourage reliance on the Malaysian courts’ inherent powers and restrict judicial intervention to those situations listed in the AA.

The AA, as the Court noted, does allow for judicial intervention in support of arbitration. The central provision is Section 11 AA, which permits an arbitral party to apply to the Malaysian High Court for any interim measure “before or during arbitral proceedings“. However, the Court pointed out that there was no similar provision for judicial intervention upon the conclusion of arbitral proceedings. In view of the Section 8 restriction, Malaysian courts could not grant any other relief in respect of an arbitral award once issued.

The Court viewed the Plaintiff’s conduct during the arbitration proceedings as a relevant factor, in particular that the Plaintiff did not exercise its opportunity to apply for the relief sought during the arbitration. The circumstances indicated that the relief sought was intended to re-open matters already decided in arbitration or an attempt to attack the award in the Italian recognition proceedings. Malaysian courts would decline to intervene on such occasions.

Further, the Court disagreed that this was a situation warranting resort to the Court’s inherent jurisdiction. Although accepting that Section 8 AA does not preclude the Court’s inherent jurisdiction to determine matters not expressly governed by the statute (La Kaffa International Co Ltd v Loob Holding Sdn Bhd & Anor [2018] 9 CLJ 593), the Court held that the Plaintiff’s application was not such a circumstance.

Key takeaways

Overall, the High Court’s decision illustrates the pro-arbitration inclination of Malaysian courts. Even where an application is not brought under the AA, the Malaysian courts will firmly apply the principles and spirit of the statute and the ML to ensure the finality of arbitral awards even where seated in foreign jurisdictions.

Nevertheless, the decision appears to restrict the right of parties to post-award judicial assistance, which could arguably include those in aid of enforcing arbitral awards in Malaysia, such as examination of judgment debtor proceedings (Order 48 ROC). Such orders are vital tools for information gathering in order for an award creditor to determine how it might enforce the award. Parties intending to seek such orders from Malaysian courts must now ensure that they first register the relevant arbitral award in Malaysia under Section 38 AA.

A further point of interest is that, while the decision analyses the interplay of Sections 11 and 38 AA and the court’s inherent jurisdiction, the High Court did not have the opportunity to consider how this analysis interacts with Section 19J AA (as adapted from Article 17J ML). Briefly, Section 19J AA  empowers the Malaysian High Court to issue interim measures “in relation to arbitration proceedings, irrespective of whether the seat of arbitration is in Malaysia…in accordance with its own procedures in consideration of the specific features of international arbitration“. While both Sections 11 and 19J AA give Malaysian courts the power to issue interim measures in relation to arbitration proceedings, Section 19J is worded more expansively. Further, unlike Section 11 AA, Section 19J is not expressly limited to interim measures “before or during arbitral proceedings“. It will be interesting to see how future Malaysian decisions approach this difference in wording.

For now, it is clear that Malaysian courts will endeavour to uphold the finality of arbitral awards regardless of where the arbitral seat is located.

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

Peter Godwin
Peter Godwin
Managing Partner, Kuala Lumpur
+60 3 2777 5104
Tse Wei Lim
Tse Wei Lim
Associate
+60 3 2777 5135

 

 

 

 

 

 

 

 

 

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.

Hong Kong court refuses enforcement where due process denied

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

X v Y  [2020] HKCFI 2782

Background

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

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

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

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

The Decision

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

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

The Tribunal’s jurisdiction

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

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

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

The Bank’s opportunity to present its case

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

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

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

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

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

Leave to Appeal

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

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

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

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

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

Comments

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

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

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

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

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

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

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

The SPC “reporting system”

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

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

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

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

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

Recognition and enforcement of offshore arbitral awards

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

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

Interim injunctions in support of arbitration

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

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

Pro-arbitration principles in judicial review

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

Six general principles are emphasised:

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

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

 

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

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

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

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

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

 

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

Hong Kong and Mainland China Enter Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards

On 27 November 2020, the Chinese Supreme People’s Court and the Hong Kong Department of Justice signed the Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (Supplemental Arrangement). The Supplemental Arrangement modifies and supplements the existing Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR which was signed on 21 June 1999 and came into effect on 1 February 2000 (1999 Arrangement).

Continue reading

INDIA AMENDS ARBITRATION LAW RELATING TO ENFORCEMENT OF AWARDS TAINTED BY FRAUD AND ARBITRATOR QUALIFICATIONS

In a little heralded development, the Government of India passed the Arbitration and Conciliation (Amendment) Ordinance 2020 (the “Ordinance”) on 4 November 2020 to amend the Indian Arbitration and Conciliation Act 1996 (the “Act”) with immediate effect. The Ordinance introduces provisions to stay the enforcement of arbitral awards tainted by fraud, and deletes certain provisions from the Act relating to qualification and accreditation of arbitrators.

Stay on enforcement

An important change introduced by the Ordinance concerns the power of the Indian court to stay enforcement of an award where an application has been made to set it aside. A court must now grant an unconditional stay on the enforcement of an award if a prima facie case is made out that the arbitration agreement or contract which is the basis of the award, or the making of the award itself was “induced or effected” by fraud or corruption. The stay shall continue until the application to set aside the award is decided.

By way of background, under Section 34 of the Act, a party to an arbitral award made in India may apply to the Indian court to have it set aside on the grounds, amongst other things, that the award conflicts with the public policy of India, which includes circumstances where the making of the award was induced or affected by fraud or corruption.

Prior to 2015, Section 36 of the Act was applied such that enforcement of an award would be stayed where an application was made under Section 34 until that application had been decided. This incentivised losing parties to challenge awards on any grounds to prevent their enforcement. An amendment to the Act passed in 2015 (discussed in our prior blog post here) modified Section 36 such that the filing of an application to set aside an award would not by itself render the award unenforceable, unless the court in its discretion granted a stay based on a separate application.

The Ordinance now restricts this discretion in that a court must stay an award unconditionally if it is satisfied that a prima facie case of fraud is made out. The amendment is deemed to have been inserted from 23 October 2015, and applies to all court cases arising out of arbitral proceedings, irrespective of whether the arbitration or court proceedings were commenced before or after this date.

The Ordinance notes that the change was made to address concerns raised by stakeholders. While the court already had the discretion to stay enforcement where the award was being challenged, the mandatory nature of the stay where a prima facie case of fraud is made out will inevitably incentivise challenges on that basis. It will be interesting to see how judges deal with such challenges.

While this amendment addresses challenges to awards made in India, it should not apply to the enforcement of foreign awards under a separate part of the Act, although the Indian court has the discretion (under Section 48) to refuse enforcement of a foreign award where it finds that the award was induced or affected by fraud.

Norms for accreditation of arbitrators

The Ordinance has also deleted the Eighth Schedule to the Act dealing with the qualifications and experience of an arbitrator, which provided that a person would not be qualified to be an arbitrator in an arbitration seated in India unless he or she is an advocate, accountant or company secretary under Indian law, or an officer of the Indian Legal Service, or holding a particular degree and/ or having public sector experience. This provision was understood effectively to exclude foreign nationals from acting as an arbitrator on arbitrations seated in India.

Section 43J of the Act now states that: “The qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by the regulations.” It is possible that these regulations would be framed by the Arbitration Council of India, which is to be formed pursuant to the Arbitration and Conciliation (Amendment) Act 2019 (discussed in our blog post here).

For more information, please contact Nick Peacock, Partner, Nihal Joseph, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803
Nihal Joseph
Nihal Joseph
Associate
+44 20 7466 2212

ENFORCING COURT CAN GRANT WIDER RELIEF THAN AWARD, SAYS HONG KONG COURT

The long-running case of Xiamen Xinjingdi Group Co Ltd v Eton Properties Limited and Others [2020] HKCFA 32 finally came to an end when the Court of Final Appeal (the CFA) handed down its decision on 9 Oct 2020. In the judgment, the CFA clarifies that in a common law enforcement action on an arbitral award, the enforcing court has the power to grant relief that is wider than that in the award.

Xiamen Xinjingdi Group Co Ltd v Eton Properties Limited and Others [2020] HKCFA 32

Continue reading

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