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
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Hong Kong court stays proceedings for arbitration, honouring arbitration agreement in insurance policy

The Hong Kong Court of First Instance stays third party proceedings commenced by an insured against an insurer, on the basis that the parties are bound by the arbitration clause contained in the insurance policy. Despite the outcome being that the main action and the third party proceedings will ultimately be pursued in different forums, by upholding the parties’ contractual agreement to arbitrate, the Court reinforces its pro-arbitration credentials and the principle of party autonomy.

Lau Lan Ying v Top Hill Company and another [2021] HKCFI 290

Background

On 22 November 2017, the plaintiff, a casual worker employed by the first defendant (D1), the sub-contractor, suffered bodily injury at work. As principal contractor, the second defendant (D2), was responsible for compensating the sub-contractor’s employees for work injuries. At the time of the accident, D2 was covered by an insurance policy (Policy) with Asia Insurance Co, Ltd (Insurer), in compliance with its obligation to obtain insurance cover under the Employees’ Compensation Ordinance. D2 accordingly made an insurance claim against Insurer on 27 November 2017, for compensation in respect of the plaintiff’s work injuries. On 30 April 2019, the Insurer repudiated its liability under the Policy, on the ground of D2’s alleged failure to submit relevant documents.

On 2 January 2020, the plaintiff commenced the present action against D1 and D2  for damages suffered as a result of the injury. D2 commenced the third party proceedings to enforce policy liability against the Insurer. Relying on the arbitration clause contained in the Policy, the Insurer applied to stay the proceedings for arbitration pursuant to section 20 of the Arbitration Ordinance.

Stay Application

Section 20 of the Arbitration Ordinance provides for a mandatory stay of legal proceedings in favour of arbitration where the action is the subject of (i) an arbitration agreement (ii) which is not null and void, inoperative or incapable of being performed, and there is (iii) a dispute/difference between the parties (iv) that is within the ambit of the arbitration agreement.

The Policy contained an arbitration clause which provides “[all] differences arising out of this Policy shall be determined by arbitration…”

Since the validity of the arbitration clause was not in dispute, the essence of the stay summons was whether there was any “difference” between D2 and the Insurer that would justify the mandatory stay in favour of resolving that “difference” through arbitration. In answering this question, the Court examined both the arbitration clause in question (particularly the word “differences”) and the wider public policy considerations.

Difference Issue

The central question before the Court was whether there was any difference falling within the ambit of the arbitration clause. In this regard, the threshold test is uncontroversial – the court will be satisfied where there is a prima facie or plainly arguable case that there is such a difference.

In construing the arbitration clause, Marlene Ng J observed three guiding principles:

  1. there is a prima facie assumption that contracting parties intend all disputes relating to a particular transaction to be resolved by the same tribunal;
  2. arbitration clauses should be construed as broadly and liberally as possible and any doubts on the scope of arbitration should be resolved in favour of arbitration; and
  3. each arbitration clause should be considered in its own context, and earlier decisions on the meaning of particular words or phrases may be persuasive depending on the similarity in contract and circumstances between such earlier decisions and the instant case.

With the above principles in mind, the Court’s analysis turned on the meaning of word “differences” in the Policy arbitration clause. Following Mimmie Chan J’s decision in VK Holdings (HK) Limited v Panasonic Eco Solutions (Hong Kong) Company Limited HCCT19/2014 (unreported), the Court confirmed that the word “differences” confers the widest possible jurisdiction. Significantly, the Court held that it is wide enough to cover a claim of repudiation. In reaching this conclusion, Ng J highlighted the distinction between repudiating a contract and a contractual liability. As per Lord Wright in Heyman & anor v Darwins Limited [1942] AC 356, in repudiating policy liability, the insurers “do not repudiate the policy or dispute its validity as a contract; on the contrary they rely on it and say that according to its terms, express and implied, they are relieved from liability”. As such, the substantive difference in this case, being whether or not the Insurer has wrongfully repudiated the Policy, is a difference arising out of the Policy and falls squarely within the arbitration clause.

Further, the Court reiterated that it is concerned only with the existence of any difference and will not evaluate the merits of that difference. Ng J drew support from the remarks by Ma J (as he then was) in Dah Chong Hong (Engineering) Limited v Boldwin Construction Company Limited HCA1291/2002 (unreported) that “even an unanswerable claim will not mean that a dispute or difference does not exist unless there is a clear and unequivocal admission of liability and quantum”.

Policy Issue

The Court went on to address whether the arbitration clause could extend to the present claim, which D2 argued to be a statutory claim rooted in the Employees’ Compensation Ordinance. D2 contended that the claim should be excluded from arbitration for public policy reasons.

At the outset, the Court pointed out that D2’s claim cannot be said to be a statutory claim. First, the plaintiff in the main action sought common law damages rather than damages under the Employees’ Compensation Ordinance. Second, in the third party proceedings, D2 similarly did not rely on the Ordinance but sought indemnity and contribution based on the Policy.

Nevertheless, the Court conducted a thorough review on principles concerning the arbitrability of statutory claims or claims based on statutory rights. The Court confirmed that:

  1. in determining whether a dispute is arbitrable, the parties’ arbitration agreement is an important starting point, which the law should respect unless there are compelling reasons not to do so; and
  2. save when the statutory provision reserves exclusive jurisdiction to the courts, in considering whether the arbitration should be precluded by public policy considerations, a high threshold is required given the countervailing policy considerations of party autonomy and compliance with international treaty obligations (such as the duty to recognise and enforce an arbitration agreement under the New York Convention).

Consistent with English law authorities, the Court clarified in dicta that, the facts that (i) relevant legislation is motivated by public policy considerations, (ii) there may be procedural complexity in referring the matter to arbitration, (iii) third parties may possibly be impacted, or that (iv) there may be limitation on the power of the arbitrator to give full remedies may not be sufficient to preclude arbitration.

In light of the foregoing, the Court decided that the present difference on policy repudiation was essentially a private matter which did not trigger wider public policy interests.

Comments

While the Court’s decision does not establish new law, it is a useful reminder of the mandatory nature of a stay of legal proceedings under section 20 of the Arbitration Ordinance. This is exemplified by the low threshold test adopted by the Court where a prima facie case would be made out so long as there is an assertion of a dispute or difference, even in circumstances where no valid defence may exist.

On the other hand, the case also illustrates that despite the one-stop-shop presumption, there is a real possibility that matters relating to the same underlying transaction may be tried at different forums. In this respect, the Court cautioned that the presumption would not be sufficient to defeat a mandatory stay in light of an unequivocal arbitration agreement. As such, if parties intend to exclude a certain subject matter of dispute from arbitration, such intention must be expressly incorporated into the arbitration clause. As demonstrated in the present case, the court will endeavour to hold parties to their contractual bargain as reflected in the arbitration clause.

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

May Tai
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Simon Chapman
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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
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Simon Chapman
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Kathryn Sanger
Kathryn Sanger
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Briana Young
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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).

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HONG KONG COURT AFFIRMS DISCRETION TO WIND UP FOREIGN COMPANY, REFUSES STAY TO ARBITRATION

In Champ Prestige International Limited v China City Construction (International) Co, Limited and  Dingway Investment Limited, the Hong Kong Court of First Instance reaffirmed the court’s discretion to order the winding-up of a foreign-incorporated company on just and equitable grounds, but refused to stay the winding-up petition in favour of arbitration.

Background

The Petitioner, Champ Prestige, entered into a joint venture with China City for the development of certain land in Florida, United States by Dingway Investment Limited, an investment company incorporated in the British Virgin Islands (Company). The share sale and purchase agreement, under which Champ Prestige acquired a 45% interest in the Company from China City (SPA), contained an arbitration clause providing for disputes arising from or in connection with the SPA to be submitted to the HKIAC for arbitration.

The SPA also provided financing arrangements for the development of the project, including a put option that Champ Prestige could exercise in the event that China City did not fulfill its funding obligations. The parties subsequently entered into a cooperation agreement containing further terms for the development of the project. The cooperation agreement contained a similar arbitration clause to that of the SPA.

China City soon began to experience financial problems. Champ Prestige eventually exercised its put option, but China City did not pay the sums due on such exercise. The parties entered into a Framework Agreement in an attempt to resolve the financial issues. This Framework Agreement did not contain an arbitration clause.

Champ Prestige sought to wind up the Company on just and equitable grounds under section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), alleging that the Company was unable to progress its intended business purpose of developing land, and that China City had variously breached the SPA and the Framework Agreement. China City applied to strike out the winding-up petition (Petition) on grounds that there was insufficient connection between the Company, whose business and assets were located in the United States, and Hong Kong, for the court to exercise its exorbitant jurisdiction to wind up a foreign incorporated company, and alternatively that the dispute should be referred to arbitration.

The court’s decision

Court’s exorbitant jurisdiction

The court reiterated and affirmed the principles governing the circumstances in which the court may exercise its discretion to wind up a foreign-incorporated company, as set out by the Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai & Ors (2015) 19 HKCFAR 501 (also known as the Yung Kee case, discussed in our previous blog post here). The key issue in the present case was whether the first of three core requirements had been satisfied, namely whether the management and ownership had sufficient connection with Hong Kong to justify the court exercising its exorbitant jurisdiction to wind up a foreign company.

The court held that this question should be considered in general and common sense terms, and that regardless of a company’s place of incorporation, it is not necessary to undertake a forensic analysis of the various components of a company’s operations and ownership if it is fairly clear that it is fairly viewed as a Hong Kong business entity.

On the facts, the court found that the ownership and management of the Company was more closely connected with Hong Kong than with either the United States or the British Virgin Islands, taking into account the following factors:

  1. the majority of the Company’s directors was resident in Hong Kong;
  2. the Company, while incorporated in the British Virgin Islands, was owned by a Hong Kong-listed company; and
  3. the project in Florida was dormant.

 

Stay for arbitration dismissed

On the issue of whether the Petition ought to be stayed in favour of arbitration, the court cited with approval its decision in Re Quiksilver Glorious Sun JV [2014] 4 HKLRD 759 (which was decided by the same judge, Harris J) that where an agreement to arbitrate has been made between shareholders, the correct approach to determining whether or not the complaints in a shareholder’s petition should be referred to arbitration is to identify and determine whether the substance of the dispute between the parties is covered by the arbitration agreement. The court further noted that, where the petitioner’s complaints form part of one continuing narrative, the court will not exercise its discretion to stay the petition unless it is clear and obvious that the dispute forming the subject of the arbitration clause would be “central and probably determinative of the factual issues” raised by the petition.

While some of Champ Prestige’s complaints related to matters arising under the SPA or the cooperation agreement, both of which contained arbitration clauses, such allegations were also relevant to the complaint that there had been a breakdown in trust and confidence between the parties. The present case was therefore not one in which part of the dispute could sensibly be hived off and referred to arbitration, with the outstanding issues to be determined once the arbitration was complete. On such grounds, the court dismissed the stay application.

Comments

This case is one of the first cases citing the Court of Final Appeal’s landmark decision in the Yung Kee case, and it is expected that the Hong Kong court will continue to exercise its discretion under its statutory jurisdiction to hear shareholders’ petitions to wind up foreign incorporated companies on just and equitable grounds.

It is increasingly common for commercial agreements, including share purchase agreements and shareholders’ agreements, to provide for dispute resolution by way of arbitration. When disputes do arise however, parties often look beyond the immediate contractual dispute and seek to rely on statutory regimes, such as unfair prejudice and winding-up on just and equitable grounds, to obtain relief. Matters may become particularly complicated where multiple (and oftentimes conflicting) dispute resolution clauses are involved.

While the court will tend to scrutinise each case on its own facts to determine whether some or all of the disputed issues may be hived off for arbitration, in the context of winding-up on just and equitable grounds, even where underlying contracts contain arbitration clauses, factual issues are often so closely intertwined that the court may not be inclined to find it has no jurisdiction entirely.

For further information, please contact Simon Chapman, Partner, Kathryn Sanger, Partner, Stella Hu, Of Counsel, Jocelyn Heng, Associate, or your usual Herbert Smith Freehills contact.

Simon Chapman
Simon Chapman
Partner
+852 2101 4217
Kathryn Sanger
Kathryn Sanger
Partner
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Stella Hu
Stella Hu
Of Counsel
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Jocelyn Heng
Jocelyn Heng
Associate
+852 2101 4276

 

 

HONG KONG: COURT MAKES WINDING UP ORDER WHERE DEBTOR UNABLE TO PROVE BONA FIDE DISPUTE ON SUBSTANTIAL GROUNDS

The Hong Kong Court of First Instance has declined to prioritise an arbitration agreement where a debtor intended to dispute the existence of a debt without proving there was a bona fide dispute on substantial grounds.

Dayang (HK) Marine Shipping Co., Ltd v. Asia Master Logistics Ltd [2020] HKCFI 311; HCCW 14/2019

Background

The parties entered into a charterparty on 25 October 2018 by which Asia Master chartered a vessel M.V. “Aoli 5” from Dayang.

The Fixture Note obliged the owner to guarantee that the vessel be watertight and that all fitted gear be workable and in good condition throughout the charter period. It provided for the cost and duration of the hire, with disputes to be resolved by arbitration in Hong Kong under English law. Finally, it applied the New York Produce Exchange 93.

This was the substantive hearing of Dayang’s winding up petition based on the unpaid debt of US$360,919.76, which was originally dated 11 January 2019 then amended on 11 April 2019. Asia Master did not deny the existence of the debt but raised a counterclaim in relation to an alleged breach of Dayang’s obligations as per the Fixture Note and submitted that the dispute should be resolved by arbitration. On 22 February 2019, Asia Master’s counsel sent a letter to Dayang to state its preparedness to settle the dispute by arbitration.

In making its decision, the Court examined the nature of the dispute and any public policy implications.

Whether the debt was disputed in good faith and on substantial grounds

Deputy High Court Judge William Wong SC first observed that the breaches of obligations, for which Asia Master claimed Dayang should take responsibility, remained under investigation. Asia Master was unable to give particulars as to the duration of the alleged delay, the extent of the loss, and whether the counterclaim would exceed (and therefore extinguish) the debt. The Court held it was insufficient for Asia Master merely to state that Dayang ought to bear some responsibility when resisting its petition for winding up based on undisputed debts. The crux of the dispute was held to be whether Asia Master had a bona fide counterclaim on substantial grounds.

The Court accepted Dayang’s argument that, where the entire debt is not disputed (exceeding HK$10,000), it becomes irrelevant whether or not arbitral proceedings commence and the Court must exercise its discretion to wind up the respondent. Where a debtor challenges a petition on the grounds of a genuine and serious counterclaim, which is greater than or equal to the debt, the burden of proof shifts and the debtor must prove the claim is genuine, serious, and of substance. The Court noted similarities with the test for deciding whether a debt is disputed in good faith and on substantial grounds, citing Re Sinom (Hong Kong) Ltd I [2009] 5 HKLRD 487 and Re Alpha Building Construction Ltd, unreported, HCCW 283/2014.

The Court found that the lack of precise factual evidence to substantiate Asia Master’s counterclaim was problematic and indicated a prima facie lack of dispute to the debt. Where the underlying contract contains an arbitration clause that covers any dispute relating to the debt, the Court asked: i) is the Court obliged to stay or dismiss the winding up proceedings in favour of arbitration; and if not, ii) should the Court exercise its discretion to do so?

As to the first question, it is established in Hong Kong law that section 20 of the Arbitration Ordinance, which requires the Court to stay its proceedings if there is a valid arbitration agreement, applies only to actions and not to petitions for winding up.

The Court also held that question of its discretion to stay or dismiss a winding up petition was similarly uncontroversial. The Court pointed to section 180(1) of the Companies (Winding Up and Miscellaneous Provisions Ordinance) (Cap. 32). The Court studied two distinct approaches to show how this discretion should be exercised in a principled manner.

The “Salford-Lasmos Approach”

Asia Master relied on the principles in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 and Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449. It contended that a winding up petition should generally be dismissed where:

  • the contract underlying a debt contains an arbitration clause that covers any dispute relating to the debt;
  • the company takes the steps required by the clause to commence the mandatory dispute resolution process; and
  • the company files an affirmation in accordance with r.32 of the Commission (Winding Up) Rules (Cap. 32H. Sub. Leg.).

However, the judge held that this principle was not engaged as no notice of arbitration had been sent. Consequently, the arbitration proceedings had not been ‘commenced’.

The “Traditional Approach”

The judge noted that the differences between the “Traditional” and “Salford-Lasmos” approaches  were:

  • under the “Traditional Approach”, there cannot be a dispute if it is shown that A is obviously right and B is obviously wrong. B must show a bona fide dispute on substantial grounds; mere assertions will not suffice;
  • under the “Salford-Lasmos Approach”, all B has to do is simply deny A is right. There is no requirement for B to show a bona fide dispute on substantial grounds.

The “Contractual Justification”

Both the Salford and Lasmos judgments acknowledge the importance of protecting the parties’ freedom of contract. Specifically, the courts must protect the parties’ freedom to refer disputes to arbitration. However, the extent to which one’s contractual rights or obligations are (or ought to be) protected by the Court must depend upon the scope of those rights and obligations. This is a matter for contractual interpretation. The analytical starting point should therefore be to construe the agreement to arbitrate.

In the Court’s view, an arbitration clause imposes an obligation to have disputes that fall within its scope determined, or resolved, by arbitration. It also prevents any party from seeking to have such disputes determined or resolved in any other forum.

The Court went on to ask whether presenting a winding up petition to the Companies Courts amounts, per se, to a breach of an agreement to resolve disputes by arbitration. In the Court’s view, “the short answer…is unequivocally ‘no’… [T]he presentation of a winding up petition does not come within the scope of an agreement to arbitrate”.

Ultimately, the Court adopted the “Traditional Approach”.

Winding up as a discretionary remedy

The judgment asserts that there are no strong reasons to put an unprecedented fetter on the Court’s otherwise flexible discretion to make a winding-up order. The judge held:

  • the conditions presented in the “Salford-Lasmos Approach” are antithetical to the nature of discretion and represent an unprecedented fetter on the Court’s discretion; and
  • the inflexibility of this approach may prejudice the interests of creditors because it can compel the creditor to establish the existence of a debt by an action. This would then deprive it of all tangible remedies where the assets of the debtor have been dissipated by the time the action for debt has been completed by arbitration.

The Court referred to several authorities to demonstrate its discretion to allow winding up petitions, even where the debtor is able to prove a bona fide dispute on substantial grounds.

Public policy concerns: ousting the creditor’s right to wind up

While the judge observed that are no public policy objections to the “Salford-Lasmos Approach”, he maintained that its real issue is the impact on the Court’s discretion to make winding up orders rather than its effect on the petitioner’s “right” to petition to wind up.

Decision

The Court made a winding up order against Asia Master, finding:

  1. to dispute the existence of a debt a debtor must show there is a bona fide dispute on substantial grounds; it cannot merely deny the debt. This test applies regardless of whether or not the debt has arisen from a contract incorporating an arbitration clause;
  2. the Court must exercise discretion irrespective of whether there is an arbitration agreement;
  3. commencing arbitration proceedings is not sufficient proof of the existence of a bona fide dispute on substantial grounds, but may constitute relevant evidence of such dispute; and
  4. where a creditor petitions a winding up order on a debt where there is a bona fide dispute based on substantial grounds, it risks being liable to pay the debtor’s costs on an indemnity basis (and the tort of malicious prosecution).

Comment

Recent developments in relation to the issue of winding up petitions with respect to the existence of arbitration clauses / arbitration proceedings between the petitioner and the debtor have seen the Courts shift from the “Traditional Approach” (which is referred to by the Court in paragraph 57 of the judgment as being the need for the debtor to show “a bona fide dispute on substantial grounds” in order to persuade the court to stay or dismiss a winding up petition) to the “Salford-Lasmos Approach” (“Lasmos Approach” previously discussed here) and then back to a more moderate approach in the case But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 (previously discussed here).  In light of such developments, it is notable that the Court in Dayang relied primarily on the “Traditional Approach” in deciding in favour of the creditor.

The Court also considered the “Salford-Lasmos Approach”.  The Court commented that even if the “Salford-Lasmos Approach” was applicable, it would still have held in favour of the creditor because the debtor did not, in failing to timely commence arbitration proceedings, hold a genuine intention to dispute the debt.

It is also notable that the Court spent more than three-quarters of this judgment in an analytical discourse over the recent developments in this area.  As noted by the Court at paragraph 135, “the Singaporean authorities have not been altogether successful in navigating a middle-ground between the Traditional Approach and the Salford-Lasmos Approach.  I suspect that similar problems would more or less arise if the same is attempted in Hong Kong”.  The Court was, therefore unable to come to a clear conclusion.  Nevertheless, the Court, in spending much time on dissecting the matter, has shown a clear intention to resolve this common issue.  Therefore, it is reasonable to expect that further developments in this area will be forthcoming.

 

Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029
Simon Chapman
Simon Chapman
Partner, Hong Kong
+852 2101 4217
May Tai
May Tai
Managing Partner, Greater China
+852 2101 4031
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales) / Professional Support Lawyer, Hong Kong
+852 2101 4214
Philip Lis
Philip Lis
Senior Associate, Hong Kong
+852 2101 4212
Jacob Sin
Jacob Sin
Associate, Hong Kong
+852 2101 4230

HONG KONG: COURT REFUSES STAY WHERE ARBITRATION CLAUSE NOT INCORPORATED FROM CHARTERPARTY

In OCBC Wing Hang Bank Ltd v Kai Sen Shipping Co Ltd [2020] HKCFI 375, the Hong Kong Court of First Instance (Court) dismissed a summons for a stay of proceedings in favour of  arbitration due to the impermissibility of incorporating arbitration agreements from a charterparty. The Court declined to stay its proceedings despite the Respondent having filed a Notice of Arbitration in respect of the same dispute, because the Notice included a clear reservation of rights to litigate.

Background

The Applicant, Kai Sen is the owner of the vessel “YUE YOU 903” and carrier of cargoes described in four tanker bills of lading dated 12 April 2018. The cargoes were to be shipped from Dumai, Indonesia to Huangpo, China and the bills of lading were negotiable bills marked “to order”.

The Respondent, OCBC, claimed it granted facilities to Twin Wealth Oils and Fats (Hong Kong) Ltd and indicated Twin Wealth Commercial Offshore de Macau Limitada as the guarantor (Borrowers). OCBC claimed it received the original bills of lading and commercial invoices from the Borrowers in late April 2018 and is therefore the lawful holder of the bills of lading and entitled to immediate possession of the cargoes.

Kai Sen neglected to present the original bills of lading and released the cargoes. OCBC claimed damages against Kai Sen for breaching the contracts of carriage that were contained or evidenced in the bills of lading, and for Kai Sen’s breach of duty as carrier. OCBC issued the writ of summons in January 2019 and filed a statement of claim in March 2019.

In April 2019, Kai Sen applied under Section 20 of the Arbitration Ordinance to stay the proceedings in favour of arbitration. Kai Sen alleged that that OCBC’s claim was subject to an arbitration agreement incorporated by reference from the charterparty into the bills of lading. OCBC denied being party to an arbitration agreement. In support of its claim, Kai Sen pointed out that OCBC had issued of a notice of arbitration on 28 March 2019.

OCBC argued that because the arbitration agreement is governed by English law, specific words of incorporation are required for an arbitration agreement to be validly incorporated into a bill of lading. This is also the position under Hong Kong law. OCBC therefore claimed that the dispute should not be resolved by arbitration because no specific words of incorporation existed in the bills of lading and OCBC had had no knowledge of the terms of the charterparty until this dispute arose. OCBC contended that it merely possessed documents against payment subject to the Uniform Rules for Collection, and that issuing the Notice of Arbitration was not a submission to arbitration but a tactic to beat the limitation period.

The purported arbitration agreement

The relevant provision of the bills of lading provides:

“This shipment is carried under and pursuant to the terms of the Contract of Affreightment/Charter Party dated 2nd March 2018 between [Kai Sen] as owner and TWIN WEALTH MACAO COMMERCIAL OFFSHORE LTD As Charterers, and all conditions, Liberties and exceptions whatsoever of the said Charter apply to and govern the rights of the parties concerned in this shipment…”

Clause 36 of the charterparty dated 2nd March 2018 referred to in the bills of lading provides:

“ARB, IF ANY, IN HONGKONG UNDER ENGLISH LAW.”

What law governs the arbitration agreement?

Queeny Au-Yeung J found that English law was expressly applied as the law of the arbitration agreement, and governed the obligation to submit disputes to arbitration. Under English law, the validity of an arbitration agreement is tested by reference to the law that would apply to the clause assuming it is valid. An express choice of law in the arbitration agreement is conclusive, regardless of the connection to the law governing the contract, due to the doctrine of separability. Following the decisions in Sea Powerful II Special Maritime Enterprises v Oldendorff GMBH & Co KG (the “Zagora”) [2016] EWHC 3212 (Comm) and Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des Engrais, ICSID Case No. ARB/81/2, the Judge held that although the seat is Hong Kong, English law should govern the incorporation of the arbitration agreement into the bills of lading.

Are specific words of incorporation required under English law ?

Specific words of incorporation must be used to incorporate “collateral” or “ancillary” arbitration or jurisdiction clauses under English law. The judge cited the leading authority, TW Thomas and Co. Limited v The Portsea Steamship Company Limited (The “Portsmouth”) [1910] P.293; [1911] P.55; [1912] A.C. 1, in which general words of incorporation in a bill of lading were held insufficient to incorporate an arbitration agreement in a charterparty.

There are three reasons for this rule.

  • bills of lading are negotiable instruments that are frequently traded internationally and incorporating arbitration clauses into them can have jurisdictional consequences
  • charterparties often include terms that exceed the legal relationship between the holder of the bill of lading and the carrier; and
  • because this is an area of law that greatly relies on clarity and certainty, courts must aim to give effect to settled authority. Consequently, only terms that are directly germane to the matters covered by the bill of lading are incorporated, such as clauses related to shipping or the carriage and delivery of goods, but not dispute resolution clauses.

Are specific words of incorporation required under Hong Kong law?

The judge held that the rule in Thomas v Portsea applies in Hong Kong. In The Pioneer Container [1994] 2 AC 324 and The Mahkutai [1996] 2 HKC 1, the Privy Council confirmed that the rule in Thomas v Portsea applies only to bills of lading or negotiable instruments, and not to other contracts (in respect of which the incorporation of arbitration clauses is permitted by Section 19(1) of the Arbitration Ordinance.

Therefore, the application would be dismissed regardless of whether English or Hong Kong law applied. In fact, the Court surveyed the laws of Singapore, Australia and Canada to demonstrate consistent application of this rule to disputes over bills of lading.

As a result, it was irrelevant whether OCBC had knowledge of the terms of the charterparty because an arbitration agreement could not be incorporated from it into the bills of lading. The Court rejected Kai Sen’s argument that OCBC, with over 30 years of experience, should be aware that an arbitration clause is a normal term in a typical charterparty.

Did OCBC unequivocally submit to arbitration?

Kai Sen claimed that by serving the Notice of Arbitration pursuant to Clause 36 of the charterparty, OCBC had submitted to arbitration. The Court found that parties may impliedly consent to arbitration by commencing or participating in an arbitration without reservation according to Section 19(1) of the Ordinance.

By expressly disclaiming acceptance of Kai Sen’s position and maintaining that Hong Kong courts had jurisdiction in its cover letter, which was delivered on the same date as the Notice of Arbitration, OCBC had manifested its intention to beat the limitation period pursuant to Art III, Rule 6 of the Hague-Visby Rules and had reserved its rights. Therefore, as the arbitration clause was not incorporated from the charterparty into the bills of lading and OCBC had reserved its right to pursue court proceedings, the Court found that it had jurisdiction and dismissed the summons for a stay of proceedings in favour of arbitration.

Comment

This case serves as an important reminder that

  1. express wording is required to incorporate an arbitration clause into bills of lading and other negotiable instruments; and
  2. commencing or participating in arbitral proceedings will not necessarily constitute consent to submit disputes to arbitration if accompanied by an express reservation to the right to litigate.

 

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)/Profesional Support Lawyer, Hong Kong
+852 2101 4214

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

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

Background to the dispute

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

Issues before the court

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

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

Decision

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

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

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

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

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

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

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

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

Comment

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

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

 

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

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

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

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

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

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

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

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

Background

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

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

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

Decision on interim-interim injunction

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

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

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

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

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

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

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

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

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

Comment

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

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

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

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

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