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
+852 2101 4029

Stella Hu
Stella Hu
Of Counsel
+852 2101 4248

Jocelyn Heng
Jocelyn Heng
Associate
+852 2101 4276

 

 

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 FINDS THAT DEFENDANT WAIVED RIGHT TO CHALLENGE JURISDICTION

Israel Sorin Shohat, the Third Defendant in proceedings commenced by Mr Balram Chainrai, sought to challenge the jurisdiction of Hong Kong courts to hear a matter related to an Israeli arbitral award issued in 2013. The court held that, while the deadline for challenging jurisdiction had not passed, Shohat had ultimately taken steps which indicated that he had submitted to the jurisdiction of the Hong Kong courts and therefore waived his right to challenge.

Balram Chainrai v Kushnir Family (Holdings) Ltd [2019] HKCFI 234

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Be on time to preserve your right to Active Remedies – the Singapore High Court considers a party’s duty to apply promptly when challenging the jurisdiction of an arbitral tribunal

In Rakna Arakshaka Lanka Ltd (“RALL“) v Avant Garde Maritime Services (Private) Limited (“AGMS“) [2018] SGHC 78, the Singapore High Court dismissed an application to set aside an award on jurisdiction, on the basis that the applicant had failed to challenge the tribunal’s preliminary ruling on jurisdiction within the deadline stipulated under section 10(3) of the International Arbitration Act (“IAA“) and Article 16(3) of the UNCITRAL Model Law. The decision provides guidance on the distinction between active and passive remedies in the context of applicable deadlines when seeking to set aside an award on grounds of jurisdiction, and resisting enforcement on the same basis.

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Tribunal awards India first BIT case win, dismissing claims of French investor

An UNCITRAL arbitral tribunal has reportedly dismissed a US$36 million claim by a French investor, Louis Dreyfus Armateurs SAS (“LDA“), against India under the 1997 France-India bilateral investment treaty (“BIT“). The award is not public at this time, but press reports state that LDA has also been ordered to pay approximately US$7 million in respect of India’s substantial legal expenses.

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English Court holds that arbitration clauses in individual sales contracts govern the disputes arising from corrupt arrangement to induce the contracts when an “umbrella agent agreement” is silent about dispute resolution

In a decision dated 24 April 2018, the English Commercial Court (the “Court“) dismissed  challenges brought under s67 and s32 of the English Arbitration Act 1996 (the “Act“) by Dreymoor Fertilisers Overseas PTE Ltd. (“Dreymoor“).

The case concerned the construction and application of arbitration clauses to disputes arising out of a complicated business structure with multiple contracts between Eurochem Trading GMBH (“ECTG“), a fertiliser seller, and Dreymoor, an international trading company. Dreymoor sought to challenge the jurisdiction of tribunals constituted in two arbitrations (one LCIA and one ICC) commenced against it by ECTG, arguing (1) for a narrow interpretation of an LCIA arbitration clause to exclude non-contractual claims brought against it by ECTG; and (2) that there was no agreement to arbitrate between ECTG and Dreymoor in respect of the ICC arbitration.

The Court followed the liberal interpretation propounded in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40. The LCIA arbitration clause covered “any dispute or claim arising out of this Contract“. Those words were wide enough to cover the non-contractual disputes which ECTG had referred to LCIA Arbitration and the s67 challenge was dismissed. In respect of the ICC arbitration, the Court again held that the terms of the arbitration clause were very wide and sufficient to cover the disputes referred under it against Dreymoor. The s32 action therefore also failed.

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Dawood Rawat v Mauritius: Dual-national claim dismissed based on treaty context interpretation

On 6 April 2018, a Tribunal constituted under the UNCITRAL Arbitration Rules rendered an Award on Jurisdiction in the case Dawood Rawat v. The Republic of Mauritius (PCA Case 2016-20).  Following a thorough analysis of the interpretation of the 1973 Investment Protection Treaty between the Republic of France and Mauritius (the “France-Mauritius BIT” or the “Treaty”), the Tribunal denied protection of the relevant investment protection treaty to a dual national – a French-Mauritian businessman – despite the treaty was silent on its application to dual nationals.  This approach was contrary to prior investment treaty decisions, such as Serafín García Armas and other v Venezuela, in which tribunals have rejected jurisdictional objections brought by respondent states where relevant the bilateral investment treaty (“BIT”) was silent on the exclusion of dual nationals.

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Amendments to the Singapore International Commercial Court Regime to strengthen Singapore as an international arbitration seat of choice

On 9 January 2018, amendments were passed to the Supreme Court of Judicature (Amendment) Act (“SCJA “) which clarify that the Singapore International Commercial Court (“SICC“) has jurisdiction to hear proceedings relating to international commercial arbitration.  The amendments also abolish the pre-action certificate procedure for applications to the SICC.

Established in 2015 as the ‘international’ division of the Singapore High Court, the SICC has gone from strength to strength in a short span of time, gaining a reputation for the quality and speed of judgments rendered. Since its establishment the SICC has heard 17 cases on matters ranging from construction, investment, banking and finance, and shipbuilding, all of which are high value cases involving international parties and counsel.

These latest amendments, along with the addition of four new esteemed international jurists to the SICC bench, are intended to further increase the popularity and usage of the SICC, and Singapore as a preferred seat of international arbitration. Continue reading

Has the pendulum swung back in favour of the DIFC courts? Two new decisions of the Judicial Tribunal

We recently reported on three decisions of the Judicial Tribunal (please click here) following our commentary on the Judicial Tribunal’s controversial first decision in Daman v Oger and the effect on the Banyan Tree jurisdiction (click here). We concluded that, notwithstanding the absence of detailed reasoning in individual decisions, it was possible to piece together the Judicial Tribunal’s approach from its decisions taken as a whole. The two new decisions shine further light on that approach. Continue reading