Inconsistent dispute resolution clauses – exploring the limits of the Fiona Trust presumption

The presumption that “rational businessmen” intend all their disputes to be resolved in the same forum may not apply where the parties clearly intended otherwise. Construing such intentions requires a “broad and commercially minded approach” to inconsistent dispute resolution clauses.

In H v G [2022] HKCFI 1327, the Hong Kong Court of First Instance set aside an arbitral tribunal’s determination that it had jurisdiction over claims under a warranty where an associated contract contained the arbitration clause, but the warranty itself provided for litigation in Hong Kong.  This decision underlines that there are limits to the Fiona Trust presumption in cases where the parties’ overall contractual arrangements give rise to agreements containing different dispute resolution provisions.

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SOUTH CHINA INTERNATIONAL ARBITRATION CENTER (HONG KONG) ARBITRATION RULES COME INTO FORCE

South China International Arbitration Center (Hong Kong) (SCIAHK) is a new Hong Kong registered arbitral institution. It is affiliated to the Shenzhen-based Shenzhen Court of International Arbitration (SCIA, also known as South China International Economic and Trade Arbitration Commission), but operates as an independent institution. SCIAHK’s Board recently approved the South China International Arbitration Center (Hong Kong) Arbitration Rules (the Rules), which came into force on 1 May 2022.

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Hong Kong gazettes success fee Bill

Hong Kong has officially published a Bill that would allow lawyers to agree outcome-based fees for arbitration work in the territory.

If, as expected, the Bill passes into law later this year, it will allow lawyers in and outside Hong Kong to agree fees based on their clients’ success in the arbitration. This is a sea-change for a jurisdiction that, until now, has prohibited such fees.

The Bill is the next stage in a process of reforming Hong Kong’s laws and professional conduct rules that began with a public consultation chaired by Herbert Smith Freehills’ Kathryn Sanger and Briana Young.

Under the proposed reforms, which enjoy widespread public backing, parties would benefit from a broad range of fee options, including:

  • Conditional fee agreements (CFAs)
  • Damages-based agreements (DBAs)
  • Hybrid DBAs

The Bill would add a new Part 10B to Hong Kong’s Arbitration Ordinance (Cap. 609), removing the prohibition on success fees for arbitration and related court or mediation proceedings. It would also amend the Legal Practitioners Ordinance (Cap. 159), as well as professional conduct rules, to allow Hong Kong barristers, solicitors, and registered foreign lawyers to accept such fees without breaching ethical obligations.

The new law would allow Hong Kong based lawyers to charge success fees for arbitrations seated in or outside the territory. Lawyers and clients based outside Hong Kong can take advantage of the new rules when working on a Hong Kong-seated case.

The proposed changes would not apply to Hong Kong civil or criminal proceedings, or to an arbitration involving a personal injury claim.

What are outcome related fees?

CFA

Under a CFA, the client agrees to pay the lawyer an additional fee, known as a success fee, only in the event of a successful outcome for the client. The success fee can be an agreed flat fee, or calculated as a percentage uplift on the lawyer’s usual (“benchmark” or “standard”) fee; i.e. the fee that the lawyer would have charged if there were no CFA in place. The client may also pay fees during the life of the matter, typically at a discounted rate. Alternatively, lawyers and clients may agree a “no win, no fee” CFA.

DBA

Under a damages based agreement, the lawyer charges no fees during the life of the arbitration, but receives payment only if the client obtains a “financial benefit” in the matter. The payment, known as the “DBA payment”, is calculated by reference to the financial benefit. Typically, it will be a percentage of money awarded to the client or paid to settle the claim. It can include any other form of financial benefit, such as a physical asset, debt or reduction in a sum claimed against the client.

Hybrid DBA

In a Hybrid DBA, the lawyer charges some (typically discounted) fees during the life of the matter, plus a DBA payment if the client obtains a financial benefit in the arbitration.

Regulation

The Bill paves the way for more detailed regulation of the outcome related fee regime, in the form of subsidiary legislation. It also empowers the Secretary for Justice to appoint an advisory body and an authorised body to oversee the regime, and allows the advisory body to issue a code of practice. This structure reflects the regime that regulates third party funding of arbitrations in Hong Kong (Part 10A Arbitration Ordinance). As with third party funding, a client will have to disclose in the arbitration that it has entered an outcome related fee agreement with its lawyers. The new provisions also contain exceptions to the general confidentiality regime under the Arbitration Ordinance, permitting such disclosure.

Finally – barring exceptional circumstances – an arbitrator cannot order a losing party to pay the costs of its successful opponent that exceed the amount it would have incurred had the successful party not entered an outcome related fee agreement with its lawyers. This adheres to the “indemnity principle” that applies in many common law jurisdictions, under which a court cannot order a losing party to pay more costs than the successful party actually paid to its lawyers. Respondents to the consultation also felt, overwhelmingly, that it was unfair to penalise an unsuccessful party for a fee arrangement over which it has no control at the outset.

Conclusion

The Bill proposes significant, welcome, changes to Hong Kong’s legal fee regime for arbitration. The recommended measures allow Hong Kong to maintain its competitive position as one of the world’s top seats, by responding to clients’ desire for alternatives to the traditional hourly fee, and allowing lawyers to share litigation risk with the parties who instruct them.

To learn more about the alternative fee arrangements we can offer, email Kathryn Sanger, Briana Young, John O’Donoghue or your usual Herbert Smith Freehills contact.

Kathryn Sanger
Kathryn Sanger
Partner
+852 21014029
Briana Young
Briana Young
Professional Support Consultant
+852 21014214

Fruit of collusion: Hong Kong Court set aside an enforcement order for a Mainland award

On a rare occasion, the Court of First Instance has set aside an enforcement order for a Mainland award (made under the auspices of the Zhanjiang Arbitration Commission) on the basis that the underlying contract was a sham, the arbitration agreement was not valid, and thus it would be contrary to public policy to enforce the award.

廣東順德展煒商貿有限公司 v Sun Fung Timber Company Limited [2021] HKCFI 3823

Background

The Respondent (Company) was 50% owned by ST and 50% owned by a company, NI, of which DL was the majority shareholder.  ST and DL were both directors of the Company.

In late 2016, a dispute arose between the two shareholders and directors.  As a result, the Company started to wind down its operations, with talks between ST and DL about selling the assets of the Company.

On 14 April 2017, ST purportedly entered into a contract on behalf of the Company with the Applicant (GD) for the sale of marble (Contract).  The Contract contained many peculiar features.  The Company’s usual business involved only timber retailing, as opposed to marble stones.  The Contract, nonetheless, was for the sale of a substantial amount of marble to GD for the significant sum of RMB 220 million.  The consideration was some 62 times of the Company’s annual sales revenue, and GD was incorporated only 3 months before the date of the Contract.  Pursuant to the Contract, the delivery of the marble was to be made within 6 days, failing which the Company had to pay RMB 2.2 million per day as penalty.  The Company failed to deliver the marble.

On 15 May 2017, pursuant to the arbitration agreement in the Contract (Arbitration Agreement), GD commenced arbitral proceedings before the Zhanjiang Arbitration Commission against the Company for breach of the Contract (Arbitration).  ST conducted the entire Arbitration on behalf of the Company, and caused the Company to admit liability and confirm that the Company should pay damages in the sum of RMB 59 million.  Within 4 days, GD obtained an award against the Company in the agreed amount (Award).

GD sought to wind up the Company based on the Award.  NI and DL only became aware of the Award during the course of the winding-up proceedings, which were subsequently dismissed by the Hong Kong court on the basis of a bona fide dispute over the debt.

GD then applied ex parte for and obtained an order granting leave to enforce the Award in Hong Kong (Enforcement Order).  NI obtained leave to intervene in these proceedings and sought to set aside the Enforcement Order on the grounds that ST lacked authority to enter into the Contract, that the Contract (including the Arbitration Agreement therein) was void, that the Company had not been given proper notice of the Arbitration, and that the enforcement of the Award would be contrary to public policy.  In particular, NI argued that the Contract was in reality a sham orchestrated by ST and GD to enable ST to receive valuable assets of the Company without the need to share such assets with NI, should the Company be dissolved in the usual way.

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HONG KONG COURT REFUSES TO TIGHTEN THE TEST AND STAYS WINDING-UP PETITION IN FAVOUR OF ARBITRATION

In a recent decision, the Hong Kong Court of First Instance stayed a winding-up petition on just and equitable grounds in favour of arbitration, and refused to require the applicant to satisfy the more onerous test as is applied to a case management stay.

China Europe International Business School v Chengwei Evergreen Capital LP (formerly known as Chengwei Ventures Evergreen Fund LP) and Others [2021] HKCFI 3513

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HONG KONG COURT CONSTRUES INCONSISTENT DISPUTE RESOLUTION CLAUSES IN RELATED CONTRACTS

In a recent decision that involved interlinked agreements containing different dispute resolution clauses, the Hong Kong Court of First Instance refused to stay court proceedings in favour of arbitration, on the basis that the centre of gravity of the dispute did not fall within the contracts that contained the arbitration agreement.

Zpmc-Red Box Energy Services Limited v Philip Jeffrey Adkins and Others [2021] HKCFI 3501

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Ministry of Justice publishes revised draft PRC Arbitration Law

On 30 July 2021, the Ministry of Justice (MoJ) of the PRC released proposed revisions to the PRC Arbitration Law for public consultation.  The MoJ also published explanatory notes to the Revised Draft.

The PRC Arbitration Law was promulgated in 1994 and has been in force for 26 years without substantial amendment.  With the rapid economic expansion over the past decades in Mainland China, the Arbitration Law has, in many respects, become disconnected from both economic reality and international practice.  In 2018, the MoJ started the revision process, which led to the publication of the Revised Draft on 30 July.

The Revised Draft signals a range of ground-breaking changes to the existing arbitration regime in Mainland China.  For example:

  • Foreign arbitration institutions will be expressly permitted to establish business operations in Mainland China to “conduct foreign-related arbitration business”;
  • Ad hoc arbitration, which is not currently permitted in Mainland China, will be permitted for “foreign-related commercial disputes”;
  • The Law will expressly recognise that the nationality of arbitral awards is determined by the seat of the arbitration. While the PRC judiciary has adopted this approach in practice, the concept of a “seat” of arbitration is not expressly recognised under the current PRC Arbitration Law.
  • The kompetenz-kompetenz doctrine, which does not exist under the current Arbitration Law, will finally be recognised. This principle allows arbitrators to determine their own jurisdiction over a claim;
  • Arbitral tribunals will be empowered to grant interim measures. Currently, this power is reserved to the PRC courts.

These are all welcome changes, which would bring Mainland China’s arbitral regime further into line with international best practice.

We will provide a more detailed summary of the key changes proposed in a later blogpost.

For further information, please contact Helen Tang, Partner, Weina Ye, International Partner, Stella Hu, Senior Consultant, Kathryn Sanger, Partner or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Weina Ye
Weina Ye
International Partner
+86 21 2322 2132
Stella Hu
Stella Hu
Senior Consultant
+852 21014248
Kathryn Sanger
Kathryn Sanger
Partner
+852 21014029

HKIAC publishes average costs and duration

The Hong Kong International Arbitration Centre has released an updated report on the average costs and duration of HKIAC arbitral proceedings, following previous reports in 2018 and 2016. The report demonstrates that HKIAC offers parties administered arbitration, as well as expedited and emergency proceedings, that are both efficient and reasonably priced.

The updated report reflects data from all cases in which a final award or decision was issued between 1 November 2013 and 31 May 2021, totalling 186 arbitrations, including 44 expedited arbitrations and 13 emergency arbitrations. Arbitrations which were withdrawn, settled or terminated prior to the final award or decision were not covered.

Cost and duration are presented by both median and mean values, but the HKIAC comments that “the median value is the more meaningful and robust value, as it minimises the skewing effect of outliers“.

Key takeaways are summarised below:

  • Overall duration and costs.The median duration was 13 months (representing a decrease from 16.2 months in the 2018 report) and the mean duration was 16.9 months. The median total costs of arbitration were US$64,606 and the mean US$137,332.
  • Payment to the arbitral tribunal. Under the HKIAC Administered Arbitration Rules, parties have the option of paying an hourly rate (capped at HK$6,500 or approximately US$840) or on ad valorem Of the 186 arbitrations reported, the vast majority opted for the former. Arbitral tribunals were paid by an hourly rate in 175 proceedings, and by reference to an ad valorem fee scale in the remaining 11 proceedings.
  • Expedited arbitration.The median duration of expedited proceedings was 8.9 months and the mean 9.3 months, a slight increase as compared to the 2018 report. Likewise, the median and mean costs for expedited arbitration increased slightly to US$24,212 and US$51,239, respectively.
  • Emergency arbitration.The duration of emergency arbitrations was measured from the date of HKIAC’s acceptance of the application to the date of the emergency arbitrator’s decision, inclusive of any stays. The median duration was 15 days (a slight increase from 14 days in the 2018 report) and 22.6 hours from application to the HKIAC to the appointment of the emergency arbitrator.

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

Simon Chapman QC
Simon Chapman QC
Partner, Regional Head of Practice - Dispute Resolution, Asia
+852 21014217
Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 21014029
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales)/Professional Support Consultant, Hong Kong
+852 21014214
Sophia Li
Sophia Li
Associate, Hong Kong
+852 21014178

Hong Kong court sets aside award for wrongful identification of party

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

AB v CD [2021] HKCFI 327

Background

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

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

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

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

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

Decision

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

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

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

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

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

Comment

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

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

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

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