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

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

Hong Kong court refuses enforcement where due process denied

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

X v Y  [2020] HKCFI 2782

Background

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

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

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

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

The Decision

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

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

The Tribunal’s jurisdiction

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

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

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

The Bank’s opportunity to present its case

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

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

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

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

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

Leave to Appeal

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

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

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

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

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

Comments

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

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

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

May Tai

May Tai
Managing Partner - Asia
+852 21014031

Simon Chapman

Simon Chapman
Partner
+852 21014217

Kathryn Sanger

Kathryn Sanger
Partner
+852 21014029

Briana Young

Briana Young
Professional Support Consultant
+852 21014214

Hong Kong court refuses to issue “interim-interim” injunction to restrain arbitrator from acting in arbitration

Hong Kong’s District Court has refused to grant an injunction to restrain an arbitrator from acting in an arbitration, on the grounds that there was already another identical application before the court scheduled for hearing and that there was no urgency for granting an “interim-interim” injunction.

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GOVERNMENT LAUNCHES PILOT SCHEME ON FACILITATION FOR PERSONS PARTICIPATING IN ARBITRAL PROCEEDINGS IN HONG KONG

On 29 June 2020, the Hong Kong Government launched a Pilot Scheme on Facilitation for Persons Participating in Arbitral Proceedings in Hong Kong. Under this Scheme, arbitrators, expert and factual witnesses, counsel, and parties to the arbitration (Eligible Persons) can participate in arbitral proceedings in Hong Kong as visitors without needing an employment visa, as was previously required. This is a welcome development, which will facilitate the participation in Hong Kong arbitrations of the many foreign nationals who travel regularly to the city for hearings and other arbitration-related activities.

The Scheme is subject to the following conditions:

  • the Eligible Person holds a nationality that permits him/her to visit Hong Kong without a visa;
  • the duration of the stay does not exceed the current visa-free period;
  • a “Letter of Proof” is obtained from the relevant arbitral institution, confirming that he or she is eligible under the Scheme. (In ad hoc arbitrations, the Letter of Proof must be issued by a reputable venue with established and well-equipped hearing facilities for ad hoc arbitrations; namely, HKIAC or the Department of Justice).

The Department of Justice has authorised the following institutions to issue Letters of Proof: HKIAC, CIETAC Hong Kong Arbitration Center, ICC Asia Office, HKMA, SCIA (HK) and eBRAM. The Department has also issued a Guidance Note on the pilot scheme to the authorised institutions.

The Scheme will be reviewed in two years’ time. Subject to the review, it may be extended to Eligible Persons from other jurisdictions, including Mainland China.

However, in view of Hong Kong’s current COVID-19 measures and travel restrictions, persons covered by the Scheme remain subject to entry restrictions. We expect the Scheme to come into full effect once the relevant restrictions have been lifted.

For more information, please contact May Tai, Partner, Simon Chapman, Partner, Kathryn Sanger, Partner, Briana Young, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

May Tai

May Tai
Partner
+852 21014031

Simon Chapman

Simon Chapman
Partner
+852 21014217

Kathryn Sanger

Kathryn Sanger
Partner
+852 21014029

Briana Young

Briana Young
Senior Associate
+852 21014214

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

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

Background

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

Challenge to the First Award

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

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

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

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

Challenge to the Second Award

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

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

Decision on the Second Award

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

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

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

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

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

Conclusion

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

 

May Tai

May Tai
Managing Partner, Greater China
+852 2101 4031

Simon Chapman

Simon Chapman
Partner, Hong Kong
+852 2101 4217

Kathryn Sanger

Kathryn Sanger
Partner, Hong Kong
+852 2101 4029

Briana Young

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

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

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

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

The full judgment is available here.

BACKGROUND

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

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

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

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

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

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

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

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

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

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

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

DECISION

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

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

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

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

COMMENTS

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

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

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

May Tai

May Tai
Managing Partner, Greater China
+852 2101 4031

Simon Chapman

Simon Chapman
Partner, Hong Kong
+852 2101 4217

Kathryn Sanger

Kathryn Sanger
Partner, Hong Kong
+852 2101 4029

Madhu Krishnan

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

 

NEW INSTITUTIONAL APPOINTMENTS FOR HSF ARBITRATION PRACTITIONERS

Head of Herbert Smith Freehills’ Global Arbitration Practice, Paula Hodges QC, has officially begun her Presidency of the LCIA Court. Lauded by the legal directories as “brilliant” and the “most complete arbitration practitioner in London”, Paula has over 25 years’ experience advising clients in international disputes, particularly in the energy, telecommunications and technology sectors. Paula has been Vice President of the Court for several years and also a LCIA Board member for a decade.  Paula has taken over the role from outgoing President Judith Gill QC in May 2019 and will continue in practice at Herbert Smith Freehills whilst undertaking her new LCIA responsibilities.

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SPC ISSUES PROVISIONS ON ACTION PRESERVATION IN IP RIGHTS DISPUTES

The Supreme People’s Court of China (SPC) has released a new set of judicial interpretations concerning interim injunction applications for intellectual property rights (IP Rights)-related disputes. The Provisions on Application of Laws in Adjudication of Action Preservation Cases Involving Intellectual Property Disputes (Fa Shi [2018] No. 21) (Provisions) were published on 12 December 2018 and take effect on 1 January 2019. Prior to that, a consultation draft of the Provisions was released for public consultation on 26 February 2015.

The Provisions provide further guidance on interim injunctive relief (i.e. action preservation) applications made under Articles 100 and 101 of the Civil Procedure Law 2017 (2017 CPL) in cases concerning IP Rights and unfair competition, and clarify certain key concepts therein. (For more information on interim relief in the PRC, contact briana.young@hsf.com to request a copy of our guide “Interim Relief in Mainland China”.)

Some important articles in the Provisions, which are covered in this post, are:

  • Article 6, which provides for circumstances classified as “urgent circumstances” under Articles 100 and 101 of the 2017 CPL;
  • Article 7, which lists the factors that the courts shall take into consideration in determining whether an action preservation order should be granted;
  • Article 10, which elaborates on the concept of “irreparable harm” under Article 101 of the 2017 CPL in cases related to IP Rights or unfair competition. Risk of “irreparable harm” is an element that needs to be proved in any application for pre-litigation or pre-arbitration action preservation orders; and
  • Article 16, which specifies circumstances under which applications for action preservation will be considered “wrongful”.

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Inside Arbitration: Issue #6 of the publication from Herbert Smith Freehills’ Global Arbitration Practice

We are delighted to share with you the latest issue of the publication from the Herbert Smith Freehills Global Arbitration Practice, Inside Arbitration.

In addition to sharing knowledge and insight about the markets and industries in which our clients operate, the publication offers personal perspectives of our international arbitration partners from across the globe.

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Astro v Lippo: First Media appeal succeeds in Hong Kong

At its final attempt, First Media has overturned the Hong Kong courts’ earlier decisions to enforce five arbitral awards against it.

In a judgment dated 11 April, the Hong Kong Court of Final Appeal (CFA) unanimously allowed First Media’s appeal, set aside the orders of the courts below, and extended time for First Media to apply for leave to set aside the orders granting Astro leave to enforce the awards in Hong Kong.

This is a long-awaited victory for First Media, which has always maintained that the awards were made without jurisdiction, despite its decision not to apply to set aside the tribunal’s award on jurisdiction. However, it is not the final hurdle. First Media must now convince the Court of First Instance, as the enforcing court, to accept its jurisdictional objection and set aside the enforcement orders, while Astro will certainly resist.

Astro Nusantara International B.V. and Others v. PT First Media TBK [2018] HKCFA 12; FACV 14/2017 (11 April 2018) Continue reading