English Court rules that pre-conditions to arbitration are not matters of jurisdiction

The English High Court has declined to set aside an arbitral award, despite the fact that the Defendant had allegedly failed to comply with certain pre-conditions to arbitration agreed in a multi-tiered dispute resolution clause.

The Court said that the alleged non-compliance was a question of admissibility of the claim before the tribunal and not of the tribunal’s jurisdiction. The matter was best determined by the arbitrators and the award was not amenable to challenge under Section 67 of the English Arbitration Act 1996 (Act).

The decision provides welcome certainty that arbitration agreements will be upheld, even where there are questions regarding compliance with pre-conditions to arbitration, such as mandated cooling off or negotiation periods.

Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm)

Background

The underlying dispute concerned the cancellation of a large-scale mining licence. The licence contained a multi-tiered dispute resolution clause, in which the parties agreed to attempt to amicably settle disputes before commencing arbitration:

The parties shall in good faith endeavour to reach an amicable settlement of all differences of opinion or disputes which may arise between them in respect to the execution performance and interpretation or termination of this Agreement, and in respect of the rights and obligations of the parties deriving therefrom.

In the event that the parties shall be unable to reach an amicable settlement within a period of 3 (three) months from a written notice by one party to the other specifying the nature of the dispute and seeking an amicable settlement, either party may submit the matter to the exclusive jurisdiction of a Board of 3 (three) Arbitrators who shall be appointed to carry out their mission in accordance with the International Rules of Conciliation and Arbitration of the… ICC…

The Defendant served a Notice of Dispute on 14 July 2019 and its Request for Arbitration followed some six weeks later, on 30 August 2019.

The Claimant applied to set aside the award under Section 67 of the Act, which provides that an application may be made to Court to challenge any award as to its “substantive jurisdiction”. This is defined under Section 82(1) as referring to the matters specified in Section 30(1) of the Act.

Section 30(1) states that unless otherwise agreed by the parties, a tribunal may rule on its own substantive jurisdiction: “that is – as to: (a) whether there is a valid arbitration agreement; (b) whether the tribunal is properly constituted; and (c) what matters have been submitted to arbitration in accordance with the arbitration agreement.

The Claimant relied on Section 30(1)(c), submitting that because proceedings could not be commenced until the three month window for negotiations had lapsed, the dispute had not been submitted to arbitration in accordance with the parties’ arbitration agreement.

It was common ground between the parties that there is a distinction between a challenge that a claim is not admissible before the tribunal and a challenge that the tribunal had no jurisdiction to hear the claim. Only the latter challenge is available to a party under Section 67 of the Act. The distinction had been recognised by the Court in an earlier case in which it was said that: “Issues of jurisdiction go to the existence or otherwise of a tribunal’s power to judge the merits of a dispute; issues of admissibility go to whether the tribunal will exercise that power in relation to the claims submitted to it.”

Decision

The Court found that leading commentary and international authorities all lean “one way” in saying that pre-conditions to arbitration are questions of admissibility, not jurisdiction.

The Court cited Gary Born’s International Commercial Arbitration (3rd edn. 2021), in which Born said that the best approach is to presume, “absent contrary evidence”, that pre-arbitration procedural requirements are not jurisdictional, but matters better determined by the arbitrators. The rationale for this approach engages important public policy issues:

…parties can be assumed to desire a single, centralised forum (a ‘one-stop shop’) for resolution of their disputes, particularly those disputes regarding the procedural aspects of their dispute resolution mechanism.… The more objective, efficient and fair result, which the parties should be regarded as having presumptively intended, is for a single, neutral arbitral tribunal to resolve all questions regarding the procedural requirements and conduct of the parties’ dispute resolution mechanism.”

The Court was also persuaded by decisions in other leading international arbitration venues. The United States Supreme Court in BG Group v Republic of Argentina 134 S.Ct.1198 rejected a challenge to an arbitral award on the basis that a mandatory pre-condition to arbitration, namely a need to exhaust remedies before a local court, had not been complied with. The Supreme Court held that the question of compliance with pre-arbitration procedures was a matter for the arbitral tribunal to decide and not a question of jurisdiction to be reviewed by the courts.

The Singapore Court of Appeal in BBA v BAZ [2020] 2 SLR 453 and BTN v BTP [2020]SGCA 105 has also recognised the distinction between jurisdiction and admissibility. In the latter case, whether a claim was time barred was held to be a question of admissibility, not a question of jurisdiction.

As a matter of English law, the key question was whether the alleged prematurity of the proceedings properly fell within Section 30(1)(c) of the Act. The Court rejected the Claimant’s submission that this depends on the construction of the dispute resolution clause at hand, on the basis that there is no difference between a clause which provides: “No arbitration shall be brought unless X” and another which says: “In the event of X the parties may arbitrate”.

The Court found that Section 30(1)(c) of the Act has been applied so as to identify what matters have been submitted to arbitration, rather than whether or not matters have been submitted to arbitration. It concluded that if an issue relates to whether a claim could be brought to arbitration (i.e. whether arbitration is the appropriate forum), the issue is ordinarily one of jurisdiction and subject to further recourse under Section 67 of the Act. Whereas if it relates to whether a claim has been brought too early, the issue is one of admissibility and that is best decided by the arbitrators.

In reaching its conclusion, the Court distinguished its previous decisions in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm) (see our blog post here) and Wah (aka Tang) v Grant Thornton International (GTIIL) Ltd [2012] EWHC 3198 (blog post here). In both cases, a challenge under Section 67 of the Act was entertained in circumstances where there was allegedly a failure to comply with a multi-tiered dispute resolution clause. However, the distinction between admissibility and jurisdiction had not been argued before the Court in either case.

Comment

The English High Court’s decision is of great practical and commercial significance, engaging fundamental policy considerations, including upholding arbitration agreements and promoting cost-effective and efficient resolution of disputes.

These policy issues are likely to be persuasive in other arbitration-friendly jurisdictions where this question may arise. Like the Act, many of its international counterparts limit the circumstances in which national courts can intervene in arbitration. In addition, although the Act is bespoke legislation and England and Wales is not an UNCITRAL Model Law jurisdiction, the distinction between matters of admissibility and jurisdiction has been recognised in Singapore, a Model Law jurisdiction.

Parties to disputes, however, remain best advised to comply with multi-tiered dispute resolution clauses where possible. Such clauses will usually be enforceable if they are drafted with a sufficient degree of certainty. Arbitral tribunals retain broad discretion to stay proceedings for a mandated cooling-off or negotiation period, or to apply cost sanctions on a non-compliant party.

It would also be open to a tribunal to rule that a premature claim is not admissible before it. In these circumstances, the parties may have to appoint a new tribunal after they have complied with the relevant pre-conditions, resulting in delay and unnecessary extra cost.

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RISE IN ARBITRATION CASES IN 2020 DESPITE REDUCED VOLUME OF IN PERSON HEARINGS DUE TO CORONAVIRUS PANDEMIC

Most arbitration institutions that have released their statistics for 2020 have reported increased caseloads and/or claim amounts, despite the COVID-19 coronavirus pandemic impacting in person hearings.  The strong demand for arbitration services and the fact that most arbitration institutions were able to move quickly to virtual hearings and avoid costly delays to proceedings establish arbitration as a resilient and reliable choice for commercial dispute resolution.  In this blog post we review both interim and full caseload statistics so far released for 2020.

HKIAC

The Hong Kong International Arbitration Centre broke a number of its own records this year.  With 318 cases, HKIAC received its highest number of new arbitration filings in over a decade.  The total amount in arbitration disputes handled by HKIAC was HK$68.8 billion (approximately US$8.8 billion).  Again, this is a record high since 2011.

203 of the arbitrations filed were administered by HKIAC (under rules such as the HKIAC Administered Arbitration Rules, the UNCITRAL Arbitration Rules and the HKIAC Electronic Transaction Arbitration Rules), representing a 20% year-on-year increase.  The amount in dispute for administered cases was HK$51.3 billion (approximately US$6.6 billion).

There was a small reduction in the proportion of new arbitration filings that were “international” (defined as at least one party not being from Hong Kong).  The proportion of all arbitration cases that were international also recorded a small drop.  The vast majority of cases (99.4%) chose Hong Kong as the seat of arbitration.  Hong Kong law was also the most commonly selected governing law for disputed contracts handled by HKIAC.

In 2020, HKIAC processed 22 applications under the Hong Kong-Mainland China Interim Relief Arrangement (Arrangement), which came into force in October 2019.  The total value of the evidence, assets or conduct sought to be preserved amounted to ¥6.4 billion (approximately US$988 million), of which ¥4.4 billion (approximately US$683.3 million) were successfully preserved.  This is an encouraging number, as it shows in the early days of the Arrangement that there is a realistic chance that assets and evidence sought to be preserved would likely be ordered to be preserved.

Fourteen emergency arbitrator applications were submitted to HKIAC in 2020. This is a large number, particularly given that only twenty-seven emergency arbitrator applications in total had been filed with HKIAC before 2020.  While it appears that 11 of the 14 applications were made in related arbitrations (which likely refer to a series of arbitrations arising from a related set of contracts or arise from the same or similar set of facts), there were still more applications than in past years.  Only three emergency arbitrator applications were filed in 2018, while none were filed in 2019.

The HKIAC granted 24 applications for expedited procedure in 2020, from a total of 28 applications.

There was a clear pivot to virtual hearings in 2020: 80 out of 117 hearings hosted by HKIAC in 2020 were fully or partially virtual, doubtless as a result of the pandemic.  Only 37 hearings were in-person, hosted at the HKIAC’s Hong Kong premises.

Fifty-two HKIAC arbitrations were concluded by Final Award in 2020, while four reached party settlement.

Finally, HKIAC released statistics on diversity of arbitrator appointments.  Of the 149 arbitrator appointments by HKIAC in 2020, 34 were of female arbitrators.  This continues an upward trend from 17.6% in 2018, to 20.5% in 2019 and 22.8% in 2020.

SIAC

The Singapore International Arbitration Centre is expected to report its full case load information later this year, but it has already announced that it had crossed the 1000-case threshold with 1005 new cases in 2020 as of 30 October 2020.  This is another record year for SIAC, breaking the previous record caseload it had reported in 2019.

CIETAC

The China International Economic and Trade Arbitration Commission also saw growth in its caseload in 2020.  A total of 3615 ongoing cases were registered by CIETAC, representing an 8.5% year-on-year growth.

CIETAC reported that it handled disputes amounting in total to ¥112.130 billion (approximately US$17.3 billion).

There was growth not only in the number of cases handled by CIETAC, but also in terms of its international caseload.  In 2020, 739 cases were categorised as “foreign-related cases”, compared to 617 in 2019.  67 of these were cases where both parties were considered “foreign”, which was a record high for CIETAC.  CIETAC made 5213 arbitrator appointments in 2020.

As part of its response to the pandemic, CIETAC also established new virtual hearing centres, handling 819 virtual hearings.  This was an increase of 628 cases that were heard virtually.

ICC

Like HKIAC, the International Chamber of Commerce Court of Arbitration also announced record demand for its arbitration services last year.

ICC reported 946 new arbitration cases in 2020, the highest since 2016.  The majority of the new cases (929 cases) adopted the ICC Rules of Arbitration, while the remaining 17 (which were ad hoc cases) were filed under the ICC Appointing Authority Rules.

LCIA

The London Court of International Arbitration also reported a record breaking 444 cases referred to the institution in 2020, which broke the record caseload LCIA had reported in 2019 by an increase of about 10%.  These results were published on an interim basis and further statistics are expected to be released later this year.

VIAC

The Vienna International Arbitral Centre received 40 new cases in 2020, with the majority of cases involving an Austrian party.  The total amount of disputes handled by VIAC by the end of 2020 was €428 million (approximately US$518 million).

Compared to 2019, where VIAC saw 45 new cases, there was a small drop in the number of new cases received.  However, looking at the statistics for VIAC over the past few years, the number of new cases each year has generally ranged from 40 to 60 cases, so the small drop is likely part of a normal fluctuation over a longer period.

While the number of new cases did not grow, on the diversity front, more than 30% of arbitrators nominated or appointed in VIAC cases were female arbitrators.  This is the highest that VIAC has seen in recent years, and is a highlight for the institution.

DIA

The statistics from the Danish Institute of Arbitration indicate that it is primarily focused on domestic arbitrations, but about one-fifth of its cases were international in nature.  At 28 cases in 2020, DIA’s international caseload was approximately the same as during  the past five years, which ranged from 27 to 33 cases.

SCAI

The Swiss Chambers’ Arbitration Institution reported 83 new arbitration cases in 2020, with 61 being international.  While the number of new cases was not the highest that SCAI has received, it continues an average growth trend over the past decade.

AAA-ICDR

The American Arbitration Association-International Centre for Dispute Resolution reported that it handled 9538 cases in 2020, worth approximately US$18 billion.  This is a slight drop from 9737 cases in 2019, but – notably – an increase in claim amount when compared to the US$15 billion in claims in 2019.  AAA-ICDR also saw an increase from 94 filings for emergency arbitration in 2019 to 111 filings in 2020.

The largest claims, in aggregate, were from the technology sector (US$1.4 billion) followed by financial services, telecommunications and energy (in that order).  This is in contrast to the largest claims in 2019 coming from life sciences (USD 1 billion) followed by construction, real estate and technology.

In terms of changes in caseload by sector, cases related to the cannabis industry saw a 100% increase, the largest rise of any sector (the same industry saw a 225% increase in 2019, which was also the largest sector rise in 2019).

On the diversity front, AAA-ICDR reported 33% of appointments as “diverse appointments” (which refers to gender and ethnic diversity).

Commentary

A majority of arbitration institutions globally reported growth in case load and/or claim amounts in 2020, many of them even breaking their previous records.  This goes to show that arbitration remains a robust dispute resolution mechanism, which has proven its ability to adapt to the highly challenging circumstances of the past year.

It was also a clear side effect of the pandemic that there was a significant shift to virtual hearings.  While users have been slowly moving towards virtual hearings for a number of years, it appears that 2020 will be recognised as the year in which virtual hearings went mainstream, allowing arbitral institutions all over the world to continue to serve the needs of their users.

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

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

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

Background

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

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

Stay Application

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

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

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

Difference Issue

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

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

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

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

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

Policy Issue

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

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

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

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

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

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

Comments

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

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

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

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Hong Kong court refuses enforcement where due process denied

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

X v Y  [2020] HKCFI 2782

Background

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

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

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

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

The Decision

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

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

The Tribunal’s jurisdiction

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

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

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

The Bank’s opportunity to present its case

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

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

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

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

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

Leave to Appeal

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

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

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

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

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

Comments

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

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

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

May Tai

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Simon Chapman

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Kathryn Sanger

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

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

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

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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 MAKES HADKINSON ORDER AND IMPOSES SECURITY AGAINST CHINESE BILLIONAIRE

The Hong Kong Court of First Instance has granted a so-called “Hadkinson order”, adjourning an application to resist enforcement of CIETAC arbitral awards, on the basis of the applicant’s poor conduct in earlier stages of the proceedings. The court also ordered the parties resisting enforcement to pay 40% of the award amounts as security. The application is the latest in a series of interim relief and enforcement proceedings in support of a Beijing seated CIETAC arbitration against Zhang Lan, billionaire and founder of the South Beauty restaurant group. Madam Zhang was earlier held in contempt of court for breaching a Hong Kong court injunction and asset disclosure order.

La Dolce Vita Fine Dining Group Holdings Ltd v Zhang Lan [2020] HKCFI 622

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

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

Background

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

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

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

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

The court’s decision

Court’s exorbitant jurisdiction

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

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

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

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

 

Stay for arbitration dismissed

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

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

Comments

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

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

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

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

Simon Chapman

Simon Chapman
Partner
+852 2101 4217

Kathryn Sanger

Kathryn Sanger
Partner
+852 2101 4029

Stella Hu

Stella Hu
Of Counsel
+852 2101 4248

Jocelyn Heng

Jocelyn Heng
Associate
+852 2101 4276

 

 

HERBERT SMITH FREEHILLS PARTNER SIMON CHAPMAN TO BE APPOINTED QUEEN’S COUNSEL

We are very proud to announce that Simon Chapman, Head of Greater China Disputes, is to be appointed Queen’s Counsel.

The award of Queen’s Counsel is for excellence in both written and oral advocacy before the higher courts and arbitration tribunals. Simon is to be one of only 4 solicitor-advocates amongst the 114 QCs appointed this year. Simon will be one of a handful of Solicitor QCs in Asia, and the fourth QC currently practising at Herbert Smith Freehills. The prestigious appointment of QC is made by Her Majesty The Queen on the advice of the UK Lord Chancellor, following consideration by an independent Queen’s Counsel Selection Panel. The appointment is given to distinguished practitioners based on merit, and in recognition of their professional ability, reputation and integrity.

Simon is an international arbitration specialist focusing on cross-border disputes in Asia. He leads the Herbert Smith Freehills Practice in Greater China and appears regularly as lead counsel before arbitral tribunals all over the world. His practice covers both investment treaty and commercial arbitration and he has particular expertise in claims in fraud and breach of warranty, as well as post-M&A, joint venture, and shareholder disputes. Simon’s clients have included governments, state-owned entities, sovereign wealth funds and corporations across a range of industries, including the energy, private equity, finance, hospitality, and TMT sectors.

“With Simon’s appointment, Herbert Smith Freehills joins a very small group of firms that can offer its clients in-house access to senior advocacy through a practising QC based in Asia” said Executive Partner and CEO Elect Justin D’Agostino. “The appointment highlights the high calibre of talent and the bench strength of the firm’s market-leading disputes practice in the region and across our global disputes practice.”

“Simon is an extremely talented advocate, and we are very proud of this richly deserved appointment”, said Paula Hodges QC, Global Head of the International Arbitration practice at Herbert Smith Freehills. “It reflects Simon’s legal excellence and demonstrates the high esteem in which he is held by his peers, colleagues and clients.”

Simon will officially take silk at a ceremony on 16 April 2020.

Simon Chapman

Simon Chapman
Partner
+852 21014217