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

Herbert Smith Freehills – SMU Asian Arbitration Lecture

This year marks the ninth edition of the Herbert Smith Freehills – SMU Asian Arbitration Lecture Series.

We are delighted that The Honourable Justice Judith Prakash will deliver the lecture on Wednesday 2 October, on the topic “The Court’s role in arbitral proceedings: regulator or promoter?”

The Herbert Smith Freehills-SMU Asian Arbitration Lecture Series was established in 2010 through funding from Herbert Smith Freehills, and promotes collaborative forms of dispute resolution and access to justice. It also aims to promote Singapore as a leading centre for dispute resolution in Asia, particularly in arbitration and mediation. Each year, a distinguished jurist delivers the lecture, which is also published in a leading global arbitration journal.

Date: Wednesday, 2 October 2019

Time: 4:30pm – Registration

5:00pm – Lecture

Cocktail Reception to follow

Venue: Singapore Management University

Administration Building

Mochtar Riady Auditorium, Level 5

81 Victoria Street

Singapore 188065

Click here to register

The lecture will be a SILE accredited CPD activity.

HERBERT SMITH FREEHILLS PROMOTES THREE ARBITRATION SPECIALISTS TO ITS GLOBAL PARTNERSHIP

Herbert Smith Freehills has promoted seven disputes lawyers to its partnership, out of a total of 22 worldwide. The promotions in the disputes practice, which take effect on 1 May, 2019, span right across the firm’s global network including: London, Paris, Dubai, Singapore, Hong Kong, and Sydney.

Of these new partners, three are arbitration specialists, reflecting the strength and importance of this ever growing practice area to the firm.

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FUNDING IN SINGAPORE AND HONG KONG: HERBERT SMITH FREEHILLS CONTRIBUTES TO LEADING PUBLICATION, ACTS ON FUNDED CASES

Third party funding is a hot topic in Asia.

As noted on this blog, Singapore introduced legislation in 2017 to allow third-party funding in international arbitration and associated proceedings, including enforcement and mediation. Hong Kong’s funding legislation takes effect today.

Our Singapore team is already representing clients in two significant Singapore-seated arbitrations in which the claimants are third-party funded. It is understood that these are amongst the first funded arbitrations in Singapore. We expect Hong Kong arbitrations to generate high levels of interest in funding once the law is in force.

In the light of these exciting developments, Herbert Smith Freehills has contributed the Hong Kong and Singapore chapters of Getting the Deal Through: Litigation Funding 2019. The chapters discuss the trends and legal landscape for funding in both Hong Kong and Singapore.

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

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

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Join us in Singapore to celebrate 60 years of the NY Convention

Enforcement of arbitration awards in SE Asia

This year marks the 60th anniversary of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, commonly referred to as the “New York Convention”.  As one of the most successful international treaties of the 20th century, and a primary tool in the promotion of arbitration worldwide, the Convention established a regime to facilitate international enforcement of arbitration awards in 159 countries.

This event will discuss the impact of the Convention in Southeast Asia, and whether its objectives have been successful in practice.  Following a keynote address by Justice Anselmo Reyes of the Singapore International Commercial Court, a series of presentations and panels will discuss the history of the Convention; how it shapes the day-to-day conduct of international arbitration; practical experience of enforcement in ASEAN states (with data from a new survey); and future prospects for similar regimes that aim to support international litigation and mediated settlements.

This event is jointly hosted by Singapore Management University (a premier university, internationally recognised for world-class research in the field of international arbitration); Singapore International Dispute Resolution Academy (a non-profit organization supported by the Ministry of Law, and Asia’s global thought leader for learning and research in negotiation and dispute resolution); and Herbert Smith Freehills (one of the world’s leading law firms, with a global reputation for international arbitration).

The event will be a SILE accredited CPD activity.

For more information on the programme and speakers, please click here.
Date:     Tuesday, 12 June 2018
Time:     Registration: 4:30pm
Event: 5:00pm to 7:30pm, followed by a cocktail reception
Venue:
NTUC Centre,
1 Marina Boulevard
Level 7, Stephen Riady Auditorium @ NTUC
Singapore 018989

Please click here to view map
RSVP: To respond to this e-invitation, click here

Please RSVP by Tuesday, 29 May 2018 to secure your seat. Spaces are limited and will be offered on a first come, first served basis.
 

Inside Arbitration: Issue #5 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 insights 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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Amendments to the Singapore International Commercial Court Regime to strengthen Singapore as an international arbitration seat of choice

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

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

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

Singapore High Court holds mandatory arbitration agreement in company constitution operative despite earlier litigation

The Singapore High Court ("Singapore Court") has clarified a number of issues concerning the content, scope and operability of arbitration agreements.  Of particular note is the Singapore Court's view on the extent to which a party's choice to subject a dispute, which may otherwise be the subject of an arbitration agreement, to litigation may act as a bar to that party subsequently choosing to refer the dispute to arbitration as a result of the doctrines of waiver or promissory estoppel. The Singapore Court also considered a number of additional issues which serve as a useful reminder as to best practice in drafting and enforcing arbitration agreements.   We discuss the case and the practical issues flowing from it in detail below. 

Facts

In BMO v BMP [2017] SGHC 127 the underlying dispute concerned the ownership of shares in a Vietnamese subsidiary of BMP (the "Subsidiary").  The Defendant, BMP, alleged that its shareholding in the Subsidiary had been substantially reduced by a series of unauthorized and unlawful share transfers which had eventually resulted in the Plaintiff, BMO, becoming the Subsidiary's majority shareholder.  The share transfers were purportedly effected by two individual shareholders in the Plaintiff, with the assistance of the Plaintiff itself.

In July 2014, the Defendant commenced litigation against the Plaintiff and the two individual shareholders in the courts of the British Virgin Islands in relation to the share transfers (the "BVI Litigation"). The Plaintiff acknowledged service of the claim and the parties made a series of interlocutory applications and filings in the courts of the British Virgin Islands.  Subsequently, in May 2015, the Defendant commenced arbitration against the Plaintiff alone (the "Arbitration"), pursuing the same cause of action and relief as it had sought against the Plaintiff in the BVI Litigation.

In March 2016, the BVI Litigation came to an end after the Defendant's claim was struck out.  In the Arbitration, the Plaintiff challenged the jurisdiction of the Tribunal to determine the Defendant's claims, on the basis that the Defendant had lost the right to arbitrate by its decision to pursue the BVI Litigation.  In April 2016, the Tribunal held that it had jurisdiction and ordered the Arbitration to proceed on the merits of the case.  The Plaintiff applied to the Singapore Court to set aside the Tribunal's ruling on its jurisdiction.

Decision of the Singapore High Court

The Singapore Court dismissed the Plaintiff's application and upheld the Tribunal's determination on jurisdiction.  In giving its decision, the Singapore Court discussed a number of important issues. 

  1. Governing law where no express choice is made

The arbitration agreement in this case was contained in the Subsidiary's company charter (i.e. the Subsidiary's constitution), which included no express choice of governing law.  The Court therefore had to determine the proper law of the charter and the arbitration agreement within it. 

The Singapore Court considered the historically divergent case law on this topic, specifically the English case SulAmérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 and the Singapore case FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12.  In short, while SulAmérica stands for the proposition that there is a rebuttable presumption that an implied choice of governing law of the arbitration agreement is the law of the substantive contract, FirstLink took the position that in a competition between an expressly chosen substantive law and the law of the chosen seat of arbitration, it is the law of the chosen seat that prevails.  Both of those decisions have been recently considered by the Singapore Court in BCY v BCZ [2016] SGHC 249 and Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267.  In both BCY and Dyna-Jet, the Singapore Court preferred the approach taken in SulAmérica.  Those decisions were discussed previously on this blog (see posts on BCY and Dyna-Jet).

In this case, the Singapore Court determined that the parties had impliedly chosen Vietnamese law to govern the charter on the basis that the charter included references in certain clauses to the requirements of Vietnamese law and it is unlikely that that the parties would intend for different laws to govern different parts of the charter.  Thus, the Singapore Court again adopted the logic of SulAmérica and applied it to the facts of the case holding that, as the parties' impliedly chose Vietnamese law for the substance of the charter, Vietnamese law also governed the arbitration agreement contained within it.

  1. Scope of the arbitration agreement contained in a company constitutional document

The Plaintiff argued that the Defendant's claims in the Arbitration did not fall within the scope of the arbitration agreement in the charter. The Singapore Court reaffirmed the broad approach to interpreting the scope of arbitration agreements, holding that arbitration agreements "should be generously construed such that all manner of claims, whether common law or statutory, should be regarded as falling within their scope unless there is good reason to conclude otherwise".

The Singapore Court also noted that the arbitration agreement used the phrase "all arising disputes" which could refer to all disputes "arising under", "arising out of", "in connection with", "connected with" or "relating to" the charter. The arbitration agreement was therefore wide enough to extend to disputes between the members of the Subsidiary that were not directly premised on the rights and duties created by the charter. 

  1. Had the Defendant lost the right to arbitrate?

In advancing its case that the Tribunal did not have jurisdiction, the Plaintiff relied on the fact that the Defendant had commenced the BVI Litigation to support three legal arguments:

  1. first, the Defendant had elected not to proceed to arbitration and had thereby waived its right to arbitrate;
  2. second, the Defendant had committed a repudiatory breach of the arbitration agreement; and/or
  3. third, the Defendant was estopped from relying on the arbitration agreement.
  1. Waiver

The Plaintiff argued that by commencing the BVI Litigation, the Defendant had elected not to proceed to arbitration and had thereby waived its right to arbitrate.  The Singapore Court considered this issue and made the following key observations:

  • The terms "waiver" and "election" share an immediate and intimate link: the consequence of election, if established, is the abandonment (i.e. the waiver) of a right.
  • It follows that there can be no "election" when there is no choice to be exercised. There is only election when a party with knowledge of its rights chooses between two inconsistent rights.
  • In the context of a breach of contract, waiver by election focuses on the conduct of the innocent party after the wrongdoing party's breach.  The choice between the two inconsistent rights belongs to the innocent party: namely, affirmation or termination of the contract.

Applying these principles, the Singapore Court held that there was no election available to the Defendant, as the party which had breached the contract by starting the BVI Litigation in breach of the arbitration agreement.  It was the Plaintiff, which then faced a choice between two inconsistent rights (to affirm or terminate) and which, if/when it exercised one of those rights, would be said to have made a waiver by election.  The Plaintiff's argument on waiver by election therefore failed.

The Singapore Court noted that if the arbitration agreement had given the Defendant a choice between arbitration and litigation, and if the Defendant had then initiated the BVI Litigation instead of choosing to arbitrate, this would have amounted to a different type of waiver, namely the unilateral waiver of one of two valid but inconsistent rights.  However, that was not the situation in this case.  Here, it was not correct to argue that a simple breach of contract could amount to a waiver by election.

  1. Repudiation

The Plaintiff argued that the Defendant's commencement of the BVI Litigation was a repudiatory breach of the arbitration agreement, which the Plaintiff had accepted through its participation in the BVI Litigation.  The Singapore Court also rejected this view, finding that breach of an arbitration agreement is not necessarily repudiatory in nature if there was some reason for the breach, such as confusion as to the correct course of action to take to purse a claim.  As in any other case of repudiation, it is necessary to analyse the facts in order to understand whether they indicate an intention not to be bound by the contract.  If not, the breach is not repudiatory. 

In this case, the Singapore Court accepted that the reason for the Defendant's decision to commence the BVI Litigation was that it was simply not aware of its obligation to arbitrate and, therefore, that there was no repudiatory breach.  In reaching this decision, the Singapore Court was mindful that after the Arbitration commenced, the Defendant had applied for a stay of the BVI Litigation in favour of the Arbitration and, therefore, this was not a case where the Defendant was maintaining parallel proceedings in breach of the arbitration agreement.

  1. Estoppel

Finally, the Singapore Court considered whether the Defendant, by commencing the BVI Litigation, had represented that it would no longer be relying on the arbitration agreement, such that it was precluded by promissory estoppel from taking a contrary position.

The Singapore Court clarified that the doctrine of promissory estoppel is applicable only in relation to a promise not to enforce legal rights.  The Defendant's commencement of the BVI Litigation was not a forgoing of any right and therefore the doctrine of promissory estoppel did not apply. Estoppel, like waiver by election, is an argument that may be raised against a party seeking to enforce its rights in response to another party's breach. The position here was reversed: the argument was raised by, not against, the party seeking to enforce its rights.

Conclusions and practical guidance

The decision in BMO v BMP provides a detailed legal analysis of a number of important issues with considerable practical impact.  Specifically, this case serves as a reminder of the following points:

  • There is now a trend of the Singapore Courts preferring to adopt the position in SulAmérica in relation to the applicable choice of governing law for arbitration agreements.  However, it remains to be seen what position the Singapore Court of Appeal will take.  In any event, specifying – in addition to the chosen seat of the arbitration – what law should govern the arbitration agreement, will help avoid uncertainty.  Parties should therefore take great care to consider carefully what law should govern the arbitration agreement, regardless of whether the arbitration agreement is contained in a commercial contract, a shareholders' agreement or a company's constitutional documents.
  • The Singapore Courts will continue to interpret arbitration agreements broadly so as to give maximum effect to parties' decision to arbitrate.  Parties should therefore carefully consider the precise scope of disputes which are intended to be the subject of an arbitration clause.  Where the scope is to be restricted, clear and effective language should be used to achieve any such restriction.
  • When determining the most appropriate forum in which to commence proceedings in relation to a dispute, clients should carefully review all relevant documentation and obtain advice as whether the dispute is required to be commenced by arbitration or litigation.  Commencing a dispute in the wrong forum can result in wasted time and costs and, potentially, the loss of substantive as well as procedural rights.

For further information about this case or arbitration in general, please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate, or your usual Herbert Smith Freehills contact.

 

Alastair Henderson
Alastair Henderson
Partner
+65 6 868 8000
Daniel Waldek
Daniel Waldek
Senior Associate
+65 6 868 8068

The European Court of Justice renders its opinion on the EU-Singapore free trade agreement: investment chapter is not within EU’s exclusive competence

On 16 May, 2017 the European Court of Justice (the Court) rendered its Opinion on the competence of the European Union to conclude the Free Trade Agreement (FTA) with Singapore. The Opinion recognises exclusive EU competence over most of the agreement and largely settles a long-standing dispute between the Commission and the Member States on the division of competences under the Lisbon Treaty.

Importantly, in the context of investor-state dispute resolution, the Court's Opinion is likely to render any agreement including protection for non-direct foreign investments or investor-state dispute settlement (ISDS) provisions a so-called "mixed agreement" which requires each of the Member States as well as the EU itself to become party, unless certain aspects commonly found in such agreements are removed or the Member States otherwise agree (discussed further below).  

The Opinion will have a major impact on the negotiation of future EU trade agreements, whether pending or anticipated (including the potential FTA between the UK and the EU following Brexit).

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