Tag: Arbitration

CICC delivers first ruling, confirms arbitration agreements severable

The First International Commercial Court of the Supreme People’s Court of China (“CICC“) has recently published its first rulings [1] on the validity of three arbitration agreements in relation to one same transaction. CICC recognised the principle of severability of arbitration agreement and held that although the underlying contracts had not been formally signed, the parties had reached valid arbitration agreements.

Background

The dispute concerns a proposed sale of shares in Newpower Enterprise Inc. (the “Target“) by Luck Treat Limited (the “Seller“) to Zhongyuan Cheng Commercial Investment Holdings Co., Ltd. (the “Purchaser“) for a consideration of RMB900 million. The parties negotiated the sale and purchase agreement (the “SPA“) but it was never signed. The Seller is a subsidiary of China National Travel Service Group Corporation and holds 100% shares in the Target. The Seller and the Target are incorporated in the BVI, while the Purchaser is a PRC company.

In connection with the share transfer, the Purchaser and a number of the Seller’s affiliates also intended to enter into a debt settlement agreement (the “DSA“) under which the Purchaser was to pay certain debts owed by the Target and the Seller’s affiliates.

In the course of May 2017, the parties negotiated on the terms of the SPA and the DSA through email correspondence. The draft SPA and DSA both provide that the SPA/DSA shall be governed by PRC law and that disputes shall be submitted to arbitration administered by the Shenzhen Court of International Arbitration (“SCIA“). The dispute resolution clauses in the draft SPA and the draft DSA have not been changed since 11 May 2017.

The negotiations were very advanced and the parties proceeded to their respective internal approvals for signing in mid-May 2017. On 1 June 2017, the Seller issued a letter to the Purchaser, indicating that the purchase of Target’s shares would constitute an overseas investment under the applicable PRC laws, and thus the Purchaser was required to apply for certain governmental approval or filing procedures. The intended signing did not take place subsequently.

On 4 April 2018, the Purchaser commenced arbitration against the Seller and its affiliates in SCIA. In response, the Seller and its affiliates applied to the Intermediate People’s Court of Shenzhen for a confirmation that parties have not entered into valid arbitration agreements.

CICC considered this case significant and took it over.

CICC’s Rulings

The main issue for CICC to decide was whether the arbitration agreements in respect of the SPA and the DSA have been validly formed.

CICC first confirmed that this issue falls within its jurisdiction as a dispute on the validity of the arbitration agreement under Article 20 of the PRC Arbitration Law (the “Arbitration Law“).

It further confirmed that the governing law of the arbitration agreements was PRC law because the parties agreed so, and went on to apply PRC law to determine the validity of the disputed arbitration agreements at the beginning of the formal inquiry of the case. CICC then referred to Article 16 of the Arbitration Law, which provides that an arbitration agreement includes (1) the arbitration clauses provided in the contract, and (2) any other written form of agreement concluded before or after the disputes. In this case, the disputed arbitration agreements were in the form of arbitration clauses in the SPA/DSA.

CICC emphasised that it has been well established that an arbitration agreement (including in the form of an arbitration clause) is separable and independent from the underlying contract in which it is contained (the doctrine of severability of an arbitration agreement). The existence, validity and governing law of the arbitration agreement are to be considered separately from those of the underlying contract.

CICC referred to the doctrine of severability of arbitration agreement under PRC law as the legal basis. Article 19(1) of the Arbitration Law provides that an arbitration agreement shall exist independently, and any changes to, rescission, termination or invalidity of the contract shall not affect the validity of the arbitration agreement. In addition, Section 10(2) of the Interpretation of the Supreme People’s Court on the Application of the Arbitration Law specifically provides that where the parties reach an agreement for arbitration regarding the dispute when entering into a contract, the validity of the arbitration agreement shall not be impacted even if the contract is not formed.

In arriving at its decision that the disputed arbitration agreements have been validly formed, CICC looked at the parties’ negotiation history and considered whether the parties had in fact consented to submit any disputes to arbitration. Arbitration agreements, like other contracts, are governed by the relevant rules on contract formation, and specifically, rules regarding offer and acceptance under PRC law.

CICC gave weight to the fact that the earliest draft SPA provided by China Beijing Equity Exchange contained a clause allowing parties to submit the dispute to Beijing Arbitration Commission for arbitration. Upon negotiation, the parties changed the arbitration institution to SCIA and the arbitration clauses in the draft SPA and the draft DSA remained unchanged since 11 May 2017. Therefore, CICC came to the conclusion that the parties have consented to the agreement to arbitrate. Valid arbitration agreements have been formed, regardless of whether the SPA and DSA were signed. CICC also stated that whether valid SPA and DSA have been entered into is a separate issue for the arbitral tribunal to decide.

Comment

The first rulings of CICC are significant as CICC expressly confirms the doctrine of severability of arbitration agreement under PRC law. While Article 20 of the Arbitration Law does not expressly provides so, CICC confirmed that the dispute over formation of an arbitration agreement falls within the scope of a dispute over validity of the arbitration agreement.

This case also demonstrates CICC’s efforts to reduce any possible delays due to the tiered reporting mechanism and improve the efficiency to resolve international commercial disputes through its review of significant international commercial cases at first instance.

 

[1] The case reference numbers for the first three rulings are (2019) Zui Gao Fa Min Te No.1, 2 and 3, respectively.

 

For more information, please contact Helen Tang, Stella Hu, Briana Young or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner, Mainland China
+86 21 2322 2160
Stella Hu
Stella Hu
Senior Consultant, Hong Kong
+852 2101 4248
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales)/Professional Support Consultant, Hong Kong
+852 2101 4214

Hong Kong funding law to take effect 1 February

Hong Kong has published its long-awaited Code of Practice for third party funders, and announced that amendments to the Arbitration Ordinance which permit funding of Hong Kong arbitrations will come fully into force on 1 February 2019. Similar amendments to the Mediation Ordinance (Cap. 620) have been deferred for further consultation.

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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. Continue reading

Recent Developments in India-related International Arbitration

Herbert Smith Freehills has issued the latest edition of its Indian international arbitration e-bulletin.

In this issue we consider various court decisions, which cover issues such as the applicability of the Arbitration Amendment Act 2015, binding non-signatories to an award, enforcement of an award before the National Company Law Tribunal, and the continued pro-arbitration approach of the Indian courts. In other news, we consider the continued rise of institutional arbitration in India, a detailed analysis of the proposed amendments to the Arbitration Act, as well as India-related bilateral investment treaty news (and other developments). Continue reading

HONG KONG: UNLAWFUL DISMISSAL REINSTATEMENT RIGHTS FROM OCTOBER

Amendments to the Employment Ordinance (“EO“) which strengthen the Labour Tribunal’s (“LT“) powers to make an order for reinstatement or re-engagement where an employee has been unreasonably and unlawfully dismissed have been passed and are to take effect from 19 October 2018. This represents a move away from the current position where both the employer and employee must agree to reinstatement or re-engagement. We anticipate that applications for reinstatement will increase; including as a strategy by employees seeking to leverage greater settlement payments from employers unwilling to take them back.

Strengthening the power of the LT

Previously, the LT was only able to make an order for reinstatement or re-engagement with the consent of both the employer and the employee. From October, where the employee has been found to have been unreasonably and unlawfully dismissed under section 32A(1)(c) of the EO (“Unlawful Dismissal”), the LT can order reinstatement or re-engagement without the employer’s agreement. Unlawful Dismissal will occur where an employee is dismissed without a valid reason and one or more of the following is present:

  • the employee is pregnant or on statutory maternity leave;
  • the employee is on statutory sick leave or is suffering from a work-related illness or injury where an assessment of compensation due under the Employees’ Compensation Ordinance is pending;
  • the dismissal is due to the employee being a member or officer of a trade union or having engaged in lawful trade union activities; or
  • the dismissal is due to the employee having given or agreed to give evidence in relation to:
    • an alleged breach of the EO, the Factories and Industrial Undertakings Ordinance or any work safety obligations; or
    • a workplace accident.

In all other cases, an order for reinstatement or re-engagement will still require the consent of both parties.

Additional financial compensation and criminal liability

In the event the employer fails to comply with an order for reinstatement or re-engagement, they must pay compensation to the employee of the lesser of HK$72,500 or three times the employee’s average monthly wages.

If it later becomes no longer ‘reasonably practicable’ for an employer to re-instate or re-engage the individual, it can apply for relief against the payment of compensation provided that it can show that the circumstances making compliance ‘no longer reasonably practicable’ are ‘attributable to the employee’, or due to a ‘change in circumstances beyond the employer’s control’. This application for relief must be made within seven days from when the reinstatement or reengagement was to occur.

Non-compliance with an order for reinstatement or re-engagement is not itself an offence, however, if the employer then fails to pay the compensation due wilfully and without reasonable excuse, they will be guilty of a criminal offence and may be subject to fine of up to HK$350,000 and three years’ imprisonment.

Retrospective effect

The amendments to the EO will not have retrospective effect and will only apply to dismissals (or notice of dismissals) where the employee was informed of the dismissal after 19 October 2018.

Key takeaways

As noted above, the ability for the LT to order reinstatement without the consent of the parties is limited to Unlawful Dismissal cases. However, it may be that, where the relationship between the employer and employee has broken down, former employees may pursue applications for reinstatement as leverage in settlement discussions. Accordingly, to avoid increased risks of claims and the time and costs associated with responding to them, employers must take additional care when dismissing employees to ensure that they have a valid reason for doing so and the termination cannot be argue to be an Unlawful Dismissal.

Gareth Thomas
Gareth Thomas
Partner, Head of commercial litigation, Hong Kong
+852 2101 4025
Tess Lumsdaine
Tess Lumsdaine
Registered Foreign Lawyer (New South Wales)
+852 2101 4122

DISPUTE RESOLUTION IN ASIA-PACIFIC: PARTIES SEEK EFFICIENT PROCESSES AND ENFORCEABLE OUTCOMES

Following our report on the Global Pound Conference series, which brought together over 4000 stakeholders at 28 conferences worldwide, our analysis of the Asia Pacific results reveals different demands in Asia and Oceania.

Six Asia Pacific cities hosted conferences to assess how dispute resolution can be improved: Singapore; Hong Kong; Chandigarh, India; Bangkok, Thailand; Sydney, Australia and Auckland, New Zealand. Each conference addressed the demand side (commercial party perspectives on dispute resolution); the supply side (what advisers and providers are delivering to commercial parties); the key obstacles and challenges; and what needs to be addressed to effect change.

In Asia the data revealed a clear desire for enhanced regulation of mediation compared to Oceania. At first blush, this could be said to be rooted in civil versus common law traditions. But only one of the Asian countries to host a GPC event, Thailand, has a civil-law system. The reason appears to be more complex: enhanced regulation, particularly around enforcement, would lend credibility to mediation in Asia as a viable alternative to litigation or arbitration. This is particularly so in the context of commercial cross-border disputes. UNCITRAL’s proposed New York-style Convention on the mutual recognition and enforcement of mediation settlement agreements is likely to be applauded in Asia and may hail an inflection point for the use of mediation.

In Oceania, the results reveal more appetite amongst businesses for (a) front-loading in terms of protocols and clauses promoting ADR and (b) collaboration between parties and lawyers. This accords more with the data from other GPC conferences worldwide.

Region-wide, the data highlights that commercial parties want to use mediation and other ADR processes more, either alone or as an adjunct to adversarial proceedings. However, the data shows that the market is not responding adequately. As a result, mediation remains under-utilised, and actual use lags behind positive attitudes to it. Unless parties and their advisors actively take a different course (for example through inserting escalation clauses in contracts, actively proposing mediation at the point of dispute, or by following mandatory mediation protocols), there is likely to remain a perpetuation of the “same old processes” – litigation and arbitration.

Yet parties increasingly seek informal processes driven by commercial, cultural, and business needs that require a negotiated settlement. Layered upon this, technology is likely to assist in any transition from formal to informal dispute resolution processes. Unconstrained by rules of procedure, mediation is well-placed to capitalise on the greater adoption of technology in dispute resolution. Online Dispute Resolution has the capacity to fundamentally change how disputes are resolved in the future. The planned Asia Pacific ODR platform for B2B disputes will promote negotiation and mediation as pre-cursers to arbitration. In the long-tern, the development of an online region-wide platform may be highly important in reforming approaches to commercial dispute resolution in the region.

To read more about the Asia Pacific GPC results and what this means for your business, please see our article published in the American Bar Association’s Dispute Resolution Magazine Spring 2018 edition here.

 

Justin D'Agostino
Justin D'Agostino
Global Head of Practice, Dispute Resolution and Regional Managing Partner
+852 2101 4010
May Tai
May Tai
Greater China Managing Partner, Hong Kong
+852 2101 4031
Dominic Geiser
Dominic Geiser
Partner, Dispute Resolution Hong Kong
+852 2101 4629
Anita Phillips
Anita Phillips
Professional Support Consultant, Dispute Resolution Hong Kong
+852 2101 4184

Shaping the future of dispute resolution: global themes and regional differences revealed

The Global Pound Conference series – a unique and ambitious project to inform how commercial disputes should be resolved to better serve modern business – brought together over 4000 dispute resolution stakeholders, at 28 conferences in 24 countries worldwide.

Herbert Smith Freehills, global founding sponsor of the series, has teamed up with PwC and IMI (International Mediation Institute) to identify key insights from the voting data. With a focus on the needs of in-house counsel, this ground-breaking report challenges the traditional and fundamental notions of what clients want and how lawyers should represent them in a dispute. Continue reading

Podcast: How Arbitration and ADR can be used together

In this short podcast Professional Support Consultants Hannah Ambrose and Vanessa Naish look at how Arbitration and Alternative Dispute Resolution (or “ADR”) can work together. The podcast considers how parties can agree to an ADR process in addition to, or alongside arbitration, looking at approaches in different jurisdictions and under different arbitral institutional rules, before turning to the complexities of drafting escalation clauses in contracts. Finally it looks at how a successful settlement should be formalised to be most effective and enforceable. Continue reading