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One Step Forward, Two Steps Back – PRC Court refuses to enforce an ICC award on the ground of public policy

In Wicor Holding A.G. v. Taizhou Haopu Investments Limited (Civil Action (2015) Tai Zhong Shang Zhong Shen Zi No. 00004), the Taizhou Intermediate People’s Court refused to enforce an ICC award on the ground of public policy.

Facts

Taizhou Haopu Investment Limited (“Haopu“) entered into a joint venture agreement (“JVA“) with Wicor Holding A.G. (“Wicor“) in 1997, establishing a joint venture company (“JV“).  The parties agreed in the JVA to have their disputes arbitrated “in accordance with ICC mediation and arbitration rules“.  The JVA also provided that “if one party initiates the arbitration, the other party shall choose the seat of arbitration“.  In July 2011, Haopu commenced legal proceedings before the Taizhou Intermediate People’s Court (“IPC“) against Wicor, alleging that Wicor had breached the JVA by starting a similar business in competition with the JV.  The Taizhou IPC rendered a judgment in 2012 (“2012 Judgment“) declaring the arbitration agreement in the JVA invalid as it failed to specify an arbitral commission in breach of article 16 of the PRC Arbitration Law.  This conclusion was endorsed by the Supreme People’s Court (“SPC“).

Interestingly, the SPC, in confirming the Taizhou IPC’s decision, found that the law governing the JVA did not apply to the validity of the arbitration agreement. Relying on Article 16 of the Interpretation of the Supreme People’s Court concerning Some Issues on Application of the Arbitration Law of the People’s Republic of China, the SPC held that since the parties had neither agreed on the applicable laws governing the arbitration agreement, nor did they decide on a seat (since neither party had even applied for arbitration), the laws at the locality of the court (PRC laws) applied to determine the validity of the arbitration clause.  (The governing law of the JVA was PRC law, so the same result would have been reached if the SPC had decided that the governing law extended to the interpretation of the arbitration agreement.)

With respect to the failure to specify an arbitration agreement, the SPC found the reference to “ICC arbitration rules” to be insufficient to ascertain the relevant arbitral commission.

Wicor had started ICC arbitration against Haopu in November 2011 based on a different dispute arising from the JVA. As Haopu had failed to designate the seat, the ICC arbitral tribunal decided, in January 2012, on Hong Kong as the seat of arbitration.  The award was rendered in 2014 and Wicor sought to enforce it before the Taizhou IPC.  However, the Taizhou IPC refused to enforce the award on the ground of public policy.

Reasoning

Wicor argued that as the dispute arbitrated by the ICC arbitral tribunal was different from the dispute handled in the 2012 Judgment, and because the arbitration involved two private parties with no public interests, the Taizhou IPC should enforce the awards under the Arrangements of the Supreme People’s Court on the Mutual Enforcement of Arbitral Awards between the Mainland and the Special Administrative Region of Hong Kong. The Taizhou IPC rejected those arguments and found that the 2012 Judgment, which had ruled the arbitration clause to be invalid, had already taken legal effect.  Since the ICC award was rendered on the basis that the arbitration agreement was valid, enforcing the award would contradict the social and public interests of China. Haopu had also argued that the behavior of the ICC arbitral tribunal in regarding the arbitration agreement as valid had harmed the judicial sovereignty of China; the Taizhou IPC did not comment on this argument in its decision.

Comments

This case demonstrates the need for parties to unambiguously designate a “commission” to administer arbitration (see, e.g., the ICC model clause for China) in contracts having any nexus to China, even where the seat is not located in the PRC. In the present case, the failure to clearly designate a commission pursuant to the requirements of the PRC arbitration law had consequences not only for the case in which the 2012 Judgment was rendered, but also for the subsequent, unrelated arbitral proceedings in question.  The reasoning of the SPC in declaring the arbitration clause invalid appeared to be based on the circumstance that the arbitration commission could not be “ascertained” from the ICC arbitration rules.  The SPC’s decision was made on the basis of the 1998 ICC Rules (although there are also some obscure references to the 1988 rules in the referral from the Taizhou IPC).  It is doubtful whether the SPC could justify the same conclusion under the 2012 ICC Rules, since they provide, in Art 1(2), that the “[ICC] Court is the only body authorized to administer arbitrations under the Rules”.

While the result is not unexpected in light of previous, similar decisions such as the 2004 case of Züblin International vs. Wuxi Woke and the 2008 case of Hemofarm DD v. Jinan Yongning Pharmaceutical Co. Ltd (in which the public policy ground for refusal to enforce an arbitral award was used for the first time by the Chinese courts), it serves to add to the uncertainty surrounding the validity of arbitration clauses in arbitrations with a China nexus.  Consequently, despite positive developments in cases such as the 2013 case of Longlide Packaging v. BP Agnati, in which the SPC upheld the validity of an arbitration agreement providing for ICC-administered arbitration in China, the present case highlights the potential risks that still remain in arbitrations involving China and Chinese parties.

Hong Kong courts are to have due regard to decisions affecting an arbitral award rendered by a court at the seat of arbitration

In Dana Shipping and Trading SA v Sino Channel Asia Ltd (HCCT47/2015), the Honourable Madam Justice Mimmie Chan of the Hong Kong Court of First Instance (“CFI“), in the latest decision in this case, declined enforcement of an arbitral award that had been set aside at its seat in London.

Background

The enforcement proceedings concerned an arbitral award rendered in London-seated arbitral proceedings in favour of the Applicant (“the Award“). On 16 November 2015, the CFI granted an order to enforce the award (“the Enforcement Order“). On 27 November 2015, the Respondent made an application to set aside the Enforcement Order (“the Earlier Application“) on the ground that the Respondent was not given proper notice of the arbitral proceedings. The Applicant applied for security, which was granted by the CFI (“the Security Order“).  After the Respondent failed to provide the requisite security for its application within 21 days, it applied for an extension of time to furnish it.  The CFI stayed enforcement of the Enforcement Order until 26 May 2016, during which time the Respondent was to provide security (“the Stay Order“).

Between the Earlier Application and the hearing for the Applicant’s security application, the Respondent had appealed to the English courts to set aside the Award. Judgment was handed down on 13 May 2016, ruling that the Award was set aside pursuant to s 72(1) of the [English] Arbitration Act 1996 (“the Act“) because it was made without jurisdiction and was of no effect (“the English Judgment“). The Respondent applied to the CFI on 24 May 2016, relying on the English Judgment, to set aside the Enforcement and Stay Orders (“the Respondent’s Application“). The Applicant argued that the Respondent’s application to set aside the Enforcement Order had already been dismissed by the Security Order and that the Respondent’s Application was an abuse of process; it also argued that the Hong Kong court retained a discretion to enforce the award.

Reasoning

(1) No automatic right to refusal of enforcement

The CFI agreed the Respondent had no automatic right by virtue of the English Judgment to resist enforcement of the Award, but acknowledged under s 89 of the Arbitration Ordinance (Cap. 609) that the enforcement court in Hong Kong has residual discretion to permit enforcement of an arbitral award set aside by a competent court at the arbitral seat, subject to recognized legal principles, as confirmed in Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111.

The CFI dismissed the existence of ex nihilo nit fit under English law and followed the approach recently established by the English courts of applying the ordinary principles for recognizing foreign judgments to a foreign judicial decision setting aside an arbitral award. Based on the principles, the CFI decided it should give effect to the English Judgment.

 (2) Can the court entertain a 2nd application to set aside the Enforcement Order?

In determining whether res judicata or issue estoppel applied, the CFI adopted the view per Kwan J in Re Chime Corp Ltd (No 2) [2003] HKLRD 945 of having reference to the ‘nature and substance’ of the ruling and decided that these doctrines would not apply in the current case. In considering that its ruling and imposition of the Security Order was only a preliminary determination of the Earlier Application to set aside the Enforcement Order, the CFI concluded it was “just and reasonable” (Wong Pak Sum v Hong Kong Furniture & Decoration Trade Association Limited [2014] 1 HKLRD 507) to reconsider the enforcement decision, since the English Judgment constituted a ‘material change in circumstances’ to justify a reconsideration.

(3) Should the court enforce the Award?

The CFI ruled that the Respondent had reasonable grounds, based on the English Judgment, for making its application. Notwithstanding its failure to set out the grounds in its present summons, the Respondent’s Application did not constitute an abuse of process (cf KB v S HCCT13/2015). Considering the facts, the CFI found the Respondent’s conduct did not demonstrate bad faith and thus could not justify the court’s exercise of its discretion to enforce the Award. The CFI, however, took into account the Respondent’s failure, in its Earlier Application, to explain the basis of its application to the English court and the grounds relied on by it.  Thus, the CFI declined to award costs in the Respondent’s favor.

Orders

The CFI acceded to the Respondent’s Application and declined to enforce the Award. The court also ordered each party to bear its own costs of the entire proceedings.

Comments

This case reaffirms the general principle that Hong Kong courts generally afford deference to decisions of the supervisory court at the seat. There must be special circumstances in order for a Hong Kong court to ignore a decision rendered by a supervisory court at an arbitral seat and render a judgment in conflict with such supervisory court’s decision.  This principle has been confirmed in a number of recent Hong Kong cases, including T v C 2016 HKCFI 559; HCCT 23/2015 (14 March 2016), in which the court denied an application to set aside its order granting leave to enforce an arbitral award rendered in Kuala Lumpur.  Please refer to our blog on this decision here.  As stated in that blog posting, there is a difference in approach followed between, on the one hand, French and, to a lesser extent, Dutch courts and, on the other hand, the courts in England and Hong Kong.  Hong Kong enforcement courts, in common with the currently prevailing approach in England, generally give “due weight” to decisions of the supervisory court at the seat of the arbitration, whereas French and Dutch enforcement courts have shown little deference for decisions rendered at the seat.

 

 

 

Hong Kong Court requires substantial security to stay enforcement of an arbitral award

In L v B (HCCT41/2015), the Honourable Madam Justice Mimmie Chan of the Hong Kong Court of First Instance (“CFI“) adjourned enforcement of an arbitral award for four months on the condition that a substantial security of HK$41.6 million including unpaid award and costs to be furnished by the losing party in the arbitral proceedings.

Background

The Applicant commenced arbitral proceedings against the Respondent for breach of a Non-Recourse Loan Agreement (“the Agreement”).  Under the Agreement, the Respondent agreed to advance a loan to the Applicant against the transfer of Applicant’s shares in a Hong Kong-listed company as collateral and security for the loan to be advanced.  The Applicant transferred 800 million shares to the Respondent; however, the Respondent advanced loans in respect of only 200 million shares transferred.

The arbitral tribunal found the Respondent liable for breach of contract and breach of fiduciary duties and awarded approximately US$41.8 million to the Applicant.  On 22 June 2015, the Respondent commenced proceedings in a Bahamian court to challenge the arbitral award.  The application to set aside the award was made under section 90 of the Bahamian Arbitration Act 2009 (“the Act”) on the ground of serious irregularity, and under section 91 of the Act to appeal on a question of law.  Three months later, the Applicant obtained leave from the CFI to enforce the award.  The Respondent applied subsequently for a stay of the proceedings before the CFI pending the determination of the challenge against the award.  The Applicant argued for either immediate dismissal of the application or provision of substantial security by the Respondent.

Reasoning

The CFI reiterated its wide, residual discretionary powers under Rule 10A of Order 73 of the Rules of the High Court (Cap. 4A) in granting orders to enforce an award.  This provides that where a debtor has applied to set aside an order made for leave to enforce, the Court may, either of its own motion or on an application made by the creditor, impose such terms, as to giving security or otherwise, as a condition of the further conduct of the application, as it thinks fit.  The primary aim of the court is to assist with enforcement of arbitral awards, to enforce arbitration agreements made by the parties, and to treat arbitral awards as final.

In determining applications for security under section 89(5) of the Arbitration Ordinance (Cap 609) (“the Ordinance“), the CFI applied the two-factor test set out in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208, which considered the strength of the argument that the award was invalid, and the ease or difficulty of enforcement of the award.

(1) Strength of argument that the award was invalid

The CFI did not consider the award to be “manifestly invalid”.  On the Respondent’s argument of egregious arbitral irregularities, the CFI found that the arbitral tribunal acted within its authority and power to make “case management decisions” and that the Respondent had been given full opportunity to make submissions.  Moreover, the commencement of challenge proceedings in the supervisory court did not automatically mean that the award had not become binding.  An arbitral award was final and binding except where it was open to appeal on the merits.  In the present case, as the appeal in the Bahamian court concerned only setting aside an arbitral award but not the merits, the award was valid and binding on the parties pursuant to the arbitration agreement, which set out the parties’ intention to treat awards as final and binding.

Moreover, pursuant to section 90 of the Act, an appeal against an award is subject to the contrary agreement of the parties.  The parties, in their arbitration agreement, had agreed that the arbitral award would be final, conclusive and binding.  The Respondent had thus not established to the CFI’s satisfaction that it had the right to appeal.

(2) Ease or difficulty of enforcement of the award

The CFI did not find any difficulties in enforcing the award and confirmed its “unfettered discretion”, derived from Article VI of the New York Convention, in deciding whether to adjourn award enforcement and to order the provision of security.  Factors for consideration in an exercise of that discretion included the merits of the proposed challenge to be made, the delay likely to be occasioned, the conduct and bona fide of the parties, risk of inconsistent judgments and whether such inconsistencies could be remedied, and balancing the respective prejudice to each party.

The CFI rejected the Respondent’s argument of potentially inconsistent judgments between Hong Kong and Bahamian courts.  If the award was ultimately set aside by the Bahamian court, the Bahamian court could order the Applicant to repay any amount recovered under the award, which would be enforced and recognised by the CFI under principles of international comity or as a foreign judgment.

Order

The CFI adjourned enforcement proceedings for four months on the condition that the Respondent provided security of HK$41 million for the outstanding award and HK$600,000 for legal costs within 21 days.  Indemnity costs (costs on a higher basis) were awarded against the Respondent consistent with the practice in Hong Kong for parties unsuccessfully resisting enforcement.

Comment

This judgment reinforces the arbitration-friendly and non-interventionist approach of Hong Kong courts, which respects the finality of arbitral awards and will generally require the posting of substantial security for applications to adjourn enforcement proceedings.

It is interesting that the Court ruled that the arbitration agreement which stated that the award would be “final, conclusive and binding”, had not established to the Court’s satisfaction that the Respondent had the right to appeal.  There have been previous English court cases in which the wording that an award was “final, conclusive and binding on the parties” was not construed as an agreement excluding the parties’ rights of appeal under section 69 of the 1996 English Arbitration Act.

In previous cases, the English courts have held that in order to amount to an agreement to exclude appeals as envisaged by section 69(1) of the 1996 Act, sufficiently clear words are necessary, although no express reference to section 69 is required.  In the context of a fairly standard arbitration clause, the use of the words “final, conclusive and binding” in isolation would not convey to a reasonable person that the parties had agreed to exclude all rights of appeal on points of law under section 69.

Although, on their face, the words “final, conclusive and binding” are words of considerable width, the reality is that the expression “final and binding” in the context of arbitration and arbitration agreements has long been used to state the well-recognised rule that an award is final and binding in the traditional sense and creates res judicata and issue estoppel between the parties.

For Hong Kong seated arbitrations, there are no rights of appeal on questions of law, unless the parties specifically opt in to Schedule 2 of the Arbitration Ordinance (the old domestic regime containing appeals on questions of law with leave of the Court).  The Schedule 2 provisions will also automatically apply (unless the parties expressly opt out) to an arbitration agreement entered into before or within 6 years from commencement of the Arbitration Ordinance (1 June 2011), if the arbitration agreement provides that it is a domestic arbitration.

The principle of non-intervention in arbitral proceedings does not displace a court’s inherent jurisdiction to grant injunctions

In Sonera Holding B.V. v. Cukurova Holding A.S. BVIHCMAP2015/0005, the Eastern Caribbean Court of Appeal (“CA“) granted an injunction restraining Cukurova Holding A.S. (“CH“), the respondent, from pursuing arbitral proceedings which could have undermined the enforcement of an earlier arbitral award.  The judgment provides a detailed analysis of the courts’ power to grant anti-arbitration injunctions following the enactment of the BVI Arbitration Act in 2013 (“Arbitration Act“).

Facts

In 2005, Sonera Holding B.V. (“Sonera“) entered into a letter agreement (“Letter Agreement“) with CH to buy shares owned by CH.  The Letter Agreement provided that a Share Purchase Agreement (“SPA“) would be entered into later.  Both the Letter Agreement and the SPA provided for ICC arbitration with seat in Geneva.  As the SPA was not signed within the period agreed under the Letter Agreement, Sonera started arbitration proceedings against CH, alleging that CH had breached the Letter Agreement to execute the SPA on time.  In September 2011, the arbitral tribunal (“First Tribunal“) held that CH had agreed on and breached the terms of the SPA and was liable to pay Sonera damages (“First Award“). Sonera sought enforcement of the First Award in various jurisdictions, including BVI.

In October 2011, the Eastern Caribbean Supreme Court (“Supreme Court“) made an ex parte order allowing Sonera to enforce the First Award (“Enforcement Judgment“). CH subsequently applied to set aside the Enforcement Judgment and challenged the First Tribunal’s jurisdiction on the ground that the arbitral proceedings had been brought under the Letter Agreement but that the relief granted was for breach of the SPA.  However, this jurisdictional challenge failed before the First Tribunal, the High Court of the Virgin Islands, the Court of Appeal and the Privy Council.

In April 2012, CH had started arbitration proceedings based on the arbitration clause in the SPA (“SPA Arbitration“) before a second tribunal (“Second Tribunal”) seeking 1) a declaration that CH had never entered into the SPA; and 2) compensation from Sonera in the same amount as the First Award.  Despite Sonera’s objections, the Second Tribunal rendered a partial award allowing the SPA Arbitration to continue.  While the Second Tribunal held that it was estopped from ruling on whether the parties had agreed on the terms of SPA and CH had breached its duties under the Letter Agreement, it could decide on whether CH had duty to transfer the shares or to pay damages for failure to do so.

Following the partial award, CH filed its statement of claim which made clear that CH was seeking not merely compensation equal to the amount awarded in the First Award, but also an order to restrain Sonera from enforcing the Enforcement Judgment, and to “unwind” the costs order granted under the Enforcement Judgment.

In 2014, Sonera applied to the Supreme Court for an anti-arbitration injunction to prevent CH from continuing the SPA Arbitration. Sonera’s application was dismissed as the Supreme Court held that section 3(2)(b) of the Arbitration Act, which states that the courts should not interfere in arbitral disputes, prevailed over section 24(1) of the West Indies Associated States Supreme Court (Virgin Islands) Act (“Supreme Court Act“), which empowers courts to grant injunctive relief.

Thereafter, Sonera appealed to the CA and the issues were 1) whether the Arbitration Act had taken away the court’s general power to grant injunctions; and 2) even if it had, whether the court still had discretionary power to grant the anti-arbitration injunction.

Holding

The CA allowed the appeal and granted the anti-arbitration injunction in Sonera’s favour. While section 3(2)(b) of the Arbitration Act stated that “the Court shall not interfere in the arbitration of a dispute…“, the CA found that this provision did not abdicate the court’s jurisdiction to grant anti-arbitration injunctions.

The CA stated that the equitable jurisdiction of the court to grant injunctions was well established. Section 3(2)(b) of the Arbitration Act did not remove the court’s jurisdiction to grant injunctive relief pursuant to section 24 of the Supreme Court Act, which empowers the court to grant interim injunctive relief when it is “just or convenient“.  According to the CA, “[h]ad it been intended that section 3(2)(b) would oust the court’s jurisdiction to grant injunctions in relation to arbitral proceedings provided under section 24 of the Supreme Court Act, this would have been clearly stated in section 3(2)(b) itself“.  As section 3(2)(b) of the Arbitration Act did not contain such wording, the Arbitration Act did not abrogate the court’s general power to grant anti-arbitration injunctions.

In considering whether to exercise its discretion to grant an anti-arbitration injunction, the CA noted that while CH seeking an award “in an amount equal to the Final Award” was not necessarily “subversive of the court’s Enforcement Judgment”, it was a different matter if CH sought relief “directly aimed at unwinding the Court’s Enforcement Judgment and its orders made by way of enforcement thereof”. The CA found that the relief sought by CH did not follow the request for SPA Arbitration commenced in 2012 and these remedies were not only intended to “wash through” the First Award, but also to nullify the Enforcement Judgment and invalidate the costs order under the Enforcement Judgment, “which is in every respect final”. Such relief, if granted under the SPA Arbitration, would be “plainly subversive” of the court’s final judgment, which constituted an interference with the court’s process, and an attack on the court’s enforcement jurisdiction under the New York Convention.  Further, the CA considered that the existence of two diametrically opposed arbitral awards concerning the same parties on the same issues ran counter to the promotion of finality of international commercial disputes.  Therefore, the SPA Arbitration should not be permitted.

Comments

The CA has reiterated that an enforcing court should ensure that the regime under the New York Convention for enforcing arbitral awards is protected. Consequently, arbitral proceedings in which the relief sought involves seeking to restrain a party from enforcing a valid arbitral award should not be permitted.  In addition, the CA found that the “non-intervention” principle in the Arbitration Act does not affect the Court’s long established jurisdiction to grant injunctive relief.

Singapore High Court sets aside arbitral award for breach of natural justice

In a recent decision in JVL Agro Industries v Agritrade International Pte Ltd [2016] SGHC 126, the Singapore High Court has set aside an arbitral award for the Tribunal’s failure to grant the plaintiff a fair hearing. The defendant is now appealing against the High Court’s decision.

Background

The parties entered into 29 contracts for sale of palm oil in 2008. When the market price collapsed they negotiated a price-averaging arrangement to permit deferment of delivery and average down the overall unit price. In 2010 the market price rose again but the parties could not agree on prices so as to allow the averaging arrangement to continue for the 5 remaining contracts. The plaintiff then commenced arbitration for breach of delivery obligations under those 5 contracts.

Tribunal’s award

The majority of the Tribunal rejected the claims. In short, they found that the price averaging arrangement – which had not been followed for the 5 contracts in dispute – was a collateral contract. The parol evidence rule did not prevent them from reaching this conclusion because of the recognised exception to the rule for collateral contracts.

The collateral contract argument had been initiated by the Tribunal and only raised briefly, 10 minutes before the end of oral closing. The Tribunal had not directed submissions on it. Nor had it been pleaded or otherwise adopted by the defendant.

The plaintiff applied to the Singapore High Court under section 24 of the International Arbitration Act (Cap 143A) to set aside the award on the grounds that it was unable to present its case on the collateral contract point in breach of natural justice which prejudiced the plaintiff’s rights.

(Two other grounds for challenging the award – that it contained decisions on matters beyond the scope of the submission to arbitration and apparent bias – were ultimately rejected).

Court’s decision

Initially the Court suspended the setting-aside proceedings for 6 months under article 34(4) of the Model Law to allow the Tribunal an opportunity to consider whether it should receive further evidence or submissions on the collateral contract point.

However, in an addendum the Tribunal concluded that it “does not consider it necessary or desirable to receive further evidence or submissions on the three issues.”

The setting-aside proceedings resumed thereafter and the Court set aside the award on the grounds of breach of natural justice:

  1. The majority of the Tribunal exercised “unreasonable initiative” to unilaterally decide that the price-averaging arrangement was a collateral contract;
  2. The decision on that point was determinative; and
  3. The dissenting conclusion that the price-averaging arrangement was not a collateral contract “suggests very strongly” that the plaintiff suffered prejudice.

While the point had been raised by the Tribunal it was clear from the transcript that this was done in a way which was “couched in the language of hypothesis for comment rather than that of thesis for proof or disproof“. The Tribunal never directed the parties to address it, even though it had directed the parties to address it on other points. Arbitrators have inquisitorial powers but the arbitration process is fundamentally adversarial and it was significant that the point was never adopted as part of the defendant’s case formally or informally; indeed the defendant implicitly rejected it. Accordingly the plaintiff could not be faulted for not dealing with it in submissions.

Our comments

International arbitration, by its nature, involves civil and common law customs and traditions, combining civil law’s inquisitorial and common law’s adversarial models.

This case is a good reminder to arbitrators that tribunals should exercise its inquisitorial powers carefully, ensuring both parties can fairly present their cases and respond to the cases against them. Arbitrators should perhaps be less reticent about sharing their thinking on arguments they consider may be important where it is not absolutely clear that the parties have addressed them.  In practice the Tribunal’s thinking sometimes evolves relatively late in the hearing or during deliberations afterwards and the risk is that by that point arbitrators might be reluctant to go back to the parties to direct more submissions on reasoning it considers important. This is particularly so in cases like this one with a long procedural history (the arbitration was started in 2011).

Similarly, arbitration counsel must remain alert at hearings to any indications from the Tribunal as to its line of thinking and ensure that there is clarity about whether particular arguments are being pursued.

This decision is unlikely to open the floodgates. The Court noted the ‘fine lines’ involved and that warned that courts must “guard against unmeritorious attempts by disappointed parties to set aside unimpeachable awards“. Arbitrators are afforded some degree of robustness and can safely rely on a chain of reasoning even if it is not formally pleaded and is raised only by implication or flowing from the arguments advanced. In its 94 page decision the Court was also at pains to examine the procedural history in forensic detail, noting the defendant had five separate opportunities to adopt the collateral contract point but these were implicitly rejected. It also emphasised that the point at issue proved central to the reasoning.

These strong facts – coupled with the unusual procedural history in that the matter had already been remitted to the Tribunal – suggest that successful challenges on natural justice grounds will remain rare.

Brexit, Sanctions and the Rise of Asian Arbitral Seats – Much Ado about Nothing or Reshuffling the Cards?

The results of the UK’s referendum, with a vote to leave the European Union, will not affect London’s position as a leading international arbitration seat and dispute resolution centre.  The recent developments do not change the fact that the UK has been and will continue to be a favored destination for dispute resolution.

London has long enjoyed its position as a highly respected and oft-used seat for international arbitration.  Recently, however, the EU-imposed sanctions and the rise of other seats, together with the perceived expense of conducting hearings in London with London-based legal representation, have led to some calling into question some of its long-held advantages.  Brexit has the potential to create additional uncertainty for London as an arbitral seat, although much of this is only a matter of perception.

Very little will change with respect to London’s status as a seat for international arbitration as a result of Brexit.  In the short term, the results of the referendum are only the very first step towards Brexit, if that is in fact what transpires.  For the time being, the status quo remains, and the UK is a member of the EU until it actually exits after the negotiations foreseen in Article 50 of the Treaty on European Union.  At most, there is the potential for disputes to arise under existing contracts due to uncertainty associated with the Brexit vote, which may in fact result in an increase in the number of arbitral proceedings, but this possible implication does not affect London as a seat.

From a practical and logistical point of view, one advantage may be that the cost of arbitrating in London may temporarily decrease as a result of the drop in value of the British Pound.  However, this is unlikely to be permanent.

In the long term and if and when Brexit becomes a reality, London will continue to enjoy its position as a leading arbitral seat.  London’s popularity as an arbitration seat is largely driven by reasons unrelated to its status in the EU.  The English Arbitration Act is a clear and effective arbitration law, the English judiciary is pro-arbitration; there is well-established arbitration case law, and London is home to many experienced and leading arbitration practitioners.  The well-established and respected status of English substantive law for international contracts often – as a matter of practice – goes hand-in-hand with a London seat.  None of these advantages germane to arbitration are likely to be affected by Brexit.

Similarly, Brexit may even bolster the popularity of arbitration usage and related court proceedings between UK-based and European companies if the application of the Brussels Regulation for the enforcement of court judgments between EU Member States is uncertain.  Without the existing enforcement framework, parties may increasingly turn to international arbitration over domestic court proceedings, as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which the UK already is and will remain a party, provides a framework for the enforcement of arbitral awards to 156 contracting parties, including all of the EU Member States.

Commentary that the ban on anti-suit injunctions – as promulgated by the then ECJ in the West Tankers decision – would, with Brexit, no longer be a concern appears to address the wrong issue.  While from a solely domestic perspective, English courts, once outside the EU, would be able to issue anti-suit injunctions unhampered by the provisions of the Brussels Regulation, the consequence of Brexit would be that the entire existing reciprocal framework for the enforcement of EU Member State court judgments would fall away (although note that this would likely leave the Hague Convention in its stead – see further below), leaving such questions to be decided by domestic rules and procedures.  In short, while UK courts could hypothetically issue intra-EU anti-suit injunctions, so too could other EU courts as against the UK.

However, if the UK does leave the EU, it is likely that it will accede to another reciprocal enforcement regime, the 2005 Hague Convention on the Choice of Court Agreements (“Hague Convention”), as an independent contracting state.

Indeed London as a choice of seat outside the EU could be compared to arbitration-friendly Asian seats such as Hong Kong and Singapore, which have been gaining significant popularity in recent years.  Intra-Asian trade is on the rise, and with China’s emergence as a world superpower, bargaining power is shifting in contract negotiations.

This is highlighted by a recent survey on International Arbitration by Queen Mary University of London, which ranked Hong Kong and Singapore as the third and fourth most popular seats after London and Paris.  Further, the percentage of respondents to the survey who preferred those seats exceeded the percentage of respondents who have used them the most over the past five years (by 8% for Hong Kong and 5% for Singapore). This is a greater difference in percentage than for any of the other seats in the top seven, which suggests that both seats have the potential to attract users in greater numbers in the future.

Both Hong Kong and Singapore have modern arbitration laws based on the UNCITRAL Model Law which reflect international best practice, their courts are non-interventionist, transparent, independent, and arbitration-friendly, and Asian seats have already benefited from the sanctions-related problems with EU Member States.   Developments in Hong Kong, such as a consultation to allow for third party funding in arbitrations, the amendment of the Arbitration Ordinance to provide for clarification on the arbitrability of intellectual property rights, and China’s “One Belt One Road” Initiative – which has the scope to transform patterns of trade and investment for decades, will only go to promote Hong Kong as an arbitration hub.

Although there will be no Brexit-induced shift away from London as an arbitral seat, the proliferation of international trade involving Asian corporations and their increased bargaining power, the growing economic strength of Asian states, coupled with the recognition and reputation of pro-arbitration predictable seats in Asia such as Hong Kong and Singapore, may see users choose to seat their arbitrations away from traditional centres.

Hong Kong Courts urge parties to seek anti-suit injunctions promptly

In Sea Powerful II Special Maritime Enterprises (ENE) v. Bank of China Ltd (CACV36/2016), the Hong Kong Court of Appeal (“CA“) upheld the Court of First Instance’s (“CFI“) decision in refusing to grant an anti-suit injunction because the party seeking relief had not acted promptly, even though the objecting party suffered no prejudice from the delay.

Facts

The Plaintiff was a ship owner who entered into a contract of carriage with a charterer by a bill of lading (“B/L“).  It was expressly provided on the back of the B/L that all terms of a charter party would be incorporated, including a clause providing for arbitration in Hong Kong.  The arbitration clause stated that any claim would be time-barred if it was not made in writing within 12 months from the final discharge of cargos (the “Limitation Period“).  Later, the Defendant succeeded the charterer and became the holder of the B/L.  The dispute arose out of the alleged wrongful delivery of cargos in China, as a result of which the Defendant commenced legal proceedings in the Qingdao Maritime Court (the “PRC Proceedings“).

Although the Defendant filed its claim within the 12-month period, the claim was only effectively served to the Plaintiff 8 months later through public notice, at which time the Limitation Period had expired. Although the Plaintiff subsequently filed a jurisdictional challenge to the Qingdao Maritime Court relying on the arbitration clause and the lapse of Limitation Period, such challenge was refused.  Following this, the Plaintiff appealed to the Shandong Higher People’s Court.  Before the appeal was decided, and only when a further 4 months had passed did the Plaintiff apply for an anti-suit injunction before the Hong Kong Court to stay the PRC Proceedings.

CFI and CA’s Holdings

The CFI rejected the anti-suit injunction application based solely on the Plaintiff’s delay even though the Defendant had not suffered any detriment due to such delay. The CFI observed that while the Hong Kong Court should ordinarily grant an injunction to restrict foreign proceedings in breach of arbitration agreements, such injunction should be sought promptly and only granted when the foreign proceedings are not too advanced, unless strong reasons would require a contrary result.  It was found by the CFI that the Plaintiff had deliberately evaded the service of the PRC Proceedings and had delayed in seeking the anti-suit injunction.  The “only motive” for the Plaintiff’s delay was to wait for the Limitation Period to expire.  While the Court held that the Defendant failed to reasonably protect itself against the time bar, the Plaintiff’s delay can be a “free-standing” ground in refusing the anti-suit injunction.  In particular, the Plaintiff should not wait until the outcome of the jurisdictional challenge to decide whether to apply for anti-suit injunction.  It is in the public interest for the parties to act promptly and claim injunctive relief at an early stage to ensure comity between the courts and avoid wasting judicial resources.  Although the judgment provided no specific guidance as to what constitutes delay, the CFI held that in practice the existence of delay is not difficult to establish by taking into account all the circumstances of the case.  The relevant time for assessing the delay started to run when the party was aware of the foreign proceedings brought in breach of the arbitration agreement.

In the CA judgment, the Plaintiff asserted that mere delay did not amount to a strong enough standalone reason to disregard the arbitration agreement. It was argued that the sanctity of the parties’ contractual rights to arbitration should be respected.  The only other reason for refusing the injunction was comity, which is “of minimal relevance” in contractual anti-suit injunctions.  The CA rejected the Plaintiff’s arguments and found that the delay and comity are in fact related.  The longer an action continues without any attempt to stop it, the less likely the Court is to grant an injunction and comity will have a greater impact. The CA upheld the CFI’s finding and dismissed the appeal accordingly.

Comments

This case delivers a clear warning from the Hong Kong Courts that parties should seek anti-suit injunctions promptly and should not wait for the outcome of jurisdictional challenges before taking steps to obtain injunctive relief.

ICC names Singapore as fourth most preferred seat of arbitration in the world

The 2015 ICC statistics are in, and it’s looking better than ever for Singapore. In its latest report, the ICC has confirmed Singapore as the number one seat in Asia and the fourth most preferred seat globally for ICC arbitration.

The 2015 ICC Dispute Resolution Statistics have revealed that, in 2015, over 6% of all new ICC cases named Singapore as the seat of arbitration, upholding its ranking as the number one seat of ICC Arbitration in Asia. Whilst the number of Singapore parties remained constant over the last 12 months, the number of foreign parties choosing Singapore as a seat for arbitration continues to rise.

According to Abhinav Bhushan, ICC’s Regional Director for South Asia, “it is important to highlight that under ICC Rules of Arbitration, parties do not require any Singaporean connections to arbitration in Singapore. They also have the flexibility to choose an arbitrator of any nationality despite the seat of arbitration.”

The 2015 statistics at a glance

  • Singapore has been the number one seat of ICC arbitration in Asia for five years running.
  • Singapore is the fourth most preferred seat globally for ICC arbitration.
  • In over 71% of all new Singapore seated arbitrations filed in 2015, one or more of the parties was not Singaporean, and in nearly half of these cases, a non-Singapore arbitrator was appointed.
  • The ICC Court recorded the second highest number of new cases in its 93-year history, with 801 new cases filed.
  • The average monetary value in dispute in new ICC cases also increased from US$63 million in 2014 to US$84 million in 20015.

The 2015 ICC Dispute Resolution Statistics not only indicate strong growth for the ICC but also confirm Singapore’s position as a leading Asia arbitration hub.

 

Hong Kong courts set aside an arbitral award for serious breach of due process

In China Property Development (Holdings) Ltd v Mandecly Ltd (CACV92/2015), the Hong Kong Court of Appeal (“CA“) affirmed the decision of the Court of First Instance (“CFI“) where an arbitral award was partially set aside due to a serious breach of due process.

Facts

The dispute arose out of a share purchase agreement between China Property Development (Holdings) Ltd (“CPD“) and the sellers (including Mandecly Ltd , Mr. Tsoi and Mr. Chan) (“Sellers“), where CPD would buy a PRC entity, BPP.  Due to the dispute, CPD and BPP commenced arbitration against the Sellers.  In relation to one of the issues to be decided by the Tribunal, the Sellers stated in the hearing that their arguments were directed against BPP only.  As a result, CPD made no submissions on that point.  However, the Tribunal in its award (“Award“) made a ruling against CPD on such issue.  CPD sought clarifications from the Tribunal as to whether there was any typographical error but was told that there was none.  The Tribunal came to its ruling by relying on the Seller’s arguments on a different issue.  Therefore, CPD sought to set aside the relevant part of the Award under Article 34 of the UNCITRAL Model Law, primarily on the ground that it was unable to present its case on the arguments on which the Tribunal had relied.

CFI and CA judgments

The CFI held that CPD had been denied a chance to present its case under Article 34(2)(a)(ii) of the UNCITRAL Model Law, which was a “sufficiently serious breach of due process”. Therefore, the CFI allowed the relevant part of the Award to be set aside.  While the CFI underlined that the Court should ensure the structural integrity of arbitration proceedings rather than decide on the substantive merits, the CFI considered it necessary to review the parties’ pleaded cases. The CA upheld the CFI’s findings and went further by stating that the Tribunal had also fallen into the error under Article 34(2)(a)(iii) of the UNCITRAL Model Law, where the award dealt with a dispute beyond the terms of the submission to arbitration or contained decisions on matters beyond the scope of the submission.  In addition, the CA noted that the Court has a residual discretion not to set aside an award even when irregularity has been established, if the Court considers the ruling could not have been different had the irregularity not occurred.  Considering the nature of the irregularity, CA regarded it as “at the serious end” and therefore such discretion was not exercised.

Comments

This is a pro-arbitration case in the sense that it shows the Hong Kong courts’ efforts to ensure integrity of arbitration proceedings, namely by allowing due process and an opportunity to present one’s case (or defense). While the Hong Kong Courts will generally respect the finality of arbitral awards whenever possible, they are ready to intervene in the event of serious breaches of natural justice.  This case highlights the importance of the parties’ right to be heard. Tribunals should be cautious in not introducing new arguments without giving the parties an opportunity to present their cases on such arguments.  In order to preserve procedural integrity, the Hong Kong courts may review the pleadings and transcripts to decide what arguments were actually presented before the Tribunal.

The arbitrability of minority shareholder rights in Singapore

In Maniach Pte Ltd v L Capital Jones Ltd and another [2016] SGHC 6, the Singapore High Court recently handed down a decision concerning a dispute between the shareholders of the international gourmet food business Jones the Grocer. In response to the majority shareholder’s move to have the dispute settled through arbitration, the Court decided that seeking damages for minority shareholder oppression (under the Companies Act) is not arbitral, and that such action must be pursued through the courts.

In reaching its decision, the Court cited Silica Investors Ltd v Tomolugen Holdings Ltd and other [2014] 3 SLR 815, in which the Singapore High Court said that whether a minority oppression action is arbitrable will depend on the facts and circumstances of each case:

The nature of a minority oppression claim and the broad powers of the court under s 216(2) of the CA would mean that a minority oppression claim is one that may straddle the line between arbitrability and non-arbitrability. It would not be desirable therefore to lay down a general rule that all minority oppression claims under s 216 of the CA are non-arbitrable. It will depend on all the facts and circumstances of the case.

This approach is contrasted somewhat to the English approaches in both Exeter City Association Football Club Ltd v Football Conference Ltd [2004] 1 WLR 2910 and Fulham Football Club (1987) Ltd v Richard and another [2012] both of which took an ‘all or nothing’ approach to the arbitrability of statutory minority oppression claims.

In Exeter City, the English High Court held that a statutory minority shareholder oppression claim under English company law is not arbitrable. However, in Fulham the English Court of Appeal held that a statutory minority shareholder claim under English company law is arbitrable even though an arbitral tribunal is unable to grant certain statutory remedies, such as a winding up order or drag along notice, which the statute makes available to a successful plaintiff.

In Maniach, the Singapore High Court departed from its earlier view in Silica, and followed the Exeter City approach.  Contrary to Silica, the Court said that it finds it difficult to accept that “arbitrability is or ought to depend on the facts and circumstances of each case“. Arbitrability, the Court said, is “an overarching concept which has its source outside the International Arbitration Act, outside the Model Law and outside the parties’ arbitration agreement. It is imposed from above in order to give effect to the public policy” of the seat or forum.

The Court said that the answer to the question of whether the statutory minority oppression claim is arbitrable must either be that all claims of this type are arbitrable, or none of them are, and that this is for two reasons:

  • First, arbitrability rests on the “fundamental conceptions of public policy“. The Court considered that it should not be within the power of a party to unilaterally arrange the facts and circumstances of the case for tactical reasons, thereby inviting the intervention of public policy and maximizing the likelihood of disrupting the parties’ bargain. This, in the Court’s view, is exactly what happens when the question of arbitrability is determined on a case by case basis. It allows a party the opportunity to potentially manipulate the outcome of the inquiry into arbitrability.
  • Second, the Court said that a case by case approach to arbitrability “undermines commercial certainty” because it becomes impossible to predict the outcome of the inquiry into arbitrability. The Court further considered that the “very same dispute on the very same underlying facts can suddenly change by a party’s unilateral act from being arbitrable to being non-arbitrable“.

Accordingly, the Court averred that the question of whether this dispute is arbitrable does not depend on the facts and circumstances of the case, but upon the fundamental question of whether a statutory minority oppression claim is indeed arbitrable. The Court was persuaded by the reasoning in Exeter City that a “minority oppression claim, being statutory in nature and being asserted in relation to the affairs of a creature of statute, ought to be supervised and determined by the court in all cases“.