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International Arbitration News, Trends and Cases

Updates to Hong Kong Arbitration Ordinance: third party funding and arbitration over IP rights

On Wednesday, 14 June 2017, two sets of amendments to Hong Kong’s arbitration law were passed to clarify that:

  • third party funding of arbitration, mediation and related proceedings is permitted under Hong Kong law, and
  • disputes over intellectual property rights (“IPRs“) can be resolved through confidential arbitration and that it is not contrary to the public policy of Hong Kong to enforce arbitral awards involving IPRs.

The relevant bills were the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 (“Third Party Funding Bill“) and the Arbitration (Amendment) Bill 2016 (“IPR Arbitration Bill“).

Third party funding

The Third Party Funding Bill amends the Arbitration Ordinance and the Mediation Ordinance to make clear that third party funding of arbitration, mediation and related proceedings is permitted under Hong Kong law.

It is now clear that the centuries-old doctrines of maintenance and champerty, which still prohibit third party funding for litigation, do not apply to funding of arbitration and mediation.

The Third Party Funding Bill also provides measures and safeguards aimed at preserving integrity if third party funding is used, including providing for a code of practice for funders (which is still to be developed after completion of a consultation process, which is already underway).

The amendments are expected come into effect later this year, to allow time for the code of practice to be drawn up.

The Third Party Funding Bill closely follows the recommendations made by the Law Reform Commission in the Report on Third Party Funding for Arbitration dated 12 October 2016, save for an amendment that allows third party funding by lawyers and law firms so long as they do not act for any party in the relevant proceedings. (See our earlier note setting out the key points of the Bill here.)

The availability of third party funding is a welcome development for arbitrations seated in Hong Kong, bringing it in line with international developments.  It will allow greater access to justice and provide another option for companies to manage financial risk.

Arbitration of disputes involving IPRs

The IPR Arbitration Bill amends the Arbitration Ordinance to clarify that disputes involving IPRs can be resolved through arbitration under Hong Kong law and that it is not contrary to the public policy of Hong Kong to enforce arbitral awards involving IPRs.

The changes are expected to come into effect on 1 January 2018, following a period of around six months to allow practitioners and others concerned to prepare for commencement of the relevant amendments after yesterday’s passage of the Bill.

The current arbitration law is silent as to the subject matters of disputes that are capable of resolution by arbitration and a clear statement concerning the arbitrability of disputes involving IPRs has been lacking.

Under the IPR Arbitration Bill, arbitration proceedings over IPRs will remain confidential and any awards will only have inter partes effect.  Legal rights of third parties not a party to the arbitration proceedings will not be affected and there will be no requirement for disclosure to or recordal of arbitral awards involving IPRs with the respective Registries of the Hong Kong Intellectual Property Department. In fact, none of the IP related legislation has been amended to make such awards a recordable instrument or event affecting rights in or under a registered IPR / an application for registration.

While expressly providing for arbitration of disputes involving IPRs is a positive step for Hong Kong as an international centre for arbitration, arbitration of disputes involving IPRs is a complex area.  Parties considering arbitration of disputes involving IPRs should seek legal advice about the implications of agreeing to arbitrate, particularly in a cross-border context.

Somewhere beyond the seen: Paris Court of Appeal sets aside an award on the basis of serious indications of money laundering after considering new evidence and reevaluating the record.

Abstract:

On 21 February 2017, the Paris Court of Appeal set aside an UNCITRAL award on international public policy grounds due to serious indications of money laundering. Allegations of corruption and criminal activity have been used increasingly in recent years in French courts to argue for the setting aside of arbitral awards on the grounds of a breach of international public policy. This is the first time, however, that the Paris Court of Appeal has set aside an award on the basis of alleged money laundering. Further, this decision appears to specify the extent of review that French courts may perform when dealing with allegations of a breach of international public policy in cases where issues of money laundering are at stake, as it follows a detailed review of facts that were put before the arbitral tribunal and the consideration of new evidence.

Relevant facts:

Mr Belokon, a Latvian citizen, acquired Insan Bank in Kyrgyzstan in 2007 and renamed it Manas Bank. In spring 2010, political tensions in Kyrgyzstan led to the fall of President Bakiev and the Kyrgyz authorities placed Manas Bank into temporary administration. The initial temporary administration period was extended several times. On 2 August 2011, Mr Belokon commenced UNCITRAL arbitration proceedings under article 9.2(d) of the Kyrgyzstan-Latvia BIT, alleging that the continuing extension of the temporary administration period amounted to indirect expropriation.

In an award rendered on 24 October 2014, the three-member tribunal found in favour of Mr. Belokon and ordered Kyrgyzstan to pay $15.2 million. An action to set aside the award was brought by the Kyrgyz Republic before the Paris Court of Appeal in January 2015, notably on the grounds that the recognition or enforcement of an award in contradiction with the fight against money laundering would constitute a breach of international public policy.

In its application to have the award set aside, the Kyrgyz Republic argued (as it had during the arbitration proceedings) that most of Manas Bank’s activities had the purpose of furthering money laundering. As evidence, it relied on the fact that the bank’s 17 main clients were offshore companies whose operations were devoid of any economic purpose and that Mr Belokon was very closely connected to the former president’s son. It also adduced new evidence that Baltic International Bank, also owned by Mr Belokon, was fined 1.1 million euros in March 2016, more than a year after the award was rendered, for breaching anti money-laundering rules in Latvia between 2003 and 2015.

In seeking dismissal of the application, Mr Belokon claimed that Kyrgyzstan’s application to set the award aside amounted to a review of the merits of the case, which he argued was not permitted under French law.

Decision:

The Paris Court of Appeal set aside the award on the basis that its recognition or enforcement would be contrary to international public policy. Interestingly, it disagreed with the tribunal’s finding that there was insufficient clear evidence to support serious indications of money laundering. Explaining its decision, the Court said that its task was to determine whether recognition or enforcement of the award would undermine the fight against money laundering by allowing a party to benefit from criminal activities. In carrying out this assessment, the Court said that it was not limited to the evidence available to the tribunal or bound by its assessment of the record, although it added that due process must always be respected.

Comment:

This decision constitutes the first example of an award being set aside by the French courts on international public policy grounds on the basis of alleged money laundering. In coming to this decision, the Paris Court of Appeal appears to have conducted a relatively thorough review by examining in detail evidence that was put before the tribunal and considering new evidence, such as the 1.1 million euro fine given to Baltic International Bank for breaching anti money-laundering rules in Latvia. This extent of review appears to share similarities with the reasoning in three 2014 Paris Court of Appeal decisions in the area of corruption (Gulf Leaders, République du Congo v. Commisimpex and SAS Man Diesel), the first two of which have been upheld by the Cour de cassation (French Supreme Court). It also appears to be in contrast with the 2004 Paris Court of Appeal decision in Thalès, an important case in this area, according to which national courts should not carry out a thorough review of matters dealt with by the arbitral tribunal and that only a flagrant, effective and concrete breach of international public policy could lead to an award being set aside.

Case: CA Paris, Belokon v Kyrgyzstan, 21 February 2017, No. 15/01650

More pro-arbitration measures in China for foreign investors

The PRC Supreme People’s Court recently announced changes promoting arbitration between companies incorporated in pilot free trade zones:

  • wholly foreign owned enterprises incorporated in pilot free trade zones can now submit commercial disputes to foreign arbitration; and
  • there is a possibility that China is opening the door to ad hoc arbitration.

These changes, issued on 30 December 2016 in the Opinions on Provision of Judicial Safeguards to the Development of Pilot Free Trade Zones (Fa Fa [2016] No. 34) (“Opinions“), are major pro-arbitration changes to promote business in China’s free trade zones.

Development of the “foreign element” rule

Under the PRC law, a contract is foreign-related only if the contract contains a “foreign element” in at least one of the following aspects: nationality of the parties, habitual residence of the parties, subject matter of the contract, legal facts leading to establishment, change or termination of the contract, as well as other circumstances which a people’s court may deem as a “foreign element”.

The importance of the “foreign element” rule under the PRC law is indicated in the choice of the seat of arbitration, given that a dispute in connection with a contract without a “foreign element” may not be submitted to arbitration seated in a foreign jurisdiction. (See the SPC’s Reply in Zhaolai Xinsheng [2013] Min Si Ta Zi No. 64.)

Change happened in the case of Siemens v. Golden Landmark ([2013] Hu Yi Zhong Min Ren [Wai Zhong] Zi No.2), whereby the No. 1 Intermediate People’s Court of Shanghai Municipality innovatively upheld the “foreign element” in a contract based on, inter alia, the fact that the parties of the contract are two wholly foreign owned enterprises (“WFOE“) incorporated in the Shanghai Pilot Free Trade Zone, even though the conventional thinking is that a WFOE in itself does not constitute a “foreign element”. Nonetheless, given that PRC court judgments do not have binding effect on other PRC courts, it was not clear at the time whether other PRC courts would adopt a similar approach.

With the promulgation of the Opinions in December 2016, Article 9 of the Opinions clarified that an “arbitration agreement concluded between WFOEs incorporated in a pilot free trade zone submitting a commercial dispute to foreign arbitration should not be held as invalid solely based on lack of foreign element of the dispute“, thereby confirming the interpretation in Siemens v. Golden Landmark in the form of a judicial document.

Ad hoc arbitration in China possible

Under the PRC Arbitration Law, a designated arbitration commission is one of the mandatory requirements for a valid arbitration agreement. As a result, ad hoc arbitration is not permitted in China.

The Opinions in Article 9 provide that an “arbitration agreement between companies incorporated in a pilot free trade zone submitting a relevant dispute to arbitration conducted at a specific place in the mainland, through specific arbitration rules, and by specific personnel may be held as valid.” Given that the designated arbitration commission is not required under this article, there are certain voices in the Chinese arbitration community suggesting that such article may be interpreted as China’s attempt to open the door to ad hoc arbitration.

Nonetheless, given that Article 9 does not go into details for some issues such as the scope of the “specific arbitration rules” as well as the potential conflict between Article 9 and the mandatory requirement regarding designated arbitration commission under the PRC Arbitration Law, clarification may be needed for future application of Article 9, and its impact on ad hoc arbitration in China still remains to be seen.

For the full text of the Opinions (in Chinese), please click here.

The New VIAC Rules – Effective from 1 March 2017

On 1 March 2017, the new arbitration rules of the Vietnam International Arbitration Centre (VIAC) came into force, replacing the 2012 rules.

The 2017 VIAC Rules include the following changes:

  • Multiple Contracts (Article 6) – under the 2017 VIAC Rules parties will now have the opportunity to bring claims relating to more than one contract in a single Request for Arbitration, irrespective of whether the claims are made under one or more arbitration agreement.
  • Consolidation (Article 15) – parties may now agree to consolidate two or more pending VIAC arbitrations into a single arbitration.  However, VIAC will retain discretion to confirm the consolidation “upon its consideration on relevant matters”.  At this stage, it is unclear what matters VIAC considers relevant and the rule is comparatively short on detail when compared to the provisions of other institutions, such as HKIAC and SIAC.  The rule is clear that unless otherwise agreed by the parties, the arbitrations will be consolidated into the arbitration that commenced first.  According to VIAC, this provision is estimated to save between 15% and 37% of the total costs of arbitration for multiple VIAC proceedings, had those proceedings not been consolidated.
  • Expedited Procedure (Article 37) – where the parties agree to it, arbitration proceedings can be conducted under a new expedited procedure. Unless the parties have agreed otherwise, the 2017 VIAC Rules provide that expedited proceedings will be heard by a sole arbitrator with time limits in the rules shortened. Unlike other institutional rules – such as SIAC or ICC’s 2017 rules with their 6 month time limits – the VIAC rules do not prescribe any particular process or specify any time limits for an award in an expedited arbitration.  This may be because the claimed statistics for VIAC arbitrations show that on average, matters are already resolved very quickly by international standards (claimed figure is 154 days).  Usefully, the rules specify that unless the parties agree otherwise, the tribunal now also has discretion to decide a case on documents only, which means no oral hearing, no requests to produce documents and no examination of witnesses. With the parties’ agreement, a hearing may also be conducted by teleconference or videoconference, instead of in person.

The 2017 VIAC Rules are part of an effort to keep VIAC’s institutional arbitration offering up to date with international best practice and contain some undoubtedly helpful features to help parties control time and cost in their arbitrations.  They are intended to address some of the key complaints from the users of arbitration generally. It is not alone in updating its rules to allow for the consolidation of multiple claims and for expedited proceedings, though the recently updated rules of the major international institutions are arguably drafted in a more comprehensive way.  It remains to be seen how VIAC will apply them in practice.  Certainly the amendments will help gather support for institutional arbitration in Vietnam and cement VIAC’s growing reputation as a leading centre for parties who have agreed to arbitrate there.  Its latest available statistics show rapid growth, with over 50 foreign element cases pending before VIAC in 2015.

More broadly, the 2017 VIAC Rules are a further positive indication that Vietnam is increasingly adopting a more pro-arbitration approach. We now look forward to seeing how the rules are applied in practice and further clarification from the Supreme People’s Court as to, for example, the status of awards made under VIAC’s new expedited procedures. We expect these will add to the positive direction the Vietnamese courts are taking in regards to the enforcement of arbitral awards.

Effective Today: Revised ICC Rules of Arbitration

The revised ICC Rules of Arbitration are in effect as of today, 1 March 2017.  The Rules were revised to increase efficiency and accountability in ICC arbitrations and, most significantly, the revised Rules provide for a new expedited procedure that brings the ICC into line with fast-track procedures already available in a number of other arbitral institutions around the world.

Unless parties opt out, the ICC’s new Expedited Procedure Rules will automatically apply to all arbitrations with arbitration agreements concluded after 1 March 2017 and with amounts in dispute up to US$2 million.  And while the ICC Court has discretion to determine that the expedited procedure is inadequate for any matter on a case-by-case basis, parties may elect to opt into the Expedited Procedure Rules for arbitrations amounts in dispute higher than US$2 million as well.

Arbitrations proceeding under the new Expedited Procedure Rules will be significantly simplified, allowing matters to move forward more efficiently.  First, regardless of what the arbitration agreement provides, the dispute will be referred to a sole arbitrator (to be appointed by the ICC Court or the parties) whose fees are on a reduced scale.  Then, expedited matters will bypass the Terms of Reference altogether – a process that could take up to 2 months under the prior Rules – and instead will go straight to a case management conference within 15 days of sending the file to the tribunal.  An award then must be rendered within six months of that conference.  In total, expedited proceedings should not take longer than 6.5 months from start-to-finish, unless limited and justified circumstances warrant an extension.

To allow matters to proceed on such a fast track, arbitrators may choose to limit the scope of disclosures, witness statements, expert reports and/or written submissions in the expedited proceedings.  Indeed, arbitrators have discretion to decide expedited cases without any document disclosures and even without hearings.  Or, if hearings are needed, the Expedited Procedure Rules allow flexibility to hold them by video or teleconference.

Parties to arbitrations with amounts in dispute greater than US$2 million or with arbitration agreements concluded before today need not feel left out:  as noted above, the ICC Rules provide a mechanism to opt into the expedited procedures.  And moreover, the amended Rules have new features that provide for greater efficiency and accountability in all ICC arbitrations.  The timeline for the Terms of Reference was cut in half from two months to 30 days in the revised Rules, for example.   And a clause in the prior version of the Rules that prohibited the ICC Court from communicating its reasons for deciding to appoint, confirm, challenge or replace an arbitrator has been deleted, providing more transparency into the Court’s decision-making process.

Overall, the 2017 ICC Rules updates are not as comprehensive as the last round of revisions in 2012, and most ICC arbitrations will continue to proceed much as they have been – with a few tweaks.   But as described above, even though potential arbitration could be far off for parties who are entering into arbitration agreements now, those are the parties for whom the revisions are most relevant.   For all commercial agreements with ICC arbitration clauses that conclude after today, parties should be aware that the Expedited Procedure Rules automatically will apply to disputes for amounts less than US$2 million unless the parties explicitly opt out in the arbitration agreement.  And similarly, parties including ICC arbitration clauses in agreements after today should consider whether they may want to opt in to the Expedited Procedure Rules for disputes with claims over US$2 million.  The parties may set their own threshold amount for opting into the expedited procedures (for example, all arbitrations with amounts in dispute below US$20 million), or they may opt into the expedited procedures for all arbitrations irrespective of the amount in dispute.  The revised ICC Rules provide model language that is recommended to effect the parties’ intentions regarding opting in or out of the Expedited Procedure Rules.

For the complete set of the updated ICC Rules, please click here.

ArbitralWomen: Winning Communication

You’re the voice, try and understand it, make a noise and make it clear.” John Farnham

On 2 February 2017, Hogan Lovells hosted a joint event with ArbitralWomen entitled “Winning Communication” in which a panel, including Julianne Hughes-Jennett, partner at Hogan Lovells, Tessa Wood, Senior Voice & Communication Coach at City Academy, Wendy Miles QC, global head of arbitration at Boies, Schiller and Flexner, and expert accountant Liz Perks, partner at Haberman Ilett, answered questions posed by Kate Wilford, senior associate at Hogan Lovells.

Julianne began by explaining the genesis of the event. She had been struck by an article concerning women in President Barack Obama’s White House and the “amplification method” used by them in order to be heard, whereby when a woman spoke, a second woman would repeat the first woman’s comment. This led Julianne to question how women are “heard” in the arbitration community, in which statistically women remain under-represented.

This chimed with statistics provided by, Liz Perks, of a study on female quantum experts in International Centre for Settlement of Investment Disputes (ICSID) arbitrations. The study found that of a total of 176 named quantum experts in public ICSID awards, where damages were awarded (and therefore quantum experts had been used), only eight included the participation of female experts. Of these eight, three had been signed jointly with a male expert. This left only five expert reports signed solely by women. The numbers speak for themselves. Wendy Miles QC noted that in her time as an arbitrator, she had never heard from a female quantum expert.

As advocates, Wendy Miles QC noted that, “our tools are our words, our minds, and our voices”. The discussion focussed on how women can maximise their potential by not only finding their voices but ensuring that their voices are heard.

Tessa opened with some introductory remarks, explaining that one’s physicality is intimately connected to the quality of one’s voice. The “armour of tension”, in which people often unconsciously shroud themselves, can result in a higher pitch, which is anything but persuasive. This effect can be heightened in the case of women, who naturally tend to be smaller than men.

This can result in the following tendencies:

  • Not wanting to take up a lot of space vocally and therefore speaking too quickly.
  • Wishing to be “liked” with the result that one may smile more than necessary, which can have an effect on one’s tone.
  • Uplifting at the end of a sentence, resulting in a sense that the speaker is in constant questioning mode, uncertain of what she is saying or lacking in confidence.

These are, of course, not only particular to women, but they did resonate with the audience on the evening.

However, Tessa emphasised that one’s voice is like a fingerprint: you should not seek to change its essential quality, but rather improve and maximise its potential. Liz agreed that “authenticity” is key, perhaps more so for experts. So, while a woman should not necessarily seek to change the pitch of her voice from high to low à la Margaret Thatcher, weaknesses can be addressed. For example, speaking more slowly has a variety of benefits, including commanding attention.

The primary “secret” to enhancing one’s voice (male or female!) is breathing and breath. Tessa stated that,”breath is the power house of the voice”. As many will know but few actually do, it is essential to breathe from one’s diaphragm, not from one’s upper chest.

Rashda Rana SC, President of ArbitralWomen, stepped in with the age old advice concerning preparation: “The key is to know your story”. If you know your story inside out, you will necessarily be authentic and this will give you time to focus on delivery. Julianne agreed that the first step was “substance and being prepared – if you get this right, it is always going to be easier to present”.

Overall, the discussion was positive with a few female advocates expressing the view that they considered, as women, that they were more likely or just as likely to be heard. One barrister commented that, in fact, certain habits that are deemed to be particularly female are just part of the arsenal available to a woman as an advocate. It is a woman’s ability to adapt these tools that should actually put her at an advantage over men when communicating.

What was particularly striking about the event was the willingness and openness with which delegates, whatever their stature and age, shared their knowledge and experiences for the benefit of all.

The question remains: do we “fix” the women or do we “fix” the system? In truth, it’s a little of both. Wendy Miles QC urged all to spend time developing one’s voice. Julianne suggested that there is merit for sensitivity training on this issue in the profession, perhaps as part of unconscious bias training.

This blog post was co-authored by Julianne Hughes-Jennett at Hogan Lovells and Francesca Albert at Practical Law Arbitration, and first published on the Practical Law Arbitration blog http://arbitrationblog.practicallaw.com.

The DIFC Courts – a “conduit jurisdiction” no more?

As we predicted in our Annual Seminar on Recent Developments in the UAE Dispute Resolution Landscape, back in November 2016, the use of the DIFC Courts as a “conduit jurisdiction” has been called into question.

There has been much discussion in the Dubai legal community and beyond about the use of the DIFC Courts as a conduit jurisdiction for the recognition and enforcement of both foreign and domestic arbitral awards following the line of decisions in Banyan Tree v Meydan Group LLC, DNB Bank ASA v Gulf Eyadah, and the Oger Dubai LLC v Daman Real Estate Capital Partners Ltd. These and other cases led to the formation of the Judicial Tribunal created by Decree No.19/2016 (“Decree“). The Judicial Tribunal’s purpose is to review and resolve “conflicts of jurisdiction” between the DIFC Courts and the Dubai Courts. The JT is made up of four Judges from the Dubai onshore Courts and three from the DIFC Courts.

In its very first decision Cassation No. 1/2016 (Judicial Tribunal) Daman Real Capital Partners Company LLC v. Oger Dubai LLC, the Judicial Tribunal has determined whether the DIFC Courts can, in this instance, serve as a conduit jurisdiction for the onward enforcement of a domestic arbitral award in mainland Dubai. We have summarised and commented on the decision below.

Background

It is important to understand the background to the original matter before analysing the Judicial Tribunal’s determination in detail.

Oger Dubai obtained an award in an arbitration seated in onshore Dubai against Daman and sought its recognition and enforcement before the DIFC Courts. As Daman was unable or unwilling to comply with the award, Oger Dubai sought and obtained an order from the DIFC Courts for recognition of the award and that Daman be wound-up. Daman applied to the Dubai Courts to annul the arbitral award and asked the DIFC Courts to adjourn its enforcement proceedings, pending the outcome of the annulment proceedings before the Dubai Courts. The Dubai Court of First Instance, subsequently, refused to annul the arbitral award on the grounds that it lacked jurisdiction to do so, as the DIFC Courts had already made a determination on the matter. This decision was confirmed by the Dubai Court of Appeal, but the matter was appealed to the Court of Cassation, before which it is still pending. Despite the on-going proceedings in the Dubai Courts, the matter was referred to the newly formed Judicial Tribunal. On 30 June 2016, the DIFC Courts decided to stay the winding up of Daman until a decision was issued by the Judicial Tribunal as to the competent court to finally hear and determine the matter.

Judicial Tribunal Decision

In the first part of the decision, the Judicial Tribunal identified and confirmed the existence of a “conflict of jurisdiction” in this case between the DIFC Courts and the Dubai Courts. This related to the fact that enforcement proceedings have been brought before the DIFC Courts and, in parallel, annulment proceedings were filed before the Dubai Courts which are still pending.

The Judicial Tribunal emphasised that had the substantive case been brought before the DIFC Courts, there would be no conflict, as the DIFC Courts would be the only appropriate forum for the dispute. In support of this, it noted that the assets in question are located in the DIFC and Daman is a DIFC registered entity.

The Judicial Tribunal further emphasised that, for the sake of justice, pursuant to Article 4 of the Decree and to avoid contradictory judgments, such a conflict of jurisdiction should not be resolved by permitting both Courts to “entertain” the case. Only one of the Courts should be permitted to determine whether the arbitral award should be enforced or annulled.

Without giving very much substantive reasoning, the Judicial Tribunal concluded that pursuant to the procedural laws:

  1. the Dubai onshore Courts were the competent Courts to make a determination on the validity of the arbitral award; and
  2. the DIFC Courts should cease from “entertaining the case“.

Analysis

At our Annual Seminar, we predicted that UAE arbitration cases referred to the Judicial Tribunal which otherwise had no nexus to the DIFC but where the claimants were attempting to use the DIFC Courts as a “conduit jurisdiction” to ultimately enforce against assets held in onshore Dubai would likely result in the Judicial Tribunal deciding the Dubai Courts in fact had jurisdiction.  One possible factor is the Judicial Tribunal has an in-built majority of Dubai Court judges and it is noteworthy that the three DIFC Judges sitting on the Judicial Tribunal (Michael Hwang; Omar Al Muhairi; and Sir David Steel) dissented from the second part of the ruling that the DIFC Courts should refrain from entertaining the case.

This Oger Dubai case had a clear connection with the DIFC as the Respondent and the project in question were based in the DIFC. If a case with such a clear link to the DIFC can be determined in such a manner then it provides little hope to future cases brought before the Judicial Tribunal with no or a more tenuous link to the DIFC to successfully argue the DIFC Courts should have jurisdiction to give recognition where parallel proceedings are before the Dubai Courts seeking nullification. Parties should carefully consider current or future actions they wish to enforce through the DIFC Courts, lest they fall victim to the same type of outcome. It now seems inevitable that attempts to use the DIFC Courts as a “conduit jurisdiction” will ultimately fail.

The brave new era excitedly predicted by many whereby Dubai seated arbitral awards could avoid scrutiny by the Dubai Courts (and the time that entails) by using the DIFC Courts as a shortcut, is seemingly coming to an end.

The Hong Kong Court of First Instance Narrowly Construes the Arbitration Ordinance in Relation to Domestic Arbitrations and the Application of Schedule 2

In A v D [2016] CFI 1014/216 the Honourable Mimmie Chan J dismissed as “totally without merit” proceedings to set aside the decision of an arbitral tribunal and counterclaim on the alleged grounds of serious irregularity under section 4 of Schedule 2 of the Arbitration Ordinance, Cap. 609 (“the 2011 Ordinance“), imposing significant cost sanctions on the applicants.

Background

The Claimants and the Respondent were equity partners of a firm pursuant to terms set out in a letter dated 11 May 2007 (the “Agreement“). In accordance with the Agreement the Respondent gave notice of his intention to retire with effect from 15 November 2009 after which his equity was assigned back to the Claimants. Disputes subsequently arose as to the amounts due from the Respondent for outstanding loans and tax owed (i.e. the Claimants’ claim) as well as his entitlement to drawings and profit (i.e. the Respondent’s counterclaim); as a result of which the matter was referred to arbitration in May 2011 in accordance with the Agreement.

The Arbitration and Proceedings to Set Aside

The arbitral tribunal ruled that the Respondent was entitled to his share of the firm’s profits and drawings only up until the effective date of his retirement (the “Ruling“). The arbitral tribunal subsequently dismissed the Claimants’ application to strike out the Respondent’s counterclaim, awarding the costs of that application against the Claimants (the “Decision and Costs Order“). The Claimants then made the present application to the Hong Kong Court of First Instance (the “Court“) to set aside the Decision and Costs Order on the grounds of an alleged serious irregularity under section 4 of Schedule 2 of the 2011 Arbitration Ordinance.  This section contains provisions pursuant to the former domestic arbitration regime, including appeals on questions of law, consolidation, and challenging an award on the basis of serious irregularity. The Respondent in turn sought a declaration that the Court had no jurisdiction in respect of the setting aside proceedings and for the action to be dismissed.

Reasoning

The Domestic Arbitration Issue

Depending upon whether an arbitration is domestic or international, different rules apply. Under the 2011 Ordinance, by operation of section 99, the provisions of Schedule 2 only apply if the parties opt in expressly for its operation. However, in the case of arbitration agreements providing that the arbitration is a domestic arbitration, by virtue of s.100 of the 2011 Ordinance, Schedule 2 applies automatically without the need for an express opt-in. In A v D there was no dispute between the parties that their partnership agreement made no such express provision. Nevertheless, the Claimants sought to argue that because the parties were Hong Kong residents and had a place of business in Hong Kong, they had subscribed to the domestic arbitration provisions under Schedule 2 without an express opt-in being necessary.

The Court rejected this argument, noting that if the intention had been for s.100 to automatically apply Schedule 2 to arbitrations between two Hong Kong entities after the 2011 Ordinance came into effect then this would have been expressly stated in its wording; moreover, the basis on which the Claimants tried to argue that the arbitration was domestic was too simple. Therefore, in view of the fact that Schedule 2 did not apply to the arbitration, Chan J held as a corollary there was no basis on which to apply the ground of irregularity to set aside the Tribunal’s decision under s.4 of Schedule 2.

Procedural Irregularity

In any event, Chan J held that the Decision and Costs Order in no way amounted to a reversal or reinterpretation of the Ruling and thus did not give rise to a procedural irregularity.

Orders

For the above reasons Chan J dismissed the application to set aside the Decision and Costs Order as “totally without merit” and awarded further costs to the Respondent on an indemnity basis, which is more generous than the most frequent party-party costs that courts tend to award as the applicants can recover all ‘reasonable’ legal expenses as opposed to just those that are strictly ‘necessary’ for conducting the arbitration.

Comments

The distinction between domestic and international arbitration in the former Arbitration Ordinance was regarded as unnecessary and problematic. It sometimes gave rise to disputes regarding the appropriate governing regime in particular cases. A significant difference between the two regimes was that the domestic regime provided the Hong Kong courts with additional powers to intervene in and assist with the arbitration process that were not available under the international regime. This included appeals on questions of law with leave of the court, consolidation of proceedings, challenging an award on the basis of serious irregularities and determination of a preliminary point of law.

By contrast, the international regime, as based on the UNCITRAL Model Law, followed the principle that the Hong Kong courts should support, but not interfere with, the arbitral process. The 2011 Ordinance, with an aim to simplify and streamline the administration and process of arbitration in Hong Kong, harmonises both domestic and international arbitration proceedings under a single unified framework. The UNCITRAL Model Law (as amended in 2006) now applies to all arbitrations commenced in Hong Kong. This new framework increases efficiency as well as provides greater certainty and consistency for both domestic and foreign parties to arbitration.

The case reiterates the narrow approach taken by the Hong Kong courts and Chan J to interpreting the 2011 Ordinance.  Parties want finality and minimal interference by the courts.  Accordingly, we do not see parties expressly adopting Schedule 2 of the 2011 Arbitration Ordinance in their arbitration agreements.
Schedule 2 is used widely in the construction industry and automatically applies to an arbitration agreement entered into at any time within a period of 6 years after the commencement of the 2011 Ordinance (i.e. before 31 May 2017) which provides that arbitration under the agreement is a “domestic” arbitration. After 31 May 2017, if the parties want appeals on questions of law and the other provisions contained in Schedule 2, they must expressly provide for it.  Use of the words “domestic arbitration” is not enough.  Finally, when making any application to set aside an award or order of an arbitral tribunal due to procedural irregularity under s.4 of Schedule 2 of the 2011 Ordinance, the applicant must state precisely the relevant ground on which it relies and provide affidavit evidence or the application will be rejected as an abuse of process.

Consistency restored as Astro v Lippo appeal dismissed

In the latest instalment of the long-running dispute between Astro and Lippo, the Hong Kong Court of Appeal (CA) has dismissed Lippo’s appeal against a 2015 first instance decision allowing the enforcement of five arbitral awards, despite a ruling of the Singaporean courts refusing enforcement on the basis that the arbitral tribunal had acted outside its jurisdiction in making the awards. Although it upheld the first instance decision, the CA notably disagreed with the High Court’s finding that Lippo did not act in good faith and reflected this in its award of 60% costs to Astro.

At first instance the judge found that First Media had not acted in good faith because it had not challenged the tribunal’s ruling on its jurisdictional objection in the Singapore courts at the time of the arbitration, but had proceeded with it and only decided to revisit this point to challenge the enforcement of the award in Hong Kong.  The CA disagreed, and found that First Media had acted in good faith as it had made an objection contemporaneously and had subsequently acted in accordance with the law of the seat of arbitration without waiving its rights.  The first instance judge had also erred in failing to place sufficient weight on the findings of the supervisory court of the seat of arbitration (the Singapore courts).  First Media was entitled to proceed with the arbitration and reserve its rights to resist enforcement despite not challenging the jurisdictional ruling pursuant to the ‘choice of remedies’ principle underlying the relevant Singaporean statute.  Good faith and the ‘choice of remedies’ principle were not mutually exclusive but complementary.  The CA also criticized the first instance judge’s approach to considering good faith in the exercise of his discretion under section 44(2) of the Arbitration Ordinance (Cap 341).

However the CA dismissed the appeal due to the “very substantial” delay in First Media’s application for an extension of time for its setting-aside application (14 months where the statutory limit was 14 days) and because the judge at first instance had not impropertly exercised his discretion by taking into account irrelevant matters, nor had he reached a “plainly wrong” conclusion.

Consequently, this decision makes clear that Hong Kong courts will generally respect decisions made by courts exercising supervisory jurisdiction at the seat of an arbitration.  However, the impact of the ruling remains a cautionary tale for award debtors who do not challenge orders to enforce awards in time.

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