Hong Kong

Case updates

C v D [2022] HKCA 729

In our last edition, we covered the Court of First Instance (CFI) judgment of C v D. The CFI held that non-compliance with a precondition to arbitration (for instance, a condition that the parties should engage in good-faith negotiation before arbitration) does not affect the jurisdiction of the tribunal unless expressly provided by the parties. The tribunal may choose to give effect to the contractual precondition by ordering a stay of the arbitral proceedings pending compliance with the clause, by imposing cost sanction or by dismissing the claim as inadmissible.

In other words, whether or not pre-arbitration conditions for arbitration have been or should be fulfilled is a question of admissibility rather than the jurisdiction of the tribunal, and the tribunal’s decision is final and the award cannot be set aside under Article 34(2)(a)(iii) of the Model Law on grounds that the tribunal has ruled on matters beyond the “scope of the submission to arbitration”.

The case was granted leave to appeal and on 7 June 2022, the Court of Appeal (CA) handed down its decision dismissing the appeal.

In dismissing the appeal, the CA rejected the argument that the distinction between admissibility and jurisdiction should not be adopted as it was not found in the text of Article 34(2)(a)(iii) of the Model Law, and observed that such distinction is a concept rooted in the nature of arbitration itself which is well recognised in case law (and academic writing) in England and Wales, Singapore, Australia and the United States.

The CA also rejected the distinction between a dispute resolution clause which provides that a reference to arbitration is subject to some conditions precedent and a dispute resolution clause which is intended to stipulate the procedural regulation of the arbitral process only. The CA held that the proper question to be asked is whether the parties intended that any dispute about the fulfilment of a condition precedent would be determined by the arbitral tribunal. Further relying on the “Fiona Trust presumption” in the English case of Fiona Trust & Holding Corp & others v Privalov & others [2007] UKHL 40 that rational business people are likely to have intended any dispute arising out of their relationship to be decided by one and the same tribunal, the CA found that there was no reason why the parties in this case would intend to exclude disputes on the basis of whether the pre-conditions had been complied with from the scope of submission to arbitration.

H v G [2022] HKCFI 1327

On the other hand, on 10 May 2022, the CFI handed down a judgment which underscores the limitations of the “Fiona Trust presumption” in the interpretation of inconsistent dispute resolution clauses in different contractual agreements.

This case concerned a building contract between a property developer and its building contractor for certain building works. The building contract required the building contractor and its third-party subcontractor to execute a warranty for the waterproofing system installed as result of the building works. The building contract provided that the dispute shall be resolved by arbitration, but the warranty provided that the warrantors agreed to submit to the non-exclusive jurisdiction of the Hong Kong Court.

G commenced arbitration against H claiming negligence and breach of contract under the building contract and the warranty. On the other hand, H contended that the tribunal did not have jurisdiction over any claims made by G under the warranty.

In deciding that the tribunal had no jurisdiction over the claims made under the warranty, the CFI ruled that the Fiona Trust presumption was not directly applicable as in this case, the building contract was between G and H and there was a separate warranty between G, H and a third-party subcontractor which was not privy to the building contract. The Court also highlighted the important point in Fiona Trust that if there is language in the relevant contract which makes it clear either that certain disputes were to be excluded or that the parties did not intend to have all their disputes resolved by one tribunal, the presumption has no role to play.

Considering that at the time when the building contract was negotiated and signed by G and H, both parties had anticipated the execution of the warranty and the separate dispute resolution clause contained in the warranty, and considering the sensible and apparent rationale for having a free-standing and independent dispute resolution mechanism in the warranty which deals with separate and independent matters, the CFI found that G and H had clearly intended that disputes under the warranty be carved out from the arbitration agreement in the building contract.

李明實,方壘 AND 史洪源 v ACE LEAD PROFITS [2022] HKCFI 3342

In the case of 李明實,方壘 and 史洪源 v Ace Lead Profits, the CFI rejected an application for stay in favour of arbitration on the basis that the claim in question did not fall within the ambit of the arbitration agreement.

This case concerned a business specialising in industrial automation and railway transport automation. The 1st plaintiffs (P1) were the eligible employees suing on their own behalf and on behalf of the employees employed by the HollySys Group who were eligible for subscription under a trust scheme. The 2nd plaintiff (P2) was the founder of the business. As the business expanded, there had been re-structuring in anticipation of public listing and a number of overseas companies were incorporated and amongst them were the 1st defendant (D1) and 3rd plaintiff (P3), both incorporated in the BVI and the 2nd Defendant (D2) was the sole director and shareholder of D1.

In 2006, HollySys was incorporated in the BVI and became the holding company of the business and HollySys Group was the PRC intermediate holding company holding all the subsidiaries in the PRC.

To share the success of the business with its employees and to reward them, a trust scheme was set up. The HollySys Trust Committee (“Trust Committee”) was formed and regulated by its own set of articles (“Articles”) and P2 intended for D2 to administer and manage the trust scheme through D1. The trust scheme consisted of different layers between P3, D1 and the employees. Eligible employees would obtain shares at a certain subscription price and declaration of trusts (“Declaration of Trusts”) would then be signed with the participating employee as the beneficiary. The arbitration agreements invoked were found in each of these Declaration of Trusts which provided that “either party shall have the rights to, when mediation is ineffective, refer any disputes arising from the trust relationship between the settlor and the trustee to the Hong Kong arbitration committee for adjudication”.

The plaintiffs commenced the present proceedings against the defendants for, among other things, a declaration that the shares held in the name of D1 were held on trust for the employees under the trust scheme and the defendants applied for a stay of the claim in favour of arbitration.

In refusing the defendants’ application, the CFI considered that the relevant terms of the Articles of the Trust Committee and noted that the Articles clearly stated that the shares held by P3 and D1 were to be used for the trust scheme. The Declaration of Trusts were created for the purpose of implementing the trust scheme. It was held that the nature of the overarching trust scheme was different from the trusts created by the Declaration of Trusts, which was between the individual beneficiaries of the shares awarded under the trust scheme. Accordingly, it was decided that the dispute regarding the scheme trust fell outside of the scope of the arbitration agreements contained in the Declaration of Trusts.

This case highlighted the importance of ascertaining the scope and coverage of arbitration agreements for disputes arising out of complex commercial arrangements involving multiple parties and inter-related arrangements.

G v X [2002] HKCFI 829; [2002] HKCFI 1864

The case of G v X concerned a series of applications for enforcement of a China International Economic and Trade Arbitration (CIETAC) award.

On 5 July 2021, G applied ex parte for leave to enforce a CIETAC arbitral award (“Award”) against X for payment of damages, interests and arbitration fees. G also applied for a Mareva injunction to restrain X and other respondents from disposing of their Hong Kong and worldwide assets up to the amount of the Award and for a disclosure order for disclosure of their assets. The Mareva injunction and disclosure orders were granted against X and against the other respondents under the Charbra jurisdiction on ex parte basis and the enforcement application was directed to be proceeded on inter-parte basis.

After the handing down of the Award, X had applied to the Beijing Intermediate Court to set aside the Award and G in turn applied for enforcement of the Award to the Beijing Court.

The parties eventually agreed for X to make payment of a sum into Court for immediate discharge of the Mareva injunction and the disclosure orders. X subsequently applied for payment out of the sum paid into Court in lieu of the Mareva and disclosure orders on the basis that the orders should never have been granted on an ex parte basis for lack of good arguable case and should be discharged for material non-disclosure. X also sought fortification of G’s undertaking as to damages in respect of the Mareva injunction.

On 22 March 2022, the Court handed down its decision and refused X’s payment out application and fortification application and found that had it not been for X’s payment made into Court and the parties’ agreement to discharge the orders, G’s application for continuation of the Mareva injunction and disclosure orders would have been granted.

In finding that there was a good arguable case for the grant of the Mareva injunction and the ancillary disclosure orders, the Court highlighted that the application was made on the basis of a final arbitral award and not at the interlocutory stage, which was after the tribunal had decided in a contested hearing on the merits of all the claims made in the arbitration. The fact that there was an application to set aside the Award did not render it less binding, or unenforceable until and unless it has been set aside. Citing the case of China CITIC Bank Corp Ltd (Quanzhou Branch) v Li Kwai Chun [2018] HKCFI 1800, it was confirmed that the Courts are in general more prepared to grant a Mareva injunction post-judgment and in aid of execution, both in terms of the assessment of whether there is a risk of dissipation of assets and as to whether the defendant is likely to sustain damages as a result of the grant of the injunction.

The Court also did not find any material non-disclosure and remarked that applications for discharge based on material non-disclosure were not to be abused or to become a “rambling and roving investigation” of what should have been disclosed. As such, the Court did not find that there had been material non-disclosure of G’s financial means. X’s claim that G must have known of the disposal of the assets (which had been the subject matter of the CIETAC arbitration) before the injunction application was made and the claim that G had misled the Court as to the full extent and reason of his failure to apply for an asset preservation order in the Mainland was also rejected.

On 21 June 2022, the Court handed down its decision on G’s application to enforce the Award and X’s application to set aside or to stay the enforcement of the Award pending the Beijing Court’s decision on the setting aside application.

X’s case for resisting enforcement was that it had been deprived of the opportunity to present its case in the arbitration on G’s amended claim for revised damages and that the Award dealt with matters beyond the scope of the submission to arbitration due to the consolidation of disputes under 8 different agreements in question.

The Court found that X had not been deprived of a reasonable opportunity to address G’s case as the Court was not persuaded that the tribunal was required to invite further submissions on quantum after finding that liability was established in the case where X chose to confine his submissions that the quantum should be nil. The Court also noted that X had the right to correct any calculation error in the Award under the CIETAC rules. As to the question on the scope of the arbitration agreement, the Court decided that the Beijing Court was in the best position to decide the scope of the arbitration agreement based on PRC law and it therefore ordered a stay of enforcement of the Award for three months or until the decision of the Beijing Court.

 

Other key developments

Outcome Related Fee Structures allowed for arbitration in Hong Kong

On 22 June 2022, the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance 2022 (the “Amendment Ordinance”) was enacted and the new Arbitration (Outcome Related Fee Structures for Arbitration) Rules (the “Rules”) along with Divisions 3, 4 and 7 of Part 10B of the Arbitration Ordinance (Cap. 609) came into force on 16 December 2022. The Amendment Ordinance and the subsidiary Rules were enacted with a main objective to provide a new regulatory regime for outcome-related fee structures (“ORFSA”) which were previously prohibited in Hong Kong.

The Amendment Ordinance allows the following agreements to be in place between a lawyer and the client in arbitrations, mediations and related court proceedings in Hong Kong:

Conditional Fee Agreement (CFA)

An agreement under which the lawyer agrees with the client to be paid a success fee for the matter only in the event of a successful outcome for the client in the matter.

Damages-based Agreement (DBA)

An agreement under which: (a) the lawyer agrees with the client to be paid for the matter only in the event the client obtains a financial benefit in the matter (“DBA Payment”); and (b) the DBA Payment is calculated by reference to the financial benefit that is obtained by the client in the matter.

Hybrid Damages-based Agreement (HYBRID DBA)

An agreement under which the lawyer agrees with the client to be paid for the matter: (a) in the event the client obtains a financial benefit in the matter, a payment calculated by reference to the financial benefit; and (b) in any event, a fee, usually calculated at a discount, for the legal services rendered by the lawyer for the client during the course of the matter.

The Rules set out the detailed regulatory framework for ORFSA with general and specific conditions required for the agreements in order to ensure their validity and enforceability.

Under the general conditions of the Rules, all three types of ORFSA must be in writing and signed by lawyer and the client, state the matter to which the agreement relates, state that the lawyer has informed the client of the right to seek independent legal advice, and for a cooling-off period of not less than seven days.

Specific conditions for CFAs include the uplift element must not exceed 100% of the benchmark fee and the agreement must state the circumstances that constitute a successful outcome of the matter.

Specific conditions for the DBAs and Hybrid DBAs include the DBA Payment must not exceed 50% of the financial benefit and the agreement must state the financial benefit to which it relates. For Hybrid DBAs, additional specific conditions applies including that in case no financial benefit is obtained by the client, the client is not required to pay to the lawyer more than 50% of the irrecoverable costs.

The Rules also provide for the maximum aggregate sum of the DBA Payments where there are multiple DBAs or Hybrid DBAs, and information in relation to the ORFSA that the lawyer must provide to the client, as well as the termination of the ORFSA.

HKIAC’S users additional route to Mainland interim relief and inforcement

22 June 2022, the Supreme People’s Court (SPC) issued a notice on the “Inclusion of the Second Group of International Commercial Arbitration Institutions” and announced that the Hong Kong International Arbitration Centre (HKIAC) will be the first arbitral institution outside the Mainland to be included in the “One-Stop” Platform for Diversified International Commercial Dispute Resolution (“One-Stop Platform”) of the China International Commercial Court (“CICC”).

The CICC was established by the SPC in 2018 to determine international commercial disputes.

The new arrangement means that parties to cases administered by the HKIAC with an amount in dispute over RMB300 million or with a significant impact, may apply for interim relief and/or the enforcement of arbitral awards directly to the CICC. Parties to arbitral proceedings in Hong Kong and administered by the HKIAC can already apply to the competent Intermediate People’s Court for interim relief and enforcement of awards but the direct access to the CICC for interim relief and enforcement of arbitral awards can save considerable time and costs.

The New South China International Aabitration Cnter (Hong Kong) - Arbitration Rules

The South China International Arbitration Center (Hong Kong) (SCIAHK) is a newly registered Hong Kong arbitral institution affiliated to, but independent of the Shenzhen Court of International Arbitration (also known as the South China International Economic and Trade Arbitration Commission). It is one of the two Hong Kong-seated Mainland arbitral institutions besides CIETAC.

On 1 May 2022, the SCIAHK Arbitration Rules took effect. The new rules were drafted based on the 2013 UNCITRAL Arbitration Rules and contains an appendix setting out the modifications to the UNCITRAL Rules.

The rules make provisions for, among others, the application of list procedure for appointing arbitrators, consolidation, parallel proceedings and single arbitration under multiple contracts, expedited procedure, summary dismissal of claims, counterclaims and defences, emergency arbitrations, Med-Arb, an optional appellate procedure, ‘off-panel’ appointment of arbitrators, electronic conduct of arbitration, confidentiality of arbitration and third-party funding or insurance of arbitrations.