HONG KONG
Philipp Hanusch
A. LEGISLATION AND RULES
A.1 Legislation
A.1.1 Landmark arrangement between Mainland China and Hong Kong concerning court-ordered interim measures in aid of arbitrations
On 1 October 2019, the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and the Hong Kong Special Administrative Region (“Arrangement”) became effective.
The Arrangement allows parties to Hong Kong seated arbitrations administered by certain eligible arbitral bodies to seek an interim measure from the Chinese courts. This has significant implications for the business community because it enables parties to resolve China-related disputes through arbitration within a well-established legal framework according to international best practices while preserving their ability to seek interim relief in Mainland China. Hong Kong is the only arbitral seat in the world that can provide this important benefit. Parties’ options for arbitrations seated in China remain unchanged, as Hong Kong courts could already grant interim measures in aid of arbitrations in China or elsewhere before the Arrangement became effective.
The Arrangement applies to commercial arbitrations (but not investment arbitrations) provided that they are: (i) seated in Hong Kong; and (ii) administered by one of the following arbitral and dispute resolution institutions and permanent offices:
- HKIAC
- CIETAC Hong Kong Arbitration Center
- International Court of Arbitration of the ICC – Asia Office
- Hong Kong Maritime Arbitration Group
- South China International Arbitration Center (HK)
- eBRAM International Online Dispute Resolution Centre
The Arrangement also applies to arbitrations that were commenced before 1 October 2019.
The Arrangement mentions three types of interim measures available in Mainland China, preservation of (i) property (e.g., freezing orders), (ii) evidence (e.g., not to destroy a document) and (iii) conduct, i.e. forms of injunctive relief and orders to compel (e.g., not to use a trademark).
The procedure of applying to the Chinese court for an interim measure depends on whether a Hong Kong seated arbitration is already pending or has yet to be commenced. A party to a pending arbitration may file an application with the administering institution requesting it to certify that it has accepted the arbitration. The institution or the party may then forward the application together with all supporting documents to the court, which will decide it in accordance with PRC law. A prospective claimant seeking an interim measure before the commencement of an arbitration must file the application directly with the court. Upon commencement, the applicant must submit a certification from the administering institution that it has accepted the arbitration. The court must discharge the measure if it has not received the certification within 30 days after it has granted it. The Supreme People’s Court has helpfully published 12 templates for applications to Chinese courts under the Arrangement.
The first applications for interim measures were submitted to Chinese Courts shortly after the Arrangement entered into effect. The Shanghai Maritime Court was the first court that granted an application under the Arrangement. By early January 2020, HKIAC had received 13 applications. One application was for an order to preserve evidence. The other 12 applications were ex parte applications for orders to preserve assets, five of which were granted. The largest sum involved was in excess of USD 160 million. We expect that the trend of parties arbitrating in Hong Kong seeking interim measures from Chinese courts will continue throughout 2020.
The Arrangement reinforces and enhances Hong Kong’s role and status as the preferred seat for China-related arbitrations. It is also an important contribution to the implementation of key policy initiatives such as the Greater Bay Area Initiative and the Belt and Road Initiative.
A. 2 Institutions, rules and infrastructure
A.2.1 ICC’s and HKIAC’s guidance relating to the application of the Arrangement
On 1 December 2019, the ICC published a note on applications for interim relief to Chinese Courts in support of Hong Kong seated arbitrations administered under the ICC Rules by the ICC’s Secretariat Asia Office. On 16 December 2018, HKIAC published a note on its practice of processing such applications under the Arrangement in HKIAC administered arbitrations seated in Hong Kong. Both notes provide helpful guidance to applicants on the making of applications under the Arrangement before or after the commencement of the arbitration. Two points are noteworthy:
- In ICC arbitrations, a claimant may file its request for arbitration with the Secretariat at any of its offices. For the purpose of the Arrangement, regardless of where a claimant files its request, the ICC Secretary-General will assign the arbitration to be administered by the Secretariat Asia Office where Hong Kong is the seat of arbitration based on (i) the arbitration agreement, (ii) a decision of the ICC Court, or (iii) a subsequent agreement by the parties.
- Both ICC and HKIAC recommend, based on a commentary of the Supreme People’s Court of the PRC, that in a pending arbitration, the applicant should submit the application together with the other required documents directly to the court rather than through the institution.
B. CASES
B.1 Court grants anti-suit injunction against third party
Where a non-party to a contract becomes entitled to enforce a right under that contract (for example, a company may be a beneficiary under a settlement agreement entered into between its affiliate and a counterparty), a question arises as to how and where the non-party can enforce its right. If a contract contains an arbitration clause, the Hong Kong courts can grant an anti-suit injunction restraining a party to the contract from pursuing foreign court proceedings commenced in breach of the arbitration clause. The Hong Kong courts may do so if the application is made in a timely manner and there is no good reason for denying it.
In Dickson Valora Group (Holdings) Co Ltd. v Fan Ji Qian [2019] HKCFI 48, the defendant had commenced court proceedings in China to claim benefits under a contract to which it was not a party. The contract provided for arbitration in Hong Kong. The plaintiff sought an anti-suit injunction against the defendant from the Hong Kong Court of First Instance (“Court”).
The Court granted the injunction and held that a non-party to a contract who becomes entitled to enforce an obligation that is subject to an arbitration clause must do so by arbitration in accordance with the contract. When considering comity in the context of the injunction, the Court emphasized the importance of respecting a conscious choice of Hong Kong as a mutually acceptable neutral ground in terms of (i) joint venture formations; (ii) governing law; (iii) and dispute resolution forum.
This case is yet another example of the pro-arbitration approach of the Hong Kong courts and their robust attitude in enforcing arbitration agreements.
B.1.1 Background
In 2010, M and DHE set up a joint venture company, the 1st plaintiff (“Company”). Foreign investors owned M while the defendant owned DHE. The joint venture concerned a property project in China. Following the Company’s incorporation, M, DHE and the Company entered into a shareholders agreement (“SHA”). The SHA contained an arbitration clause adopting Hong Kong arbitration for disputes arising out of the SHA.
In December 2011, M, DHE and the Company entered into an addendum to the SHA (“Addendum”). The Addendum was an addendum to a Supplementary Agreement (“SA”), which referred to the SHA, and was expressly intended to be a “complement” to the SHA. It provided that the defendant would be entitled to a success fee upon fulfillment of certain conditions and that the success fee might be paid by the Company’s subsidiary, the 2nd plaintiff. The defendant was neither a party to the SHA nor the Addendum.
The relationship between M and DHE subsequently broke down. In 2018, the defendant commenced proceedings against the plaintiffs in Mainland China claiming the success fee under the Addendum. The Chinese court subsequently granted the defendant a freezing order over the plaintiffs’ assets and an execution order over some of the 2nd plaintiff’s property.
The plaintiffs challenged the Chinese Court’s jurisdiction on the basis that the dispute was subject to the arbitration clause in the SHA, but the court dismissed the challenge.
In November 2018, the plaintiffs brought proceedings in Hong Kong seeking an anti-suit injunction restraining the defendant from pursuing the proceedings in China and commencing any similar proceedings in China.
B.1.2. Decision
Neither the Addendum nor the SA contained any separate provisions on choice of law and dispute resolution. However, the SA referred to the SHA. Under Hong Kong law, a reference to a document that contains an arbitration clause may be sufficient to constitute an arbitration agreement, provided that the reference is such as to make that clause part of the contract. Hence, the Court considered whether the arbitration clause in the SHA was incorporated into the Addendum by way of reference, which was a question of interpretation and incorporation.
The Court found that the Addendum was subject to the arbitration clause in the SHA. The Court noted that from a practical point of view, it would be wholly uncommercial to suggest that if there should be a dispute between M and DHE about the success fees that the parties contemplated, that it would not be regulated by the choice of law clause and the arbitration clause in the SHA.
The Court then considered whether the defendant was bound to pursue his claim by arbitration, notwithstanding that he was not a party to the SHA, and whether there were good reasons not to grant the injunction. The Court considered various authorities relied on by the parties, including, in particular, two English cases that suggested that a person who became entitled to enforce a contractual obligation could only do so in accordance with its terms and, if the obligation was subject to an arbitration clause, the obligation could only be enforced by arbitration.[1]
The Court found that the defendant’s rights of a success fee, if any, were derived from the plaintiff’s contractual promise to DHE; the arbitration clause formed an inseparable part of that promise. Accordingly, the promise of the success fee was subject to the arbitration clause. If the claim was not pursued in the contractually-agreed mode, the plaintiffs had a right to prevent the claim against them. Unless an injunction was granted, such right would be rendered wholly ineffective and valueless.
Finally, the Court considered whether there were good reasons not to grant the injunction. The Court concluded that there were no good reasons not to restrain the defendant from proceeding in a way that repudiated the integral condition of the right he sought to assert under the Addendum.
In reaching this decision, the Court considered the following discretionary factors:
(i) Whether the plaintiffs were guilty of inexcusable or inordinate delay in applying for the anti-suit injunction.
(ii) Whether the delay was serious when viewed against the progress of the foreign proceedings.
(iii) Whether it was abusive for the plaintiffs to make the application only after their failed jurisdictional challenge in the Chinese court.
On the last point, the Court noted that the plaintiffs had to raise the challenge promptly as they would otherwise have been regarded as having accepted the Chinese court’s jurisdiction. In concluding that the plaintiffs’ course of action was not abusive, the Court took into account various matters. Two points are particularly noteworthy. First, comity considerations were less important where the foreign proceedings were inconsistent with the contractual mode of dispute resolution; moreover, the unambiguous policy of the Hong Kong courts in support of arbitration was to be placed in the balance against comity considerations. Second, arbitration agreements and processes require the support and protection of the courts. The joint venture vehicle was a Hong Kong company, Hong Kong law governed the contract and is provided for Hong Kong seated arbitration. This showed that the foreign and Chinese investors had consciously chosen Hong Kong as a mutually acceptable neutral ground. Such choices are an important part of the bargain between commercial parties and should not be easily thwarted.
B.1.3 Takeaway points
Parties who choose Hong Kong as the place of incorporation, Hong Kong law as the governing law of their contracts and Hong Kong as the seat of arbitration for resolving their disputes can rest assured that the Hong Kong courts will respect and protect their choice. Hong Kong courts will not hesitate to restrain a party from commencing or proceeding with foreign court proceedings in breach of an arbitration agreement unless the applicant is guilty of inexcusable or inordinate delay or there are any other good reasons for not granting an injunction.
Third parties who intend to claim a benefit under a contract that is derived from a party to that contract are subject to the dispute resolution provisions agreed by the parties to the contract unless the contract indicates otherwise.
Notably, the Contracts (Rights of Third Parties) Ordinance (Cap 623) (“Ordinance”), which reformed the doctrine of privity, did not apply in this case as all relevant agreements that were entered into, before the Ordinance came into operation on 1 January 2016. An effect of the Ordinance is that a third party may enforce a contract term if the contract expressly provides either that the third party may do so or the term purports to confer a benefit on the third party. The Ordinance also makes clear that if the third party’s right is subject to an arbitration agreement, the third party is treated as a party to that agreement as it regards a dispute between itself and the promisor relating to the enforcement of the term.
As a consequence, contract drafters often include, sometimes by way of routine, a “boilerplate” clause excluding the operation of the Ordinance. However, circumstances may arise where the Ordinance is beneficial to a business. For example, a company may wish to provide the benefit of an indemnity to its affiliates and other identified parties. Contract drafters should thus consider carefully whether any third parties should be able to claim a benefit under the contract before excluding the operation of the Ordinance. Conversely, where it is intended to confer a benefit to a third party, the contract should expressly identify the third party and provide that it may enforce a specific term of the contract. In complex transactions involving multiple parties and documentation, it is important to ensure that the position of the third party is clearly identified and consistent throughout all relevant agreements.
B.2 Court clarifies when the limitation period for enforcing arbitral awards in Hong Kong starts to run
Under Hong Kong law, an arbitration agreement is premised upon an implied undertaking by the parties to perform an award. Accordingly, the six-year time limit to enforce awards in Hong Kong runs from the time when the award debtor fails to honor that promise. In its recent decision in CL v SCG [2019] HKCFI 398, the Hong Kong Court of First Instance dismissed an enforcement application because it was made out of time. The court provided useful guidance on the important question of when the six-year limitation period starts to run.
B.2.1. Background
In March 2005, CL commenced HKIAC administered arbitration proceedings in Hong Kong against SCG. The dispute arose out of a sale and shipment contract. On 17 February 2011, the arbitral tribunal rendered an award ordering SCG to “forthwith” pay CL around USD 2.1 million.
CL demanded payment from SCG on 18 March 2011. On 9 July 2011, CL applied to the Shenzhen Intermediate People’s Court to enforce the award. SCG opposed. In March 2015, CL’s application was rejected. CL appealed but its appeal was rejected on 1 March 2017. By then, CL had spent almost six years on seeking to enforce the Hong Kong award in China.
On 6 February 2018, CL applied to the Hong Kong court to enforce the award in Hong Kong. SCG opposed the application on the ground that it was time-barred. SCG relied on section 4(1)(c) of the Limitation Ordinance: actions to enforce an award (where the submission is not by an instrument under seal) shall not be brought after the expiration of six years “from the date on which the cause of action accrued.”
In response, CL invoked the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region. This arrangement was put in place in 1999 because the New York Convention no longer applied between Hong Kong and China after Hong Kong was returned to China on 1 July 1997. The arrangement prohibits an applicant from applying for enforcement to more than one court at the time and the applicant may only apply for enforcement to the court of another place when enforcement in the first place turned out to be insufficient to satisfy the award. CL argued that the limitation period did not run while it attempted to enforce the award in China.
B.2.2 Issues
The Honourable Madam Justice Mimmie Chan, who is the judge in charge of arbitration-related court proceedings in the CFI, had to determine: (i) the precise date when the cause of action to enforce the award accrued and (ii) whether the six-year limitation period was suspended while CL sought enforcement of the award in China.
B.2.3 Decision
On the first issue, SCG submitted that three months was a reasonable time for SCG to pay and honor the award. The limitation period started to run three months from the date of the award or, alternatively, when CL applied to the Shenzhen court to enforce the award. Hence, SCG took the position that the limitation period had expired either on 18 May 2017 or on 9 July 2017.
CL contended that the limitation period only started to run when SCG manifested a clear and unequivocal intention not to be bound by the award; that is when SCG filed its submissions with the Shenzhen court opposing CL’s application to enforce the award. Chan J did not accept CL’s argument as it would have effectively meant that an award creditor could indefinitely defer the accrual of its cause of action by expressing an equivocal stance as to whether or not it would honor the award.
Chan J then explained the principles of determining when the six years start to run. That what is a reasonable time for payment and performance under an award depends on the terms of the award as well as the facts and circumstances of the case. Pointing out that the award ordered SCG to make payment “forthwith,” Chan J explained that the cause of action based on the implied obligation to honor the award arose when SCG failed to make payment “within a reasonable time of the publication of the award and demand being made.” Taking into account that SCG demanded payment one month after the award was made, 21 days was a reasonable time for payment. Consequently, the cause of action accrued on 8 April 2011 (i.e., 21 days from 18 March 2011 when CL made its first demand) and the six-year limitation period expired on 8 April 2017.
On the second issue, CL contended that the limitation period was suspended when CL applied to the Chinese courts for enforcement of the award and that it only resumed on 1 March 2016 when its appeal was rejected. CL submitted that it would be contrary to Hong Kong public policy to refuse enforcement of an award by operation of the Limitation Ordinance simply because the successful party had first attempted to enforce it in Mainland China.
Chan J rejected this argument. However unfair the consequences may be, there was simply no express provision in the enforcement arrangement or the Arbitration Ordinance (which implements the arrangement in Hong Kong) or the Limitation Ordinance that limitation period should not run while a successful party seeks to enforce an award in China.
Takeaway points
Before commencing arbitration, it is important for claimants to consider whether the other party has any assets to satisfy a favorable award and where those assets are. Award creditors who intend to enforce a favorable award in different jurisdictions should ascertain the applicable time limits in the relevant jurisdictions and see whether there are any constraints on concurrent enforcement applications in those jurisdictions.
In Hong Kong, enforcement applications must be brought within six years from the date the cause of action has accrued. To play safe, award creditors should assume that the six years starts to run when they receive the award. When noting the expiration of the Hong Kong limitation period, sufficient time for the preparation of the enforcement application should be factored in.
Award creditors who obtain a Hong Kong or Mainland award against debtors with potential assets in both places must make a decision as to where to seek enforcement first. Creditors who decided to start in China but subsequently find themselves entangled in a lengthy court battle must be wary of the limitation period for enforcement in Hong Kong. Creditors who are at risk of running out of time and wish to seek enforcement in Hong Kong within the six-year period must procure determination of a pending application in Mainland China before applying for enforcement in Hong Kong. These principles also apply between Hong Kong and Macau.
[1] Schiffahrtsgesellschaft Detlef Von Appen Gmbh v Wiener Allianz Versichrungs AG and Voest Alpine Intertrading GmbH (The Jay Bola) [1997] 2 Lloyd’s Rep 279 and Shipowners’ Mutual Protection and Indemnity Association (Luxembourg) v Containerships Denizcilik Nakliyat ve Ticaret AS (The Yusuf Cepnioglu) [2016] 3 All ER 697.
