Philipp Hanusch and James Ng
A. LEGISLATION AND RULES
A.1.1 Amendments to the mutual enforcement arrangement between Hong Kong and the Mainland
Upon Hong Kong’s return to the People’s Republic of China (PRC) on 1 July 1997, the PRC extended the territorial application of the New York Convention to Hong Kong. However, arbitral awards made in Hong Kong could no longer be directly enforced in the Mainland and vice versa, as the New York Convention no longer applied between these two jurisdictions. This situation was remedied by the “Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR” which took effect on 1 February 2000. Since then, the Arrangement has followed the spirit of the New York Convention and successfully provided an effective enforcement mechanism.
On 27 November 2020, the “Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region” was signed to amend four aspects of the Arrangement:
- Award creditors may apply simultaneously for enforcement in the Mainland and Hong Kong subject to the principle that the total amount to be recovered from enforcement must not exceed the amount determined in the award. Under the previous regime, simultaneous enforcement was prohibited which required award creditors to decide in which jurisdiction to seek enforcement first. Where creditors had unsuccessfully spent years on trying to enforce an award in one jurisdiction, this prohibition put them at risk of a subsequent enforcement action in the other jurisdiction being time-barred.
- Award creditors may apply for preservation or mandatory measures before or after the court’s acceptance of an enforcement application, thereby bringing the Arrangement in line with the actual practice of many Mainland courts.
- Under the original wording of the Arrangement, only awards made by certain recognized Mainland arbitral authorities pursuant to the PRC Arbitration Law could be enforced in Hong Kong. The amendment has removed this restriction so that any awards made in the Mainland fall under the Arrangement and can be enforced in Hong Kong. This brings the Arrangement in line with the prevalent international approach under the New York Convention: for the purpose of recognition and enforcement, the seat of arbitration rather than the domicile of the administering arbitral institution determines in which jurisdiction the award was made.
- The term “recognition” has been added to the Arrangement when referring to enforcement, making clear that Hong Kong awards need to be recognized before they can be enforced in the Mainland – this was previously uncertain. Notably, the Hong Kong Arbitration Ordinance (Cap. 609) already provided that a Mainland award that is enforceable in Hong Kong will also be recognized for other purposes (e.g., to rely on it in court proceedings by way of defense or set-off).
In the Mainland, the Supplemental Arrangement has been implemented by way of a judicial interpretation promulgated on 27 November 2020. In Hong Kong, the amendments under (ii) and (iv) above came into effect on 27 November 2020. The amendments under (i) and (iii) above, which require minor amendments to the Arbitration Ordinance (Cap. 609), will take effect on 19 May 2021.
The amendments are in line with the spirit of the New York Convention and enhance the position of award creditors seeking enforcement of Hong Kong awards in the Mainland and vice versa.
A.1.2 Review of prohibition on Outcome Related Fee Structures (ORFS) for Arbitration
On 17 December 2020, a Sub-committee of the Law Reform Commission published a consultation paper on ORFS for arbitration, launching a three-month public consultation on the issue. The Sub-committee recommended that Hong Kong law be amended to permit lawyers to use ORFS (including conditional fee agreements, damages-based agreements and hybrid damages-based agreements) for arbitrations taking place in and outside Hong Kong; it also invited public views on appropriate safeguards to be put in place. The Sub-committee considered the reform important for preserving and promoting Hong Kong as a leading center for arbitration services, and to enable Hong Kong to compete on an even playing field with other popular arbitral seats which allow some form of ORFS.
A.2 Institutions, Rules and Infrastructure
A.2.1 HKIAC Guidelines for Conducting Virtual Hearings
In May 2020, the HKIAC produced Guidelines for Conducting Virtual Hearings which seek to ensure a seamless and effective virtual hearing experience, whether conducted fully or partially virtual. The Guidelines provide instructions on how to engage the HKIAC for arrangement of various hearing services, such as video and audio conferencing or transcription and interpretation services. The Guidelines also set out best practices in formulating virtual hearing protocols.
A.2.2 HKIAC’s Women in Arbitration initiative established its first WIA and Executive Committees
In August 2020, HKIAC’s Women in Arbitration (WIA) initiative established its first WIA Committee and Executive Committee. The WIA Committee is responsible for shaping WIA’s policies and activities to promote gender diversity in arbitration and related areas in China. WIA was launched in February 2018 to promote access and success of female practitioners in international arbitration and related areas in China, and to develop the next generation of leading female practitioners. WIA activities have since then been organized in Shanghai, Beijing and Hong Kong.
A.2.3 Strong use of arrangement on mutual assistance in court-ordered interim measures
On 1 October 2019, the landmark arrangement on mutual assistance in court-ordered interim measures in aid of arbitrations between Hong Kong and Mainland China came into operation. Since then, parties to Hong Kong seated arbitrations administered by certain eligible arbitral institutions (e.g., HKIAC, ICC – Asia Office, CIETAC Hong Kong) can seek an interim measure from the Mainland courts that will be enforceable in the Mainland. Hong Kong is the only arbitral seat in the world that can provide this important benefit to parties who choose to resolve China-related disputes by arbitration seated outside the Mainland.
According to statistics from HKIAC, by 31 January 2021, HKIAC had processed 37 applications under the arrangement. 34 applications sought asset preservation, two sought evidence preservation and one sought conduct preservation. Out of the 21 applications that had been resolved by then, interim measures were granted in 20 cases. The total value of assets sought to be preserved amounted to approximately RMB 12.5 billion (approximately USD 1.9 billion). Applications were made to 17 different Mainland courts in 14 cities. Around 27% of the applications were made by Mainland parties. Around 52% concerned assets or evidence owned by Mainland Chinese parties, the other 48% concerned assets owned by or conduct of non-Mainland parties.
B.1 Courts further develop principles governing the interface between winding-up petitions and arbitration agreements
Under Hong Kong law, a company is deemed unable to pay its debts if a creditor, to whom the company is indebted at least HKD 10,000 (around USD 1,290), has served a so-called statutory demand (SD) on the company and the company has failed to pay within three weeks. A creditor may then petition to wind-up the company. England and other common law jurisdictions have very similar concepts.
Where the debt falls within the ambit of an arbitration clause in a contract, the mandatory stay proviso under article 8(1) of the UNCITRAL Model Law does not apply to a winding-up petition; instead, the courts have a discretion as to whether to stay or dismiss the petition.
This requires the court to consider the competing policy objectives of (i) discouraging the tactical bypassing of an arbitration clause by filing a winding-up petition to pressurize a debtor to pay a genuinely disputed debt and (ii) being mindful of opportunistic insolvent debtors relying on an arbitration clause to require the creditor to incur the cost of obtaining an award and to prevent the creditor from exercising its statutory right to petition for the winding-up of a debtor who fails to pay a debt that is not genuinely disputed.
The Hong Kong courts originally followed the English approach in Salford. In Re Southwest Pacific Bauxite (HK) Ltd (aka Lasmos), the Court of First Instance (CFI) held that, save in exceptional circumstances, a winding-up petition would generally be dismissed where (i) the debtor disputes the debt, (ii) the arbitration agreement covers any dispute relating to the debt and (iii) the debtor has taken steps to commence the dispute resolution process in accordance with the arbitration agreement (often referred to as “Salford-Lasmos Approach”). Accordingly, a debtor would not need to show a bona fide dispute on substantial grounds when seeking to stay or dismiss a winding-up petition.
In Sit Kwong Lam, doubt began to be cast on the strict application of the Salford-Lasmos Approach. In that case, there was no arbitration clause that covered the dispute relating to the debt. However, the CFI noted that even if there was an arbitration clause and it precluded the parties from invoking the court’s insolvency jurisdiction prior to the commencement or completion of the arbitration process, the clause would be contrary to public policy and not enforced; a creditor’s statutory right to petition for insolvency could not be restricted or fettered by contract.
Soon thereafter, a Court of Appeal judge in But Ka Chon v Interactive Brokers LLC expressed reservations about the Salford-Lasmos Approach, including whether the court’s discretion should be exercised only one way to substantially curtail a creditor’s statutory right to present a petition.
In Dayang, the CFI found that a debtor must show a bona fide dispute on substantial grounds which deviates from the earlier position in Lasmos. The underlying dispute between the petitioner and the debtor-company arose out of a charter party evidenced by a fixture note with an arbitration clause that provided for arbitration in Hong Kong. The petitioner served an SD on the debtor for unpaid hire of around USD 360,000. The debtor failed to pay within 21 days and the petitioner presented a winding-up petition. The debtor did not deny that they owed the debt, but raised a counterclaim against the petitioner in relation to an alleged breach of the fixture note. The arbitration clause clearly covered the disputes relating to the debt as well as the counterclaim. The debtor relied heavily on the Salford-Lasmos Approach, submitting that the winding-up proceedings should be stayed or dismissed.
The judge in Dayang made the usual winding-up order against the debtor for the following reasons:
First, the court has discretion as to whether to stay or dismiss the winding-up petition; the existence of an arbitration agreement is irrelevant to the court’s exercise of its discretion. However, the fact that arbitration proceedings have or would be commenced may be relevant evidence that there is a bona fide dispute, but this alone is not sufficient to prove the existence of a bona fide dispute on substantial grounds.
Second, where a debtor opposes a petition on the basis that they have a genuine and serious cross-claim at least equal to the debt, the test is very much the same as for deciding whether a debt is disputed bona fide and on substantial grounds: (i) the debtor must prove that their cross-claim is genuine, serious and of substance and (ii) there must be supporting relevant details to demonstrate that the cross-claim is based on substantial grounds. A mere denial is not sufficient. Here, the debtor had failed to pass the test because their counterclaim consisted of pure allegations without any precise factual evidence substantiating the claim. In contrast, under the Salford-Lasmos Approach, it would have been sufficient to dispute the debt.
Third, even if the Salford-Lasmos Approach applied, the order would still be made on the facts, as the debtor had taken no steps to commence arbitration. The “mere gauge of an interest” to resolve a dispute by arbitration was not a valid commencement.
The need for a carefully balanced approach is underscored by the many businesses that are in a precarious financial position whilst navigating the recovery phase following the disruptions caused by COVID-19. Where a creditor serves an SD on the debtor for a debt that is outstanding and due with the prospect of commencing winding-up proceedings instead of arbitration proceedings, creditors and debtors alike may wish to consider the following points:
First, if a creditor presents a winding-up petition, it is unclear whether they have to show a bona fide dispute on substantial grounds (Dayang) or whether it is sufficient for the debtor to merely dispute the debt and show that it has commenced arbitration (Salford-Lasmos Approach).
Second, in deciding which route to take, a creditor should lay a paper trail to show the opportunities the debtor had been given to explain why they genuinely dispute the debt, and to carefully consider any grounds for non-payment relied upon by the debtor.
Third, a debtor in receipt of an SD who disputes the debt should be prepared to produce precise factual evidence substantiating its position and refer the dispute to arbitration without delay.
Forth, where the debtor does not react to an SD or merely denies the debt without more, the creditor may consider presenting a petition to avoid having to go through arbitration proceedings which could deprive them of all tangible remedies if the debtor’s assets have been dissipated in the meantime. However, presenting a petition to pressurize a debtor into a settlement or paying a genuinely disputed debt can be an abuse of process and result in punishment by the court.
B.2 CFI applies principle that there must be a plain manifestation in an arbitration clause for it to apply to bills of exchange
In T v W, the CFI considered the issue of whether an arbitration clause in a loan agreement (“LA”) covered disputes arising out of a check referred to in the LA. The LA provided that it was governed by Hong Kong law and any dispute had to be arbitrated in Hong Kong.
The plaintiff commenced court proceedings against the defendant for HKD 5 million plus interest payable under a post-dated check drawn by the defendant. The defendant relied on the arbitration clause in the LA and requested the court to stay the proceedings and refer the parties to arbitration.
The LA referred to the plaintiff’s check drawn for the loan and the defendant’s check drawn for repayment. According to the defendant, the parties signed the LA as the last in a series of Chinese written agreements between them which evidenced the plaintiff’s loan to the defendant and the defendant’s agreement to pay interest.
In deciding whether the dispute between the parties fell within the ambit of the arbitration clause in the LA, the court restated the following guiding principles:
First, since a cheque is a separate contract, the cause of action on a cheque is separate from the cause of action on the underlying contract.
Second, as a general commercial legal principle, bills of exchange are regarded as the equivalent of cash. The intrinsic nature of a bill of exchange is an unconditional order to pay and the holder or beneficiary of the bill is entitled to regard it as a deferred installment of cash.
Third, as previously held by the Court of Appeal, there must be a “plain manifestation” in an arbitration clause that it is to apply to bills of exchange before the presumption against taking bills of exchange into arbitration is to be rebutted.
The CFI was not satisfied that the arbitration clause in the LA could be construed to extend to the claims made under the cheque which was a separate agreement. Normally, there is a general presumption that rational business persons intend that disputes arising out of the same relationship should be determined by the same tribunal unless there is clear language to exclude any particular dispute. However, as observed by the CFI, business persons will rarely be prepared to discard the value of a cheque issued and held as security to ensure due payment and easy and speedy enforcement. This defeats the rationale of the “one-stop-shop dispute resolution presumption” absent a clearly expressed intention that disputes in relation to the cheque should be resolved by arbitration together with disputes relating to the underlying LA.
The CFI’s decision may not be the end of the matter, as the CFI granted the defendant permission to appeal.
B.3 CFI upholds award challenged on grounds of jurisdiction and public policy
In X v Jemmy Chien, the CFI considered an application by the plaintiff to set aside an award and a cross-application by the defendant to enforce the award. The case confirms the continued robust position of the Hong Kong courts in upholding arbitration agreements and awards.
In April 2010, the plaintiff and the defendant entered into a service agreement (SA). The defendant agreed to provide certain services against a commission of 5% on payment received from the plaintiff’s customers. The SA was governed by PRC law and provided for arbitration in Hong Kong.
A dispute arose over payment of outstanding commission under the SA. The defendant referred the dispute to arbitration, claiming around USD 1.7 million. The plaintiff challenged the arbitrator’s jurisdiction, alleging that there was no valid arbitration agreement between the parties, as the defendant had signed the SA as agent for one Mr. Chen (C), who was the true party to the SA. The plaintiff alleged that the defendant and C proceeded this way to conceal that C had an interest in the SA. The plaintiff argued that on the one hand, C was the Vice President of a third-party company (TP), which acted as an intermediary that ordered products from the plaintiff’s group and resold them to its customers; on the other hand, C was to perform the SA which was prejudicial to TP’s interests and in conflict with C’s duties to TP. The defendant denied these allegations, saying that it had merely delegated the performance of the duties under the SA to C.
On 25 February 2019, the arbitrator issued his award ordering the plaintiff to pay the commission. On jurisdiction, the arbitrator considered PRC law and Hong Kong law (which governed the arbitration agreement), and found that the defendant was the true party to the SA.
The plaintiff then applied to the CFI to set aside the award on the grounds that (i) there was no valid arbitration agreement and (ii) the award was in conflict with the public policy of Hong Kong.
In July 2019, the defendant applied for leave to enforce the Award. In March 2020, the CFI dismissed the setting aside application. In deciding the application, the CFI had to (i) review the arbitrator’s jurisdictional decision that the defendant was the true party to the arbitration agreement and (ii) consider whether enforcing the arbitration agreement and award would be in conflict with Hong Kong public policy.
On reviewing the arbitrator’s jurisdictional decision, the CFI noted that the standard of review was one of correctness (in the sense that the arbitrator was correct in finding that he had jurisdiction), limited to true questions of jurisdiction. The CFI was conscious that it was not the role of the courts to review the merits of the arbitrator’s findings of credibility and fact.
The CFI concluded that the arbitrator did not make any mistake. The decision on whether the defendant was a party to the SA was a finding of law made on the basis of the facts which were in turn found by the arbitrator on the basis of the parties’ evidence. The arbitrator was the best person to determine the parties’ intention on the basis of witness testimony and documentary evidence.
The CFI then considered the public policy ground and concluded that it was not made out:
First, since an arbitration clause in a contract was an agreement separate from the underlying contract, allegations of fraud or illegality affecting the contract did not automatically render the arbitration agreement null and void. The real question was whether the arbitration clause could be impeached by the existence of fraud or illegality.
Second, even if the services under the SA were intended to be performed by C, this did not affect the validity of the arbitration agreement. It was still open to the plaintiff and the defendant to separately agree that any dispute as to performance and payment under the SA was to be arbitrated between them.
Third, even if the SA was a sham to hide the true transaction between the plaintiff and C, this occurred with the plaintiffs’ agreement acting in concert with the defendant. Setting aside the award would mean allowing the plaintiff to rely on its own wrongdoing and avoid payment for services received. The CFI made clear that for this reason, it would exercise its residual discretion to uphold the award, even if the plaintiff had made out the public policy ground.
The following points are noteworthy:
First, when signing a contract, parties should ensure that the execution clause leaves no doubt as to who are the contracting parties and in what capacity persons are signing it.
Second, the court will intervene only in rare circumstances where there is a true question of jurisdiction. In reviewing a tribunal’s jurisdictional decision, the court will not stray into the merits of the tribunal’s findings of fact and law.
Third, the public policy ground is often invoked by parties as a supportive “catch-all” ground in conjunction with other grounds. However, the Hong Kong courts have always construed this ground narrowly and it is rarely invoked successfully.
 Salford Estates (No 2) Ltd v Altomart Ltd (No 2)  Ch 589
 Re Southwest Pacific Bauxite (HK) Ltd  2 HKLRD 449
 Sit Kwong Lam  2 HKLRD 924
 But Ka Chon v Interactive Brokers LLC  4 HKLRD 85
 Dayang (HK) Marine Shipping Co, Ltd v Asia Master Logistics Ltd  HKCU 494
 T v W  HKCFI 2918
 See CA Pacific Forex Ltd v Lei Kuan Leong  1 HKLRD 462
 See Fiona Trust & Holding Corporation v Privalov  4 All ER 951
 See T v W  HKCFI 160
 X v Jemmy Chien  HKCFI 286