A. LEGISLATION AND RULES
A.1 Legislation
A.1.1 Further amendments to the mutual enforcement arrangement between Hong Kong and the Mainland become effective
Enforcement of awards between Hong Kong and Mainland China is governed by the “Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR” which has been in effect since 1 February 2000. The Arrangement follows the spirit of the New York Convention and has been providing an effective enforcement mechanism.
In November 2020, a Supplemental Arrangement was signed to amend four aspects of the Arrangement. Two amendments came into effect in November 2020.[1] On 19 May 2021, the other two amendments came into effect which required amendments to the Arbitration Ordinance (Cap. 609). Both enhance the position of award creditors.
First, creditors may apply for enforcement in both jurisdictions simultaneously subject to the prohibition of double recovery (section 93). Previously, simultaneous enforcement was prohibited which required award creditors to decide in which jurisdiction to seek enforcement first. This puts creditors who had unsuccessfully spent years trying to enforce an award in one jurisdiction at risk of a subsequent enforcement action in the other jurisdiction being time-barred. The Hong Kong courts strictly enforced the prohibition: in A Co v B Co,[2] a creditor attempted to enforce a Shenzhen award in Hong Kong without disclosing that enforcement proceedings on the Mainland were still on foot. When the debtor brought this to the court’s attention, the court set aside the enforcement order.
Second, the amendment has removed the original restriction in section 2(1) that only awards made by certain recognized Mainland arbitral authorities could be enforced in Hong Kong as Mainland awards. Now all awards made on the Mainland can be enforced in Hong Kong as Mainland awards.
A.1.2 Recommendation to allow lawyers to agree on Outcome Related Fee Structures for Arbitration
In early 2019, the prohibition on third-party funding for arbitrations in Hong Kong was lifted. However, lawyers in Hong Kong remain barred from entering into Outcome Related Fee Structures with their clients. On 15 December 2021, a Sub-committee of the Law Reform Commission issued a report on Outcome Related Fee Structures for Arbitration.[3] The report publishes the findings of a public consultation and extensive and detailed recommendations for reform. The Sub-committee’s recommendations include the following:
- The prohibitions on the use of conditional fee agreements, damages-based agreements, and hybrid damages-based agreements in arbitrations should be lifted, except for personal injury claims
- Any success fee premium or legal expense insurance premium should in principle not be borne by the unsuccessful party, but the tribunal may apportion them in exceptional circumstances
- There should be a cap on the success fee of 100% of the benchmark costs. Any payment due under a damages-based agreement should be capped at 50% of the client’s financial benefit
- Fee arrangements should specify the circumstances in which a lawyer or client is entitled to terminate them as well as an alternative basis (e.g., hourly rates) on which the client will pay the lawyer if the arrangement is terminated
- A detailed regulatory framework, including safeguarding provisions, should be set out in subsidiary legislation and client-care provisions should be set out in professional codes of conduct
If adopted, the recommendations will enhance Hong Kong’s competitiveness as one of the world’s leading arbitral seats, cater to increasing client demand for pricing and fee flexibility, and improve access to justice.
A.2 Institutions, rules and infrastructure
A.2.1 HKIAC launches Case Connect and Case Digest
In November 2021, HKIAC launched Case Connect, an online case management platform for cases administered by HKIAC and cases in which HKIAC provides ongoing administrative support (e.g., fundholding services). The platform serves various purposes. It can host arbitration-related documents and serve as a communication tool between parties and the tribunal. It has a case-specific calendar allowing users to track deadlines and trace any recorded activity in a case. Case Connect offers banking-grade encryption, 99% uptime, and around-the-clock server monitoring.
In December 2021, HKIAC launched Case Digest, a searchable database of anonymized and summarized procedural decisions taken by HKIAC under different versions of its Administered Arbitration Rules, the UNCITRAL Arbitration Rules, the HKIAC Securities Arbitration Rules, and the Arbitration Ordinance (Cap. 609). Case Digest provides insight into HKIAC’s procedural decision-making on different procedural issues. For example, it includes decisions of the Proceedings Committee on the applicability of the Expedited Procedure, consolidation of arbitrations, and joinder of additional parties, and decisions of the Appointments Committee appointing Emergency Arbitrators and determining the number of arbitrators.
A.2.2 Continued strong use of mutual assistance in court-ordered interim measures arrangement
We continue to see a strong use of the landmark arrangement on mutual assistance in court-ordered interim measures in aid of arbitrations between Hong Kong and Mainland China which came into operation on 1 October 2019. The arrangement provides a unique benefit to Hong Kong seated arbitrations administered by certain eligible arbitral institutions (e.g., HKIAC, ICC – Asia Office, CIETAC Hong Kong), as it allows parties to seek an interim measure directly from a Mainland court.
In 2021, HKIAC received 25 applications to Mainland courts, bringing the total number of applications made via HKIAC to 60. Applications are predominantly for asset preservation. So far, a total of RMB 15.4 billion (USD 2.4 billion) worth of assets have been sought to be preserved and Mainland courts ordered the preservation of assets worth RMB 12.7 billion (USD 2 billion). The arrangement has been used against Mainland respondents (61%) as well as foreign respondents (39%).
B. CASES
B.1 Hong Kong court finds that award which is inconsistent with previous award concerning the same parties is manifestly invalid
In the case of W v AW,[4] W sought to set aside an award in the Court of First Instance, relying on issue estoppel. Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided, and one of the parties seeks to re-open that issue in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant.[5]
AW sought to enforce the award and applied for security pending the setting aside decision. The court refused to grant security because it considered the award manifestly invalid due to substantial injustice. The findings in the award contradicted the findings made in an earlier award on the same issues between the same parties. Although there was a common arbitrator in both arbitrations, the second tribunal neither explained in its award why there were inconsistent findings nor did it give the parties an opportunity to address it on the previous award before it made its own award.
The case highlights the potential risks of inconsistent outcomes in related but separate arbitrations and clarifies the duty of an arbitrator sitting in related arbitrations between the same parties but with different tribunal members.
B.1.1 Background
In September 2015, W, AW and related parties entered into a Framework Agreement setting out their rights in relation to an envisaged acquisition by a Mainland investor of 80% of the shares in AW’s company for around RMB 1 billion. In December 2015, W and AW entered into a Share Redemption Agreement for AW to redeem W’s shares in AW. Both agreements were part of a series of transactions intended to pave the way for the acquisition.[6]
The acquisition did not complete and disputes arose under both agreements. The disputes were referred to HKIAC arbitration: (i) in January 2017, W and a related party commenced Arbitration 1 against AW and related parties under the Framework Agreement; and (ii) in June 2017, AW commenced Arbitration 2 against W under the Share Redemption Agreement.
Different tribunals were constituted, but AW appointed the same co-arbitrator (A) in both arbitrations.
In Arbitration 1, W sought specific performance of the Framework Agreement and alternatively damages for breach of contract. AW counterclaimed for damages alleging misrepresentations as to W’s shareholding in AW. In Arbitration 2, AW sought to rescind the Share Redemption Agreement for misrepresentation and claimed damages. Although the agreements which gave rise to the arbitrations were different, the pleadings of the misrepresentation claims against W were essentially identical.
In March 2020, Tribunal 1 rendered its award in Arbitration 1 and in July 2020, Tribunal 2 rendered its award in Arbitration 2. Tribunal 1 found in favor of W on its claims for breach of the Framework Agreement and dismissed AW’s misrepresentation counterclaim. However, Tribunal 2 found in favor of AW’s misrepresentation claim, allowed AW to rescind the Share Redemption Agreement and ordered W to repay around USD 3.8 million to AW, plus interest and costs.
B.1.2 W challenged Award 2, while AW sought to enforce it.
In October 2020, W applied to the court to set aside Award 2, relying on issue estoppel. W argued that Award 2 was in conflict with Hong Kong public policy as it contravened principles of fairness, due process and justice. Although Tribunal 2 (including A) was bound by the findings on common issues already determined in Award 1, it ignored these findings and instead made inconsistent findings on the same issues between the same parties.[7]
In December 2020, AW applied for leave to enforce Award 2 and for security from W in respect of the sums payable under Award 2 as a condition for the further conduct of W’s setting aside application.
In deciding whether to order security, the court has to consider two key factors.[8] First, the strength of the argument that Award 2 was invalid – if Award 2 was manifestly invalid, the court would not grant security, but if it was manifestly valid, the court would either grant immediate enforcement or substantial security. Second, the ease or difficulty of enforcement of Award 2 and whether it would be rendered more difficult.
In June 2021, the court decided on AW’s application for security. The court found that Award 2 was manifestly invalid and that enforcement would not be rendered more difficult because neither party had assets in Hong Kong which was chosen as a neutral forum. The court dismissed the security application because it would not have been just to order security given that W had a strong case on the merits to set aside Award 2.
B.1.3 The manifest invalidity of Award 2
The misrepresentation claims in the arbitrations turned on the same alleged representations. However, while Tribunal 1 held unanimously that there was no actionable misrepresentation, Tribunal 2 held unanimously that the Share Redemption Agreement was rescinded by misrepresentations. The court found that it was clear from the awards that the tribunals made inconsistent findings on the same issues of fact and law forming a necessary ingredient in the cause of action of misrepresentation.
The court is only concerned with the structural integrity of the arbitral process and the award. Therefore, the court may only consider whether the award should be set aside and not enforced if there is conduct that is serious or egregious, such that due process is undermined.[9] Accordingly, the court had to consider whether it would be just to permit both awards to stand and bind the same parties notwithstanding the inconsistencies in the awards. This turned on the issue of whether W was at fault in failing to draw to the attention of Tribunal 2, before Award 2 was made, to the relevant factual findings made in Award 1.
The parties submitted as follows. AW argued that arbitration proceedings were adversarial and that Tribunal 2 could not be expected to deal with issues decided in Award 1 when W neither pleaded issue estoppel nor informed Tribunal 2 of Award 1. W replied that it was only after Award 2 was made that it became aware that the findings of Tribunal 2 were inconsistent with those in Award 1. Moreover, W had advised Tribunal 2 during the hearing that there were concurrent proceedings between the parties with a risk of inconsistent findings. W also highlighted that A was a member of Tribunal 1 and was aware of the issues decided in Award 1.
The court concluded that Award 2 could not be enforced because it lacked the necessary fairness and due process. That A was a common arbitrator in both arbitrations was material to its decision.
Firstly, A did not issue any dissenting decision in either award which meant that A itself had made inconsistent findings. A did not explain in Award 2 why the findings on the same facts were different or why A did not consider W and AW to be bound by the findings in Award 1. A’s failure constituted injustice and grave unfairness to W.[10]
Secondly, fairness and justice would have required A to invite submissions from W and AW in Arbitration 2 as to the effect of Award 1 on the issues to be decided in Arbitration 2.
Thirdly, the confidentiality of Arbitration 1 and Award 1 did not prevent A from disclosing Award 1 to the other Tribunal 2 members. This is because the legitimate use of an earlier award in a later arbitration between the same parties did not raise the mischief against which confidentiality rules are directed.[11]
Fourthly, W was entitled to appoint a different arbitrator of its choice in Arbitration 2 after AW had appointed the same arbitrator, and to expect that the arbitrator would discharge the duty to act fairly and impartially.
B.1.4 Comments and takeaway
Parties who enter into agreements that form part of the same transaction or a series of transactions should make an informed and conscious decision as to whether disputes arising out of or in relation to any of these agreements should be resolved in one arbitration. If so, parties should adopt identical – or at least compatible – arbitration clauses in all related agreements and choose arbitration rules which offer multi-party and multi-contract contract regimes. These regimes seek to reduce the risk of parallel proceedings and inconsistent outcomes by allowing parties to make claims arising out of more than one contract in a single arbitration, to join additional parties, or to have related proceedings consolidated or at least conducted concurrently.
However, even where available, it is not always possible to engage such regimes. For example, it may be too late to consolidate two arbitrations because the first arbitration is too advanced and/or different tribunals are constituted; reasons for parties to appoint different arbitrators in related proceedings may vary; the decision may be strategic or a party may prefer an arbitrator with different qualifications in the second arbitration.
While the risk of inconsistent outcomes cannot be eliminated where related disputes involving the same or similar parties are resolved in separate arbitrations, the risk can be mitigated. Parties should consider carefully what information to introduce in the second arbitration through pleadings, evidence, legal submissions and communications with the tribunal. If issues re-emerge in the second arbitration, it is important to raise issue estoppel rather than merely relying on a common arbitrator to bring any relevant previous decisions to the co-arbitrators’ attention.
B.2 Court of Appeal confirms presumption against taking bills of exchange into arbitration
The case of T v W[12] reinforces the important principle that bills of exchange have a legal life of their own, separate from the underlying contract. They usually do not fall within the scope of an arbitration clause in the underlying contract unless there is a clear and express indication that they do.
Under a Loan Agreement, P agreed to lend D HKD 5 million. P advanced the money and D drew a post-dated check for HKD 5 million in repayment of the principal. The Loan Agreement provided for the resolution of disputes through arbitration in Hong Kong. D failed to repay the loan.
When P presented the check for payment in March 2020, the check was dishonored. P gave notice of dishonor and commenced an action in the Court of First Instance (CFI). P simply sued on the check. D disputed the claim and applied to the CFI for an order to stay the action and refer the parties to arbitration, on the basis of the arbitration clause in the Loan Agreement.
Pursuant to section 20(1) of the Arbitration Ordinance (Cap. 609), which gives effect to article 8 of the UNCITRAL Model Law, where a plaintiff brings an action in court which is the subject of an arbitration agreement, the court must refer the parties to arbitration, if a party so requests unless the court finds that the agreement is null and void, inoperative or incapable of being performed. Unless the point is clear, the court will not decide the matter but stay it and refer the parties to arbitration, so that the tribunal can decide whether it has jurisdiction.
In November 2020, the CFI dismissed the stay application on the basis that the check was a separate contract from the Loan Agreement and that bills of exchange were generally regarded as the equivalent of cash.
The CFI considered itself bound by the Court of Appeal (CA) decision in Pacific Forex.[13] In that case, the CA had held that to rebut the presumption against taking bills of exchange into arbitration, there must be a plain manifestation in the arbitration clause that it applies to bills of exchange. The CFI found that the parties had intended the check to be a security for the repayment of the loan and that the term “disputes” in the arbitration clause meant disputes only relating to the Loan Agreement and the parties’ claims and liabilities thereunder. There was no sufficiently plain indication that the parties intended the arbitration clause to extend to claims under the check. The CFI noted that there were good commercial reasons for the parties, as rational business persons, to agree that disputes in relation to the check were not to be resolved by arbitration.
On appeal, D invited the CA to find that Pacific Forex was either was plainly wrong or overtaken by the English House of Lord’s decision in Fiona Trust[14], so as to allow the CA under the doctrine of precedent to depart from its earlier decision. The CA dismissed D’s appeal.
The CA first considered the House of Lords decision in Nova (Jersey) Knit[15] on which the reasoning in Pacific Forex was based. D argued that Nova (Jersey) Knit was a decision based on German law, but the CA rejected this argument pointing out Lord Russell’s consideration in that case of the English law position in relation to bills of exchange. Lord Russell noted that it was a deep-rooted concept of English commercial law that a claim for unliquidated damages under a sales contract was no defense to a claim under a bill accepted by the purchaser, nor was it available as set-off or counterclaim. The bill was itself a contract separate from the sales contract. Its purpose was not only to serve as a negotiable instrument but also to avoid the postponement of the purchaser’s liability to the seller. While it was conceivable in theory that an arbitration clause in an underlying sales contract sufficiently clearly embraces liability under a bill of exchange, Lord Russell did not consider it easy to envisage a clause so inconsistent with the nature and function of such a bill.
Before the CA’s decision in Pacific Forex, two CFI judges very experienced in arbitration had already endorsed the English law position in Nova (Jersey) Knit,[16] emphasizing the strong commercial reasons underpinning the principle that bills are in a special category with a legal life of their own.
The CA then turned to the argument that Pacific Forex was overtaken by the Fiona Trust. D heavily relied on the presumption in Fiona Trust that parties, as rational business persons, were likely to have intended any dispute arising out of the relationship into which they had entered to be decided by the same tribunal unless the language made it clear that certain questions were intended to be excluded from the arbitration clause.
The CA also rejected this argument. Fiona Trust was not concerned with bills of exchange which are treated as the equivalent of cash subject to the competing presumption against taking bills of exchange into arbitration without sufficiently plain indication. While the “one-stop-shop” presumption in Fiona Trust has been adopted and often applied in Hong Kong, the CA pointed out that it may also be said – and has been said in Pacific Forex – that rational business persons will not readily forgo their rights on a dishonored check, which include the right to sue in court for judgment. That summary determination procedures were available under modern arbitration rules (e.g., the early determination procedure under the HKIAC Rules) did not change this. The CA also noted that Pacific Forex has been applied in Singapore where, like in Hong Kong, both the UNCITRAL Model Law and the Fiona Trust presumption have been adopted.[17]
Ultimately, whether an action on a bill falls within the scope of an arbitration clause in the underlying contract was a question of construction. Forex Pacific did not restrict the principle that the clause had to be construed in the context of the agreement as a whole against the factual matrix, including all relevant circumstances. Here, there was simply no basis to construe the clause as covering an action on the check alone and the question of scope under the Fiona Trust approach did not arise.
[2] A Co v B Co [2021] HKCFI 1477.
[3] The report can be downloaded here.
[4] W v AW [2021] HKEC 2792; [2021] HKEC 2792.
[5] See Arnold & Others v National Westminster Bank plc [1991] 2 AC 93, 105, endorsed in Mohammed Amjad v John M Pickavant & Co [2013] 1 HKC 145.
[6] The facts and structure of the transaction have been simplified for the purpose of this article.
[7] W also complained of apparent bias of the presiding arbitrator in Arbitration 2 but the court saw no merit in W’s complaint.
[8] The applicable principles, which were not in dispute between the parties, are as set out in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208 at 212 and have been applied in Hong Kong in Guo Shun Kai v Wing Shing Chemical Co Ltd [2013] 3 HKLRD 484 and Dana Shipping and Trading SA v Sino Channel Asia Ltd [2017] 1 HKC 281; see also here.
[9] See Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1 (CA) at paragraphs 94 and 105.
[10] The court relied on A v B [2015] 3 HKLRD 586 where it was held that it was a serious irregularity and a denial of due process which caused substantial injustice and unfairness to the parties if an important issue was not addressed in the award.
[11] See Judicial Committee of the Privy Council in AEGIS Ltd v European Reinsurance Co of Zürich [2003] 1 WLR 104 1.
[12] T v W [2022] HKCA 95, [2022] HKEC 161 (CA); [2021] HKCFI 160, [2021] HKEC 162 (CFI).
[13] CA Pacific Forex Ltd v Lei Kuan Ieong [1999] 1 HKLRD 462.
[14] Fiona Trust & Holding Corporation & Others v Privalov & Others [2007] UKHL 40.
[15] Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713.
[16] E.g., York Airconditioning & Refrigeration Inc v Lam Kwai-hung trading as North Sea A/C Elect. Eng. Co. [1995] 2 HKLR 256 (Kaplan J).
[17] Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53.
