A. LEGISLATION AND RULES
A.1 Legislation
A.1.1 Hong Kong expands financing options for arbitration parties
Third-party funding is an arrangement by which the funder receives a financial benefit only if the funded party is successful in the proceedings. It is contingent — the funder takes a risk that the claim will not succeed, while the funded party has a reduced financial risk.
Third-party funding for arbitrations, arbitration-related court proceedings and mediations has been permitted in Hong Kong since February 2019. However, lawyers remained prohibited from funding clients for whom they act in an arbitration by agreeing on outcome-related fee structures (ORFS), such as conditional and contingency fees.
This has changed: effective 16 December 2022, solicitors, barristers and registered foreign lawyers may enter into ORFS agreements. The new regime answers a growing client demand for more flexible fee arrangements.
The regime is set out in a new Part 10B of the Arbitration Ordinance (Cap. 609) and the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap. 609D). It is accompanied by necessary amendments to the Legal Practitioners Ordinance (Cap. 159).
Three types of ORFS agreements are permitted:
First, conditional fee agreements: the client pays the lawyer a success fee only in the event of a “successful outcome” for the client in the matter. The agreement defines when an outcome is considered successful — it typically includes any financial benefit for the client, including money and any consideration reducible to a monetary value, such as an amount owed under an award or a settlement agreement, or any avoidance or reduction of a potential liability (where a claim is successfully defended). The success fee is fixed by reference to the “benchmark fee,” i.e., the fee the lawyer would have charged absent a CFA, and it is capped at double the benchmark fee.
Second, damages-based agreements: the client pays the lawyer only in the event it obtains a financial benefit in the matter. Unlike under CFAs, the “DBA payment” is calculated by reference to the financial benefit the client obtains in the matter (e.g., damages awarded to the client or damages awarded against the client falling below a set threshold). The DBA payment is payable in addition to any recoverable lawyer’s costs and it is capped at 50% of the financial benefit. The DBA must state, among other things, the financial benefit, the basis for calculating the DBA payment and when the DBA payment becomes payable.
Third, hybrid DBAs: the client pays the lawyer in any event a fee for the legal services rendered which may or may not be calculated at a discount. If the client obtains a financial benefit, then it also pays a DBA payment calculated by reference to the financial benefit. If the client obtains no financial benefit, it does not have to pay more than 50% of the benchmark fee that is not recoverable from any other party to the arbitration (irrecoverable costs). It is possible that the client obtains a financial benefit and the DBA payment is less than the irrecoverable costs that would have been payable if no financial benefit was obtained (capped amount). In that case the lawyer may elect to retain the capped amount instead of the DBA payment. In addition to the requirements for DBAs, the Hybrid DBA must state the fee that is payable in any event and the benchmark fee the lawyer would have charged absent a Hybrid DBA.
Hong Kong’s offering is significantly broader than that in Singapore where lawyers are only permitted to enter into CFAs, but not DBAs or Hybrid DBAs.
Like Hong Kong’s third-party funding regime, its ORFS regime provides for various safeguards. These include that agreements must be in writing and signed, and state that the lawyer has informed the client of the right to seek independent legal advice, the grounds of premature termination, and whether disbursements are to be paid by the client irrespective of the outcome. A client may in any event terminate the agreement within a cooling off period of no less than seven days.
The regime also protects opponents in that it prohibits an arbitral tribunal from ordering an opponent to pay the uplift component of a success fee as costs, unless justified by exceptional circumstances. Such circumstances could exist where a respondent deliberately tried to cripple the claimant financially, with the aim of preventing the claimant from pursuing a legitimate claim.
The new regime is a welcome development. It meets client demand for more flexible fee structures, additional funding options and risk sharing. This in turn enhances Hong Kong’s competitiveness with other major arbitral seats where similar arrangements are allowed.
A.2 Institutions, rules and infrastructure
A.2.1 Parties to HKIAC administered arbitrations get additional route to interim relief and enforcement in Mainland China
In June 2022, the Supreme People’s Court of the People’s Republic of China (SPC) decided to include HKIAC as the first foreign arbitral institution in the “one-stop” platform for diversified international commercial dispute resolution of the China International Commercial Court (CICC). The CICC determines international commercial disputes, with cases being tried by a panel of three or more SPC judges familiar with international disputes.
This means that parties to HKIAC administered arbitrations with an amount in dispute over RMB 300 million (approximately USD 43 million) or with a significant impact may apply directly to the CICC for interim relief and/or the enforcement of arbitral awards. This is in addition to the options of (i) seeking interim relief from a competent Mainland court under a special arrangement which is only available to parties arbitrating in Hong Kong, and (ii) enforcing an arbitral award in a competent Mainland court.[1]
This new route can offer an important alternative in appropriate cases as it allows a party to have its application for interim relief or enforcement be determined by highly experienced judges who specialize in international commercial disputes.
A.2.2 HKIAC’s arbitration statistics for 2022 show continuing trust in Hong Kong as leading international arbitration hub
The HKIAC’s 2022 arbitration statistics set a new record. The HKIAC received 344 arbitration filings involving a total of 997 parties and 470 contracts. The vast majority of the arbitrations was seated in Hong Kong. Approximately 50% arose from contracts signed in or after 2020 which reaffirms parties’ continuing trust in Hong Kong. Arbitrations continued to be predominantly international featuring parties from 63 jurisdictions. The total amount in dispute across all arbitrations was approximately USD 5.5 billion. Approximately 27% of arbitrators appointed by the HKIAC were female and approximately 30% were arbitrators not previously appointed by HKIAC over the last three years.
A.2.3 Launch of online arbitration and mediation platforms
eBRAM (Electronic Business Related Arbitration and Mediation) is a not-for-profit company which strives to provide users globally with a speedy, cost-effective and secure one-stop-shop online platform for deal-making, dispute avoidance and dispute resolution.
In October 2022, eBRAM launched its online arbitration and mediation platforms. It offers users its own eBRAM Arbitration Rules and Mediation Rules. The entire process takes place fully digitally and virtually, allowing parties to resolve their disputes amicably by mediation or arbitration from anywhere in the world. eBRAM also offers a range of technology assisted services, such as sharing legal documents, AI assisted translation, secure e-signing services, and video conferencing.
B. CASES
The Hong Kong courts continue to take a strong pro-arbitration attitude and a robust approach toward enforcing arbitration agreements and awards.
The Kompetenz-Kompetenz principle that arbitral tribunals have the power to decide disputes concerning their own jurisdiction is firmly embedded in Hong Kong law and practice. Section 20(1) of the Arbitration Ordinance, which gives effect to article 8 of the UNCITRAL Model Law, provides that where a plaintiff brings a court action 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. A case where the court dismissed a stay application is discussed in section B.2 below.
Where a party challenges the tribunal’s jurisdiction in a pending arbitration, Hong Kong law adopts a flexible approach: section 34(1) of the Arbitration Ordinance, which gives effect to article 34 of the UNCITRAL Model Law, allows a tribunal to rule on its own jurisdiction either as a preliminary question or in an award on the merits. If the tribunal affirms jurisdiction in a preliminary ruling, any party may request within 30 days the Court of First Instance to decide the matter. The court reviews the matter de novo and its decision is final (see also section B.1 below).
The courts enforce awards in Hong Kong in a manner that is “as mechanistic as possible.” In considering setting aside and enforcement applications, the courts do not look into the merits or at the underlying transaction. Even if sufficient grounds are made out to set aside an award or to refuse enforcement, the courts have a residual discretion and may nevertheless enforce the award despite the proven existence of a valid ground.
A rare example of a case where the court refused enforcement on the ground that it would contravene Hong Kong public policy is Guangdong Shunde Zhanwei Trading Ltd v. Sun Fung Timber Company Limited [2021] HKCFI 3823. In that case, the Court of First Instance found that an award made in Mainland China was procured by the award debtor’s director and shareholder in collusion with the award creditor. The court found that the debtor company was never a party to the contract and its arbitration clause, and it had not been given proper notice of the arbitration. The contract was a sham and entered into so that the shareholder who operated the company could obtain its assets via the creditor without having to share them with the other shareholder in the course of a dissolution.
B.1 Hong Kong court affirms boundaries of the Fiona Trust principle where related contracts provide for different dispute resolution mechanisms
The Fiona Trust presumption is a well-known and important principle for the construction of arbitration agreements established by the House of Lords in Fiona Trust v. Privalowv [2007] Bus LR 1719 (per Lord Hoffman). It means in essence that parties, as rational business people, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal.
In H v. G [2022] HKCFI 1327, the Court of First Instance clarified certain limitations of this principle. A property developer (G) entered into a building contract with a building contractor (H). The contract provided for disputes to be referred to arbitration under the HKIAC Domestic Arbitration Rules. The contract required H to give a guarantee/warranty in a specified form of deed of warranty in respect of a waterproofing system to be installed and produced as a result of the building works. The warranty was appended to the building contract and contained a non-exclusive jurisdiction clause in favor of the Hong Kong courts. It was executed by H as the main contractor and SC as its subcontractor.
G commenced arbitration against H seeking damages as a result of H’s alleged breach of both the building contract and the warranty, and for negligence. H contended that the tribunal lacked jurisdiction over any claims made by G under the warranty. The tribunal affirmed jurisdiction in a preliminary ruling. H sought a court review of this ruling under section 34 of the Arbitration Ordinance.
The core issue was the interpretation of the two contracts and their dispute resolution clauses. The court first clarified that the Fiona Trust presumption was not directly applicable because unlike in Fiona Trust, multiple contracts were made in the present case. The court referred to the important point in Fiona Trust that if the language of the contract makes it clear that certain questions were intended to be excluded from the tribunal’s jurisdiction or that the parties intended to have their disputes determined separately, then the presumption has no role to play. The court noted that the presumption had “limited application in a case where the overall contractual arrangements between the parties gave rise to agreements containing different dispute resolution provisions.”
Therefore, the key question for the court was whether it was to be presumed that G and H had intended that disputes under the building contract and disputes under the warranty, which involved the liability of SC, should be determined by the same tribunal, in one forum, by arbitration.
The court considered it material that when G and H entered into the building contract, they anticipated the execution of the warranty and agreed on its contents in the precise form appended to the building contract. Further, the three parties to the warranty — which also included the subcontractor SC — agreed to submit to the non-exclusive jurisdiction of the Hong Kong courts. This was notwithstanding the fact that the building contract contained an arbitration clause.
The court found that on a proper interpretation of the dispute resolution mechanisms, when entering into the building contract, G and H had clearly intended to exclude disputes under the warranty from the arbitration clause. Consequently, the court held that the tribunal had no jurisdiction over the claims made under the warranty.
Courts and tribunals will not always find that an arbitration agreement will cover every dispute that arises “in connection with” or “in relation to” a contractual relationship. This is especially important in transactions involving multiple contracts with different dispute resolution mechanisms. Resolving disputes in a single forum by arbitration avoids fragmented disputes and the risk of inconsistent outcomes. When adopting different dispute resolution mechanisms in multiple related contracts, parties should carefully consider the implications of agreeing to resolve disputes under each contract separately and in different fora.
B.2 Court allows action to proceed as it is plainly not subject of an arbitration agreement
The applicable legal principles in Hong Kong for the determination of stay applications under section 20 of the Arbitration Ordinance are clear and settled: the party requesting a stay has to show that there is a prima facie or plainly arguable case that the action is brought in the same matter which is the subject of the arbitration clause. The court has no discretion — unless the point is clear, the action must be stayed for the tribunal to decide whether it has jurisdiction over the dispute.
In LS v. FL [2022] HKCFI 1050, the Court of First Instance dismissed a stay application because the action was plainly not the subject of an arbitration agreement.
FL commenced an arbitration against LS in Hong Kong for claims arising under a distribution agreement. LS then commenced court proceedings for a crossclaim under an oral agreement. Its case was that the two agreements were inter-dependent and/or that they dealt with the same subject matter, such that disputes arising under the oral agreement should be subject to the arbitration clause in the distribution agreement.
The court made three key findings that allowed it to dismiss the stay application without a risk of usurping the tribunal’s jurisdiction and power in the pending arbitration.
First, the court found that on a proper construction of the distribution agreement, which had an entire agreement clause, it was clear that the agreements were not inter-dependent and they did not deal with the same subject matter.
Second, the court noted that under Hong Kong law, an arbitration agreement must be in writing. Pursuant to section 19 of the Arbitration Ordinance, which adopts Option I under article 7 of the UNCITRAL Model Law, this requirement is also met where a contract refers to a document containing an arbitration clause and the reference is such as to make that clause part of the contract. Here, the court found that the documents evidencing the oral agreement made no reference to any document with an arbitration clause in a manner which makes the clause part of the oral agreement.
Third, FL also sought to rely on the Fiona Trust principle (see section B.1 above). The court found that the principle did not apply here because there were multiple related commercial agreements, each dealing with different aspects of the parties’ relationship and dealings, and each containing its own provision for expressed choices of dispute resolution mechanisms. In such a scenario, the proper test in ascertaining the parties’ intention on how the dispute should be dealt with was to identify the nature of the claim, and the agreement with the closest connection with the dispute and claim, or, in other words, the agreement at the center of gravity of the dispute.[2] The court found that this was the oral agreement. The court added that, even if it applied the Fiona Trust principle, it was not satisfied that FL and LS had intended that the arbitration clause in the distribution agreement should apply to the different subject matter of the oral agreement.
B.3 Insolvency petitions where the debt is subject to an arbitration clause or exclusive jurisdiction clause in favor of foreign courts
A creditor may petition to bankrupt or wind up a debtor who is deemed or shown to be unable to pay its debts. Where the debt falls within the ambit of an arbitration clause in a contract, the question is in what circumstances should the court stay or dismiss the petition pending adjudication of the debt by way of arbitration.
The Court of First Instance in Lasmos Ltd v. Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 held that save in exceptional or wholly 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. The Lasmos approach does not require a debtor to show a bona fide dispute on substantial grounds when seeking to stay or dismiss a winding up petition. However, this approach has been doubted in subsequent cases.[3]
By comparison, the Singapore position is that if the debt is disputed or a crossclaim is raised, winding up proceedings should be stayed or dismissed if the dispute falls within the scope of a valid arbitration agreement between the parties and the debtor has not raised the dispute in an abuse of the court’s process: AnAn Group (Singapore) Pte Ltd v. VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158.[4]
In Re Guy Kwok-Hung Lam [2022] HKCA 1297, the Court of Appeal considered whether a creditor’s bankruptcy petition presented in Hong Kong should be allowed to proceed where the petition debt, which the debtor disputes, arises from an agreement containing an exclusive jurisdiction clause in favor of a foreign court. While the court was not asked to determine the proper approach on arbitration clauses, it summarized the current position and made obiter comments on the effect of arbitration clauses on winding up petitions.
The underlying agreement provided for the exclusive jurisdiction of the New York courts. The debtor defaulted and the creditor presented a bankruptcy petition in the Court of First Instance. In parallel, the debtor commenced New York court proceedings disputing the debt. The court granted the bankruptcy order. It found that the exclusive jurisdiction clause was not a bar to the petition and that the debtor had failed to show that there was a bona fide dispute on substantial ground over the debt.[5]
The debtor appealed to the Court of Appeal on the ground that the petition should have been dismissed or stayed because the debt was disputed and he had raised a crossclaim, both of which were subject to the exclusive jurisdiction clause. The debtor argued that the court should follow the Lasmos approach by analogy, whereas the petitioner argued that this approach should not be extended to exclusive jurisdiction clauses.
The three judges allowed the appeal and dismissed the petition, but on different reasons. The majority (per G Lam JA, Barma JA agreeing) found that the court’s approach to stay an ordinary action should be adopted, i.e., where the petition debt is disputed and subject to an exclusive jurisdiction clause in favor of a foreign forum, the petition should not be allowed to proceed pending the determination of the dispute in the agreed forum, unless strong reasons can be shown. Chow JA expressed reservations on this approach stating that it would effectively disregard the distinction between an action on a debt and a petition based on a debt, as well as the wider public interest considerations pertaining to a petition. He found that where the debt is caught by the exclusive jurisdiction clause, the court had a discretion which should be exercised having regard to all relevant circumstances; the lower court adopted a wrong approach as it focused only on the existence of a bona fide dispute of the debt on substantial grounds.
The judgment discussed various principles for insolvency petitions and in particular those concerning a debt that is subject to an arbitration agreement. However, none of the judges adopted or endorsed the Lasmos approach. The following obiter comments of Lam JA in the judgment are specifically relevant to arbitration agreements.
First, where a petitioner seeks a bankruptcy/winding up order on the basis that the debtor’s defenses do not raise any bona fide disputes on substantial grounds, it seeks a determination of the dispute by the court. The reasoning that an arbitration agreement would not be engaged because it is for the liquidator to determine the dispute when it comes to the adjudication of proofs has been criticized by the Singapore Court of Appeal in AnAn Group as effectively meaning to offload the decision-making function onto the liquidator.
Second, the insolvency process is a class remedy with the result that the debtor’s assets become subject to a statutory trust for the benefit of the creditors pari passu. A petitioner is seeking to recover a debt and is not entitled to present a petition until it is established as a creditor and hence a class member. Whether the petitioner is a creditor is an anterior question. Lam JA noted the court’s statement in AnAn Group that there is strictly speaking no conflict of policy interests between the arbitration and insolvency regimes because the debtor can only be said to be insolvent when the debt is established to be due and owing by way of arbitration, and it remains unsatisfied.
Third, the court should not embark upon a review of the merits of the dispute. The ordinary meaning of “dispute” is that there is a dispute when one party’s claim is not admitted by the other party.
In November 2022, the Court of Appeal granted leave to appeal to the Court of Final Appeal on the question of the effect (if any) of an exclusive jurisdiction clause in favor of a foreign court on a bankruptcy petition in Hong Kong.[6] It remains to be seen how the Court of Final Appeal will determine this issue and whether it will comment on the position of arbitration agreements.
[1] For the interim measures arrangement, see here; for the enforcement arrangement, see here.
[2] See Trust Risk Group SpA v. Amtrust Europe Ltd [2017] 1 CLC 456.
[3] For a discussion of these cases, see here.
[4] For a discussion of this case, see here.
[5] Re Guy Kwok-Hung Lam [2021] HKCFI 2135.
[6] Re Guy Kwok-Hung Lam [2022] HKCA 1683
