A. LEGISLATION AND RULES
A.1 Legislation
A.1.1 Hong Kong adopts restrictive state immunity doctrine
State immunity is a fundamental rule of customary international law, which originates in the historical notion that a sovereign cannot be sued in the courts of its own country or of a foreign country. By the State Immunity (Overseas Territories) Order 1979, the United Kingdom extended the ambit of its State Immunity Act 1978 to Hong Kong, which adopted a restrictive approach to state immunity under which foreign states were not immune from the jurisdiction of the courts in respect of commercial activities.
Upon Hong Kong’s handover to the People’s Republic of China (PRC) on 1 July 1997, it became uncertain whether restrictive immunity continued to apply in the newly established Hong Kong Special Administrative Region of the PRC or whether it had adopted the PRC’s position, which had always followed the absolute doctrine of affording foreign states immunity for both sovereign acts and purely commercial activities.
In Democratic Republic of the Congo and others v FG Hemisphere Associates LLC (No.2) [2011] 5 HKC 395, the Court of Final Appeal (CFA) held that absolute state immunity applied in Hong Kong since 1 July 1997, because a municipality such as Hong Kong could not, as a matter of law and constitutional principle, adopt a state immunity doctrine different from the rest of the PRC. In reaching this decision, the CFA considered a confirmation of the Standing Committee of the National People’s Congress (NPCSC) that Hong Kong courts must apply the PRC’s rules and policies on state immunity.
The CFA also held that under the absolute immunity doctrine, a waiver of immunity had to be given unequivocally at the time when the forum state’s jurisdiction is invoked against the impleaded state (i.e., “in the face of the court”). A contractual advance waiver of immunity was therefore considered unlikely to be effective.
Further, the CFA opined that a state’s participation in a Hong Kong arbitration constituted its agreement to submit to the contractual jurisdiction of the arbitrators. While such submission could not be taken as a submission to the jurisdiction of the Hong Kong courts, the CFA stated obiter that it may constitute an implied submission to their supervisory jurisdiction over the arbitration.
On 1 September 2023, the NPCSC adopted the PRC Law on Foreign State Immunity, which became effective on 1 January 2024. This is a historic and significant development, as the PRC now applies the restrictive state immunity doctrine, no longer affording foreign states immunity from suit or execution with respect to transactions or property of a commercial nature.
Regarding arbitrations, Article 12 FSI Law provides that if a foreign state has, among other things, entered into a written arbitration agreement, it does not enjoy immunity from the jurisdiction of the PRC courts for certain matters that are subject to their review, namely the validity of arbitration agreements, the setting aside of arbitral awards, the recognition and enforcement of awards, and other arbitration-related matters that are subject to court review as provided by law.
For the FSI Law to apply in Hong Kong, it must be promulgated as a national law applicable in Hong Kong or implemented by local legislation. As this has not occurred at the time of writing, the FSI Law’s application in Hong Kong has yet to be clarified. However, based on the key principles established in the Congo case, it is clear that Hong Kong is to follow the PRC’s new approach of restrictive state immunity. As a result, a foreign state can no longer invoke immunity in Hong Kong court proceedings for transactions of a commercial nature or where it has otherwise expressly waived immunity; likewise, a foreign state’s property in Hong Kong no longer enjoys immunity from execution if used for commercial activity or where the state has otherwise expressly waived immunity.
A.2 Institutions, rules and infrastructure
A.2.1 HKIAC received its 100th application under the Mainland-HK Interim Measures Arrangement
In October 2023, the HKIAC received its 100th application under the arrangement on mutual assistance in court-ordered interim measures in aid of arbitrations between Hong Kong and Mainland China since it came into force on 1 October 2019. The arrangement provides a unique benefit for parties to Hong Kong-seated arbitrations administered by certain eligible arbitral institutions (e.g., HKIAC, ICC – Asia Office, CIETAC Hong Kong), as it allows them to seek an interim measure directly from a Mainland court.
According to the HKIAC, 94 out of the 100 applications were for asset preservation, two were for evidence preservation, and four were for conduct preservation. A total of RMB 25.1 billion (approximately USD 3.5 billion) worth of assets have been sought to be preserved. Thirty-six different Mainland courts rendered 69 decisions and granted asset preservation in 65 of them, worth a total of RMB 15.8 billion (approximately USD 2.3 billion). 81% of the applicants were non-Mainland parties, whereas 62% of respondents were Mainland parties. The average time taken by the Mainland courts to issue a decision in 50 of the 65 decisions was 20.5 days from receipt of an application, with a median time of 13 days.
B. CASES
Hong Kong courts adopt a pro-arbitration and pro-enforcement approach. They endeavor to uphold arbitration agreements, recognize and enforce arbitral awards, and interfere in the arbitration of the dispute only as expressly provided for by the Arbitration Ordinance (Cap 609).
Hong Kong is a UNCITRAL Model Law jurisdiction. Article 34(2) of the Model Law, which sets out the grounds for the setting aside of an award, is given effect in Hong Kong by Section 81(1) of the Arbitration Ordinance (Cap 609). The same narrow grounds can be found in the Ordinance with regard to the refusal of enforcement of awards, whether made in a New York Convention jurisdiction, Mainland China, Hong Kong, or elsewhere.
Even if sufficient grounds are made out to set aside an award or to refuse its enforcement, the Hong Kong courts have residual discretion and may nevertheless enforce the award despite the proven existence of a valid ground. In this edition, we have chosen two cases to illustrate the circumstances in which the courts exercise their discretion to deny enforcement of an arbitral award.
B.1 Court of First Instance affirms the principle of arbitrator immunity and refuses enforcement on the ground of public policy
Judicial immunity is an important doctrine that safeguards judicial independence and protects judges from being compelled as witnesses in relation to the exercise of their judicial functions. It is invoked to defeat liability claims against judges, making them immune to any act committed in the exercise of their judicial functions.[1]
In Song Lihua v Lee Chee Hon, the Court of First Instance had to consider whether judicial immunity extends to arbitrators, making them likewise immune from being compelled to testify how they exercised their functions in the arbitration where enforcement of an award is challenged. The court affirmed the principle of arbitrator immunity under Hong Kong law and refused to compel an arbitrator to give evidence in the enforcement proceedings ([2023] HKCFI 1954). However, the court ultimately refused enforcement of the award on the ground of public policy ([2023] HKCFI 2540). This is a narrow ground that only applies where the consequence of enforcing the award would be to violate the most basic notions of morality and justice in Hong Kong.
On 12 January 2023, the Applicant (S) obtained leave from the court to enforce a Mainland award issued by the Chengdu Arbitration Commission in 2021. On 26 January 2023, the Respondent (L) applied to set aside the enforcement order on various grounds, including that enforcement would be contrary to Hong Kong public policy because the conduct of one of the arbitrators (A) during the second hearing deprived L of the opportunity to present his case and of the right to a fair hearing.
Specifically, L complained that he had not received any notice of or documents relating to the arbitration, which had been sent to his former address. By the time he was informed of the arbitration, he had missed the first hearing and his lawyers could only attend the second hearing. L’s lawyers were only able to search the file of the Arbitration Commission on 4 January 2023. The Commission refused L’s request for a copy of the video recording of the entire proceedings, but on 29 January 2023, L’s lawyers were able to view the recording of the second hearing and obtain screenshots of the video. L claimed, in essence, that this video showed that A (who attended the second hearing remotely) was distracted and failed to give his undivided attention at the hearing.
On 22 March 2023, L applied to the court for a letter of request to be issued to the Mainland judicial authority to obtain statements from A and the tribunal secretary (TS) regarding the conduct of the second hearing. L’s application was made under the Arrangement on Mutual Taking of Evidence in Civil and Commercial Matters between the Courts of the Mainland and Hong Kong. This arrangement has been in force since 1 March 2017, and assists parties arbitrating in Hong Kong in obtaining evidence with enhanced efficiency and greater certainty; it is part of a range of measures reflecting Mainland China’s and Hong Kong’s efforts to increase legal cooperation between the two jurisdictions.
L sought to adduce this evidence at the hearing of his setting aside application on 24 August 2023 in support of his contention that it would be contrary to Hong Kong public policy to enforce the award by reason of any serious irregularity or lack of due process in the conduct of the arbitration.
On 31 July 2023, the court declined L’s application for a letter of request with regard to both A and TS.
As to A, L sought to compel A to effectively give evidence for use in proceedings where A’s award was challenged as being irregular and against public policy. Whether a Hong Kong court had the power to do so was a question of Hong Kong law on procedure and admissibility of evidence.
The court recognized that arbitrators perform and exercise a judicial or quasi-judicial function and that their decision-making and judgments are comparable in nature and process to those of judges; there is thus a need to protect the course of arbitrators’ independent judgment from threats of suit and collateral attacks.
The court held that absent fraud or bad faith, arbitrators should be entitled to the same immunity available to judges. The court noted that arbitral immunity and autonomy would be illusory if the court is to compel or enable the parties to compel arbitrators to give evidence as to their decision-making, including the exercise of their powers and discretion in the arbitral process.
As to the specific facts at hand, the court recognized that it was within the power and discretion of the tribunal, which included A, to decide whether to allow the second hearing to take place remotely and how the second hearing should be conducted. If L contended that the manner in which A had participated in the hearing was unfair or had affected due process, L may object to the tribunal at the relevant time as well as challenge enforcement. But L may not compel A to justify or explain or give evidence generally on his conduct of the process of the hearing or of how and why he exercised his power and discretion to proceed with the hearing in the way it was held. A’s discretionary powers had to be exercised judicially, and in making the decision and exercising his power in conducting the hearing, A was performing his function as an arbitrator. As such, A was entitled to immunity and could not be compelled to give evidence on these matters.
As to TS, the court declined the application because it was not satisfied with the relevance, necessity and probative value of the evidence sought, and it considered the request totally disproportionate to the evidence that TS might provide. The court found that TS would only have been able to give evidence as to limited matters by viewing the video showing A’s participation in the hearing. This could just as effectively be done by L’s lawyers and by the court at the hearing of the setting aside application. Screen captures were available, and L already had information as to whether A had asked questions or voiced opinions, and whether there were disruptions in the communication.
Indeed, L’s application for a letter of request was unnecessary for its setting aside application. At the end of the hearing of L’s setting aside application on 24 August 2023, the court found in L’s favor and discharged the enforcement order as contrary to Hong Kong public policy based on serious irregularities in A’s conduct. The court handed down the reasons for its decision on 5 October 2023 ([2023] HKCFI 2540).[2]
At the outset, the court reiterated the basic principles. It noted that recognition and enforcement of arbitral awards is underpinned by the fundamental principle that the award is made as a result of due process, and that recognized rules of natural justice have been observed in the arbitration. It is a fundamental principle of natural justice in Hong Kong that no person shall be judged without a fair hearing, in which each party is given the opportunity to respond to the evidence against it and to be heard on its case. The Arbitration Ordinance expressly requires a tribunal to give the parties a reasonable opportunity to present their cases and to deal with the cases of their opponents. The established and well-known rule is that not only must justice be done, but it must also be seen to be done.[3] Further, as arbitrators are carrying out a quasi-judicial role, they have duties to conduct the arbitral proceedings and decide the case before them with appropriate care, skill and professional integrity.
At the setting aside hearing, the entire video of the second hearing in the arbitration had become available, and excerpts of the video were played. Based on this video evidence, L complained that for at least the second half of the hearing, A failed to give his undivided attention to the hearing and his conduct deprived L of the opportunity to present his case and of the right to a fair hearing.
Upon careful review of the excerpts and the entire video, the court found that L’s complaint was justified. The court observed that A had barely been stationary for more than one minute apart from the last part when he was inside a car. He moved from one room of the premises to another, at times talking to and/or gesturing to others in the room. He went offline a number of times, and his video image froze repeatedly. On at least two occasions, he failed to answer or even acknowledge questions from the other arbitrators. At one point, A even stated that he had no reception as he was en route to the high-speed railway. Significantly, A was moving around when the parties’ lawyers were adducing and challenging the evidence produced and when the other arbitrators were asking questions as to the evidence and the parties’ respective case.
The court explained that the first role of the arbitrator is to preside and hear the case and that a hearing takes place to inform the tribunal of the material required for the determination of the case, as well as for fact-finding and fair consideration of the contrary argument. If A was not concentrating on or not hearing the lawyers’ submissions, an objective observer would have reasonable doubts as to whether A had already made up his mind as to the dispute and was not interested in what the parties had to say on the evidence or the law. An observer would also have reasonable doubts as to whether A’s decision in the case can be actually supported by the evidence when he had not properly focused on the submissions at the hearing. A’s conduct could, therefore, impair confidence in his judgment, and L could fairly doubt if his case has been truly heard and considered at all.
The court found that there was no apparent justice and fairness when a tribunal member was not hearing and focused on hearing the parties in the course of the trial. Therefore, enforcement of the award would violate the most basic notions of justice in Hong Kong and should be refused.
This case is an important reminder for arbitrators to ensure that they give their undivided attention to the parties at a hearing and when they attend a hearing remotely to eliminate any distractions as far as possible.
Two further aspects of the case are noteworthy. First, S relied on the fact the Chengdu Intermediate People’s Court (as the supervisory court of the arbitration) had denied L’s application to set aside the award, finding that A’s conduct did not have any actual impact on the hearing. However, a Hong Kong court (as the enforcement court) has to apply its own standards and law when deciding whether enforcement would be contrary to Hong Kong’s public policy. The court concluded that A’s conduct lacked due process and fell short of the high standards of a fair and impartial hearing expected by the Hong Kong courts. This illustrates the independence of the Hong Kong courts in reaching their own conclusions, which may well differ from those of the Mainland courts.
Second, S argued that L’s lawyers had waived any irregularities of the second hearing because they failed to raise any objection regarding A’s conduct. Importantly, for arbitration counsel, the court rejected this argument. It noted that it can be expected that at a hearing, advocates are focused on presenting their case, on the submissions being made by their opponent, and on the papers and materials being presented, rather than on observing the image of the arbitrator on the screen, unless the arbitrator was asking questions or making a comment.
B.2 Court of First Instance refuses enforcement for serious denial of due process
In considering applications to set aside an award or refuse its enforcement, the fact that the tribunal had erred on facts or law is not a ground for the courts to interfere. The courts only look at the structural integrity of the arbitral process and step in when there is an error that is so egregious that it would be shocking to the court’s conscience to allow the award to stand and permit its enforcement.
In Canudilo International Company Limited v Wu Chi Keung and Others [2023] HKCFI 700, the court considered in the context of enforcement proceedings whether there was a defect in the structural integrity of the arbitral process due to the arbitrator’s misunderstanding of the proceedings, which is so egregious and caused an outcome that is so unfair and unjust that the court could not ignore the error, as the enforcement of the award would be repugnant.
The dispute arose out of two sales contracts between the applicant (CIC) and a company (C). Four parties were named as guarantors in either or both contracts.
On 10 September 2019, CIC commenced a Hong Kong arbitration against C and the four guarantors, claiming that C defaulted on payment and that the guarantors were liable for C’s default.
On 10 December 2019, an arbitrator (A1) was appointed. A1 later decided to bifurcate the arbitration: CIC’s claim against C was to be determined in an interim final award without a hearing, while CIC’s claims against the guarantors were to proceed in accordance with the timetable.
C did not participate in the arbitration due to disagreement among its controllers, but the guarantors participated and raised various defenses.
On 26 June 2020, A1 issued an interim final award after he declared the proceedings between CIC and C closed. A1 held that as between CIC and C, C was liable to pay CIC. The interim award made it clear that it only involved the dispute between CIC and C, and that the dispute between CIC and the guarantors would continue. On the same day, C’s lawyers requested an extension of time for C to file submissions. A1 then stated that CIC and the guarantors should be given a reasonable opportunity to decide whether a new arbitrator should be appointed to continue the arbitration. The guarantors could not agree, and on 20 July 2020, A1 resigned; A1 considered that there would have been reasonable doubt as to his impartiality if he had continued to act after he issued his interim award.
On 17 September 2020, a new arbitrator (A2) was appointed. A2 stated that he considered that the entire arbitration between CIC and C had concluded when the interim award was issued, and that he would only deal with the arbitration between CIC and the guarantors.
After conducting a hearing, A2 issued a final award, ordering two guarantors (W) to pay CIC. In the award, A2 stated that he was bound by A1’s interim award, which he considered binding on not only C but also the guarantors. He found that the guarantors could have raised before A1 any defenses in relation to C’s liability as well as their own liability, but they failed to do so.
On 10 August 2021, CIC obtained the court’s leave to enforce the final award. On 26 April 2022, W applied to set aside the enforcement order on the basis that: (i) A2 had exceeded his mandate and jurisdiction by failing to determine the issues in dispute; (ii) the arbitration was not conducted in accordance with the arbitration agreement and/or the agreed procedures; (iii) W did not have a reasonable opportunity to present their case; and (iv) enforcement of the award would be contrary to Hong Kong public policy.[4]
W argued that A2 had failed to decide the key issue of their defense, as A2 had only dealt with a few defenses on a peripheral basis. They claimed that A2 had failed to apply an independent mind when he made the final award without being influenced by A1’s interim award.
The court agreed with W and set aside the enforcement order.
In its decision of 8 March 2023, the court expressed grave concerns that on an objective reading of the final award, A2 had not applied his own independent mind, pursuant to the mandate given to him under the arbitration agreement, to decide the dispute between the parties. The court found that it was not clear from the final award that W was given the opportunity to test and challenge the evidence on the contracts and the alleged primary debt. While the dispute between CIC and C was resolved in the interim award, the dispute between CIC and W had not been decided by A1, and his findings did not bind W, who was entitled to dispute C’s primary debt, which was the very issue for determination by A2.
The court considered it grossly unfair and unjust that A2 considered that W had already been given the opportunity to present evidence and make submissions before A1 but failed to do so and should be bound by A1’s findings when A1 had directed them to file evidence and make submissions at the second part of the arbitration. The court held that the arbitration had not been conducted in accordance with the arbitration agreement and/or the agreed arbitration procedures, and that the violation of W’s rights in the arbitration was sufficiently serious and egregious for the final award to be set aside.
The court found that it would be contrary to the basic notions of justice and requirements for a fair hearing to enforce the final award when A2 had failed to independently determine the issues in dispute between CIC and W and had unfairly and unjustly deprived W of a reasonable opportunity to present their case as to whether they were bound by the interim award and A1’s findings therein.
[1] See Song Lihua v Lee Chee Hong [2023] HKCFI 1954 at paragraph 34 with reference to the Credit Transit Inc v Chartrand 2021 QCCS 4329 (Quebec Supreme Court).
[2] S sought leave of the CFI to appeal to the Court of Appeal against the discharge of the enforcement order. On 14 November 2023, the CFI refused leave ([2023] HKCFI 2959). The court rules permit S to seek leave to appeal directly from the Court of Appeal. At the time of writing, it was unknown whether S had done so.
[3] See R v Sussex Justices, ex parte McCarthy [1924] KB 256 (as per Lord Hewart CJ).
[4] The application was made out of time but the court extended time due to the merits of the application and the seriousness of the errors undermining the structural integrity of the award.
