By: Anthony Poon1Anthony Poon is a partner in Baker & McKenzie’s Hong Kong office. His practice focuses on commercial arbitration and litigation in both Hong Kong and China with special emphasis on cross-border and joint venture disputes. The authors would like to thank Annabella Chu for her assistance. and Philipp Hanusch2Philipp Hanusch is an associate in Baker & McKenzie’s Hong Kong office. His practice focuses on international commercial arbitration. He has represented parties in institutional arbitrations under the ICC Rules, HKIAC Rules, CIETAC Rules, Vienna Rules, ICDR Rules and in ad hoc arbitrations under the UNCITRAL Arbitration Rules.
A. Legislation, Trends and Tendencies
A.1 Legislation
International arbitration in Hong Kong continues to be governed by the Arbitration Ordinance 2011. Only minor amendments to the Ordinance were made in 2015 to remove uncertainties.
A.2 Trends and Tendencies
Hong Kong continues to be a preferred seat of arbitration, as confirmed by the 2015 International Arbitration Survey on Improvements and Innovations in International Arbitration conducted by Queen Mary University of London. The survey ranked Hong Kong as the most preferred seat outside of Europe; HKIAC was ranked as the third most preferred arbitral institution (after the ICC and LCIA) worldwide.
It has been uncertain under Hong Kong law whether the doctrines of maintenance and champerty prohibit third party funding for arbitrations in Hong Kong. A subcommittee of the Law Reform Commission was therefore asked to review the position and to make appropriate recommendations. In October 2015, the subcommittee released its consultation paper. The subcommittee recommended that the Arbitration Ordinance be amended to expressly allow third party funding for arbitrations in Hong Kong, provided that appropriate financial and ethical safeguards are complied with to manage potential risks. It is believed that implementation of this recommendation would enhance Hong Kong’s position as an international arbitration center and provide potential alternative financing options to parties choosing to arbitrate in Hong Kong. It remains to be seen how third party funding will be regulated in Hong Kong and how quickly the reform will be implemented.
In July 2015, HKIAC launched an Arbitration Evaluation System, allowing users to evaluate the conduct of their arbitral proceedings and the performance of their arbitrators. According to HKIAC, feedback is treated with the strictest confidence, but HKIAC retains the right to publish statistics compiled on the basis of information collected. HKIAC expects that the collected data will enhance its ability to appoint available and competent arbitrators.
After HKIAC introduced tribunal secretary services for HKIAC and ad hoc arbitrations and published accompanying guidelines in 2014, HKIAC launched the world’s first tribunal secretary accreditation program in December 2015. In practice, tribunal secretaries play an important role in assisting tribunals in organizational and administrative tasks. This can result in significant savings of time and costs. It is, however, critical that secretaries do not exercise any decision-making functions or perform any essential duties of the tribunal. By adopting guidelines for the use of tribunal secretaries, parties can establish a clear understanding with the tribunal as to the scope of the secretary’s duties. Appointing a qualified secretary will further help to ensure that they perform these duties efficiently and diligently.
CIETAC has published revised arbitration rules, which came into effect on 1 January 2015 and will bring CIETAC’s regime closer to international practices. Notably, a new Chapter VI has been introduced with special provisions for arbitrations administered by the CIETAC Hong Kong Arbitration Center, which was launched in 2012. These provisions make clear that, unless otherwise agreed by the parties, the place of arbitration will be Hong Kong; that Hong Kong arbitration law applies; and that the arbitral award will be a Hong Kong award. Hong Kong tribunals are expressly empowered to grant interim relief. A separate fee schedule has been introduced, providing for higher remuneration for arbitrators sitting in Hong Kong than for those sitting in mainland China. This may result in a larger pool of leading international arbitrators available for CIETAC arbitrations in Hong Kong.
B. Cases
B.1 First Antisuit Injunction Granted by Court of First Instance
Ever Judger Holding Co. Ltd. v. Kroman Celik Sanayii Anonim Sirketi3[2015] HKEC 605. is the first reported case in which a Hong Kong court granted an antisuit injunction in support of a Hong Kong arbitration agreement. The court held that, as a matter of Hong Kong law, the court should ordinarily grant an injunction to restrain the pursuit of foreign proceedings brought in breach of an agreement for arbitration in Hong Kong, at any rate where the injunction has been sought without delay and the foreign proceedings are not too far advanced, unless the other party can demonstrate strong reason to the contrary.
The plaintiff (the “Shipowner”) chartered and delivered cargo to the defendant (the “Buyer”). The bills of lading incorporated a Hong Kong arbitration clause. After the ship arrived in Turkey, the Buyer, alleging the cargo was damaged, obtained an order for the arrest of the ship and filed a claim for damages in Turkey. The Shipowner, in turn, obtained an ex parte antisuit injunction from the Hong Kong court on the basis that the Buyer brought the Turkish proceedings in breach of the arbitration agreement under the bills of lading.
The Buyer challenged the injunction on three grounds: (i) related proceedings in Turkey between the Buyer and its insurers; (ii) the Shipowner had already raised a jurisdictional challenge in the Turkish court; and (iii) the Shipowner was guilty of delay in seeking the injunction (the Shipowner applied to the Hong Kong court less than two months after the Buyer filed its claim in Turkey).
The court found that: (i) the refusal of an antisuit injunction would not result in a single composite trial free from inconsistencies between the two courts; (ii) the jurisdictional challenge was raised by the Shipowner because it would otherwise be taken to have submitted to the jurisdiction of the Turkish court; and (iii) the Shipowner had acted swiftly from the moment the Buyer filed its claim in Turkey.
The decision confirms that Hong Kong courts will not hesitate in appropriate circumstances to enforce an agreement providing for arbitration in Hong Kong where a party has brought proceedings in breach of such an arbitration agreement.
B.2 Residual Discretion of Court of First Instance to Enforce Award
In Astro Nusantara International v. PT Ayunda Prima Mitra,4[2015] HKEC 330. the court refused an application by the respondent (“First Media”) to extend time for resisting the enforcement of five arbitral awards rendered in Singapore despite a decision of the Singapore Court of Appeal that the tribunal had no jurisdiction over the applicant.
The underlying dispute arose from a joint venture agreement between companies belonging to the Indonesian Lippo group and companies within the Malaysian Astro group, which is why the arbitration and related court proceedings are commonly known as Astro v. Lippo.
In the Singapore arbitration, three of the eight Astro claimants were added to the arbitration by the tribunal (“Additional Parties”) although they were not parties to the arbitration agreement. First Media objected to the tribunal’s joinder order, but did not seek immediate court review of the tribunal’s decision.5Under Article 16(3) of the UNCITRAL Model Law, if a party objects to the tribunal’s jurisdiction and the tribunal rules, as a preliminary question, that it has jurisdiction, a party “may,” within 30 days, request the supervisory court to review the tribunal’s decision. The Singapore Court of Appeal found that this was not a “one-shot remedy” and that a party can still seek court review at the setting aside or enforcement stage. Instead, First Media defended the arbitration. In 2009 and 2010, the tribunal ultimately rendered five awards in favor of all Astro claimants.
First Media chose not to exercise the “active remedy” of setting aside the awards in Singapore; instead First Media exercised the “passive remedy” of resisting enforcement after Astro sought to enforce the awards in Singapore later in 2010. In October 2013, the Singapore Court of Appeal refused enforcement of the awards as between the Additional Parties and First Media on the ground that the arbitral tribunal lacked jurisdiction over the Additional Parties.
In October 2010, Astro sought to enforce the arbitral awards in Hong Kong. First Media failed to resist enforcement within the 14-day time limit under Hong Kong law. Only in January 2012, around 14 months too late, did First Media apply for an extension of time to allow it to resist enforcement.6The focus was on enforcement of the awards by Astro against First Media. In February 2015, the court refused the application.
Although the judge accepted that the tribunal had no jurisdiction over the Additional Parties and that Hong Kong law recognizes the principle that parties are free to choose between active and passive remedies, the judge noted that he had a residual discretion under Hong Kong law to allow enforcement even where a ground for refusal was made out.
Applying the principle that a party can only rely on a ground for refusal of enforcement under the Arbitration Ordinance if it did so in good faith, the judge exercised this discretion, finding that First Media’s deliberate decision “to defend the claim on the merits in the hope that it would succeed before the Tribunal, and keep the jurisdictional point in reserve to be deployed in the enforcement court only when it suited its interests to do so,” despite being fully aware of the grounds for objection, amounted to a breach of its duty to act in good faith. With regard to his decision to refuse an extension of time, the judge noted that the delay was substantial and the result of a deliberate and calculated decision by First Media, and that the awards remained binding between the parties because First Media failed to have them set aside in Singapore.
In December 2015, the court granted leave to First Media to appeal against the decision that First Media should not be permitted to resist enforcement because it had acted in breach of the good faith principle, on the basis that the contrary view was reasonably arguable and that the proper scope of that principle for the purpose of enforcement of a foreign award was an issue of general or public importance. It will be interesting to see what the Court of Appeal will say about the proper scope of the good faith principle in this regard.
B.3 Court of First Instance Sets out 10 Principles of Enforcement
In KB v. S,7[2015] HKEC 2042. the court refused an application to set aside an order granting leave to enforce an arbitral award. In her decision, the judge summarized the attitude of the Hong Kong courts towards enforcement of arbitration agreements and awards in Hong Kong in 10 principles, as follows:
1. The primary aim of the court is to facilitate the arbitral process and to assist with the enforcement of arbitral awards.
2. Under the Arbitration Ordinance, the court should interfere in arbitrations only as expressly provided for in that ordinance.
3. Subject to the observance of the safeguards that are necessary in the public interest, the parties to a dispute should be free to agree on how their dispute should be resolved.
4. Enforcement of arbitral awards should be “almost a matter of administrative procedure,” and the courts should be as “mechanistic as possible.”
5. The courts are prepared to enforce awards except where complaints of substance can be made out. The party opposing enforcement has to show a real risk of prejudice and that its rights are shown to have been violated in a material way.
6. In dealing with setting aside or refusal of enforcement applications on grounds concerning due process, the court is concerned with the structural integrity of the arbitration proceedings. In this regard, the conduct complained of “must be serious, even egregious,” before the court would find that there was an error sufficiently serious to have undermined due process.
7. In considering whether or not to refuse the enforcement of the award, the court does not look into the merits or at the underlying transaction.
8. Failure to make a prompt objection to the arbitral tribunal or the supervisory court may constitute estoppel or lack of good faith.
9. Even if sufficient grounds are made out either to refuse enforcement or to set aside an arbitral award, the court has a residual discretion and may nevertheless enforce the award despite the proven existence of a valid ground.
10. Parties to an arbitration have a duty to act in good faith, or to act bona fide.
The 10 principles provide useful guidance for parties when making decisions as to whether to resist enforcement of arbitration agreements or awards, and illustrate the pro-arbitration approach of the Hong Kong courts.
C. Costs in International Arbitration
C.1 Allocation of Costs
Under the Arbitration Ordinance, the tribunal must assess the amount of costs to be awarded (other than its fees and expenses) and award those costs (including its fees and expenses). The tribunal has full discretion whether or not to award costs, but it must exercise its discretion judicially, not arbitrarily, after taking into account all relevant considerations.
In practice, when awarding costs, Hong Kong tribunals usually adopt the “costs follow the event” or “loser pays” principle. This is also the starting point in local court proceedings; in appropriate circumstances, however, the courts will readily depart from that principle and adopt an issue-based approach. Notably, while the HKIAC Rules (2008) provided that the costs of the arbitration were in principle to be borne by the unsuccessful party, which corresponds to the rule in Hong Kong court proceedings, the HKIAC Rules (2013) now expressly allow the tribunal to apportion all or part of the costs of the arbitration between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.8The “loser pays” principle has been the approach most commonly adopted by HKIAC tribunals; see Decisions on Costs in International Arbitration, ICC Commission Report, 2015, Issue 2), which points out that this is to some extent driven by the HKIAC Rules (2008), which provided that the costs of the arbitration shall in principle be borne by the unsuccessful party. We may therefore see more decisions in the future where Hong Kong tribunals adopt an issue-based approach.
When awarding costs, the tribunal may take into account factors such as the parties’ relative success in their claims, their conduct of the arbitration and any written settlement offer. Parties may include in their arbitration agreement express wording on the allocation of costs. However, parties used to adopting the so-called “American approach” that each party shall bear its own legal costs of the arbitration in any event must bear in mind that under the Ordinance, any agreement to this effect is valid only if made after the dispute has arisen.
C.2 Security for Costs
Pursuant to the Arbitration Ordinance, the tribunal may require a claimant (or a respondent advancing a counterclaim) to give security for the costs of the arbitration, unless the parties have agreed otherwise.
The Ordinance has deliberately left the grounds on which security should be granted to the discretion of the tribunal, except that it does not allow a tribunal to grant security on the sole ground that the claimant is a natural person who is ordinarily resident outside Hong Kong, or a corporation that is incorporated under a law of a place outside Hong Kong, or whose central management and control is exercised outside Hong Kong.
The tribunal’s discretion is unfettered, but must be exercised judicially. One important factor a tribunal will take into account is whether the claimant would be unable to pay the respondent’s costs if the claim was unsuccessful, or encounter serious difficulties in enforcing a costs order against the claimant other than difficulties arising from the claimant’s residence abroad. Other factors for consideration include, for instance, the timing of the application, whether the claim is a genuine one and whether the order would stifle the claimant’s ability to pursue its claim. Tribunals will often seek guidance from court cases in this area.
When granting security for costs, the tribunal must specify the period within which the order has to be complied with. If the order has not been complied with within the specified period (which may be extended), the tribunal may make an award dismissing or staying a claim (or counterclaim).
C.3 Recovery of Costs
Under the Arbitration Ordinance, the tribunal must only allow costs that are reasonable, having regard to all the circumstances, unless otherwise agreed by the parties. The Ordinance further empowers a tribunal to award simple or compound interest on costs and to order that costs be paid forthwith or within a specified period by a party who has been unsuccessful in making or opposing an interlocutory application.
An important tool for the tribunal to control costs is the possibility to direct that the parties’ recoverable costs of the entire arbitration or a certain part thereof (e.g., for discovery) be limited to a specified amount, unless the parties agree otherwise.
Recoverable costs in Hong Kong arbitrations include external counsel’s time charges and, unless otherwise agreed,9E.g., preparatory costs are not recoverable under the HKIAC Rules. may also include costs incurred in the preparation of the arbitral proceedings prior to the commencement of the arbitration. Whether the costs of a party’s in-house counsel or other staff members who provided assistance for the conduct of the arbitration can be recovered will depend on the applicable arbitration rules. Under the HKIAC Rules, for instance, these costs are usually not recoverable.
The Ordinance does not set out any procedure by which costs are to be determined. The general principle is that the party claiming costs bears the burden of proving that it has actually paid for or incurred those costs and that they are reasonable. Costs are to be assessed by the tribunal, unless the parties have agreed that costs shall be assessed by the court. The tribunal is not obliged to follow the scales and practices of the courts.