Newsletter 212 EN



 





 



Current Legal Developments in Hong Kong

 

 

I.  
Setting aside arbitration awards

 

In
August 2016, the Hong Kong Court of Appeal heard two cases on the issue of the
court’s ability to set aside international arbitration awards. In the first
case, the court set aside the arbitration award because there was sufficient
evidence that the applying party was unable to
present its case to the arbitration tribunal properly
. In the second
case, the same court refused to set aside the arbitration award, as the court
did not find sufficient evidence to do so.

 

1.     Court of
Appeal sets aside arbitration award



a)   
Facts

 

China
Property Development (
CPD) acquired a company (BPP) from Mandelcy
(
Seller). A dispute regarding
the acquisition arose, and CPD and BPP together commenced arbitration
proceedings against the Seller. Regarding one specific issue, the Seller argued only against BPP, and not against
CPD, the other claimant. Thus, CPD was not able to present its case regarding the
said issue. However, the Tribunal ruled on this issue against CPD.

 

CPD, therefore, applied to the court to set aside the arbitration
award under Section 81 (2) (a) ii of the Arbitration Ordinance (
AO), as it were unable to
present its case to address those matters upon which the Tribunal might have
based its decision.

 

b)  
Decision

 

The
Court of First Instance (
CFI) and Court of Appeal (CA) ruled that the Tribunal had denied CPD the
opportunity to present its case. The CA also found that there was a breach of
Section 81 (2) (a) iii AO, as the award dealt with a dispute beyond the scope
of the arbitration.

 

2.     Court of
Appeal refuses to set aside arbitration award

 

a)    Facts

 

A
dispute arose with regards to four
agreements between Tronic International (Claimant –
C) and Topco Scientific (Defendant 1 – D1) and two other
defendants (
D2 and D3).  C
submitted the case to arbitration, claiming damages against all Defendants for
breach of contract. The Defendants submitted a counterclaim for damages for
wrongful termination. The Tribunal awarded D1 and D2 damages and cost of
arbitration.

 

C applied to the CFI to set aside the award on the grounds of
Section 81 (2) (a) ii AO. C argued that it was unable to present its case and Section
81 (2) (a) iii AO, as the Tribunal considered issues which were not raised
during the proceedings.

 

b)  
Decision

 

The
CA ruled that C was given sufficient
opportunity to make submissions prior to
the tribunal’s ruling. Article 19 of the ICC rules permits parties to raise new
issues if authorised by the tribunal. The tribunal may at its discretion permit
to argue newly arising issues as long as both parties receive the opportunity to present their case regarding the
issue, including whether or not the issue should be canvassed. Here, the court ruled, C was given such an opportunity.

 

3.    
Comment

 

Both
cases applied to the courts on the same grounds to set aside the respective arbitration
award. CPD was successful in their claim due to the extraordinary circumstances
and the tribunal’s grave due process error.

 

Tronic’s
application to the court, on the other hand, rather appealed to the outcome of
the arbitration, concerning the substantive merits of the dispute and the
correctness of the award.

 

However,
a motion to set aside an award has to show that a party’s fundamental
procedural rights have been violated (Art.
V of the New York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards
). State courts will – in general – not assess the material
findings and conclusions made by the tribunal. Regarding Tronic’s arbitration
process, there was no substantial breach of process.

 

Both
cases show the Hong Kong Courts’ positive approach to arbitration, with a firm
ground not to interfere in arbitration awards and decisions unless there is a
substantial breach of law.

 

 

II.  No
enforcement of arbitration awards which was already set aside at its seat

 

[Dana
Shipping and Trading SA v Sino Channel Asia Ltd (HCCT47/2015)]

 

The
CFI recently decided not to enforce an arbitration award based on an English
court’s decision to set aside said arbitration award.

 

a)   
Facts

 

A
tribunal in London rendered an award in favour
of
the applicant (
A), and A applied
to the CFI for an enforcement order, which was
granted
.

 

The
respondent (
B) applied to the CFI to set aside the enforcement
order. During the process in Hong Kong, B applied to the English courts to set
aside the arbitration award, which was granted.
Relying on the English judgement, B applied to the CFI to set aside the
enforcement order.

 

b)  
Decision

 

The
CFI found that the English award was in accordance with the same principles as Hong Kong law. The court also found
that B did not abuse the process as B had reasonable grounds to rely on the English
judgement when making his applications. Since the arbitration award was set
aside in England, there was no basis for the CFI to enforce the (already set
aside) English arbitration award.

 

This
decision is not surprising since there is
no ground to enforce an arbitration award that was already set aside at its
seat.

 

 

III.        
Court refers matter to arbitration

 

[Chee
Cheung Hing & Co Ltd v Zhong Rong International (Group) Ltd [2016] HKEC
656]

 

In
this case, the CFI stayed court proceedings under Section 20 AO, which provides
for referrals to arbitration where "[…] an action is brought in a matter which is the subject of
an arbitration agreement […].
” The CFI considered the arbitration agreement
to be valid prima facie and binding despite the Plaintiff’s contention
that the underlying contract was not validly
formed
.

 

a)   
Facts

 

Chee
Cheung Hing (
CCH) commenced court proceedings seeking a declaration
that the parties had not entered into a binding contract (for construction
works) and was therefore entitled to compensation.

 

CCH
sought the declaration on the basis that a letter of intent issued by Zhong
Rong International (
ZRI) did not constitute acceptance of the tender it had
submitted for the works, and there was,
therefore,
no binding contract between the parties.

 

ZRI
argued that the parties’ signing of the letter of intent constituted acceptance
of the tender, and the Plaintiff’s execution of the works as well as the
parties’ subsequent conduct affirmed and evidenced the existence of a binding
contract.

 

The
conditions of the tender referred to the terms of the “Agreement and Schedule
of Conditions of Building Contract” which included an arbitration clause. ZRI
applied to the CFI under Section 20 AO on the basis that the contract (and
arbitration agreement) between the parties were valid and binding, and
therefore, CCH should start arbitration proceedings instead of submitting the
matter to the ordinary courts.

 

b)  
Decision

 

The
Court held that it should not attempt to resolve the issue and the matter
should be referred to arbitration. The
court found that the terms of both the tender and the letter of intent
expressly provided that arbitration should
resolve disputes
.

 

This
reasoning is a positive endorsement of the doctrine of separability of
arbitration agreements in situations where the existence of the underlying
contract is in dispute. The doctrine says that the dispute settlement clause
has to be considered separate from the underlying contract. Thus, if the
underlying contract is unenforceable, the dispute settlement agreement remains enforceable, and the dispute needs to be submitted to arbitration.

 

 

IV.         
Indemnity costs in Hong Kong Arbitration awards

 

[Peter
Cheung & Co v Perfect Direct Limited & Yu Guolin (HCMP 2493/2012) and
New Haven Investments Limited & Rondo Development Limited v Yu Guolin (HCA
115/2013)

 

In
the above cases, the CFI has extended the principle of indemnity costs to cases
where a party attempts to delay the enforcement of an arbitration award. While the action in the present judgment was not a
direct challenge to an arbitral award, the CFI found that the purpose of the
action was “clearly an attempt to delay the enforcement of an arbitral award”.
Therefore, indemnity costs (100% of the legal costs of the dispute) should be
awarded to deter such behaviour, instead of only awarding costs on a party to
party basis, based on which only 60% to 70% of the legal costs can be obtained
from the losing party.

 

a)   
Facts

 

Yu
Goblin (
Yu)
invested in a third company. Perfect Direct Limited (
PDL) guaranteed to Yu the
market value of shares of that company would remain stable (for ten months). However,
the market value dropped and Yu, therefore, requested the guaranteed security.
When PDL refused, Yu commenced court proceedings in Hong Kong.

 

Shortly
after that the action was stayed with the consent of both parties and referred
to arbitration in accordance with the arbitration
clause of the guarantee agreement. An arbitral tribunal in Shanghai issued an
award in favor of Yu, who then sought and
obtained an Enforcement Order in Hong Kong.

 

PDL
still refused to release the security and instead suggested to solve the matter
by Hong Kong courts. Accordingly, Yu restored his claim in the court action.

 

Five
working days before the hearing in the court, PDL applied to consolidate the action
with another action (“Consolidation Summons”), which involved Yu and shared
some overlapping facts. However, PDL did not
file any evidence in support of the consolidation.
Furthermore, PDL only belatedly filed evidence with regards to the initial
court action.

 

The
CFI had to decide whether costs regarding the
consolidation
and the court action should be ordered against PDL on an indemnity basis.

 

b)  
Decision

 

The
CFI ruled that PDL had to pay costs on an indemnity basis. The CFI based its decision on PDL’s overall behaviour
(including belated filing of evidence, attempt to re-litigate the same case
in court and the failure to seek setting aside the arbitration award
),
which justified the indemnity costs.

 

The
extension of the indemnity costs principle, beyond challenges to arbitral
agreements and awards to actions attempting delay, reinforces the
pro-arbitration approach of the Hong Kong courts and its efforts to deter
so-called tactics employed by unsuccessful parties to frustrate arbitral
awards.

 

 

V.  
Summary

 

This
summary of recent arbitration matters in Hong Kong shows that Hong Kong courts
obtain a positive approach to arbitration and the basic rule remains that
arbitration awards are quite difficult to be set aside by Hong Kong courts. This can be a double-edged
sword because arbitration can be a way to
settle a legal dispute outside of court quicker than submitting it to the
ordinary Hong Kong courts, where proceedings usually take 18 to 24 months to
obtain a first judgment. Furthermore, the
arbitration award does usually end the dispute, because arbitration awards cannot
be appealed and the courts will only in
very limited cases set aside the award.

 

On
the other side, it must be considered
that there might be arbitration cases in which the award is plainly wrong,
maybe because the arbitrator decided it wrongly or because the merits of the
case were considered judged inconsistently. In such case, it is almost
impossible for the losing party to set aside the award because the Hong Kong courts will only consider whether
fundamental rights have been violated and will not re-open the case again.

 



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) Limited

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Before
signing a contract with an arbitration agreement, it should carefully be considered whether arbitration is the
appropriate matter for settling disputes, considering the above-mentioned pros and cons, but also
considering that costs of arbitration do even for small cases easily exceed HKD
1 million.