Lin Ming and Fujian Yuansheng vs. Sequedge ASA Capital (Cayman) Ltd & Others (Link to Judgment), HCA 1900/2011
It is fairly common to see complex litigation where the same subject matter can give rise to parallel legal proceedings. Parallel legal proceedings, whether across different jurisdictions or forums, give rise to the undesirable risks of inconsistent rulings on similar facts and escalation in legal costs of having to deal with the same issues several times.
Whilst the Rules of the High Court in Hong Kong offer the twin solutions of consolidation and/or joinder for parties to merge parallel court proceedings into one single set of proceedings, no easy solution presents itself when litigants are confronted with parallel proceedings in court and arbitration.
The litigants in the case of Lin Ming and Fujian Yuansheng vs. Sequedge ASA Capital (Caymen) Ltd & Others ("Lin Ming") found themselves in such an undesirable predicament in the first case of its kind before the Hong Kong Court of First Instance, where the parties took out mirror-image applications to stay the proceedings in the other forum (court/arbitration) initiated by the other parties in favor of their own proceedings.
The first Plaintiff (P1) was the owner of a food processing business in Mainland China. He entered into a Share Purchase Agreement with the twenty-eighth Defendant (D28) for the sale of 1,000 shares in a company known as Win Power, which is wholly owned by P1. The twenty-seventh Defendant (D27) and a company known as Gingero were subsequently assigned portions of the 1,000 shares in Win Power and therefore inherited the same rights and obligations under the Share Purchase Agreement as D28.
The Share Purchase agreement contained a Put Option clause which gave D27, D28 and Gingero the right to sell their shares back to P1 at a contractually agreed price if Win Power was not listed on an internationally recognized stock exchange within 24 months of completion of the Share Purchase Agreement. The Share Purchase Agreement also contained an arbitration agreement requiring the parties to refer disputes arising out of or relating to the Share Purchase Agreement to arbitration.
As the listing did not take place within the stipulated time, D27, D28 and Gingero exercised the Put Option. D27, D28 and Gingero commenced arbitration proceedings against P1 to compel the latter to pay over the purchase price for the shares after the latter failed to pay the purchase price under the Put Option.
Shortly after the arbitration was commenced, P1 and the second Plaintiff (P2), a Mainland company engaged in the food business and wholly owned by P1, commenced court proceedings in Hong Kong against twenty-eight (28) Defendants including D27 and D28. P1 and P2 alleged that the 28 Defendants, together with Mainland officials, had unlawfully conspired to take over P1's food business, which included attempts to have P1 and his sister arrested in the Mainland. As such, P1 argued that he was no longer bound to honor the Put Option under the Share Purchase Agreement because D27 and D28 have breached an implied term not to frustrate the potential listing of Win Power through their conspiracy with the other Defendants to take over P1's food business.
Mirror-Image Applications Before the Court
It was common ground between P1, D27 and D28 that the court proceedings and the arbitration raised similar factual issues. Confronted with parallel proceedings in court and arbitration dealing with similar factual issues, P1, D27 and D28 took out mirror image applications to stay the proceedings in the other forum initiated by the other parties.
D27 and D28: Application to Stay Court Proceedings
D27 and D28 took out the typical application to stay the court proceedings pending arbitration of the dispute under Section 20 of the Arbitration Ordinance (Cap. 609), which gives legal effect to Article 8 Of the UNCITRAL Model Law. Section 20 reads as follows:
“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall…refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”
P1: Application for Injunction to Restrain Arbitration Proceedings
The application by P1 involved asking for a novel remedy. P1 applied for an injunction to restrain D27, D28 and Gingero from continuing with the arbitration pending resolution of the Court proceedings. The injunction application was based on the court’s general power under Section 21L of the High Court Ordinance (Cap.4) to grant injunctions when it is just and convenient to do so. Section 21L reads:
“The Court of First Instance may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the Court of First Instance to be just or convenient to do so.”
Parties Arguments: Application to Stay Court Proceedings
In support of their application to stay the Court proceedings pending arbitration, D27 and D28 argued that:
- It is established law that once the conditions set out under s.20 of the Arbitration Ordinance are satisfied, a stay of the Court proceedings is mandatory.
- As the dispute between P1, D27 and D28 fall within the scope of the arbitration clause in the Share Purchase Agreement, and the arbitration clause is not null and void, inoperative or incapable of being performed, the Court is obliged to stay the Court proceedings.
P1 offered no arguments as to why the Court should not stay the Court proceedings. Instead, it focused its arguments on why the Court should grant the injunction to restrain the arbitration proceedings, which in turn leads to the conclusion that the Court proceedings must be allowed to continue.
Parties Arguments: Application for Injunction to Restrain Arbitration Proceedings
P1 made the following arguments in support of their injunction application:
- The Court has the general power under Section 21L of the High Court Ordinance to grant injunctions where it is just and convenient to do so.
- P1 referred to an English case law which held that the Court has the power to grant injunctions to restrain arbitrations in circumstances where the injunction would not cause injustice to the claimant in the arbitration and the continuance of the arbitration would be oppressive, vexatious, unconscionable or an abuse of process. However, such power should be exercised very sparingly and with due regard to the principles of respect for party autonomy in arbitration and self restraint by the Courts when intervening in the arbitral process.
P1 directed the Court’s attention to the following points which made it just and convenient for an injunction restraining the arbitration to be granted:
- If the arbitration is allowed to continue, there would be a risk that the Court and the arbitral tribunal would reach different conclusions on the same factual matrix, which is wholly undesirable.
- There would be no injustice to D27, D28 and Gingero if the arbitration were stayed. On the other hand, P1 would have to apply his resources to two identical proceedings.
D27 and D28 put up a strong rebuttal against the points made by P1 as follows:
- The Court has no power to grant the injunction sought. Section 12 of the Arbitration Ordinance, which gives effect to Article 5 of the UNCITRAL Model Law, provides that:
“In matters governed by this Law, no Court shall intervene except where so provided in this Law.”
Since the Arbitration Ordinance does not provide for the Court’s power to restrain the parties from continuing with the arbitration in these circumstances, it follows that the Court has no power to grant the injunction under Section 12 of the Arbitration Ordinance.
- As the Court has the mandatory duty to stay the Court proceedings under Section 20 of the Arbitration Ordinance, it would be self-defeating for the Court to allow the arbitration to continue (i.e. there is no point restraining the arbitration from continuing if the Court proceedings had to be stayed anyway).
- Gingero is not a party to the Court proceedings, so the Court has no power to restrain Gingero from proceeding with the arbitration.
Decision of the Court
With respect to the D27 and D28’s application to stay the Court proceedings, the Court held that it was bound to grant a stay once the conditions set out under Section 20 of the Arbitration Ordinance were satisfied. As the conditions were satisfied, the Court granted a stay of the Court proceedings.
Turning to P1’s injunction application to restrain D27, D28 and Gingero from continuing with the arbitration, the Court was content to assume that it had the power under Section 21L of the High Court Ordinance to grant an injunction to restrain parties from continuing with an arbitration, notwithstanding the terms of Section 12 of the Arbitration Ordinance. The Court’s assumption was in part derived from English case law cited by P1, which were persuasive authority because England has similar legislation carrying the same tension between Section 12 of the Arbitration Ordinance and Section 21L of the High Court Ordinance. However, as the Court did not hear full arguments on this point, it declined to express a concluded view on it.
In any event, the Court exercised its discretion and held that it would not restrain D27, D28 and Gingero from continuing with the arbitration for the following reasons.
- Firstly, the risk of inconsistent findings in parallel proceedings were self-induced by P1 taking out the Court proceedings two months after the arbitration had commenced.
- Secondly, D27 and D28 would suffer an injustice in having to wait for a long time for the Court proceedings to be resolved before it can resume the arbitration, as the number of parties and the scope of the issues in the Court proceedings is much larger than the arbitration.
- Thirdly, it would not be oppressive, vexatious, unconscionable or an abuse of process to allow the arbitration to continue. This is because D27 and D28 will still have to contend with the Court proceedings which will proceed between P2 and the Defendants, including D27 and D28. Accordingly, the inconvenience, expenses and strain on resources suffered by P1 in having to deal with two parallel proceedings will be equally felt by D27 and D28.
- The Court has no power to restrain Gingero from continuing with the arbitration as it is not a party to the Court proceedings.
The Lin Ming case brings to the forefront the principal disadvantage of arbitration – its inability to consolidate parallel proceedings or join other parties without consent. This disadvantage is most keenly felt in multi-party or multi-contract scenarios, such as a large scale financing agreements involving multiple lenders, borrowers and/or guarantors, or large scale construction projects involving multiple contracts between different contractors and consultants. Similar factual and legal issues may arise out of related contracts involving different parties in the same transaction, which inevitably leads to multiple arbitrations or court proceedings running on parallel tracks once a dispute arises.
In the event of parallel arbitrations, this disadvantage has been recognized and alleviated to some extent by recent amendments to the arbitral rules of leading arbitral institutions, such as the ICC and CIETAC, which allow for consolidation of parallel arbitrations and joinder of parties in limited circumstances. These amendments will no doubt offer some relief to parties entangled in parallel arbitrations.
Alternatively, parties can always resort to the self-help by inserting provisions for consolidation of related arbitrations into their arbitration clauses and by ensuring that related agreements all carry the same arbitration clause. The International Bar Association has published that Parties based in Hong Kong are encouraged to expressly opt to apply Section 2, Schedule 2 of the Arbitration Ordinance (Cap. 609), which provides for a comprehensive regime for consolidation of arbitrations, as part of their arbitration agreement.
Where there are parallel proceedings in court and arbitration, the Court’s robust approach in upholding its mandatory obligation under Section 20 of the Arbitration Ordinance to stay court proceedings in favor of arbitration will help to eliminate such a procedural catastrophe.
However, Section 20 of the Arbitration Ordinance will fall short where one or more of the parties to the court proceedings are not parties to the same arbitration agreement. In this regard, litigants in arbitration should be alive to the risk of tactical manoeuvring where other litigants can create parallel proceedings by using a related entity, such as a wholly owned subsidiary, which is also a non-party to the arbitration agreement, to raise the same issues in existing proceedings. This tactic may well have been used in the case of Lin Ming, which explains the hollow victory experienced by D27 and D28 in successfully securing a stay of the Court proceedings vis-à-vis P1, but which will still continue in another guise against them on the same factual issues by P2 9P1’s related entity.
As a postscript, P1 applied for leave to appeal the Court’s decision, but the application for leave was denied. A final resolution of the Court’s power to grant injunctions restraining arbitrations, which is a question that the Court recognized was “a matter that requires detailed consideration and is eminently suitable for decision by the higher Courts”, will unfortunately have to wait for another day.