Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Dispute Resolution volume discussing topics including Brexit’s impact on choice of law and jurisdiction, market competition and the popularity of ADR within key jurisdictions worldwide.
GTDT: What are the most popular dispute resolution methods for clients in your jurisdiction? Is there a clear preference for a particular method in commercial disputes? What is the balance between litigation and arbitration?
Simon Powell: Our clients’ primary choices of dispute resolution methods in Hong Kong are litigation in the Hong Kong courts and arbitration (administered by the Hong Kong International Arbitration Centre (HKIAC) or the International Chamber of Commerce (ICC)).
Our clients display no clear preference between litigation and arbitration. Sophisticated clients increasingly recognise that the best choice of dispute resolution method differ depending on the particular scenario. The Hong Kong courts and the various arbitral centres operating in Hong Kong are equally highly regarded in terms of their independence and the experience they bring to bear on the dispute resolution process, and each provides viable and reliable dispute resolution services.
Typically, certain types of cases will, by their very nature, tend to make one lean towards a litigation or court-driven process (for example, a straightforward claim to enforce a debt, an insolvency-related matter or intra-company dispute, cases that involve non- commercial elements (such as alleged fraud or tortious conduct) or perhaps a case with no cross-border international element).
We also tend to see clients wanting to litigate rather than arbitrate when they anticipate that enforcement of an arbitral award could be problematic as the counterparty (or its assets) are not located in an arbitration-friendly jurisdiction. Clients also look to opt for litigation where they wish to publicise their claims in the local press covering court-related matters – the originating process containing the particulars of a claim that the plaintiff will lodge with the court to commence litigation is accessible by the general public in Hong Kong – or where clients would welcome the additional public scrutiny and pressure that come with a dispute in an open forum. Clients who require urgent interim relief, to preserve or protect assets, often consider court orders or court-ordered remedies more desirable insofar as enforcement and speed are concerned. Where an expedited judgment process is applicable (for example, in cases involving summary or default judgment), clients also prefer to litigate as arbitration currently only offers an expedited procedure in limited circumstances and has only recently introduced provisions enabling a summary process in appropriate cases.
Commercial parties tend to prefer arbitration when they wish to take advantage of the privacy and confidentiality afforded to parties in arbitral proceedings. It remains the case that arbitration is generally perceived to be less costly than litigation and to a degree this is accurate because of the narrower scope of discovery and disclosure (such as production of documents) in arbitration, the availability of more flexible time and cost-management measures and the limited challenges that can be made to an award. Resolving a dispute through arbitration is typically quicker than a court process principally because the parties are not at the mercy of the judge’s diary, and also because of the limited appeal process.
And of course, in the international context, the relative ease of enforcing an arbitration award made in Hong Kong in over 150 other states (through the New York Convention) and in mainland China (through the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region) makes arbitration an attractive option for parties entering into international agreements (or where they anticipate having to enforce any judgment or award they obtain somewhere other than Hong Kong).
Finally, the availability of third-party funding of arbitration – a recent development in Hong Kong, the key provisions of the relevant Ordinance amending the Arbitration Ordinance having come into force as of February 2019, following the issuance of the code of practice in December 2018 – will also appeal to commercial parties where they wish to share the risk (and reward) of the arbitration with a third party. Third-party financing of litigation is still, with certain narrow exceptions, a criminal offence and impermissible in Hong Kong.
GTDT: Are there any recent trends in the formulation of applicable law clauses and dispute resolution clauses in your jurisdiction? What is contributing to those trends? How is the legal profession in your jurisdiction keeping up with these trends and clients’ preferences? Does Brexit continue to affect choice of law and jurisdiction?
SP: A number of recent decisions of the Hong Kong courts show the courts’ robust attitude in upholding and enforcing dispute resolution clauses that contain an arbitration agreement by staying proceedings that are brought in breach of the arbitration agreement or granting an anti-suit injunction restraining such proceedings and awarding indemnity costs against those refusing to abide by their agreement to arbitrate. This was evident in a case we handled in 2016 (Lim Choon Hock v Hung Ka Hai Clement & Others), where we successfully stayed proceedings brought in defiance of an arbitration provision in the underlying agreement and obtained an indemnity costs award in favour of our client, as well as in earlier cases such as Bluegold Investment Holdings Ltd v Kwan Chun Fun Calvin (stay of proceedings) and Ever Judger Holding Co Ltd v Kroman Celik Sanayii Anonim Sirketi (anti-suit injunction). The court’s approach in these cases is significant in showing that the court will treat these clauses as obligatory (and in the case of an arbitration agreement, as exclusive). Because of this, dispute resolution clauses must be carefully considered and meticulously drafted at the time the parties negotiate their agreements, not treated as an afterthought. The court will rigorously hold parties to their bargain even if circumstances have changed significantly by the time a dispute arises or the nature of the dispute is one wholly unanticipated at the time the parties entered into the contract.
In the recent case of Lasmos Limited v Southwest Pacific Bauxite (HK) Limited, the Companies Judge in Hong Kong, Harris J, considered the effect an arbitration clause in an agreement has on the exercise of the court’s discretion to make a winding-up order. In Lasmos, Harris J departed from the approach of earlier authorities in Hong Kong and held that a petition for the winding up of a company should ‘generally be dismissed’ where there is an applicable arbitration clause in the contract under which the debt arises if the debt that the petition is founded on is disputed by the company. In his judgment, Harris J suggested that a ‘dispute’ in this context meant any non-admission of the debt or a prima facie dispute, rather than a ‘bona fide dispute on substantial grounds’. This case is significant, with the Companies Judge declining to follow the established approach to this question in earlier Hong Kong decisions, instead moving closer to the jurisprudence of the English and Singapore courts. The earlier Hong Kong decisions – such as Hollmet AG v Meridian Success Metal Supplies Ltd and Re Jade Union Investment Limited – held that the court must first be satisfied that there is a bona fide dispute on substantial grounds before it gives weight to the arbitration agreement in the court’s exercise of its discretion as to whether or not to make a winding-up order. In Lasmos, Harris J, citing authorities in England and Singapore, suggested that where there is an arbitration clause and a dispute relating to the debt upon which the petition is founded, a creditor would be required to arbitrate without the court first determining whether the company has a bona fide defence on substantial grounds. In such circumstances, the petition would be dismissed (or, in exceptional circumstances, stayed). While Harris J stressed that the existence of an arbitration clause was relevant to how the court exercises its discretion and does not oust the court’s jurisdiction (in certain circumstances, a creditor would still be entitled to invoke the collective insolvency process prior to arbitration), the court would nevertheless hold a creditor to his or her contractual bargain, namely, to resolve any dispute by arbitration.
The effect of this decision has yet to be fully felt (having only been handed down in March 2018). However, we envisage that it might very well influence the drafting of arbitration clauses going forward where a contract provides for disputes to be resolved by way of arbitration seated in Hong Kong, particularly if a party wishes to preserve the ability to invoke the jurisdiction of the Companies Court and seek to wind up a company where there is (at least arguably) no bona fide disputed debt, without first having to undertake an arbitration process to determine whether the alleged debt is disputed on bona fide grounds (although one can envisage the creditor claimant seeking to invoke the early determination process in appropriate cases, to obtain an award more quickly, where any defence would be manifestly without merit).
Dispute resolution clauses and arbitration agreements in multi-contract scenarios
In the 2016 case Bluegold Investment Holdings Limited v Kwan Chun Fun Calvin, the parties entered into various contracts relating to the issue of convertible notes. All the contracts contained arbitration provisions, save for a guarantee agreement that provided for the non-exclusive jurisdiction of the Hong Kong courts. The plaintiff commenced a court action under the guarantee; the other party applied to stay that action in favour of arbitration. The court stayed the action in favour of arbitration, noting that where an arbitration agreement is widely drafted, it could be construed to include contracts that might contain a different dispute resolution clause, demonstrating the strong pro-arbitration stance of the Hong Kong court and underlining the importance of drafting dispute resolution clauses with great care, to avoid incurring time and costs in disputes over the appropriate dispute resolution method and, possibly, ending up with a result that was not intended.
Brexit and impact on Hong Kong
It is still too early to assess the full impact of Brexit (which, as of the date of publication of this article, is still under way) on Hong Kong insofar as questions over choice of law and jurisdiction are concerned, both in terms of the applicable substantive law and in terms of the perception of the local business community (such as whether parties might now opt for Hong Kong law as the governing law and the Hong Kong courts, or an arbitration seated in Hong Kong, as the forum for resolving disputes, as opposed to English law and the English courts or English seated arbitration). However, the prognosis is that it is unlikely Brexit will have any direct impact on the choice of Hong Kong law as the substantive law governing the contract, because Hong Kong has developed its own common law legal system on which EU law and EU matters have minimal (if any) influence. As to the relative appeal of using Hong Kong law as the governing law of a contract and according jurisdiction to the Hong Kong courts over contractual disputes, it is difficult to see Brexit – in and of itself – as having an impact on how international commercial agreements are drafted and settled in Hong Kong. There are usually specific reasons for parties choosing Hong Kong law and courts versus English law and courts in a contract (for example, the location of parties, neutrality of jurisdiction, situs of the property or transaction) and these factors will remain independent of the underlying drivers and effects of Brexit. Notwithstanding this, one can readily envisage that Brexit might very well have the indirect effect of pushing commercial parties towards choosing arbitration in Hong Kong (or elsewhere), rather than litigating in the English courts, in international, cross-border matters, although whether this will ultimately be the case remains to be seen.
GTDT: How competitive is the legal market in commercial contentious matters in your jurisdiction? Have there been recent changes affecting disputes lawyers in your jurisdiction? How is the trend towards ‘niche’ or specialist litigation firms reflected in your jurisdiction?
SP: The Hong Kong legal market in commercial contentious matters is very sophisticated and increasingly competitive. Historically, the Hong Kong legal market was dominated by a number of established local and UK law firms, but recent years have seen an increasing number of American, global and Chinese law firms making a foray into disputes matters in Hong Kong, some with great success. Most recently, a new trend has seen the ‘Big Four’ accounting firms launching new legal ventures, or making significant additions to their existing legal services offerings in the legal market in Hong Kong, in a bid to offer clients even more seamless and integrated solutions and to bridge gaps between clients’ businesses and legal advisers. Whether these new legal ventures look to offer dispute resolution services in due course remains to be seen.
Hong Kong has consistently been ranked as a leading arbitration centre in Asia and one of the most preferred seats worldwide.
The following are the few noteworthy recent changes in the Hong Kong legal landscape.
Hong Kong as an arbitration hub
Hong Kong has consistently been ranked as a leading arbitration centre in Asia and one of the most preferred seats worldwide thanks to the significant efforts to promote Hong Kong as an arbitration centre by the government, the courts and the legal community of Hong Kong.
Arbitration legislation (that is, the Arbitration Ordinance) was thoroughly revamped in 2011 and the HKIAC adopted an updated version of its rules in November 2018. In 2017, the Legislative Council (Hong Kong’s legislative body) also enacted laws permitting third-party financing of arbitration for the first time (with the relevant laws largely coming into force in February 2019), although the long-standing prohibition against third-party financing of litigation (a criminal offence in Hong Kong) remains. These changes, along with a supportive supervising court, have seen an increasing number of parties turning to arbitration as a means to settle their disputes, or anticipated disputes, by incorporating arbitration agreements with Hong Kong as the seat in their commercial agreements.
The rise of solicitor advocates
One of the key recent changes in the disputes arena is the increasing advocacy being undertaken by solicitor advocates in the Hong Kong courts, a role that had traditionally been undertaken by barristers. Hong Kong solicitors were first able to attain higher rights of audience (entitling them to undertake advocacy in all the courts in Hong Kong) in 2010. There remains only a small proportion of solicitors with such rights – there were 63 solicitor advocates as of October 2018 – but recent years have seen those solicitor advocates increasingly taking the opportunity to appear in the higher courts, providing clients with more choice in their selection of legal representation.
GTDT: What have been the most significant recent court cases and litigation topics in your jurisdiction?
The Yung Kee saga
The leading judgment of the Hong Kong Court of Final Appeal (CFA) (delivered jointly by Ma CJ and Lord Millett NPJ in November 2015) in Kam Leung Sui Kwan v Kam Kwan Lai & Ors (more commonly referred to as the Yung Kee case in Hong Kong) was the first judgment by a final appellate court in any Commonwealth country dealing squarely with the question of the jurisdiction to wind up foreign companies on ‘just and equitable’ grounds in a shareholder dispute.
In its judgment, the CFA adopted a more liberal approach in finding the necessary relevant connection between a foreign holding company and Hong Kong to establish jurisdiction for a ‘just and equitable’ winding-up than had previously been adopted by the Hong Kong courts. Following the Yung Kee case, it seems likely that a sufficient connection will be established even where a company does not have assets in Hong Kong so long as there are other connecting factors, such as the existence of business activities in Hong Kong.
In Interush Limited & Anor v The Commissioner of Police, the Commission of Custom & Excise and Mak Wing Yip Cyril, Superintendent of Police, the Court of Appeal dismissed a challenge to the constitutionality of an aspect of Hong Kong’s money laundering legislation.
The court held that the statutory regime that obliges banks to disclose suspicious transactions relating to property known or believed to represent proceeds of a crime is not unconstitutional. In the circumstances of this case, the court held that although property rights under the Basic Law were engaged, the regime was no more than necessary for the legitimate purpose and societal benefit of anti-money laundering and a reasonable balance had been struck.
The Competition Commission’s first major case
Hong Kong enacted its first ever industry-wide competition law, the Competition Ordinance (Cap. 619), in June 2012, with the law coming fully into effect in December 2015, marking a watershed moment in Hong Kong’s regulatory landscape.
The Competition Ordinance ushered in a cross-sector competition regime that prohibits a range of anticompetitive practices in Hong Kong and established the Competition Commission, as well as the Competition Tribunal (the Tribunal, which has similar powers to a court). In 2017, the Competition Commission commenced its first major case before the Competition Tribunal – Competition Commission v Nutanix Hong Kong Ltd – a matter we handled on behalf of one of the key co-defendants.
In 2018, the Competition Tribunal clarified key discovery issues relevant to respondents charged with a contravention of the competition rules.
The tribunal’s decision on the substantive question remains pending as at the date of writing, but in interlocutory decisions rendered in 2018, the Competition Tribunal clarified key discovery issues relevant to respondents charged with a contravention of the competition rules, reaching the conclusion that respondents before the Tribunal have extensive – although not unbounded – discovery rights in enforcement proceedings. Key holdings that have emerged from the case so far include:
- that there is no automatic general discovery in enforcement actions before the Tribunal;
- discovery is at the discretion of the Tribunal;
- while discovery in Tribunal proceedings should approach the standard applicable in criminal proceedings, the law does not require automatic disclosure of all unused materials, only those materials meeting the ‘test of relevance’; and
- other aspects of criminal jurisprudence and procedures do not necessarily apply or apply in the same way to competition proceedings.
Additionally, the court has held that communications between the Competition Commission and parties who unsuccessfully seek leniency are privileged and need not be disclosed in later proceedings, which mirrors the position in other jurisdictions, such as the United States.
GTDT: What are clients’ attitudes towards litigation in your national courts? How do clients perceive the cost, duration and the certainty of the legal process? How does this compare with attitudes to arbitral proceedings in your jurisdiction?
Clients’ attitudes towards litigation
Litigation is seen as a robust process resulting in robust judgments and as the ‘traditional’ way to resolve disputes. The right result is seen as more likely because of the fact that the first instance judge’s decision is public and subject to review by an appellate court. For some parties, litigation in a public setting provides a measure of cathartic release; the traditional ‘day in court’ can be ensured, whatever the ultimate outcome. The public nature of litigation can also encourage a settlement because of the fear of public or reputational loss. Settlement can also result from mediation, the use of which is strongly encouraged by the judiciary.
Trends in the use of arbitration
Arbitration, however, remains a very popular method of dispute resolution, with many parties opting to include an arbitration clause in their contracts. The number of new dispute resolution cases handled by the HKIAC, including both arbitration and mediation, reached 521 in 2018. The total amount in dispute in cases administered by the HKIAC was about US$6.7 billion. The HKIAC’s caseload was largely international in nature with 71.7 per cent of new arbitration cases involving at least one non-Hong Kong party and 80.7 per cent of new administered arbitrations being international cases.
General features of arbitration in Hong Kong
The reasons for the increasing use of arbitration in Hong Kong are fairly straightforward to understand. Arbitration is increasingly familiar to users and popular where cross-border enforcement might be necessary. Parties are attracted by the fact that they have a say in choosing who will determine their dispute, rather than relying on an unknown person from a foreign, unfamiliar court to judge their case. They are often also attracted by the confidential, private nature of the arbitral process (after all, who wants to air their dirty laundry in public?). Arbitral institutions are increasingly addressing complaints over the time and costs of the arbitral process, and their arbitrators are keen to progress arbitrations economically and efficiently, leading to a more flexible, less formal, quicker and cheaper dispute resolution process.
GTDT: Discuss any notable recent or upcoming reforms or initiatives affecting court proceedings in your jurisdiction.
SP: The recent case of Tang Hanbo v The Securities and Futures Commission provides an interesting insight into the Securities and Futures Commission’s (SFC) increasingly close cooperation with the China Securities Regulatory Commission (CSRC) and illustrates the SFC’s power to share information with the CSRC and other regulators outside Hong Kong. Mr Tang Hanbo, a Chinese national residing in Hong Kong, sought to quash a search warrant obtained by the SFC from a magistrate in Hong Kong and the SFC’s subsequent decision to transmit materials seized during its search to the CSRC by way of judicial review. On 8 December 2017, the Hong Kong Court of First Instance refused Mr Tang’s judicial review application.
A new version of the HKIAC’s Administered Arbitration Rules came into effect on 1 November 2018, along with a Practice Note on the Appointment of Arbitrators.
Changes under the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016
In February 2017, the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 came into effect, making various changes to the Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Companies (Winding Up) Rules and modernising Hong Kong’s insolvency law in a number of ways that will be of use to liquidators and of benefit to creditors. These include increasing creditor protection by enabling a court to set aside transactions made at an undervalue prior to the commencement of a company’s winding-up (and not just transactions that are unfair preferences), simplifying the proceedings of committees of inspection and the procedures by which a solicitor is appointed by a liquidator, and improving the public examination procedures.
The Contracts (Rights of Third Parties) Ordinance
The Contracts (Rights of Third Parties) Ordinance came into effect on 1 January 2016, reforming the privity doctrine and establishing a new statutory regime on third-party rights in contractual relations. Going forward, in appropriate circumstances, third parties will be entitled to rely on the new legislation to enforce the terms of a contract where the contracting parties intend to create legal obligations enforceable by a third party.
The Companies (Amendment) (No. 2) Ordinance 2018
The Companies (Amendment) (No. 2) Ordinance 2018 came into effect on 1 February 2019, which amended the Companies Ordinance (Cap. 622) and its subsidiary legislation to clarify existing provisions and to further facilitate corporate activities in Hong Kong. Major revisions under the Amendment Ordinance include:
- streamlining corporate reporting obligations to facilitate compliance;
- enhancing accounting-related provisions to reflect the latest accounting standard; and
- modifying certain procedural and technical regulations concerning local and non-local companies.
GTDT: What have been the most significant recent trends in arbitral proceedings in your jurisdiction?
SP: The key trends relating to arbitral proceedings in Hong Kong involve the growing attempts to address the main complaints of users of arbitration services – the increasing cost and time involved in arbitral proceedings and the lack of transparency – and the numerous demonstrations of the Hong Kong courts’ staunchly pro-arbitration attitude.
Where the parties are of different nationalities, the HKIAC will not generally appoint a sole or presiding arbitrator of the same nationality as any of the parties, unless the parties agree otherwise.
A new version of the HKIAC’s Administered Arbitration Rules came into effect on 1 November 2018, along with a Practice Note on the Appointment of Arbitrators (as discussed below).
The major amendments to the prior version of the HKIAC’s Rules are as follow.
- Online delivery of documents: to allow for delivery of documents submitted in an arbitration through the use of a secured online repository upon all parties’ agreement.
- Use of alternative means of dispute settlement (for example, Arb-Med-Arb): to allow parties to pursue other means of dispute resolution after commencing an arbitration by temporarily suspending the arbitration, and to resume arbitration upon a party’s request.
- Early determination procedure: to empower an arbitral tribunal to determine a point of law or fact that is manifestly without merit or manifestly outside of the tribunal’s jurisdiction, or a point of law or fact that would not result in an award being rendered in favour of the party that submitted such point.
- Emergency arbitrator procedure: to allow parties to file applications for the appointment of emergency arbitrators before the commencement of an arbitration; further, all time limits under the Emergency Arbitrator Procedure have been shortened under the new rules.
- Time of delivering awards: arbitral tribunals are now required to notify the parties and the HKIAC of the anticipated date of delivering an arbitral award, which shall be within three months from the closure of the proceedings or relevant phase of the proceedings, unless agreed otherwise by the parties or extended by HKIAC.
- Expanded provisions for single arbitration under multiple contracts: to allow parties to commence a single arbitration under multiple contracts, even where there is no complete identity of the parties to each relevant contract.
- Concurrent proceedings: to enable arbitral tribunals to hear multiple proceedings at the same time, or one immediately after another, or suspend any of those proceedings until after the determination of any other of those proceedings, where a common question of law or fact arises in all the arbitrations (but the arbitrations have not been consolidated).
- Third-party funding: a funded party is required to disclose the existence of a funding agreement and the identity of the third-party funder; the confidentiality provisions are also amended to allow disclosure of information to a third-party funder.
HKIAC Practice Note on the Appointment of Arbitrators
In November 2018, the HKIAC Practice Note on the Appointment of Arbitrators came into effect. The Practice Note covers:
- the appointment process of arbitrators, including factors considered by the HKIAC when making an appointment;
- guidance as to the nationality of sole and presiding arbitrators (for example, where the parties are of different nationalities, the HKIAC will not generally appoint a sole or presiding arbitrator of the same nationality as any of the parties, unless the parties agree otherwise); and
- factors to enhance the diversity of qualified arbitrators (that is, the HKIAC will include, wherever possible, qualified female candidates and qualified candidates of any age, ethnic group, legal or cultural background among those it considers for arbitral appointments).
Launch of Panel of Arbitrators for Financial Services Disputes
In May 2018, the HKIAC launched a Panel of Arbitrators for Financial Services Disputes, which currently includes 30 members from approximately 20 jurisdictions. Panel members speak more than 10 languages and collectively offer experience in a wide range of disputes arising from the financial services sector including those in relation to structured financing, sovereign lending, forex trading, derivatives, asset management, and regulatory matters. Following its establishment, the panel will be the primary source for the HKIAC’s appointment of arbitrators for financial services cases, and has been welcomed by practitioners as a convenient source of candidates for parties and arbitrators to consider when constituting arbitral tribunals for cases arising from the financial services sector.
Court confirms right of appeal is limited under the Arbitration Ordinance
In March 2019, the Court of Appeal in Chun Wo v Housing Authority reiterated the high threshold for leave to appeal an arbitral award on a question of law in a domestic arbitration (there is no right of appeal on a point of law in an international arbitration). In dismissing the plaintiff’s application, the court confirmed that leave would only be granted if it can be demonstrated to the court, clearly, quickly and easily, without meticulous legal argument, that the decision is ‘obviously, or demonstrably, wrong’, or that the correctness of the decision is ‘seriously in doubt’. In the context of the construction of contracts, the court distinguished between ‘one-off’ contracts and ‘standard term’ contracts. One-off contracts are where the exact combination of words and phrases that fall to be construed has not only never been used before (and so does not possess an already established meaning that each party was entitled to assume the other knew when they entered into the contract), but is also unlikely to be used in the future by any other parties. In respect of standard term contracts, when contracts are entered into that incorporate standard terms, it is in the interests of justice and the conduct of commercial transactions alike that those standard terms should be construed and treated by arbitrators as giving rise to similar legal rights and obligations in all arbitrations in which the events giving rise to the dispute do not differ from one another in some relevant respect. It is only if parties to commercial contracts can rely upon a uniform construction being given to standard terms that they can prudently incorporate them in their contracts without the need for detailed negotiation or discussion.
The Court of Appeal reiterated the high threshold for leave to appeal an arbitral award on a question of law in a domestic arbitration.
When considering the meaning of these terms, the court noted that the Court of Final Appeal has held – in Swire Properties v Secretary for Justice – that: ‘Leave should not normally be given in “one-off” disputes unless the arbitral tribunal’s construction is “obviously wrong”; but leave can sometimes be given in ‘standard clause’ disputes as long as there is at least “a strong prima facie case” that the arbitral tribunal’s construction is wrong.’
Substantial security required to stay enforcement of an arbitral award
In a decision handed down in July 2018 in Baosteel Engineering & Technology Group Ltd v China Zenith Chemical Group Ltd, the Court of First Instance granted a temporary stay of enforcement of an arbitral award for six months but only on condition that the party seeking a stay of enforcement pay into court the entire amount of the award (approximately 19.8 million yuan) or provide a bank guarantee for such sum, failing which the application for stay of execution be discharged, again reinforcing the strongly pro-arbitration credentials of the Hong Kong courts, and the deference they give to the sanctity of arbitral awards.
Difficulty in proving locus does not render arbitration agreements incapable of being performed
In December 2018, the Court of Appeal held (in Chu Kong v Lau Wing Yan & Ors) that the question of whether a plaintiff or claimant had locus to bring arbitration proceedings derivatively on a company’s behalf fell within the bounds of the arbitration agreement between the parties and the fact that the plaintiff might have difficulty in showing locus did not render the arbitration agreement incapable of being performed.
Viewed in the light of the Hong Kong courts’ strongly pro-arbitration stance, the Court of Appeal’s decision in this case is not surprising. Taking issue with the locus of the plaintiff or claimant can be regarded as a challenge on the competence of the arbitral tribunal under the Arbitration Ordinance and section 34(1) of the Ordinance explicitly provides that the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.
Disputes over fees of solicitors held arbitrable
In Fung Hing Chiu Cyril v Henry Wai (a case reported in 2018 involving applications by the plaintiff for a declaration that an arbitration clause in their retainer agreement with the defendant firm of solicitors was void and that the arbitration proceedings instituted by the defendant be stayed, and a cross-application by the defendant to stay the court proceedings to arbitration pursuant to the arbitration clause), the court held that the arbitration clause in question was not null, void or inoperative on the ground of public policy and that there was nothing in the Arbitration Ordinance or the Legal Practitioners Ordinance to prevent a dispute over fees between a solicitor and a client from being referred to arbitration.
GTDT: What are the most significant recent developments in arbitration in your jurisdiction?
Intellectual property disputes
On 1 January 2018, the Hong Kong Arbitration (Amendment) Bill 2016 came into force, amending the Arbitration Ordinance (Cap. 609) to clarify that disputes over intellectual property rights may be resolved by arbitration.
In June 2017, the long-anticipated Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 was enacted, making various amendments to the Arbitration Ordinance (Cap. 609) and Mediation Ordinance (Cap. 620). The key provisions relating to third-party funding of arbitration and mediation came into force as of 1 February 2019, confirming that such funding is not prohibited by the common law tort and offence of maintenance and champerty. This represents a welcome liberalisation of the old regime under which third-party funding of arbitration and litigation constituted both a tort and a crime in Hong Kong. While third-party funding of litigation, save for certain narrow exceptions, remains prohibited in Hong Kong, third parties with no legitimate interest in the arbitration (as well as court proceedings under the Arbitration Ordinance) are now entitled to fund an arbitration, and share in the proceeds of an award or settlement. Arbitration funding can take the form of money or any other financial assistance, in relation to any costs of the arbitration and is not limited to professional funders. This means that lawyers and law firms can also be third-party funders subject to the limitation that lawyers and firms who act for any party in relation to the arbitration may not fund those proceedings.
While third-party funding of litigation, save for certain narrow exceptions, remains prohibited in Hong Kong, third parties with no legitimate interest in the arbitration are now entitled to fund an arbitration.
This reform allows parties to shift the financial risk of arbitration, as well as remove arbitration costs from their profit and loss statements and balance sheets. More broadly, the reform could potentially increase access to justice. As the Department of Justice has stated, enabling third parties to fund arbitration will ‘add to the attractiveness of Hong Kong as an international arbitration centre’. The arbitration community in Hong Kong has hailed the reform, with commentators noting the value of maintaining and promoting Hong Kong’s position as a leading arbitration centre. Some of the key provisions permitting the use of third party funding for arbitration are now in force, as of 1 February 2019.
Special arbitration clause for trust disputes
In December 2018, the ICC launched an updated version of its ICC Arbitration Clause for Trust Disputes, which is formulated as an agreement to be included in the initial trust instrument or in a deed of variation. It is intended to be binding on the settlor, initial trustees and power-holders once they have executed the trust instrument, and is binding on all others by virtue of having acted, or having claimed or accepted benefits, under the trust. The scope of the clause is limited to ‘internal disputes’, including among trustees, between trustees and power-holders, between trustees or power-holders and beneficiaries, or between beneficiaries themselves. External disputes brought by third parties who wish to challenge the validity of the trust are not covered.
While the courts will not mandate mediation, parties who are involved in legal proceedings before the Hong Kong courts are strongly incentivised to enter into the mediation process.
Given that trust matters have particular features and are often complex, involving multiple parties and differing fora, the updated clause is welcome as it provides the flexibility that is so often key in complex trust matters. As there are usually multiple parties involved in trust disputes it can be challenging to appoint the arbitral tribunal in the usual way, and so arbitral institutions such as the ICC can help in the process by appointing arbitrators. The arbitration clause may also assist in effecting the bringing proceedings in a single forum, rather than in multiple fora.
GTDT: How popular is ADR as an alternative to litigation and arbitration in your jurisdiction? What are the current ADR trends? Do particular commercial sectors prefer or avoid ADR? Why?
SP: Ever since the implementation of the Civil Justice Reform in Hong Kong in 2009, the judiciary in Hong Kong has shown itself to be extremely supportive of mediation, and encourages parties to attempt to use mediation to resolve their disputes. While the courts will not mandate mediation, parties who are involved in legal proceedings before the Hong Kong courts are strongly incentivised to enter into the mediation process because of the adverse costs consequences that a court might visit on a party who has unreasonably refused to attempt to resolve its dispute by mediation.
The use of mediation is also particularly popular in certain industries; for example, in the construction industry, mediation is typically used in the standard form of building contract and in Hong Kong government construction projects.
The Inside Track
What is the most interesting dispute you have worked on recently and why?
For a number of reasons – the use of strategy to achieve a commercial goal, the urgency of the application for relief and the satisfaction of a job well done – one of the most interesting disputes we worked on recently was the China Kingstone case, a shareholder dispute. We represented the majority shareholder, Wongs Investment Development Holdings Group Limited (through Wongs’ liquidators, partners of PwC), in a battle with a minority shareholder, who (very unusually for a minority) controlled the board of a Chinese mining company, China Kingstone Mining Holdings Limited, which was listed on the Hong Kong Stock Exchange. The dispute involved a number of court skirmishes over the ownership and control of China Kingstone. The board of the company had undertaken a series of actions that were unfairly prejudicial to the majority shareholder, including attempts to dilute the shareholding of the majority shareholder (so that it would lose its majority stake) and to entrench the rights of the existing board. Through a series of urgent injunction applications (seven in total) we succeeded in thwarting those efforts, assisting the liquidators in retaining its majority shareholding in the listed company and, ultimately, selling the majority stake to monetise its assets for the benefit of Wongs’ creditors.
Describe the approach adopted by the courts in your jurisdiction towards contractual interpretation: are the courts faithful to the actual words used, or do they seek to attribute a meaning that they believe the parties actually intended?
In recent times, there has been a fundamental change in the approach that the common law takes in construing commercial contracts. We have moved away from a purely literal interpretation to one where contracts are understood and construed against their context so as to give effect to their true, underlying commercial purpose. Indeed, the overriding objective in construction is to give effect to what a reasonable person rather than an exacting lawyer would have understood the parties to mean. In Fully Profit (Asia) Ltd v Secretary for Justice, Chief Justice Ma emphasised the overall importance of context when construing contractual terms. He noted that ‘it is . . . not particularly helpful in most cases to refer to the “ordinary and natural meaning” of words because, as very often experience tells us, there can be much debate over exactly what is the ordinary or natural meaning of words. The surer guide to interpretation is context.’ Put shortly, Hong Kong courts aim to discover the commercial purpose behind the contract, and eschew an overly literalist approach that might defeat the parties’ intention.
What piece of practical advice would you give to a potential claimant or defendant when a dispute is pending?
Recognising that the actions parties take at the very beginning of a dispute – even prior to the initiation of a formal dispute resolution process – can significantly affect, and potentially compromise, their legal rights, I would always advise parties to seek counsel from experienced litigation or disputes counsel from the very outset. Those parties who manage their disputes in this way are likely to find that the costs they incur at the very beginning of the process (where a quick settlement might even be reached before parties become too entrenched in their respective positions, but if not, at least the risks can be managed more effectively) will be money well spent, and will minimise costs in the longer run.