“Hong Kong courts: pro-arbitration in principle and in practice” – Nick Gall and Ashima Sood contribute the Hong Kong chapter for Practical Law’s Dispute Resolution Global Guide
The Dispute Resolution Global Guide provides practical analysis of topical cross-border issues and country-specific Q&A guides on dispute resolution law and practice worldwide. The Q&A guide aims to give a structured overview of the key practical issues including, for example, court procedures, fees and funding, interim remedies (including attachment orders), disclosure, expert evidence, appeals, class actions, enforcement of judgments, cross-border issues and the use of ADR.
Hong Kong courts: pro-arbitration in principle and in practice
This article considers the pro-arbitration approach of courts in Hong Kong, in the context of two recent cases,Shanghai Fusheng Soya-Food Co, Ltd & Another v Pulmuone Holdings Co Ltd HCCT 48/2012 and Astro Nusantara International BV v PT First Media TBK HCCT 45 of 2010. It also considers other significant initiatives and developments in the arbitration regime, such as the recent updating of the administrative procedures for UNCITRAL cases in Hong Kong.
- Recent case law concerning applications to set aside and enforce arbitral awards
- Shanghai Fusheng Soya-Food Co, Ltd & Another v Pulmuone Holdings Co Ltd HCCT 48/2012 decided on 25 April 2014 by the Honourable Madam Justice Mimmie Chan
- Astro Nusantara International BV v PT First Media TBK HCCT 45 of 2010 decided on 17 February 2015 by the Honourable Mr Justice Chow
- Other significant initiatives and developments in the arbitration regime
- Contributor details
- Nick Gall, Senior Partner & Head of Litigation
The pro-arbitration approach of Hong Kong courts is one of the key attributes that underpins Hong Kong’s position as an attractive venue for commercial dispute resolution. The judiciary maintains a policy of minimal intervention and routinely supports the arbitral regime by upholding its independence and finality.
Due to the rapid economic growth in the markets and a surge in cross-border transactions, arbitration users across the globe are demanding a robust regulatory framework and a judicial climate that is pro-arbitration. Hong Kong has been successful in recognising these demands both in principle as well as in practice.
This article considers:
- Two recent judgments which emphasise the strong support that the Hong Kong courts provide to the arbitration process.
- Other important developments in the arbitration regime in Hong Kong.
Recent case law concerning applications to set aside and enforce arbitral awards
The two judgments discussed below reflect the progressive approach of the Hong Kong judiciary, in that they place a strong emphasis on the limited supervisory role that the courts play in any arbitral process and assure parties that enforcement will not be refused, except in very limited circumstances.
Shanghai Fusheng Soya-Food Co, Ltd & Another v Pulmuone Holdings Co Ltd HCCT 48/2012 decided on 25 April 2014 by the Honourable Madam Justice Mimmie Chan
In this case, the application of Shanghai Fusheng Soya-Food Co Ltd (SFS) to set aside a domestic arbitration award in favour of Pulmuone Holdings Co Ltd (Pulmuone) on the grounds of public policy and res judicata was dismissed by the Hong Kong Court of First Instance.
Background. The underlying dispute arose under a joint venture agreement between SFS and Pulmuone that was governed by the Law of the People’s Republic of China and provided for all disputes to be arbitrated in Hong Kong.
In May 2010, Pulmuone (on behalf of the joint venture company), sued SFS in Shanghai for misappropriating the funds of the joint venture company.
Subsequently, Pulmuone, in its capacity as a shareholder of the joint venture company, initiated arbitral proceedings against SFS under the International Chamber of Commerce (ICC) in Hong Kong, alleging a repudiatory breach of the joint venture agreement and seeking the dissolution of the joint venture company and damages.
SFS denied the claims made by Pulmuone and asserted that it was Pulmuone who had, in fact, acted in breach of the joint-venture agreement and accordingly, counterclaimed for damages.
On 11 August 2012, the ICC tribunal rendered an award in Pulmuone’s favour, which SFS subsequently sought to set aside on the following grounds:
- The award had failed to take note of the judgment handed down by the Shanghai court, which was partially in favour of SFS (as it held that SFS had only misappropriated 10% of the total amount claimed by the Pulmuone). This was despite SFS’s attempt to bring the judgment to the attention of the ICC tribunal ”to avoid any inconsistency”.
- Re-litigation (by way of arbitration) on the same issues was contrary to the public policy of Hong Kong (section 81, Arbitration Ordinance (Cap. 609)). Cap 609 essentially gives effect to Article 34 of the UNCITRAL Model Law on International Commercial Arbitration 1985 (UNCITRAL Model Arbitration Law) and provides that the court can set aside an arbitral award if it finds that the award is ”in conflict with the public policy” of the state.
- Res judicata estoppel including issue estoppel was applicable since Pulmuone was litigating in court on behalf of the joint venture company and had also commenced arbitral proceedings as a shareholder.
Decision. In her judgment handed down on 25 April 2014, the Honourable Madam Justice Mimmie Chan dismissed SFS’s application and ordered costs in favour of Pulmuone on an indemnity basis.
Chan J began by considering the public policy ground and held that there was nothing offensive to the notions of justice and morality in permitting Pulmuone to enforce the award. Citing Qinhuangdao Tongda Enterprise Development  1 HKLR 173 and Hebei Import & Export Corp v Polytech Engineering Co Ltd  2 HKCFAR 111 and A v R (Arbitration: Enforcement)  3 HKLRD 389, which emphasised the restrictive scope of the term ‘”contrary to public policy'”, Chan J held (at paragraph 39 of the judgment) that:
”…this is not a case which cries out for setting aside the award on the ground that it is an affront to the administration of justice, or that to enforce the award would be to violate the most basic notions of morality and justice of the Hong Kong Court. There is no serious breach which has undermined due process, the applicants had a fair opportunity to present their case on all the issues raised in the arbitration, and I can find no injustice caused to the applicants as a result of the existence or effect of the judgment”.
Chan J specifically relied on the judgment in Grand Pacific Holdings Ltd v Pacific China Holdings Limited (in liq) (No 1)  4 HKLRD 1 where the Court of Appeal made it clear that for setting aside an arbitral award under Article 34 of the Model Law, the court will only consider the public policy objection in terms of the structural integrity of the arbitration proceedings and not the substantive merits of the dispute or the correctness of the award.
Regarding the issue of res judicata, Chan J analysed the substance of the issues in the court action and the arbitration proceedings. Rejecting SFS’s argument that there were overlapping issues in the two proceedings, Chan J held that the issues were distinct and therefore the ground of issue estoppel had not been established. Chan J also noted that SFS had participated in both the court action as well as the arbitration proceedings and had been given ample opportunity to make all the relevant submissions before the ICC tribunal.
Key points. This decision reinforces the following key points:
- The public policy ground is one of the most popular weapons in international arbitrations to resist enforcement of arbitral awards. It is a nebulous concept as it varies from one country to another. The above decision is a good example of Hong Kong’s approach to public policy. It demonstrates the pro-enforcement bias of Hong Kong courts and assures commercial parties that an arbitral award will generally not be set aside based on this ground.
- The case also serves as a warning to parties that indemnity costs will follow in the event of an unmeritorious attempt to resist enforcement in Hong Kong.
- Parties must raise all the issues prior to the close of arbitral proceedings. The reason why the ICC tribunal did not consider the judgment of the Shanghai court was because it had already declared the arbitral proceedings closed. On this issue, however, Chan J made it clear that the judgment would not have materially impacted the award, even if the ICC tribunal had considered it.
Astro Nusantara International BV v PT First Media TBK HCCT 45 of 2010 decided on 17 February 2015 by the Honourable Mr Justice Chow
This is another seminal case highlighting the pro-enforcement approach of the judiciary in Hong Kong. The dispute in this case arose under a proposed satellite television joint venture between companies of Astro Group (Astro), a Malaysian media group, and an Indonesian conglomerate, the Lippo Group (Lippo) (including PT First Media TBK (First Media)), which provided for all disputes under the joint venture to be referred to the Singapore International Arbitration Centre (SIAC).
First Media’s application to set aside orders granting leave to Astro to enforce five arbitration awards was dismissed by the Hong Kong Court of First Instance in February this year. Before considering the issues in this case, it is necessary to understand the factual background preceding the judgment. There are two proceedings to consider: the initial arbitration in Singapore and the enforcement proceedings carried out in that jurisdiction to enforce the award, and the enforcement proceedings in Hong Kong.
Proceedings in Singapore. In an arbitration commenced against Lippo (including First Media), Astro sought to add some of its related entities (that were not parties to the relevant subscription and shareholders’ agreement containing the arbitration agreement but had provided funds and services to the proposed joint venture) as co-claimants.
At the preliminary hearing, the tribunal ruled that it had the power to join the additional parties to the arbitration and rendered four other awards, including an interim final award on merits, which required First Media to pay various sums to the additional parties and a comparatively smaller sum to Astro.
The Singapore High Court granted leave to enforce the five awards. First Media did not apply to set aside the enforcement orders within the time prescribed and therefore Astro entered judgments in Singapore on the awards.
First Media then applied to set aside the judgments and the enforcement orders by challenging the jurisdiction of the tribunal to add the additional parties. The application was dismissed by the Singapore High Court on the ground that it was made out of time.
In October 2013, on an appeal by First Media, the Singapore Court of Appeal overturned the decision of the Singapore High Court and held that the tribunal did not have the necessary powers under the SIAC rules to join the parties and accordingly, the awards were unenforceable by such parties. The Singapore Court of Appeal also considered the active and passive choice of remedies available to parties challenging an arbitral award on the jurisdiction ground and ruled that a party that sought to challenge a preliminary ruling but did not seek to set aside the award could, as an alternative, passively rely on this defence at the enforcement stage.
Proceedings in Hong Kong. In 2010, the Hong Kong Court of First Instance granted leave to Astro to enforce the awards as judgments and directed First Media to apply to set aside the orders of the Court within 14 days of service. No application had been made to set aside the Hong Kong orders and therefore judgment was entered in Hong Kong against First Media.
First Media did not take any steps to resist the enforcement of the awards as it believed that it did not have any assets in Hong Kong against which the awards could be enforced.
In July 2011, however, Astro obtained a garnishee order to attach a debt due to First Media from a majority shareholder. First Media subsequently made two applications to the High Court of Hong Kong seeking:
- An extension of time to set aside two court orders made by the Honourable Mr Justice Saunders in August and September 2010 granting leave to Astro to enforce five arbitration awards against First Media.
- To set aside these court orders.
The key issues before the Hong Kong Court of First Instance were:
- Whether there were valid grounds for granting an extension of time to apply to set aside the Hong Kong court orders, 14 months after the expiry of the prescribed period.
- Whether First Media should not be permitted to resist enforcement of the awards on the principle of good faith as First Media did not challenge the tribunal’s preliminary ruling on jurisdiction and instead sought to defend its claims on the merits in the arbitration.
- Whether a Hong Kong court was bound by the decision of the Singapore Court of Appeal, which was the enforcing court.
Decision. The Honourable Mr Justice Chow held that First Media was not entitled to an extension and dismissed the setting aside application, citing the following reasons:
- First Media’s application to set aside the orders for enforcement was made 14 months out of time. Chow J. stated that he was not prepared to exercise his discretion to extend the time for First Media’s application given that:
- the delay was substantial and a result of First Media’s tactical decision to not resist enforcement in Hong Kong; and
- the awards had not been set aside and were valid and binding on First Media.
- First Media’s failure to challenge the tribunal’s preliminary ruling on jurisdiction amounted to a breach of the principle of good faith. Relying on China Nanhai Oil Joint Service Corporation Shenzhen Branch v Gee Tai Holdings Co Ltd  3 HKC 375 and Hebei Import & Export Corp v Polyteck Engineering Co Ltd  2 HKCFAR 111, Chow J stated that he had the discretion to refuse enforcement if the party’s conduct was found to be in breach of good faith. Applying the authorities, Chow J concluded at paragraph 91 of the judgment: ”it seems clear that what First Media decided to do was 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. The fact that First Media did raise the objection with the Tribunal should not, in my view, make any difference having regard to its subsequent conduct [during the arbitration]…. First Media should not be permitted to rely on s 44(2) of the Ordinance to resist enforcement of the awards because it has acted in breach of the good faith, or bona fide, principle”.
- The Singapore Court of Appeal’s decision was final and conclusive as to whether the tribunal had jurisdiction to join the other parties into the arbitration.
The Court of First Instance accepted that the tribunal had no jurisdiction over the award-creditors. However, in light of First Media’s conduct in breach of good faith, the Court exercised its discretion in precluding First Media to prove any grounds for refusing enforcement under section 44 of the Arbitration Ordinance. The Court also made a costs order nisi in favour of Astro.
Key points. This decision is presently subject to appeal but it follows from the case that:
- An award debtor must immediately apply to resist enforcement in Hong Kong.
- The fact that an arbitral award has been refused enforcement by a court in another jurisdiction is not a ground for resisting enforcement under the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.
- For the time being, parties contemplating the choice of remedies must carefully examine the implications in Hong Kong. In Hong Kong seated arbitrations, parties are usually free to choose between the active and passive remedies, setting aside the award within the prescribed time limits or waiting to oppose enforcement. Given this choice, it is unclear as to when exactly the exercise of such choice would result in breach of good faith. It shows that parties will be sanctioned for attempting an end-run around enforcement and such strategic moves will not be rewarded.
Other significant initiatives and developments in the arbitration regime
Some significant changes have been brought about in the arbitration regime in Hong Kong this year, particularly with a view to align Hong Kong practices with international standards.
The beginning of this year saw the Hong Kong International Arbitration Centre (HKIAC) updating the administration procedures for UNCITRAL cases, bringing them in line with all versions of the UNCITRAL Rules (the 1976 and 2010 versions). HKIAC has also revised its model arbitration clause to provide an express choice of law to govern the arbitration agreement.
Another noteworthy change includes codification of procedures for challenging an arbitrator under a range of rules into one streamlined system.
In a move to further enhance its position as an international arbitration centre, Hong Kong has signed an agreement with the Permanent Court of Arbitration (PCA), pursuant to which PCA-administered proceedings can be conducted in Hong Kong on an ad-hoc basis.
Besides, the opt-in provisions for domestic arbitration are likely to undergo considerable changes, once the Hong Kong Arbitration (Amendment) Bill 2015 comes into force.
Forward-looking reforms such as these, the unobtrusive support of the judiciary and the positive trend of enforcement of awards reinforce Hong Kong’s position as one of the most preferred and comforting forums for international commercial dispute resolution.
Nick Gall, Senior Partner & Head of Litigation