2024 mid-year arbitration round-up: upholding the integrity of arbitration in Hong Kong

Edward Liu (Partner), Vinca Yau and Lori Ng (Senior Associates), Richard Poon and Aaron Lai (Associates), all members of the dispute resolution team at Haiwen & Partners LLP

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Introduction

In the rapidly evolving landscape of international commercial arbitration, the Hong Kong courts have played a pivotal role in upholding the integrity and finality of arbitral awards. This comprehensive half-year review examines a series of recent decisions that showcase the Hong Kong judiciary's nuanced approach to balancing the autonomy of the arbitral process with the need to address substantive issues of public policy and procedural irregularities.

The cases discussed in this article highlight the Hong Kong courts' commitment to reinforcing the city's reputation as a leading global hub for international commercial arbitration. By carefully navigating the complex interplay between arbitration and related legal frameworks, such as insolvency proceedings and multi-contract disputes, the courts have demonstrated a steadfast dedication to preserving the sanctity of the arbitral process while ensuring alignment with evolving legal standards and public policy considerations.

This review underscores the Hong Kong courts' unwavering support for the arbitral process, their reluctance to interfere with the arbitrators' expertise and decisions, and their recognition of the importance of party autonomy. The decisions analysed herein provide valuable insights for practitioners and commercial parties alike, as they navigate the ever-changing landscape of international arbitration.

Navigating the complexities of re-arbitration: upholding the integrity of arbitral awards

In the dynamic landscape of commercial dispute resolution, the concept of re-arbitration has become increasingly significant, presenting both challenges and opportunities for parties seeking to address perceived defects or mistakes in the original arbitral award. A series of recent cases in Hong Kong - for example G v X and Others and G v N - showcase the Hong Kong courts' nuanced approach to balancing the finality of arbitration with the need to ensure procedural integrity and alignment with public policy.

The case of G v X and Others [2023] HKCFI 3316 involved a complex arbitration dispute between G, a Hong Kong-based investment firm, and X, a Chinese technology company, over the sale of interests in a Chinese online music company. The initial 2021 arbitration award had favoured G, finding X liable to pay substantial damages for breaching the sale agreement. However, shortly after the award was rendered, X sought to set aside the award in the Mainland Chinese courts, alleging various procedural irregularities in the arbitration proceedings.

While the Mainland setting aside application was pending, G initiated enforcement proceedings in Hong Kong, which were initially adjourned by the Hong Kong court to await the outcome of the Mainland court proceedings. Subsequently, the Mainland courts ordered a re-arbitration, citing procedural issues with the initial arbitration, but limited the scope of the re-arbitration to focus solely on specific evidential matters. The re-arbitration tribunal ultimately upheld X's liability to pay the same substantial damages as in the original award.

When the enforcement proceedings resumed in Hong Kong, the court upheld G's application and ordered X to pay indemnity costs. The Hong Kong court emphasised its pro-arbitration stance, holding that the original award remained valid under Mainland law, as the setting aside proceedings had been terminated. The court further highlighted that the scope of the re-arbitration was limited to the evidential issue, and the new award did not alter the original findings on damages. By prioritising the finality and efficiency of the arbitration process, the court reaffirmed the integrity of arbitration decisions, signalling a commitment to enforcing awards unless substantial legal grounds dictate otherwise.

The dynamic between illegality defences and public policy considerations in arbitration was further explored in the cases of G v N [2023] HKCFI 3366 and the subsequent appeal in G v N [2024] HKCFI 655. The dispute arose from a securities purchase agreement (SPA) between G and N, a BVI-registered company, where the validity of the SPA was challenged in the British Virgin Islands courts by one of N's shareholders. The shareholder argued that the share allocation under the SPA was contrary to the company's interests.

Following the BVI judgment, G initiated arbitration in Hong Kong, seeking restitution of the funds paid under the allegedly invalid SPA. N countered with claims of illegality concerning the SPA and raised defences such as unclean hands. The arbitrator initially dismissed G's claims and upheld N's counterclaim for damages.

When G sought to set aside the arbitral awards, the Hong Kong court held that the matter should be remitted to the arbitrator under article 34(4) of the UNCITRAL Model Law. This was to allow the arbitrator to reassess the implications of the recent Hong Kong Court of Appeal decision in Monat Investment Ltd v All Person(s) In Occupation of Part of The Remaining Portion of Lot No 591 in Mui Wo DD 4 No 16 Ma Po Tsuen, Mui Wo, Lantau Island [2023] HKCA 479, which had revised the test of illegality in line with the UK Supreme Court's decision in Patel v Mirza [2016] UKSC 42; [2016] 2 Lloyd's Rep 300; [2016] Lloyd's Rep FC 435.

The court's approach in G v N [2024] HKCFI 655 further clarified the delicate balance between supporting arbitral awards and minimising court intervention on public policy grounds. The Court of Appeal emphasised the importance of maintaining the integrity of arbitral awards while also considering public policy implications, cautioning against the use of public policy as a basis for a substantive review of awards, especially where the tribunal's assessment of illegality is contested.

The Hong Kong courts' commitment to respecting the arbitral process and reducing judicial intervention is further exemplified in G v N [2024] HKCFI 721. In this case, the court upheld the enforcement of an interim order issued by the arbitral tribunal, directing the claimant (G) to take steps to dismiss parallel court proceedings in Mainland China. The court's analysis clearly distinguished the interim order from a final award, recognising the tribunal's discretion in granting such measures to safeguard the ongoing arbitration, and underscoring the courts' deference to the arbitrators' procedural decisions.

Collectively, these cases underscore the Hong Kong courts' unwavering support for the arbitral process, striking a careful balance between upholding the finality and integrity of awards and allowing for limited intervention to address substantive issues of public policy or clear procedural irregularities.

This approach reinforces Hong Kong's position as a premier hub for international commercial arbitration, where the autonomy of the arbitral process is guarded while ensuring alignment with evolving legal frameworks and public policy considerations. The courts have demonstrated a willingness to remit matters back to the arbitrators for further assessment, rather than immediately overturning awards, showcasing their reluctance to interfere with the arbitrators' expertise and decisions.

Furthermore, the courts have distinguished between final awards and interim orders, granting the arbitral tribunal significant discretion in issuing procedural measures to safeguard the ongoing arbitration. The stringent framework for enforcing interim orders, with limited grounds for refusal and no avenue for appeal, underscores the courts' deference to the arbitrators' procedural decisions.

This careful balance struck by the Hong Kong courts is crucial in upholding the integrity and finality of the arbitral process, while also ensuring that public policy considerations and evolving legal standards are properly addressed. By adopting this nuanced approach, Hong Kong solidifies its reputation as a leading jurisdiction for international commercial arbitration, where the courts play a supportive role in facilitating fair and efficient dispute resolution.

Navigating the complexity of multi-contract disputes: determining the proper forum

The Hong Kong Court of First Instance's decision in AAA and Others v DDD [2024] HKCFI 513 highlights the intricate challenges that can arise when parties to a commercial transaction have executed multiple related agreements, each with its own dispute resolution clause. This case underscores the importance of carefully navigating the jurisdictional landscape when claims span across different contractual instruments.

The dispute involved a loan arrangement between the borrower (AAA) and the lender (DDD), with BBB and CCC acting as guarantors. The parties had executed various documents, including a loan agreement, an amended loan agreement, share charge agreements, a pledge, and a promissory note. While the majority of these documents did not contain any dispute resolution clause, the loan agreement and the promissory note each had their own arbitration or dispute resolution provisions.

When a default occurred under the promissory note, the tribunal appointed by the Hong Kong International Arbitration Centre (HKIAC) determined that it had jurisdiction over the claims. However, the Hong Kong court disagreed, identifying three distinct paradigms of conflicting dispute resolution clauses in related agreements:

(1) The basic paradigm: a single contract with two or more dispute resolution clauses.

(2) The intermediate paradigm: multiple related contracts with only one dispute resolution clause in one of the contracts.

(3) The generalised paradigm: multiple related contracts with two or more dispute resolution clauses.

The court noted that in the basic paradigm, the presumption is that the parties intended to resolve all disputes in a single forum, absent a clear contrary intention. In the intermediate paradigm, the presumption is that the parties intended for all disputes arising out of the package of contracts to be resolved under the dispute resolution clause in the one contract that contains it.

However, in the generalised paradigm, which was the case at hand, the court emphasised the need to apply the "centre of gravity" approach, as outlined in the English case of Trust Risk Group SpA v AmTrust Europe Ltd [2015] EWCA Civ 437; [2015] 2 Lloyd's Rep 154. This approach requires a careful mapping of each dispute resolution clause to determine which one is more closely connected to the specific issue at hand, rather than assuming a single forum for all disputes.

The Hong Kong court ultimately concluded that the dispute arising from the promissory note fell outside the scope of the tribunal's jurisdiction, as it should be resolved under the dispute resolution clause within the promissory note itself.

This decision highlights the nuanced and contextual approach that courts must take when dealing with multi-contract disputes and conflicting dispute resolution clauses. It underscores the importance for parties to carefully consider the implications of including different dispute resolution mechanisms in their suite of related agreements, and the potential challenges that may arise in determining the proper forum for resolving their disputes.

By providing clear guidance on the various paradigms and the application of the "centre of gravity" principle, the Hong Kong court has offered valuable insights to commercial parties and legal practitioners navigating the complexities of multi-contract dispute resolution. This approach reinforces Hong Kong's position as a leading jurisdiction for the effective resolution of international commercial disputes, where the courts are attuned to the unique challenges presented by modern, complex commercial arrangements.

Maintaining integrity in arbitration: Hong Kong courts carefully balance deference and due process

Recent decisions of the Hong Kong courts demonstrate a nuanced approach to reviewing arbitral awards, underscoring the delicate balance between respecting the autonomy of the arbitral process and ensuring adherence to the principles of due process.

In the case of CNG v G and Another [2024] HKCFI 575, the dispute arose from a shares subscription and purchase agreement (SHA). The respondents claimed that CNG had breached the SHA, and the arbitral tribunal issued a first partial award in favour of the respondents. CNG sought to set aside the award on the grounds of its inability to present its case, the arbitral procedure not being in accordance with the parties' agreement, the award dealing with disputes beyond the scope of submission, and the award being in conflict with public policy.

The Hong Kong court firmly rejected CNG's attempts, emphasising the principle of minimal intervention in reviewing arbitral decisions. The court reiterated that it does not sit as an appellate body to review the arbitrators' findings of fact or law, and will only intervene when there is an apparent breach of natural justice or a clear indication that the tribunal failed to address key issues. The court found that CNG had been given a "reasonable opportunity" to present its case and that the tribunal's reasoning was coherent and adequately explained.

Similarly, in X and Another v Z Co [2024] HKCFI 695, the dispute concerned the alleged failure of X and Y to complete the purchase of shares after Z had exercised an exit right pursuant to a share subscription and purchase agreement (SPA). The respondents (X and Y) sought to set aside the final arbitral award in favour of Z, claiming their inability to present their case and alleging that the arbitral procedure was not conducted in accordance with the parties' agreement.

The Hong Kong court again firmly rejected the respondents' attempts, emphasising the well-established legal principles regarding the review of arbitral decisions. The court reiterated the narrow grounds for refusing the enforcement of an award, stating that only conduct that is sufficiently serious or egregious to amount to a denial of due process would warrant an order to set aside or refuse enforcement. The court also stressed the importance of a generous interpretation of arbitral awards, expecting no substantial faults that can be found with them.

The Hong Kong courts have also demonstrated a willingness to balance deference to the tribunal's decision-making with the need to ensure adherence to the principles of due process. In AAB v BBA and Another [2024] HKCFI 699 the underlying dispute concerned a share transfer claim against AAB. AAB sought to set aside the tribunal's second partial final award on three grounds: (i) lack of reasoning; (ii) lack of due process in the conduct of the arbitration; and (iii) failure to address an issue.

The Hong Kong court carefully considered each of AAB's grounds. Regarding the lack of reasoning, the court emphasised that a well-reasoned award does not need to be overly detailed, as long as it allows the parties to understand the basis for the arbitrator's material findings. The court also reiterated that the mere presence of terse or succinct reasoning is not a ground for criticism, as it reflects the diversity of arbitrators' styles.

On the issue of due process, the court reminded that parties must be given a "reasonable opportunity" to present their case, not a "full opportunity", and found that AAB's passive attitude during the proceedings amounted to a waiver of its right to object to the procedural timetable. As for the failure to address an issue, the court acknowledged the oversight but emphasised that a tribunal is allowed to deal with issues compositely and is not required to address every argument raised by the parties.

Ultimately, the court remitted the outstanding issue back to the tribunal for determination, suspending the set-aside proceedings for three months, rather than setting aside the award at the first instance.

Similarly, in A v B and Others [2024] HKCFI 751 the dispute arose from license agreements between the applicant A and a licensee B, with the respondents acting as guarantors C and D. A sought damages and an injunction against C and D, and the arbitral award was issued in favour of A.

The respondents sought to set aside the award, claiming that the arbitrator failed to provide any reasons for her decisions. The Hong Kong court carefully examined the arbitrator's reasoning and found that the arbitrator had clearly failed to provide sufficient reasons on key issues, such as the choice of governing law for the non-compete covenant and the rejection of the respondents' proposed date of termination for the damages calculation. Accordingly, the court proceeded to set aside the enforcement order.

The Hong Kong courts have also demonstrated their willingness to manage set-aside applications in a manner that preserves the integrity of the arbitral process. In SA and Others v BH and Another [2024] HKCFI 1357, the dispute arose from a joint venture between the plaintiffs (a Dutch company and two US residents) and the first defendant (a BVI company) regarding the development of a communication satellite. The plaintiffs applied to set aside an interim award in favour of the first defendant, raising three grounds, including national security concerns.

In response, the first defendant applied for security for costs against the plaintiffs in the set-aside application. The Hong Kong court carefully considered the plaintiffs' arguments against the court's jurisdiction to grant the security for costs order, ultimately rejecting their claims. The court found that the plaintiffs' shares in the second defendant company were not readily realisable assets in Hong Kong and that the plaintiffs' conduct during the arbitration proceedings, including their failure to comply with prior costs orders in other jurisdictions, justified the order for security for costs.

The Hong Kong courts' emphasis on preserving party autonomy is further exemplified in the case of SYL and Another v GIF [2024] HKCFI 1324. The dispute arose from a loan agreement and two security deeds entered into between the plaintiffs and the defendant. The defendant commenced a single arbitration under the HKIAC Administered Arbitration Rules 2018, seeking to consolidate the disputes under the various agreements.

The plaintiffs challenged the tribunal's jurisdiction, arguing that the arbitration agreements were incompatible and that the composition of the tribunal was defective, as it did not align with the parties' agreed appointment mechanism. The Hong Kong court carefully examined the various arbitration agreements and the challenges raised by the plaintiffs.

The court acknowledged the potential for multiple interpretations of the phrase "mutatis mutandis" in the arbitration agreements of the security deeds but placed greater emphasis on the parties' fundamental right to determine the constitution of the tribunal, as enshrined in the arbitration agreements. The court held that forcing the parties to accept a unilateral decision on the appointment mechanism would be against their autonomy. Ultimately, the Hong Kong court disagreed with the tribunal, finding that it lacked jurisdiction.

The recent decisions of the Hong Kong courts demonstrate a robust and nuanced approach to the review of arbitral awards. The courts have consistently upheld the finality of arbitral awards, while providing guidance on the limited grounds for intervention and the importance of party autonomy.

By carefully balancing deference to the tribunal's decision-making with the need to ensure adherence to the principles of due process, the Hong Kong courts have reinforced the city's reputation as a leading jurisdiction for international commercial arbitration. The courts' willingness to remit outstanding issues back to the tribunal, their emphasis on the quality of the tribunal's reasoning, and their proactive measures to manage set-aside applications all contribute to the overall integrity and credibility of the arbitral process in Hong Kong.

These judgments send a strog message to arbitration users and practitioners that the Hong Kong courts are committed to preserving the autonomy and finality of the arbitral process, while ensuring that fundamental principles of due process are upheld. This delicate balance, struck by the Hong Kong courts, solidifies the city's position as a premier destination for international commercial arbitration.

Preserving access to justice: Hong Kong courts reject security for costs in anti-recognition applications

In the face of growing efforts to challenge the enforcement of arbitral awards, the Hong Kong court has taken a firm stance in safeguarding the fundamental right of access to justice for award debtors. In a recent decision of AAD and Another v BBF [2024] HKCFI 698, the court has rejected the imposition of onerous conditions, such as security for costs and Hadkinson Orders, in anti-recognition applications, striking a careful balance between the interests of award creditors and debtors.

The dispute arose from a commercial relationship between the claimants, which included a Mainland Chinese and a Hong Kong company, and the respondent, a Mainland Chinese company. After the claimants supplied machines to the respondent, the respondent decided to manufacture its own machines instead of continuing to purchase them. This led to an arbitration administered by the HKIAC, in which the tribunal found in favour of the claimants on liability.

Following the unsuccessful attempt by the respondent to set aside the award, the tribunal issued a quantum award in favour of the claimants. The claimants then sought a recognition order of the quantum award, prompting the respondent to file an application against the recognition and enforcement of the award (the "Anti-Recognition Application") and seek a stay of execution of the recognition order.

In response, the claimants applied for security for costs against the Anti-Recognition Application, including a Hadkinson Order that would dismiss the Anti-Recognition Application if the respondent failed to comply with the security for costs order.

The Hong Kong court firmly rejected the claimants' application, emphasising the fundamental right of access to justice for award debtors. The court stated that it is generally against the position of the Hong Kong court to impose security as a condition for a party opposing the enforcement of an award, as this right is entitled to the award debtor and should not be deprived easily, unless in special circumstances.

The court also found that the claimants failed to demonstrate that a Hadkinson Order should be issued in the current circumstances, as the respondent's previous non-compliance with a costs order did not constitute the type of contempt of court or contumelious conduct typically required for such an order.

Furthermore, the court noted that even if a Hadkinson Order were issued, the respondent could still choose to disobey it, which would only cause the Anti-Recognition Application to remain in limbo and delay the enforcement of the quantum award. The court emphasised that the correct approach for the claimants was to seek a quick resolution of the Anti-Recognition Application, rather than pursuing the security for costs and Hadkinson Order.

The Hong Kong court's decision in this matter underscores its commitment to preserving the fundamental right of access to justice for award debtors, even in the face of enforcement challenges. By rejecting the claimants' application for security for costs and a Hadkinson Order, the court has sent a clear message that it will not easily deprive award debtors of their right to oppose the recognition and enforcement of arbitral awards, unless there are exceptional circumstances.

This judgment highlights the Hong Kong court's nuanced approach to balancing the interests of award creditors and debtors. The court recognised that the imposition of onerous conditions, such as security for costs and Hadkinson Orders, could ultimately hinder the swift resolution of the dispute and the enforcement of the award, which is contrary to the fundamental principles of international commercial arbitration.

The court's emphasis on the claimants' need to seek a quick resolution of the Anti-Recognition Application, rather than pursuing aggressive tactics, demonstrates the its pragmatic approach to arbitration-related disputes. This judgment reinforces Hong Kong's reputation as a jurisdiction that values party autonomy, due process, and the overall integrity of the arbitral process.

By preserving the award debtor's right to access justice, the Hong Kong court has struck a delicate balance, ensuring that the enforcement of arbitral awards remains effective, while safeguarding the fundamental principles that underpin the arbitration framework in the city.

Navigating the intersection of arbitration and insolvency: Hong Kong courts clarify the way forward

Recent decisions of the Hong Kong Court of Appeal have shed light on the intricate interplay between arbitration and insolvency proceedings, offering guidance to practitioners on how the courts will approach cases where these two realms converge.

In the case of Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299, the dispute arose from a bond instrument dated 27 November 2017 between the petitioner and the company. The bond instrument contained an arbitration clause.

The company failed to redeem the convertible bond after the listing of the company failed. The petitioner then served a statutory demand and presented a winding-up petition to the Hong Kong Court of First Instance ("CFI").

In opposing the petition, the company argued that the CFI should dismiss the petition and the parties should resolve their dispute in arbitration, following the principles in Re Lam Kwok Hung Guy, ex parte Tor Asia Credit Master Fund LP (2023) 26 HKCFAR 119. However, the CFI refused to adjourn the hearing of the petition, finding that the company had failed to demonstrate a bona fide dispute on the debt, and granted the winding-up order against the company. Crucially, the CFI distinguished the present case from Re Guy, stating that the principles in Re Guy were confined to the context of exclusive jurisdiction clauses, and did not extend to contracts containing arbitration clauses.

The company appealed to the Hong Kong Court of Appeal ("CA"), contending that the reasoning in Re Guy should be extended to the contract containing an arbitration clause and the CFI was wrong in refusing to adjourn the petition.

The CA noted that the parties had affirmatively agreed to submit their dispute for resolution by the agreed mechanism, in this case, the arbitration clause in the bond instrument. The CA held that the Hong Kong courts should conduct a multi-factorial analysis when deciding whether to exercise its discretion to allow the petition, balancing the strong policy reason to abide by the arbitration agreement and the public policy underpinning the legislative scheme of the court's winding-up jurisdiction.

The CA ultimately dismissed the company's appeal, finding that the company had not provided sufficient evidence as to its intended actions following the requested adjournment, nor had it submitted any evidence to dispute the debt or indicate its intention to arbitrate.

The second case, Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352, dealt with the issue of cross-claims in the context of company winding-up procedures.

The petitioner and the company entered into an agreement to establish a joint venture company ("JVC"). Disputes subsequently arose between the parties, leading to the petitioner commencing an arbitration against the company pursuant to the arbitration clause in the joint venture agreement.

After the petitioner obtained a favourable arbitral award and leave from the CFI to enforce it, the company attempted to seek an injunction against the petitioner to present a winding-up petition. This application was dismissed by the CFI.

During the appeal process, the petitioner presented a winding-up petition against the company. In the meantime, the company believed that the petitioner had withheld the books and records of the JVC and commenced a second arbitration against the petitioner. The second award was subsequently set aside by the court on the ground that the tribunal lacked jurisdiction.

Undeterred, the company commenced a third arbitration against the petitioner, seeking an award to uphold the findings in the second award and for damages for the Petitioner's breach of the joint venture agreement). The company asserted that the third arbitration amounted to a cross-claim against the petitioner and applied to the Hong Kong court to stay the winding-up petition.

The CA observed that the lower court's approach to cross-claims is distinct from the treatment of disputed debts. While a cross-claim does not affect the petitioner's standing to present a winding-up petition, the court held that the presence of a cross-claim is a matter for the court's discretion in deciding whether to stay or dismiss the petition.

Importantly, the CA held that where the cross-claim is subject to an arbitration clause, it would be contrary to the parties' agreement for the court to determine the presence of a genuine and serious cross-claim. Echoing the principles in Re Guy, the CA emphasised the need to uphold the parties' agreement to resolve disputes in the agreed forum, which in this case was arbitration.

The decisions in these two cases highlight the Hong Kong courts' nuanced approach to balancing the sanctity of arbitration agreements and the public policy objectives of insolvency proceedings.

In Re Simplicity & Vogue Retailing (HK) Co Ltd the court's distinction between exclusive jurisdiction clauses and arbitration clauses is particularly notable. By refusing to automatically extend the principles in Re Guy to the latter, the court has demonstrated its willingness to safeguard the parties' agreed dispute resolution mechanism, even in the face of insolvency proceedings.

This decision is significant as it reinforces Hong Kong's pro-arbitration stance. Arbitration has become increasingly common in modern commercial contracts, as it offers the benefits of confidentiality and efficiency in dispute resolution. The court's refusal to deprive the award debtor of its right to oppose the recognition and enforcement of the award, unless in exceptional circumstances, underscores its commitment to preserving the fundamental principles of arbitration.

The court's approach in Re Shandong Chenming Paper Holdings Ltd further highlights the delicate balance the courts must strike when dealing with cross-claims in the context of winding-up proceedings. By recognising that the presence of a cross-claim is a matter for the court's discretion, the court has avoided a rigid application of the principles concerning disputed debts.

Crucially, the court's emphasis on upholding the parties' agreement to resolve disputes through arbitration, even in the face of cross-claims, demonstrates the courts' unwavering dedication to respecting the autonomy of the parties and the integrity of the arbitral process.

These twin rulings serve as a valuable resource for practitioners, as they navigate the complex interplay between arbitration and insolvency. The decisions provide clarity on the courts' approach and underscore the importance of carefully considering the unique circumstances of each case when seeking to enforce arbitral awards or resist winding-up petitions.

As the global business landscape continues to evolve, the Hong Kong courts' ability to adapt and provide consistent guidance in this area will be crucial in maintaining the city's status as a leading international arbitration hub and a preferred jurisdiction for commercial disputes.

Damages for breach of implied promise: upholding the sanctity of arbitral awards

In the ever-evolving world of commercial disputes, the interplay between arbitration and the enforcement of arbitral awards can often present complex legal challenges. A recent decision by the Hong Kong court has shed light on the appropriate assessment of damages for the breach of an implied promise arising from an arbitration agreement, underscoring the importance of upholding the finality and integrity of arbitral awards.

The case, 廈門新景地集團有限公司 formerly known as 廈門市鑫新景地房地產有限公司 (Xiamen Xinjingdi Group) v Eton Properties Ltd and Another [2024] HKCFI 1291, presented a long-running legal saga spanning over 17 years. The court was tasked with determining the damages owed to the plaintiff as a result of the defendants' failure to comply with an arbitration award, in breach of their implied promise under the arbitration agreement.

The dispute originated in 2005 when the plaintiff commenced arbitration against the first and second defendants for their breach of an agreement for the development of land held by the fifth defendant. Prior to the publication of the arbitration award, the first and second defendants transferred the shares in the fourth defendant, which held 100 per cent of the fifth defendant, to the third defendant, without the plaintiff's or the tribunal's knowledge.

In October 2006 the tribunal issued an award in favour of the plaintiff, ordering the defendants to pay damages and to "continue to perform with the Agreement". The plaintiff subsequently applied to the Hong Kong courts for a judgment in terms of the award and for its enforcement.

However, the first and second defendants applied to set aside the judgment and opposed its enforcement, arguing that it had become impossible to perform due to the transfer of their ownership of the fourth defendant. The matter eventually reached the Hong Kong Court of Final Appeal, which in 2020 dismissed the defendants' appeal and upheld the enforcement of the Judgment.

The crux of the dispute in the present case centred around the assessment of damages. The plaintiff argued that the damages should be based on the value of the shareholding in the fourth defendant, including the entire interests in the land or the sale proceeds received by the fifth defendant as of the date of the award. The defendants, however, contended that such an assessment would amount to rewriting the award, as the tribunal had only ordered them to "continue with" the agreement.

In its decision, the Hong Kong court recognised the distinction between the defendants' performance of the agreement, which was subject to the arbitration, and their performance of the arbitration award itself. Regarding the timing of the damages assessment, the court held that since the plaintiff's cause of action was the breach of an implied promise, it could only arise upon the publication of the award.

Applying the established compensatory principle for the breach of an implied promise, the court found that the first and second defendants' breach concerned their failure to continue with the agreement in 2006. The plaintiff's damages were the amount that the defendants would have procured the transfer of the shares of the fourth defendant to the plaintiff, to enable the plaintiff to obtain the benefits of the land development.

This decision adds clarity to the assessment of damages for the breach of an arbitration award, affirming the difference between a claim arising from a breach of contract and a breach of an implied promise in the arbitration agreement. The court's adherence to the compensatory principle, even in the face of the defendants' subsequent actions rendering the original contract impossible to perform, underscores the importance of upholding the sanctity of arbitral awards.

By refusing to allow the defendants to escape the consequences of their own wrongdoing, the court has reinforced the integrity of the arbitral process and the finality of its decisions. This case serves as a valuable precedent for practitioners navigating the complex interplay between commercial disputes and the enforcement of arbitral awards, highlighting the Hong Kong courts' commitment to providing clarity and consistency in this area.

As the global business environment continues to evolve, the ability of courts to strike the right balance between respecting the parties' arbitration agreements and upholding the public policy objectives of commercial disputes will be crucial. This decision and another stands as a testament to Hong Kong's reputation as a leading international arbitration hub, where the finality and enforceability of arbitral awards are consistently safeguarded.

Navigating the challenges of arbitrator removal: upholding the integrity of the arbitral process

The recent decision by the HKCFI in P v D [2024] HKCFI 1132 has provided valuable insights into the courts' approach to addressing issues surrounding the removal of arbitrators. This case highlights the importance of parties carefully considering and presenting all relevant grounds for challenging an arbitral tribunal, as well as the court's limited supervisory role in this regard.

The case arose from an arbitration initiated by D against P under the UNCITRAL Arbitration Rules. During the proceedings, P made repeated requests for the tribunal to seek an evidence-taking order from the Hong Kong courts, which the tribunal initially refused. After obtaining a court order for taking evidence, P sought further approval from the tribunal, which was eventually dismissed due to P's substantial delay.

Dissatisfied with the tribunal's handling of the proceedings, P issued a notice of challenge to remove the tribunal on various grounds, including that the tribunal did not keep an open mind, made decisions beyond the parties' contentions, and demonstrated apparent bias against P. After DL withdrew from the tribunal, YZ and MC (the "Impugned Arbitrators") refused to do so, and the HKIAC ultimately dismissed P's challenge.

P then applied to the Hong Kong court for the removal of the Impugned Arbitrators under the Arbitration Ordinance, relying on the grounds raised in the notice of challenge as well as two additional grounds.

The court addressed the two additional grounds first, holding that they were not properly presented to the HKIAC and therefore fell outside the scope of the court's supervisory role. The court emphasised that parties must deliberate and present all grounds of challenge at once, or risk waiving those grounds.

Regarding the grounds raised in the notice of challenge, the court adopted the objective "fair-minded and informed observer" test for apparent bias, as established in the case of Jung Science Information Technology Co Ltd v ZTE Corporation [2008] HKCFI 606; [2008] 4 HKLRD 776. The court accorded some weight to the HKIAC's dismissal of the challenge, noting the de novo nature of the court's review.

Ultimately, the court found that none of the grounds, including the tribunal's refusal to convene an oral hearing, its consideration of factors beyond the parties' contentions, its approach to time extensions and costs, and its comments on P's conduct, demonstrated a real possibility of bias from the perspective of a fair-minded and informed observer.

This decision highlights the importance of maintaining the integrity and efficiency of the arbitral process. By emphasising the need for parties to present all relevant grounds for challenging arbitrators at the appropriate stage, the court has reinforced the principle of procedural propriety and the finality of arbitral decisions.

The court's limited supervisory role, as outlined in this case, underscores the autonomy of the arbitral process and the deference afforded to the decisions of the appointing authority, in this case, the HKIAC. This approach ensures that the courts do not unduly interfere with the arbitral proceedings, unless there are clear instances of bias or a denial of a party's right to be heard.

Furthermore, the court's analysis of the grounds for challenge, guided by the objective "fair-minded and informed observer" test, demonstrates a balanced and nuanced approach to assessing allegations of arbitrator bias. By acknowledging the controversial nature of certain tribunal decisions and the wide discretion afforded to arbitrators, the court has reinforced the importance of maintaining confidence in the impartiality and integrity of the arbitral process.

The decision also serves as a valuable resource for practitioners and parties involved in international arbitration, particularly in understanding the Hong Kong courts' stance on the removal of arbitrators. It highlights the need for parties to carefully consider and present all relevant grounds for challenge, as well as the courts' limited role in supervising such challenges.

Navigating the complex landscape of arbitral appeals in Hong Kong

The Hong Kong courts have recently grappled with the intricate issues surrounding the appealability of arbitral decisions, underscoring the delicate balance between preserving the autonomy of the arbitral process and safeguarding the parties' rights. Two recent cases, W v Contractor [2024] HKCFI 1452 and Sun Tian Gang and Others v Hong Kong & China Gas (Jilin) Ltd [2024] HKCFI 1597, provide valuable insights into the courts' approach in this domain.

In W v Contractor the HKCFI tackled the distinction between arbitral awards and interim measures, and the implications for the right to appeal.

The dispute arose from a construction project, where the plaintiff (the respondent in the arbitration) was the employer, and the defendant (the claimant in the arbitration) was the main contractor. After the commencement of arbitration, the plaintiff made a demand on a bank bond provided by the defendant as a condition precedent to the contract. The defendant then applied to the tribunal for an interim measure to restrain the plaintiff from making any further demands on the bond.

The arbitrator subsequently issued an "Award and Reasons In Respect of Applications for Interim Measures", which restrained the plaintiff from making a demand for payment under the bond. The plaintiff then sought leave to appeal the award on questions of law under section 6 of schedule 2 to the Arbitration Ordinance.

The court, guided by the factors outlined in the earlier English case of ZCCM Investments Holdings plc v Kansanshi Holdings Ltd [2019] EWHC 1285 (Comm); [2019] 2 Lloyd's Rep 29, determined that the injunction in the award was an interim measure rather than a final award. Factors such as the substance and form of the order, its finality, and the tribunal's intention were crucial in this assessment.

The court found that the injunction was only interim in nature, pending the determination of the substantive issues in the arbitration. The decision was not perceived to be a final award on the merits, and the arbitrator had not been rendered functus officio (having no further duties to perform). Consequently, the court concluded that the plaintiff could not seek leave to appeal under section 6 of schedule 2 to the Arbitration Ordinance.

The Sun Tian Gang and Others v Hong Kong & China Gas (Jilin) Ltd case addressed the complex issue of the application of the right to appeal arbitral awards under the Arbitration Ordinance, particularly in the context of pre-existing arbitration agreements.

Mr Sun commenced an arbitration in Hong Kong against the Hong Kong & China Gas (Jilin) Ltd and, after the tribunal had made a partial final award on the merits, he applied to the court for leave to appeal against the award on questions of law pursuant to sections 5 and 6 of schedule 2 to the Arbitration Ordinance.

The key issue before the court was whether the provisions in schedule 2, which grant the right to appeal, were applicable to the underlying arbitration agreement, which was entered into before the commencement of the Arbitration Ordinance on 1 June 2011 (the "Commencement Date").

Section 100 of the Arbitration Ordinance states that the provisions in schedule 2 apply to:

(a) an arbitration agreement entered into before the Commencement Date which has provided that arbitration under the agreement is a domestic arbitration; or

(b) an arbitration agreement entered into within six years after the Commencement Date which provides that arbitration under the agreement is a domestic arbitration.

The HKCFI found that since the underlying contract between the parties did not expressly provide that the arbitration was a domestic arbitration, the requirements of section 100(a) were not satisfied. Consequently, Sun's application for leave to appeal against the award was dismissed.

The court rejected Sun's arguments that the arbitration would have been considered domestic under the repealed Arbitration Ordinance, stating that the legislative intent of the current Ordinance was to introduce a unitary regime that dispenses with the distinction between domestic and international arbitrations. The court also dismissed Sun's arguments based on the principle of legality, finding that the clear and express language of section 100(a) could not be read down or limited to preserve the right of appeal.

The rulings in these two cases highlight the Hong Kong courts' nuanced approach to navigating the complex landscape of arbitral appeals. On one hand, the courts have demonstrated a strong commitment to preserving the autonomy and efficiency of the arbitral process, by limiting the grounds for challenging interim decisions and strictly interpreting the statutory provisions on the right to appeal.

On the other hand, the courts have also recognised the need to safeguard the parties' fundamental rights, as evidenced by the detailed analysis and reliance on well-established precedents. This balanced approach ensures that the integrity and fairness of the arbitral process are consistently upheld.

Challenging arbitral settlement agreements: navigating the uncharted waters in Hong Kong

In the ever-evolving landscape of international arbitration, the recent case of L v R [2024] HKCFI 1611 before the HKCFI has shed light on the complex issue of whether the grounds to challenge arbitral awards can be applied to settlement agreements reached during the arbitration process.

The dispute originated from an arbitration initiated by R against L before the HKIAC. During the course of the arbitration proceedings, the parties reached a settlement agreement, which was governed by Hong Kong law and subject to the exclusive jurisdiction of the Hong Kong High Court.

Pursuant to the settlement agreement, R and L jointly applied to and requested the tribunal to terminate the arbitration on the terms set out in the settlement agreement. However, the tribunal did not follow the parties' request to record the settlement in the form of an arbitral award. Instead, it terminated the proceedings and made an order on the costs of the arbitration in the form of a procedural order ("PO 7"). The tribunal stated in PO 7 that it did not make any determination as to the validity of the settlement agreement, nor did it rule on the merits of any claims or counterclaims presented in the arbitration.

L, by way of originating summons, sought to set aside the settlement agreement and the PO 7. Later, L was granted leave to serve the originating summons out of the jurisdiction on R.

The key issue was whether the Settlement Agreement and PO 7 were "awards" within the meaning of the Arbitration Ordinance, which would allow L to invoke the grounds for challenging or resisting the enforcement of an award.

The court, in its assessment, applied the factors outlined in the earlier case of ZCCM Investments Holdings plc v Kansanshi Holdings Ltd to classify PO 7 as either an award or an interim order.

The court found that L had shown at least a serious question to be tried that PO 7 was a final and binding award. The court reasoned that PO 7 terminated the arbitration, ruled on the costs issue, and rendered the tribunal functus officio (having no further duties to perform). Accordingly, nothing remained for the tribunal to decide.

As for the settlement agreement, the court looked at section 66 of the Arbitration Ordinance, which addresses the treatment of settlement agreements. The court found that since the tribunal did not follow the parties' request to record the settlement in the form of an arbitral award, the settlement agreement was to be treated as an arbitral award under section 66(2) of the AO for the purpose of its enforcement.

Accordingly, the court found that there was a serious question to be tried whether the grounds for challenging or resisting the enforcement of an award, as provided for in the AO, could apply to an application to set aside the settlement agreement.

Given that L had shown a serious question to be tried on the merits of its claims, the court refused to set aside the service out order.

This case serves as a stark reminder of the complex and uncharted waters surrounding the challenges to arbitral settlement agreements in Hong Kong. The court's recognition that there is a serious question to be tried on the applicability of the grounds for challenging awards to settlement agreements is a significant development.

While the court's ruling in this case was limited to the test for service out of the jurisdiction, future rulings on the substantive merits of the application to set aside the settlement agreement and PO 7 will be eagerly awaited. These decisions will provide much-needed clarity on the extent to which the AO's provisions on challenging awards can be invoked in the context of settlement agreements.

The Hong Kong courts' approach in navigating this novel issue will have far-reaching implications for the finality and enforceability of settlement agreements reached during the arbitration process. As the global business landscape continues to evolve, the ability of the courts to strike a balance between upholding the sanctity of such agreements and safeguarding the parties' rights will be crucial.

Enhancing arbitration efficiency and integrity: key updates to the Hong Kong International Arbitration Centre's 2024 Rules

The Hong Kong International Arbitration Centre (HKIAC) has recently unveiled its 2024 Administered Arbitration Rules ("2024 HKIAC Rules"), marking a significant update to the institution's procedural framework. These new rules, which came into effect on 1 June 2024, are designed to enhance the efficiency and integrity of HKIAC-administered arbitrations, reflecting the evolving needs of the global business community.

Designating and removing arbitrators: safeguarding fairness and integrity

One of the notable changes in the 2024 HKIAC Rules is the requirement for parties to provide a reasoned proposal on the number of arbitrators in their Notice of Arbitration and Answer to the Notice (articles 4.3(g) and 5.1(e)). This requirement aims to encourage parties to thoughtfully consider the appropriate composition of the arbitral tribunal, ensuring that the decision is not made arbitrarily or without due consideration.

Additionally, the HKIAC now has the authority to consider factors that may affect the efficiency or integrity of the arbitration before confirming the designation of an arbitrator (article 9.3). This empowers the institution to take a more proactive role in safeguarding the procedural fairness and impartiality of the arbitration process.

Furthermore, the HKIAC can, in exceptional circumstances, revoke the appointment of an arbitrator who is prevented from or has failed to fulfil their functions in accordance with the Rules (article 13.10). This provision serves as a safeguard against potential delays or disruptions caused by underperforming or unavailable arbitrators, reinforcing the HKIAC's commitment to maintaining the integrity of its arbitration proceedings.

Streamlining arbitration proceedings: enhancing efficiency and adaptability

The 2024 HKIAC Rules introduce several provisions to enhance the management of arbitration proceedings. Article 13.1 now explicitly requires the arbitral tribunal to consider information security and the environmental impact when adopting procedures for the conduct of the arbitration. This reflects the growing importance of data protection and sustainability considerations in modern dispute resolution.

The new article 13.6 grants the arbitral tribunal the discretion to determine preliminary issues, bifurcate proceedings, and adopt other procedures to decide the case efficiently. This codifies the tribunal's existing powers and provides a clear framework for their exercise, empowering the arbitrators to tailor the proceedings to the unique circumstances of each dispute.

Additionally, the Rules now impose a timeline for the closure of proceedings (article 31.1) and the delivery of the final award (article 31.2), ensuring timely resolution of disputes. This measure addresses the common concern of drawn-out arbitrations, helping to maintain the appeal of HKIAC-administered arbitration as a preferred dispute resolution mechanism.

Apportioning arbitration costs: promoting responsible conduct

The 2024 HKIAC Rules have also expanded the factors the arbitral tribunal must consider when determining the costs of the arbitration and their apportionment between the parties (article 34.4). These new factors include the relative success of the parties, the scale and complexity of the dispute, the parties' conduct, any outcome-related fee structure agreement, and the adverse environmental impact arising from the parties' conduct.

This holistic approach to cost allocation encourages parties to conduct the arbitration in an efficient and environmentally conscious manner, aligning with the broader sustainability goals embraced by the global business community. By incentivising responsible behaviour, the HKIAC rules aim to foster a more accountable and collaborative arbitration process.

Enhancing information security: addressing evolving risks

Recognising the growing importance of data protection, the 2024 HKIAC Rules introduce a new article 45A, which allows parties to agree on or the tribunal to impose directions on protecting the security of information. The tribunal can also make decisions regarding any breach of the information security measures, underscoring the need for heightened cyber security awareness in modern arbitration proceedings.

As the use of technology, virtual hearings, and electronic documentation continues to expand in arbitration, this new provision serves as a timely and necessary safeguard against the rising threat of data breaches and cyber security incidents.

Strengthening HKIAC's position as a leading arbitration hub

These updates to the HKIAC Rules demonstrate the institution's commitment to adapting to the evolving needs of the global business community. By enhancing the efficiency and integrity of the arbitration process, streamlining proceedings, and addressing emerging concerns such as information security and environmental impact, the 2024 HKIAC Rules further solidify Hong Kong's position as a premier destination for international dispute resolution.

As parties increasingly turn to HKIAC-administered arbitration, these procedural improvements will undoubtedly contribute to the continued success and reliability of the HKIAC as a leading arbitration institution, reinforcing Hong Kong's reputation as a world-class hub for commercial dispute resolution. The institution's proactive approach to modernising its rules ensures that HKIAC-administered arbitrations remain a strong choice for businesses navigating the complexities of the global marketplace.

Conclusion

The recent decisions of the Hong Kong courts in the first half of 2024 have solidified the city's position as a premier destination for international commercial arbitration. By striking a careful balance between upholding the finality and integrity of arbitral awards and allowing for limited intervention to address substantive issues of public policy or clear procedural irregularities, the courts have demonstrated a nuanced and progressive approach to arbitration-related disputes.

The Hong Kong judiciary's staunch commitment to respecting the autonomy of the arbitral process, while also ensuring adherence to the principles of due process, has reinforced the city's reputation as a leading global hub for international commercial arbitration. The courts' willingness to remit outstanding issues back to the tribunal, their emphasis on the quality of the tribunal's reasoning, and their proactive measures to manage set-aside applications all contribute to the overall credibility and integrity of the arbitral process in Hong Kong.

As the global business environment continues to evolve, the Hong Kong courts' ability to adapt and provide consistent guidance in navigating the complex intersection of arbitration and related legal frameworks will be crucial in maintaining the city's status as a preferred jurisdiction for the resolution of international commercial disputes. This comprehensive review of recent decisions underscores the Hong Kong courts' dedication to preserving the sanctity of the arbitral process and upholding the city's position as a premier hub for international commercial arbitration.

Edward Liu (Partner), Vinca Yau and Lori Ng (Senior Associates), Richard Poon and Aaron Lai (Associates), all members of the dispute resolution team at Haiwen & Partners LLP