Arbitration-Related Developments in 2018

As Hong Kong enters into the New Year, Peter Yuen and Matthew Townsend of Fangda Partners, Hong Kong examine the arbitration developments in the jurisdiction over the past 12 months

In 2019, Hong Kong remains well placed as one of the preferred seats for international arbitration users.[1]  The jurisdiction continues to benefit from a number of systemic factors, whether that be its legal infrastructure; the neutrality and impartiality of its judicial system; and its vibrant progressive arbitration community.

In recent years Hong Kong has also increasingly sought to trade on its cultural and geographical proximity to mainland China.  In 2018, the region continued efforts to position itself as the preferred jurisdiction for resolving disputes arising out of the PRC’s belt-and-road initiative (“BRI”) consisting of infrastructure development projects relating to over 60 countries worldwide.

The past 12 months have seen a number of positive developments, including the Hong Kong authorities’ issuance of a code governing the third-party funding of arbitrations; new HKIAC arbitration rules; and a slew of pro-arbitration judgments by the local courts. 

THIRD PARTY FUNDING

On 7 December 2018, after a lengthy consultation process, the Hong Kong Department of Justice published a much-anticipated Code of Practice for Third Party Funding in Hong Kong (the “Code”).[2]

Significantly, with the issuance of the Code, new statutory provisions which the Hong Kong Legislative Council passed as early as June 2017, will finally come into force.  These reforms, which take the form of amendments to Hong Kong’s Arbitration Ordinance (Cap. 609) (“AO”) abolishing the doctrines of champerty and maintenance with respect to arbitration, will remove all doubt as to the permissibility of third-party funding for arbitration in Hong Kong.  

The authors’ discussions with funders confirm that the absence of a transparent and predictable code for the past 18 months has had a ‘freezing effect’ upon funders’ willingness to fund arbitrations in Hong Kong.  Fortunately, the wait is now over, with the key reforms coming into effect on 1 February 2019.  Hong Kong will then be set to join jurisdictions such as England & Wales, Australia and Singapore, all of which have permitted third-party funding for some time. 

The amended AO adopts a fairly broad definition of “third party funder” which includes any person or entity who is “a party to a funding agreement” but who, other than by way of that agreement, has no “interest recognized by law in the arbitration”.[3]  The Hong Kong rules, therefore, appear to apply to individuals and entities such as law firms.  This compares to the narrower definition under Singaporean law, which applies only to professional funders carrying out funding as their principal business.[4]

The Code itself is intended to set out the practices and standards with which such third-party funders are ordinarily expected to comply in carrying on activities relating to third-party funding of arbitration.  Key provisions include the following:

  • Requirements that the funder maintain certain levels of capital adequacy, periodically provide the advisory body with proof regarding the same, and disclose to the funded party relevant changes of circumstance (paragraph 2.5).
  • Provisions requiring the funder to maintain written procedures to ensure proper identification and management of conflicts of interest, and provisions requiring observation of applicable rules regarding confidentiality and legal professional privilege (paragraphs 2.7 and 2.8).
  • Duties of the funder to notify the funded party of the funder’s disclosure obligations under the legislation (paragraph 2.10).
  • Provisions requiring stipulation in the funding agreement as to the degree of the funders’ liability to the funded party for costs, including security for costs, and other liabilities (paragraph 2.12).
  • Provisions requiring that the funding agreement identify whether and if so how, the funder may terminate the funding agreement on grounds of counterparty breach, or change in the prospects of recovery (paragraph 2.13).
  • A prohibition on the funder simply terminating the agreement at will, and a requirement that, in the event of termination (other than for material breach) the funder shall be liable for pre-termination funding (paragraphs 2.14 and 2.15).
  • A stipulation that the funding agreement must provide that the funded party may terminate the agreement if it reasonably believes that the funder has committed a material breach of the Code or the funding agreement that may lead to irreparable damage (paragraph 2.16).

Whilst a funder is not liable to judicial or other proceedings merely by virtue of its failure to comply with the Code, any breach of the Code is admissible in evidence, and any failure to comply may, therefore, be taken into account, if relevant to a question being decided in such proceedings.  It is, therefore, unsurprising that consultation process leading to the publication of the Code has been a comprehensive one, with funders taking an active interest.

It may also be noted that, certain arbitration institutions have also sought to formalise guidelines for funders and funded parties.  As early as May 2016, the Hong Kong sub-commission of the China International Economic and Trade Arbitration Commission (“CIETAC”) published its own guidelines for third-party funding, for which the co-author was one of the Working Group Members.[5]  

THE HKIAC

2018 was another active year for the Hong Kong International Arbitration Centre (“HKIAC”).

In early April 2018[6], the institution announced its 'Belt and Road Programme' seeking to capitalise on the HKIAC’s prime position to act as an administering institution for disputes arising out of the BRI.

Separately, on 1 November 2018, the institution brought into force new administered arbitration rules (“HKIAC Rules”).  These rules make a number of amendments to the preceding 2013 rules.  The changes include the following:

  • New provisions allowing an applicant for emergency arbitration proceedings to apply up to seven days prior to the filing of a Notice of Arbitration, rather than (as previously) needing to await the filing of the notice (Article 23.1 and Schedule 4).
  • A new early Determination Procedure for points of fact or law which are manifestly without merit, manifestly outside the Tribunal’s jurisdiction, or for which no award could be rendered even if upheld (Article 43).
  • New provisions broadening the scope for single arbitration under multiple contracts allowing such proceedings even in circumstances in which the parties to the arbitration are not bound by each of the arbitration agreements (Article 29).
  • New provisions requiring the Tribunal to notify the parties and HKIAC of the anticipated date of delivering an arbitral award, and putting in place an initial (but extendable) three-month deadline for rendering the award (Article 31.2).
  • New provisions formalising the parties’ ability to request a stay in the proceedings, pending efforts to settle the arbitration between themselves (Article 13.8).
  • New provisions reflecting the introduction of third-party funding for arbitration in Hong Kong (Articles 34.4, 44 and 45.3(e)).
  • Provisions easing electronic document submission by parties, and requiring greater consideration of technology by the Tribunal (Articles 3.1(e), 3.3, 3.4 and 13.1).

The new HKIAC Rules build on the 2013 version, which were already popular with sophisticated parties as they reflected modern international arbitration practice.  The latest incarnation, therefore, does little more than making certain limited changes, which are in turn necessary to keep the HKIAC Rules at the forefront of international arbitration rules.

LATEST TWIST IN THE ASTRO LIPPO SAGA

In Astro Nusantara International B.V. and Others v. PT First Media TBK [2018] HKCFA 12; FACV 14/2017 (11 April 2018) the Hong Kong Court of Final Appeal (“CFA”) overturned the lower courts’ earlier decisions with respect to the enforcement of five arbitral awards against First Media.

The Astro Lippo dispute has been much reported (see previous articles by the authors in the Hong Kong Lawyer[7]).  It involves Singapore and Hong Kong enforcement proceedings pursuant to a Singapore-seated arbitration.  Awards were rendered in early 2010, and the same year the CFI entered judgment in terms of the awards.  First Media did not resist enforcement within the prescribed time limit, believing it had no assets in Hong Kong, but subsequently unsuccessfully sought from the Court of First Instance (“CFI”) and Court of Appeal (“CA”) an extension of time to resist enforcement.  The present CFA decision allowed First Media’s appeal to the CA decision, set aside the enforcement orders already granted, and extended First Media’s time to apply for leave to set aside the orders granting Astro leave to enforce the awards in Hong Kong.

However, the present case deals principally with the extension of time issue.  First Media’s substantive case on enforcement relates to jurisdiction, and the joining of certain Astro entities to the initial arbitration.  First Media must, therefore, now persuade the CFI to accept this substantive case on jurisdiction, and set aside the enforcement orders. The saga is set to continue into 2019.

CFI GRANTS ANTI-SUIT INJUNCTION TO RESTRAIN PRC COURT PROCEEDINGS BROUGHT IN BREACH OF ARBITRATION AGREEMENT PROVIDING FOR HONG KONG ARBITRATION

In Arjowiggins HKK2 Ltd v Shandong Chenming Paper Holdings Ltd [2018] HKCFI 93; HCCT 53/2015 (19 January 2018), the CFI granted a Hong Kong award creditor (Arjowiggins) an anti-suit injunction to restrain the award debtor (Shandong Chenming) from continuing parallel litigation proceedings in the PRC mainland.

Section 21L of the High Court Ordinance (Cap. 4) empowers a court to order injunctive relief in circumstances in which it is just or convenient to do so.  This is similar to powers granted under section 45(2) of the AO.  Despite their, somewhat misleading, name, ‘anti-suit’ injunctions of the sort rendered are not addressed to or binding upon the foreign court.  Rather, they are directed at a party, who must comply with the terms of such an injunction or face sanctions under Hong Kong law.  It was noted in the judgment that Shandong Chenming has assets in Hong Kong.

Arjowiggins’ application was brought under the High Court Ordinance on grounds that the parallel proceedings were instituted in breach of the parties’ arbitration agreement, and further that Shandong Chenming’s conduct was vexatious and oppressive, since inter alia it was an attempt to re-litigate the claims which had been raised and decided in the arbitration leading to the award.  The CFI examined the claims raised in the mainland proceedings and held that in substance such claims fell within the arbitration agreement between the parties (under which the award was made) and should, therefore, not be re-opened and pursued in the mainland court proceedings.

The case underlines the pro-arbitration stance of the Hong Kong court, which is both prepared to examine the substance of the underlying claims to a dispute to determine if they will fall within an arbitration agreement, and willing to order anti-suit injunctions restraining a party from pursuing foreign proceedings.

CFI SETS ASIDE PRC AWARD ON GROUNDS OF INSUFFICIENT REASONING

In  Z v Y [2018] HKCFI 2342; HCMP 1771/2017 (18 October 2018) the CFI refused to enforce a mainland Chinese award on grounds that the Tribunal had not given adequate reasons for its decision to reject evidence that the underlying agreement had been “tainted by illegality” as it related to a sham transaction.

The validity or otherwise of the agreement was a question of PRC law.  In assessing whether the Tribunal’s determination had offered sufficient reasoning, the CFI applied the principle in R v F [2012] 5 HKLRD 278 that in the award, “the reasons may be short, so long as the factual and legal basis are explained and the reasoning is expressed to enable the parties to understand how, and why, a finding is made on a material issue, and how a conclusion is reached by the tribunal”.  However, in this case, as even the low threshold established in R v F was not met.  In particular the Hon. Chan J found that the Tribunal had “failed to give any adequate reason” as to the key issue when it came to the Respondents’ claim of illegality.

The decision is an important reminder to parties that, notwithstanding their pro-enforcement approach, and the strict application of grounds for refusal, the courts will nonetheless be willing to set aside awards which are insufficiently reasoned.  The authors’ full report on this case can be found here.

CONCLUSION

In 2019, Hong Kong will look to further consolidate its position as a regional arbitration hub. With the Code in force, the number of funded arbitrations seated in Hong Kong will undoubtedly increase.  Furthermore, in view of the size of the BRI initiative, and the significant scope for commercial disputes arising from the associated infrastructure and construction projects, 2019 and beyond should increasingly see arbitration activity in this area. 

The Authors would like to thank Johnson Ng of Fangda Partners for his contribution to this article

 

[1] Queen Mary University of London and White & Case International Arbitration Survey 2018 (https://www.whitecase.com/sites/whitecase/files/files/download/publications/qmul-international-arbitration-survey-2018-18.pdf), page 9. The five most preferred seats of arbitration are London, Paris, Singapore, Hong Kong and Geneva.
[2] https://www.doj.gov.hk/eng/public/pr/20181207_pr4.html.
[3] AO, s.98J.
[4] The Civil Law Act and the Civil Law (Third-Party Funding) Regulations 2017, s. 4.
[5]https://hkarbitration.files.wordpress.com/2016/05/cietac-draft-guidelines-17-may-16.pdf. Other members included Dr. Nicolas Wiegand, and Dr. Dorothee Ruckteschler, CMS Hasche Sigle (Hong Kong/Germany); Paul Starr, and James McKenzie, King & Wood Mallesons; James Rogers of Norton Rose Fulbright; Christopher Boog of Schellenberg Wittmer;  Robert Rhoda of Bird & Bird;  James MacKinnon of Herbert Smith Freehills;  Andrew Aglionby of JAMS International; and Cameron Hassall of Clifford Chance.
[6] http://www.hkiac.org/news/hkiac-announces-belt-and-road-programme.
[7] See for instance http://www.hk-lawyer.org/content/hong-kong-court-appeal-refuses-enforce-astro-v-lippo-awards

Registered Foreign Lawyer, Fangda Partners in Association with Peter Yuen & Associates (Hong Kong)

Matthew Townsend is an arbitration lawyer based in Hong Kong.  His practice is primarily focused on international arbitration and dispute resolution, often (but not always) involving Chinese parties.

Townsend has experience of arbitration in a number of jurisdictions under a number of different arbitration rules.  His practice focuses on the energy, infrastructure, construction, technology and international trade sectors.  He has experience acting as advocate at all stages of an arbitration hearing

Partner, Peter Yuen Associates in Association with Fangda Partners (Hong Kong)