Hong Kong Courts Contemplate Anti-Arbitration Injunctions

March 29, 2012 Authors: James Rogers, Matthew Townsend

In a decision issued on 8 March 2012,[1] the Hong Kong Court of First Instance addressed a legislative grey area surrounding the power of the Hong Kong courts to stay arbitration proceedings commenced in the territory.

Little guidance exists on the apparent conflict between the Hong Kong Arbitration Ordinance (which restricts court intervention in arbitration proceedings except as provided for in the Ordinance) and the Hong Kong High Court Ordinance (which provides the courts with a broad discretionary power to grant injunctive relief). While Judge P Ng SC did not make a determinative ruling on this issue, a task he suggested was best left to the higher courts, he was content to assume that the courts had jurisdiction to grant anti-arbitration injunctions notwithstanding the provisions of the Arbitration Ordinance.

However, those wary of the effects of this development upon the efficiency of Hong Kong arbitration should take comfort that, for Judge Ng, this power may only be used "very sparingly and with great caution."

Two applications

The dispute concerned the alleged failure by a food processing group owned by Mr Lin Ming to comply with a put option contained in a share purchase agreement with the Sequedge Group (the "Agreement").

An HKIAC arbitration was commenced in September 2011 by the Sequedge companies while Mr Lin filed a claim in the Hong Kong courts against the Sequedge companies and 26 other defendants in November 2011. Mr Lin argued that the defendants had wrongfully brought about his arrest by PRC government authorities and conspired to unlawfully take over the management of his group of companies. Mr Lin argued that such actions amounted to a fundamental breach of the Agreement resulting in its termination.

Mr Lin then applied for an anti-arbitration injunction (the "Injunction Application") on 29 November 2011, while the Sequedge companies brought a mirror application for a stay of the court proceedings in favour of arbitration (the "Stay Application") on 19 December 2011.

The approach of the Hong Kong courts to arbitration

Section 20 of the Hong Kong Arbitration Ordinance (Cap. 609), which came into force on 1 June 2011, obliges the Hong Kong courts to refer parties to arbitration, and stay other legal proceedings, where a valid arbitration agreement exists. The only exception to this obligation arises where "the agreement is null and void, inoperative or incapable of being performed."

The court's power to otherwise intervene in arbitral proceedings is further limited by Section 12 of the Ordinance which provides that "[i]n matters governed by this Law, no court shall intervene except where so provided in this Law" and Section 3 which provides that "the Court should interfere in the arbitration of a dispute only as expressly provided for in this Ordinance."

These provisions appear in conflict with the Hong Kong High Court Ordinance (Cap. 4), Section 21L of which provides the Hong Kong courts with a general discretion to grant injunctive relief when it appears just or convenient to do so.

Decision

Judge Ng looked to a number of recent English cases which have dealt with a similar legislative tension in English law. Those cases recognize the right of the courts to intervene and injunct arbitration proceeding in favour of litigation only where the arbitration proceedings are "oppressive, vexatious, unconscionable or an abuse of process." However, although Judge Ng recognised that he had the discretion to grant an anti-arbitration injunction, he rejected Mr Lin's various arguments that the continuation of the arbitration was oppressive. He considered that the course the Court should adopt was "quite obvious" given the facts and the mandatory nature of Section 20 of the Arbitration Ordinance.

Judge Ng agreed with Mr Lin that parallel proceedings in different fora could lead to undesirable and inconsistent outcomes. However the Judge noted that Mr Lin himself had created this state of affairs by commencing litigation proceedings two months after the HKIAC procedure was initiated.

The Judge also pointed out that the arbitration proceedings, involving three applicants and two defendants, would likely be simpler and faster than the case before the Hong Kong courts, which concerned 28 defendants. It would therefore be less oppressive for the parties to stay the litigation rather than the arbitration proceedings. Separately, the fact that some parties, associated with Mr Lin, were involved in the litigation but not the arbitration proceedings, was not a sufficient ground to stay the arbitration. The facts of the case meant that this would not guarantee that the matter would be resolved in a single proceeding.

Judge Ng therefore granted the Stay Application, staying the litigation proceedings in favour of arbitration. Although he opened the door to the possibility of anti-arbitration injunctions, his sensible reasoning has ensured that the hurdle for applicants remains high.

This article was prepared by James Rogers (jrogers@fulbright.com, +852 2283 1035 or +86 10 8513 5888) and Matthew Townsend (mtownsend@fulbright.com, +86 10 8513 5805 or +852 2523 3200) of the firm's International Arbitration and ADR Practice Groups in Hong Kong and Beijing. For further information, please contact any of the authors listed above.

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[1] Lin Ming & another v Chen Shu Quan & others HCA 1900/ 2011.