Pro-arbitration decisions in Hong Kong and China

Hong Kong courts have demonstrated a pro-arbitration stance in the first two quarters of 2015. We discuss the first anti-suit injunction granted by the Hong Kong court to enjoin foreign proceedings and the first constitutional challenge of the Arbitration Ordinance. And, in China, the Supreme People’s Court has clarified confusion generated by the CIETAC split.

The Singapore Court of Appeal’s decision in PT First Media TBK v Astro Nusantara International BV and others in 2014 attracted much attention. It decided that – under article 16(3) of the Model Law – a party that was dissatisfied with a ruling of a SIAC tribunal on a question of jurisdiction could withhold its challenge to that ruling in the Singapore court until after further awards were rendered against it in the arbitration. In other words, a party could leave its challenge to a decision on jurisdiction until the enforcement stage of proceedings.

In 2010, the Hong Kong court granted orders allowing Astro to enforce SIAC awards in Hong Kong against First Media. However, First Media did not immediately take any action to set aside the orders. In the interim, (i) Astro managed to obtain a garnishee order in Hong Kong against a loan by First Media; and (ii) First Media obtained a favourable decision in Singapore against the enforceability of a substantial part of the awards. First Media therefore later applied to the Hong Kong court to set aside the 2010 orders together with the necessary application for an extension of time to do so.

At first instance, First Media’s application did not succeed. The judge considered it a well-established principle of Hong Kong law that an award-debtor seeking to resist enforcement of an award was under a general duty of good faith. This duty was wide enough to cover situations recognised as giving rise to an estoppel or waiver.

The court found that:

• First Media had not acted in good faith in deliberately reserving the jurisdictional point – not raising it while the arbitration was ongoing but only challenging on jurisdictional grounds during enforcement.
• First Media’s delay in contesting enforcement was caused by a deliberate and calculated decision not to take action in Hong Kong. The court would not therefore assist First Media out of its predicament.

The court pointed out that the SIAC awards had not been set aside in Singapore. The position that the awards were valid and created legally binding obligations in Hong Kong therefore remained unchanged.

In a case in March 2015¹ the Court of Appeal held that – in light of s84(3) of the Arbitration Ordinance and s14(3)(ea)(v) of the High Court Ordinance – there could not be any appeal from the decision of a Court of First Instance judge refusing leave to appeal a decision allowing a Mainland China arbitral award to be enforced.

It held that courts have a limited role in the enforcement of arbitral awards. It is a deliberate policy decision to restrict rights of appeal, so that parties’ expectation of finality is met.

In July 2015, the Court of Appeal heard an application by China International Fund Limited (CIF) challenging the constitutionality of sections 81(4) and 84(3) of the Arbitration Ordinance.² CIF attempted to resist enforcement of an arbitral award in the Court of First Instance but failed. Its application for leave to appeal made to the Court of First Instance also failed. It then sought leave to appeal from the Court of Appeal arguing that, under article 82 of the Basic Law (the constitutional document of Hong Kong) the power of final adjudication should be vested in the Court of Final Appeal and should not be limited at the Court of First Instance level.

The Court of Appeal considered the issue to be of general public importance and allowed a full hearing of the issues before a three-judge bench – the first time the provisions of the Arbitration Ordinance have been subject to a constitutional challenge. On August 12, 2015, the Court of Appeal rejected the challenge, finding that the restriction of appeal to the higher court was both proportionate and constitutional. The court stated that the restriction was in line with the Ordinance’s aims to provide a fast, final and binding dispute resolution process with limited intervention from domestic courts.

In April 2015, in Ever Judger Holding Co v Kroman Celik Sanayii Anonim Sirketi,³ the court held that Hong Kong courts would readily grant an anti-suit injunction to restrain the pursuit of foreign proceedings brought in breach of an agreement to arbitrate in Hong Kong. This was particularly the case where the injunction was sought without delay and the foreign proceedings were not too far advanced. Strong reasons had to be shown by the defendant to dissuade the court that an injunction should not be granted.

The principle, according to the court, is that the parties should be held to their contract. Questions as to the balance of convenience or whether one forum is more appropriate than another are not relevant. The fact that there might be a risk of parallel proceedings and inconsistent decisions would not necessarily deny an anti-suit injunction.

Traditionally, courts in Hong Kong have frowned upon issues in dispute between the same parties being split, to be decided in different fora. The modern approach⁴ is to interpret an arbitration agreement upon the assumption that, unless they indicate clearly to the contrary, commercially-minded parties are likely to want all disputes to be decided by the same tribunal.

In July of this year, in CPC Construction Hong Kong Limited v Harvest Engineering (HK) Limited,⁵ the court referred to a ‘forensic nightmare’ of possible parallel proceedings in litigation and in arbitration, since the arbitration clause in the subcontract covered the defendant’s counterclaim, but not the plaintiff’s claim under the loan and guarantee agreements (which were related to but not arising from the subcontract).

The court therefore only stayed the counterclaim in favour of arbitration and not the plaintiff’s claim. Recognising that this left open the possibility of simultaneous litigation and arbitration proceedings, the court suggested that it might be appropriate to order a stay of the claim pending arbitration as a case management decision to avoid duplication of time and resources and possible inconsistent results. It considered there was bound to be considerable overlap in each forum. It then reserved its decision, allowing time for the plaintiff to respond.

In China, the Supreme People’s Court (SPC) has taken the welcome step of clarifying certain issues concerning arbitrations administered by the China International Economic and Trade Arbitration Commission (CIETAC), South China International Economic and Trade Arbitration Commission (SCIA), and Shanghai International Economic and Trade Arbitration Commission (SHIAC).

These issues arose following the controversial 2012 move by the Shenzhen and Shanghai sub-commissions of CIETAC to break away and establish themselves as separate arbitration commissions. This led to significant confusion in the China arbitration scene as to which institution should be competent to accept and administer arbitrations brought under clauses which provided expressly for disputes to be resolved by arbitration at the CIETAC Shenzhen and Shanghai sub-commissions.

The SPC published a notice of reply concerning judicial review of arbitral awards by CIETAC and its former sub-commissions. The Reply – effective from July 17, 2015 – is binding on all of China’s lower courts. It provides as follows.

SCIA/SHIAC
SCIA/SHIAC will have jurisdiction over disputes arising from arbitration agreements entered into before the CIETAC Shenzhen sub-commission and CIETAC Shanghai sub-commission change of names to SCIA and SHIAC (on October 22, 2012 and April 8, 2013 respectively) (the Change of Names) which provide for the submission of disputes to these sub-commissions.

CIETAC
CIETAC will have jurisdiction over disputes arising from arbitration agreements entered into on or after the Change of Names which provide for the submission of disputes to the CIETAC Shenzhen sub-commission or the Shanghai sub-commission. However, where such an arbitration has been referred to SCIA or SHIAC and the respondent has not challenged its jurisdiction before an award is rendered, an application to have an award set aside or declared unenforceable after it has been rendered (on the basis that SCIA or SHIAC has no jurisdiction) will not be supported by the court.

Status of arbitrations accepted by CIETAC/SICA/SHIAC prior to July 17, 2015
If an arbitration accepted by CIETAC, SIAC or SHIAC prior to July 17, 2015 should not have been accepted, a party is not entitled to have an award set aside or declared unenforceable upon it being rendered on the basis of the lack of jurisdiction of the arbitral body.

Where more than one arbitral body has accepted jurisdiction before July 17, 2015, a party may apply to the Mainland China court prior to the first hearing of the arbitral tribunal for a determination on the validity of the arbitration agreement; a decision will be made by the court in accordance with the Reply. In the absence of such an application, the arbitral body that first accepted jurisdiction shall have jurisdiction.

Alfred Wu is a partner and Muriel Cheng is an associate in the Hong Kong office of Norton Rose Fulbright.