Hong Kong

In summary

A number of pro-arbitration developments occurred in Hong Kong during 2019. This included the Hong Kong and mainland China authorities bringing into force the Interim Measures Arrangement, the courts handing down a number of arbitration-related decisions and the Hong Kong Law Reform Commission establishing a subcommittee to consider the legalisation of outcome-related fee structures for arbitration.

Discussion points

• The entry into effect of the Interim Measures Arrangement
• A number of decisions relating to the setting aside of arbitration awards handed down by the Hong Kong Court
• Hong Kong to study outcome-based fees for arbitration

Referenced in this article

• P v M [2019] HKCFI 1864
• N v C [2019] HKCFI 2292
• But Ka Chon v Interactive Brokers LLC [2019] HKCA 873
• X v Jemmy Chien [2019] HKCFI 2172
• Soleh Boneh International Ltd v Government of the Republic of Uganda and National Housing Corporation [1993] 2 L1 Rep 208

Hong Kong’s arbitration institutions

In recent years, the trend has been for Hong Kong’s arbitral institutions to report increased caseloads:

• The Hong Kong International Arbitration Centre (HKIAC) reported 503 new cases in 2019, slightly down from 521 in 2018.
• The China International Economic and Trade Arbitration Commission (CIETAC), which opened a Hong Kong arbitration centre in 2014, reported 617 foreign-related cases, an increase from 522 in 2018.^[1]
• The ICC has yet to report its 2019 figures, but it reported 10 new cases in 2018.

Parties have chosen to arbitrate in Hong Kong in view of its arbitration-friendly judiciary, workable legal infrastructure and considerable pool of arbitration professionals. Hong Kong looks set to continue to benefit from important policy initiatives originating in mainland China. These include the Belt and Road Initiative and the Guangdong-Hong Kong-Macao Greater Bay Area Development, each of which will likely generate considerable economic activity and resulting dispute resolution work.

Interim Measures Arrangement

Perhaps the most significant development for Hong Kong arbitration in 2019 was the entry into force on 1 October 2019 of the Hong Kong-Mainland China Interim Measures Arrangement.^[2]

Under China’s ‘one country, two systems’, Hong Kong functions as a separate legal jurisdiction from mainland China, with its own independent courts and legal system based on English common law. Before this arrangement, mainland China’s courts would, in general, order interim relief only in support of arbitrations seated in mainland China. Parties wishing to keep open the prospect of interim relief in China may also choose to arbitrate in Hong Kong. The arrangement will, therefore, likely further consolidate the territory’s position as a preferred arbitral seat for disputes with Chinese parties.

Under the arrangement, mainland China courts are empowered to grant interim measures in aid of Hong Kong-seated arbitrations administered by ‘qualified’ institutions, including the above-named institutions, as well as the South China International Arbitration Centre (SCIA) (Hong Kong). The arrangement requires applicants to submit applications for interim measures to the relevant arbitral institution, which is responsible for forwarding the application to the appropriate Chinese court. Alternatively, an applicant may deliver its application directly to the relevant court.

The arrangement has been swiftly put into practice. On 13 February 2020, the HKIAC reported that since the arrangement entered into force it has processed 13 applications seeking to preserve evidence or assets worth a total of 5.5 billion yuan (approximately US$798 million) in mainland China. The HKIAC further noted that court orders had been issued in respect of 1.7 billion yuan (approximately US$244 million) in assets and that 40 per cent of cases were brought by applicants from mainland China. This suggests that the benefit of the arrangement will be felt not only by international parties, but also by mainland China parties seeking relief in respect of assets or property located in mainland China.

Hong Kong courts deliver arbitration-related decisions

Hong Kong courts handed down a number of arbitration-related decisions in 2019. In P v M,^[3] the Hong Kong Court of First Instance (HKCFI) set aside parts of domestic arbitral awards on the basis of procedural concerns which had not been cured despite the remission of the original award back to the arbitrator. While the decision relates specifically to the ‘serious irregularity’ test for setting aside domestic awards under the opt-in regime applicable to domestic arbitral awards under Schedule 2 of the Arbitration Ordinance, its principles have wider applicability. In this case, the court found that the high standard for procedural irregularity under section 4(2)(b) and/or 4(2)(c) and 4(3)(c) of Schedule 2 had been reached because the arbitrator had decided the case on grounds not advanced by the parties. Specifically, the award debtor had put forward a defence regarding notification, which the arbitrator subsequently dismissed based on grounds upon which the award creditor had been wholly silent. The decision is, therefore, a salient reminder to arbitrators and parties of the potential dangers of raising or determining issues late in arbitral proceedings, without possibility of reply by all parties.

In another case concerning the sufficiency of the reasoning contained in an arbitrator’s award, in N v C,^[4] the HKCFI refused to set aside an arbitral award once again rendered in a procedure under the opt-in provisions of Schedule 2 of the Arbitration Ordinance. The award debtor applied to set aside the award under section 4(1) and (3) of Schedule 2 or, alternatively, under section 81 of the ordinance, on grounds that the arbitrator had:

• failed to deal with all issues put to it by not taking into account an issue relating to time bars;
• failed to provide adequate reasons in the award; and
• decided on a point that was neither pleaded nor identified as an issue.

However, the HKCFI denied the application for setting aside, finding to the contrary that the arbitrator’s findings had in fact been pleaded and that the parties had been given a full opportunity to present their cases. In relation to the allegation that the arbitrator had committed a serious irregularity by failing to deal with the time-bar defence, the HKCFI found that the arbitrator’s failure to provide sufficient reasons for a decision is not the same as failure to deal with an issue. On the contrary, an arbitrator does not fail to deal with issues simply because it does not answer every question that qualifies as an issue and it may deal with an issue even where it does not arise in the award.

In But Ka Chon v Interactive Brokers LLC,^[5] the Court of Appeal commented on the intersection between Hong Kong’s arbitration and insolvency regimes. Previously, in Lasmos,^[6] the lower court had followed the principle that the court should generally dismiss a winding-up petition in favour of arbitration if:

• the debt is not admitted;
• there is an arbitration agreement covering the dispute; and
• the debtor has commenced the contractually mandated dispute resolution process.

However, in Interactive Brokers, the appeal court, speaking obiter, suggested that this new approach – which requires parties to arbitrate even over indisputable debts, provided that they are not admitted – significantly curtails creditors’ statutory rights. This suggests that the Hong Kong courts might continue their habitual approach of requiring debtors to wind up unless they are able to show that the debt is bona fide disputed on substantial grounds.

In X v Jemmy Chien,^[7] the HKCFI considered the application of an award creditor which was opposing set-aside proceedings for security as a condition for further conduct of the set-aside application. The award debtor had applied to set it aside based on jurisdictional and public policy grounds. In deciding the application for security, the court applied the English case of Soleh Boneh^[8] and considered two important factors:

• the strength of the argument that the award is invalid; and
• whether the delay in progressing the application would render the enforcement of the award more difficult.

Applying the first test, the court found the award was not manifestly invalid and so security should not be ordered on that basis. Applying the second test, the delay was not likely to render enforcement more difficult because, although the applicant did not have a presence, business or assets in Hong Kong, it did have significant assets internationally, and there was no evidence of dissipation. Accordingly, the court refused the award creditor’s application for security.

Hong Kong looks into outcome-related fee arrangements

Hong Kong law prohibits lawyers from charging outcome-related fees for work on contentious proceedings – including arbitration. In this way, Hong Kong differs from other major arbitral seats, including London and the United States (which already allow lawyers to charge success fees for both arbitration and litigation). In August 2019, the authorities in Singapore (which likewise prohibit outcome-related fee arrangements) announced that they were consulting on whether to introduce such fees for arbitrations seated there. However, on 22 October 2019, Secretary of Justice Teresa Cheng SC announced that the Hong Kong Law Reform Commission would form a subcommittee to study outcome-related fees arrangements. On 25 October 2019, the Hong Kong Law Reform Commission announced that it had established a subcommittee to consider whether reform is needed to the relevant law and regulatory framework to allow outcome-related fee structures for arbitration and, if so, to make recommendations for reform. The announcement reflects increased interest in flexible fee structures across the region.

* The authors wish to acknowledge the contributions of their Fangda Partners colleagues Zi Wei Wong, an associate, and Francis Wong, a trainee, in the preparation of this chapter.

Notes

^[1] The CIETAC does not confirm how many of these cases represent Hong Kong-seated arbitrations.

^[2] The Arrangement Concerning Mutual Assistance in Court-Ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region.

^[3] [2019] HKCFI 1864.

^[4] [2019] HKCFI 2292.

^[5] [2019] HKCA 873.

^[6] Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426.

^[7] [2019] HKCFI 2172.

^[8] Soleh Boneh International Ltd v Government of the Republic of Uganda and National Housing Corporation [1993] 2 L1 Rep 208.