A roundup of 2022 arbitration cases in the Hong Kong courts

Introduction

Judicial support for arbitration is key to Hong Kong maintaining its status as one of the most preferred arbitration hubs in the world. A few notable cases have come through the Hong Kong courts in 2022 in which the courts have dealt with issues such as multi-tiered dispute resolution processes, the nomination of a non-existent arbitration institution, inconsistent dispute resolution mechanisms across multiple related contracts, contracts that were entered into without proper authority of a contracting party and disputes involving multiple processes in courts and in arbitration. In the decisions, one can see the courts drawing upon international authorities to keep the case law in Hong Kong at the forefront of international developments, maintaining a policy of minimal curial intervention, and continuing to bring a purposive and rational businessman’s view to construing arbitration agreements, whilst upholding the public policy objectives of the local arbitration law. These will ensure that international businesses will continue to see Hong Kong as an arbitration-friendly jurisdiction where they can comfortably bring their disputes for resolution by arbitration.

C v D [2022] HKCA 729 (7 June 2022)

A multi-tiered dispute resolution clause in the contract between C and D required the parties to negotiate in good faith first and refer the dispute to their Chief Executive Officers (CEOs) for resolution, and resort to arbitration if the dispute could not be resolved amicably in 60 business days. 

As a dispute arose, the parties attempted to resolve it amicably but did not refer it to their respective CEOs. D subsequently referred it to arbitration and was issued a partial award.

C sought to set aside the partial award in the Hong Kong Court of First Instance (CFI) on the grounds that the arbitral court lacked jurisdiction because D had failed to comply with the escalation mechanism and the court did not decide the dispute per the agreed procedures of the parties. The CFI refused to set aside the partial award. The court held that compliance with pre-arbitration procedural requirements is a question of admissibility not jurisdiction, and the agreed procedures related to the arbitration procedures, not the pre-arbitration requirements. 

C’s subsequent appeal on the CFI decisions was dismissed by the Court of Appeal (CA). The CA agreed with the CFI’s analysis that C’s objection to the partial award, based on alleged failure in observing pre-arbitration procedural requirements, concerned the admissibility of the claim. The CA also ruled that a dispute relating to the admissibility of the claim should be resolved by arbitration tribunals and would not be a basis to challenge an arbitral award. On the distinction between jurisdiction and admissibility, the CA took the view that this is a well-recognised distinction in case law and in academic writings in multiple jurisdictions. The CA accepted that the question as to whether the tribunal has the power to hear a case is a question that goes to jurisdiction, whereas the question as to whether it is appropriate for a tribunal to hear a case (such as whether it is premature, etc) is one that goes to admissibility. The CA did not further consider whether the pre-arbitration requirements would fall under the definition of arbitration procedures. The CA’s decision is now being appealed to the Court of Final Appeal.

C v D [2022] HKCA 729 (7 June 2022)

李明實, 方壘 and 史洪源 and Others v. Ace Lead Profits Ltd and Another [2022] HKCFI 3342 (4 November 2022)

Plus View Investment Limited (P3) and Ace Lead Profits Limited (D1) were allotted shares in HollySys Automation Technologies Limited (HollySys) upon its incorporation. The founder of Beijing HollySys, Dr. Wang (P2), set up a trust scheme to give out those shares held by P3 and D1 (Trust Scheme) to HollySys employees (P1). The participating employees paid a subscription price for the shares and signed the Declarations of Trust (DoTs) to be beneficiaries, with P3 and P1 as trustees. The arbitration agreement within the DoTs specified Hong Kong law as the governing law and provided adjudication power on disputes to the Hong Kong arbitration committee.

In the CFI, plaintiffs sought a declaration that HollySys shares held by and in the name of D1 were held on trust for the employees under the Trust Scheme (Trust Shares Claim). The Trust Scheme was of two layers: (1) a de facto trustee-beneficiaries relationship between D1 and P3 as trustees and P1 as beneficiaries over the trust shares (the Overarching Trust), and (2) the individual trusts created by the signed DoTs (the DoT Trusts). The court accepted the plaintiffs’ submission that the Trust Shares Claim related to the Overarching Trust, and therefore fell outside the ambit of the arbitration agreement. Subsequently, the defendants applied for a stay of proceedings, claiming that the Trust Shares Claim was within the scope of the arbitration agreement and should be referred to arbitration. 

The CFI dismissed the defendants’ application. While the court upheld the arbitration agreement despite the nomination of a non-existent arbitration institution (i.e. the Hong Kong Arbitration Committee), it confirmed that the arbitration agreement only covered disputes related to the fiduciary duty between the trustees and individual beneficiaries in the DoT Trusts. Hence, a claim for the Overarching Trust was outside the scope of the arbitration agreement. On 20 January 2023,¹ the defendants’ application for leave to appeal against CFI’s decision, on the basis that the court erred in law, was refused for the lack of reasonable prospects of success.

李明實, 方壘 and 史洪源 and Others v. Ace Lead Profits Ltd and Another [2022] HKCFI 3342 (4 November 2022)

MAK v LA [2022] HKCFI 285 (24 January 2022)

Mak, a former employee of LA, commenced labour tribunal proceedings against LA, claiming for unpaid 2019 discretionary bonus and the vesting and redemption of the discretionary bonuses from 2016 to 2018 in the form of shares units in LA managed funds (Deferred Shares) upon the termination of his employment. There were conflicting dispute resolution clauses in the relevant employment documents. The employment letter contained a provision for the parties to submit to the exclusive jurisdiction of the Hong Kong courts and tribunals, while one of the three letters pertaining to Deferred Shares was signed by Mak and allowed LA to appoint a sole arbitrator from the Hong Kong International Arbitration Centre.

LA challenged the jurisdiction of the Labour Tribunal and claimed that the Deferred Shares matter should be submitted to arbitration. Subsequently, the Labour Tribunal transferred proceedings to the CFI, where LA sought to stay Mak’s claims at the Labour Tribunal pending arbitration.

The CFI stayed its proceedings in favour of arbitration for matters covered by the arbitration clause and stayed other related claims pending the arbitration’s outcome. Upon applying the closest connection test and the extended Fiona Trust principle, the court extended the application of the arbitration clause to all of the letters referring to Deferred Shares. Also, the court found that the Labour Tribunal did not have exclusive jurisdiction over Deferred Share claims and therefore must refer them to arbitration.

MAK v LA [2022] HKCFI 285 (24 January 2022)

Guangdong Shunde Zhinwei Trading Co Ltd v Sun Fung Timber Co Ltd [2022] HKCFI 551 (22 February 2022)

Purportedly on behalf of Sun Fung Timber Co (SFT), co-owner ST contracted with Guangdong Shunde Zhinwei Trading (GD) for the sale of marble (Contract). Failure to deliver the marble within six days would subject SFT to a penalty clause of RMB 2.2 million per day.

As SFT failed to deliver the marble by the stipulated time, GD commenced arbitration proceedings before the Zhanjiang Arbitration Commission in accordance with the Contract. Upon ST’s admission that, acting purportedly on behalf of SFT, it had breached the Contract, an arbitral award was issued ordering SFT to pay GD for the breach. ST also consented to the arbitral award purportedly on behalf of SFT.

SFT's co-owner NI and director DL were unaware of the arbitral award until GD filed a winding-up petition against SFT. The Hong Kong CFI dismissed the petition on the grounds of there being a bona fide dispute over the debt. GD obtained leave to enforce the award in Hong Kong (Enforcement Order), after which NI obtained leave to intervene and set aside the Enforcement Order.

The CFI set aside the Enforcement Order,finding that the Contract was a sham as ST had no authority to bind SFT and the arbitration agreement was invalid. The court held that enforcing the arbitral award would be  contrary to public policy in due to fraud and collusion, finding that the Contract and the arbitral award were procured by ST in collusion with GD. Factors considered included the exorbitant penalty clause, SFT’s apparent financial difficulties in procuring large quantities of marble, and NI’s and DL’s lack of knowledge of the award until GD’s winding up petition commenced. GD’s applicationfor leave to appeal against CFI’s findings of facts and exercise of discretion was refused for the lack of reasonable prospects of success. 

Guangdong Shunde Zhinwei Trading Co Ltd v Sun Fung Timber Co Ltd [2022] HKCFI 551 (22 February 2022)

H v G [2022] HKCFI 1327 (10 May 2022)

The building contract between property developer G and building contractor H contained an arbitration clause with HKIAC Arbitration Rules as the governing law (Arbitration Clause). Additionally, H, G, and H’s subcontractor executed an ancillary warranty of the building contract that contained a provision for the parties to submit to the non-exclusive jurisdiction of the Hong Kong courts (Non-Exclusive Jurisdiction Clause).

Following alleged construction problems in the project, G commenced arbitration proceedings against H for breach of warranty. The arbitral tribunal held that it had jurisdiction over the warranty claims because the Arbitration Clause was wide enough to encompass such claims.

Subsequently, H applied to, and successfully obtained from,  the CFI an order to set aside the tribunal’s jurisdiction determination. The CFI held the Fiona Trusts presumption that rational businessmen intend to subject all disputes to the same forum was not directly applicable, as the warranty was a separate agreement and the sub-contractor was not privy to the building contract. G and H also displaced the presumption by express language as the parties had agreed to include the Non-Exclusive Jurisdiction Clause in the warranty during their negotiations on the building contract. 

H v G [2022] HKCFI 1327 (10 May 2022)

Arjowiggins HKK2 LTD v. X Co [2022] HKCFI 859 (24 March 2022)

Arjowiggins HKK2 Limited (HKK2) and X Co entered into a contract for a joint venture in mainland China (JV Company). Upon the breakdown of the relationship, X Co applied and received a dissolution order of the JV Company from the mainland court. A liquidation committee (LC) was formed. Subsequently, X Co commenced HKIAC proceedings against Arjowiggins for an order for the immediate return of certain JV company documents, claiming that it was entitled to take exclusive possession of those documents. HKK2 claimed that the LC was the proper organ to possess the documents unless and until the court appointed a liquidation committee. Immediately before the arbitration hearing, the court appointed a compulsory liquidation group (CLG). The arbitral tribunal then issued a final award ordering the delivery of the JV documents to CLG.

X Co applied to the Hong Kong CFI for leave to enforce the final award, while HKK2 in turn made a successful application for that award to be  set. The CFI held that a claim for delivery of JV documents to the CLG would fall outside the ambit of the parties’ submission to arbitration, as it conflicted with X Co's assertion that it was entitled to exclusive possession and return of the JV documents regardless of voluntary or compulsory liquidation. Additionally, HKK only pleaded that the LC had the right of possession and made no further pleadings on CLG's right of possession following its appointment.

X Co applied for leave to appeal against the CFI’s decision to set aside the award, claiming that the court erred in holding the arbitral tribunal had no right to raise new issues in ensuring the parties would get a proper remedy, and should have exercised its residual discretion not to set aside the award. The court dismissed X Co’s application for the lack of reasonable prospects of success, given the high threshold required to succeed in an appeal against the court’s exercise of discretion.

Arjowiggins HKK2 LTD v. X Co [2022] HKCFI 859 (24 March 2022)

A v B [2022] HKCFI 3620 (1 December 2022)

A was granted an ex parte injunction to restrain B from disclosing, publishing, or communicating information about certain  arbitrations commenced in Hong Kong between the parties and any awards ultimately rendered from the arbitrations. A sought a second ex parte injunction to restrain B from disclosing information concerning the arbitrations and awards in those arbitrations associated with a certain product, including the issuance, promotion, and redemption of such product (Restraining Order). A issued a third summons requesting the CFI to hear the Restraining Order application urgently.

A submitted that B’s application to the court in parallel proceedings in the Seychelles on restructuring scheme involved or contemplated similar issues concerning the product, hence the application for the Restraining Order directly referring to such a product should not be delayed. The court refused to grant the Restraining Order on the basis that the court has discretionary power and the grounds for declining an application of interim measure are non-exhaustive. In addition, the court emphasized the enforcement of the “minimal curial intervention” policy to acknowledge the parties’ choice to arbitrate and the autonomy of the arbitral process. The court also stated that as a matter of public policy, it would be unnecessary to use duplicated costs and judicial resources for the same issues to be submitted to both the Hong Kong and Seychelles courts, in addition to an arbitral tribunal, when the parties opted for arbitration.

A v B [2022] HKCFI 3620 (1 December 2022)