Hong Kong arbitration update: HKIAC records unprecedented HK$92.8 billion in dispute with parallel supportive Hong Kong court supervisory decisions

Background

The applicant, who was a licensed moneylender in Hong Kong, entered into two agreements with the respondent borrower, a Loan Agreement and a Supplemental Agreement. The terms of the loans were essentially the same, however the Supplemental Agreement (which prevailed in the event of any inconsistency) included a revised clause relating to the manner in which disputes would be resolved:

"Any dispute or difference arising out of or in connection with the Loan Agreement and this Supplemental Loan Agreement shall, at the option of the Claimant (or the Plaintiff, as may be applicable), be referred to and finally resolved by arbitration administrated by the Hong Kong Arbitration Society and in accordance with the HKAS Online Arbitration Rules for the time being in force or by court proceedings in Hong Kong courts.

凡因借款合約及本補充貸款合約所引起的或與之相關的任何爭議或意見分歧，均應由申請人(或原告人，視何者適用而定)選擇提交香港仲裁公會按其現行有效的香港仲裁公會網上仲裁規則進行仲裁，或提交香港法庭進行法院程序，最終解決。"

In the Supplemental Agreement, the respondent's email address was: xyz@china.hk.

The applicant obtained a favourable award in arbitration on 28 November 2022. Following that, it also obtained an enforcement award from the Court of First Instance (“CFI”) on 2 December 2022. The respondent sought to set aside both the award and the enforcement order, but the application had been brought more than 3 months after the receipt of the award, and was therefore out of time (Model Law, Article 34(3), as given effect by s. 81 of the Arbitration Ordinance (“AO”)). 

As for the enforcement order, the Court held that it should be set aside. It addressed two issues as follows.

Was there a valid arbitration agreement?

The respondent's first line of argument was that the arbitration clause contained in the Supplemental Agreement was not a valid arbitration agreement, as there was no "element of compulsion" requiring the parties to arbitrate. This argument was rejected by the judge, who held:

"12. In this case, if the dispute resolution clause in the Supplemental Agreement confers an option to litigate, such an option is conferred only on the lender, i.e. the Applicant, and not on the Respondent as borrower. As such, when the Applicant exercised its option and chose arbitration as the method of dispute resolution, in this case by commencing the Arbitration, the Respondent is bound by the Applicant’s choice, an arbitration agreement came into existence and the Respondent is compelled to follow the option conferred on and chosen by the Applicant. On an objective reading of the dispute resolution clause in question, there is no option at all conferred on the Respondent.

13. In my judgment, the Supplemental Agreement contains an arbitration agreement which replaced the dispute resolution clause in the Loan Agreement. Such arbitration agreement is valid and binding on the Respondent, and confers jurisdiction on the tribunal."

Was the respondent given an opportunity to present his defence? (Lack of notice)

The second line of argument was that the respondent was unable to present his defence in the arbitration (AO, s. 86(1)(c)(ii)). Although it was not expressly relied on by the respondent, the Court accepted that this ultimately turned on the issue set out in AO, s. 86(1)(c)(i) – namely, whether or not the respondent was "given proper notice of the appointment of the arbitrator or of the arbitral proceedings". In the circumstances, there was no prejudice to the applicant since the respondent, would necessarily have had to show that he was not properly served the notice of arbitration, in order to show he was deprived of an opportunity to present his defence.

The respondent's case was that the notice of arbitration had been sent to the wrong address, namely xyz@chinat.hk, instead of the address listed in the Supplementary Agreement, xyz@china.hk. The only evidence of this was the arbitration award itself – indeed, the respondent had not actually given any evidence that he did not receive the notice of arbitration. Nonetheless, in the judge's view, the award was dissatisfactory:

"28. Despite the pro-arbitration approach, an arbitral award is recognized and enforced by the Court only if the award and the arbitral process leading to the award is structurally intact and there is due and fair process. The solemnity afforded to the award by the Court’s recognition and enforcement cannot be justified, if the award is shown on its own face to be irregular, and contradictory to the terms of the arbitration agreement. The Court cannot enforce any haphazard document as a judgment or order of the Court. Nor should the credibility and integrity of the arbitration process be compromised by the enforcement of an award which cannot stand on its face. Care must therefore be taken by an applicant, to ensure that the documents (including the award in question) presented to the Court in support of an application to enforce the award are all correct, and in order, for enforcement of the award to be allowed by the Court.

29. In this case, the Court cannot turn a blind eye to the fact that the Award on its face refers to notice of the Arbitration having been served at an address or by a mode of service which is different to that stated for the Respondent in the Supplemental Agreement, which is the contract stated to be enforced by the Award. The contents of paragraph 11 of the Award must be taken to be correct and accurate. If it had contained any typographical error, it would have been corrected by the tribunal, on its own accord or on the application of the Applicant, but there has been no amendment of the Award in this case. As I have held, the deeming provision cannot be invoked at all in this case, when the Notice was not sent to the correct email address as is apparent from the Supplemental Agreement."

As can be seen, the failure to implement proper service was ultimately fatal, and could not be redeemed, however "pro-arbitration" the courts may be.

In the outcome, the applicant may very well have to recommence the arbitration in order to cure the defective service of the notice of arbitration.

Background

In February 2022 (which was after the parties entered the agreement), the European Union imposed additional sanctions on the provision of goods and services to the Russian oil and gas sectors. The 1^st plaintiff (as contractor) had entered a consortium agreement for the development of LNG and gas processing plants with the Russian-incorporated defendant (as complex owner), but as a result of the sanctions was forced to suspend work.

Following the contractor's refusal to recommence works, the Russian complex owner attempted to terminate the contract and demanded that advance payments be returned. In the Russian courts, it obtained a freezing order over the plaintiffs' assets in Russia. 

Originally, that freezing order had been granted in support of anticipated arbitration. However, it had thereafter been amended to maintain the freeze over the assets in question while the Russian owner pursued its claims in Russian courts, in breach of the arbitration agreement.

The contractor obtained an anti-suit injunction from the Hong Kong court, which the owner applied to discharge.

Legal principles

The judge began her analysis by noting that:

"24. The position concerning anti-suit injunctions in the arbitration context is now clear from the authorities. The Court will be ready to grant an injunction to restrain proceedings brought in breach of an agreement to arbitrate, and will ordinarily exercise its discretion to grant such an injunction unless the defendant can show that there is a strong reason to the contrary".

The Court also noted the significant distinction between an injunction to restrain a breach of an arbitration agreement (akin to an exclusive jurisdiction clause) and an injunction to restrain proceedings on forum non-conveniens grounds or an injunction to restrain foreign proceedings which are vexatious or oppressive, explaining that the:

"… justification for the grant of relief in the first type of case is that the injunction is to uphold and enforce the positive promise of a party to arbitrate the dispute, and the negative right to be vexed by proceedings brought in breach of the arbitration agreement. Accordingly, there is no need to prove that the arbitral tribunal is the more convenient forum, and (as Lord Justice Millett observed) no need to feel diffidence in granting the injunction, or to exercise the jurisdiction sparingly and with great caution, for fear of giving an appearance of undue interference with proceedings of a foreign court."

Where the foreign proceedings are in breach of an arbitration agreement, the Court would only refrain from delivering an anti-suit injunction if it could be demonstrated that there were "strong reasons" for suing in a non-contractual forum. Citing A v B [2022] HKCFI 1031, the Court noted that such reasons would require "something unforeseeable at the time of the contract, or something so exceptional that goes to the interests of justice".

Exclusive jurisdiction of the Russian Court?

Whilst the initial freezing order in Russia was sought in support of arbitration proceedings, the defendant's position eventually morphed into the contention that the Russian court (and not an arbitral tribunal administered by the HKIAC) had exclusive jurisdiction to hear the parties' disputes. 

The argument was advanced on the basis that the Russian Procedural Code conferred exclusive jurisdiction on the Russian Court over (1) disputes involving parties sanctioned by a foreign state, and (2) disputes between one Russian or foreign party and another Russian foreign party, where the cause of action in the dispute is restrictive measures introduced by a foreign state. 

The judge was unpersuaded. First, even reading the Procedural Code on its face, the relevant provision (Article 248.1) did not provide a basis for the defendant's position. This was because it only applied "unless otherwise established [by international treaty], or by agreement between parties pursuant to which disputes involving them shall be considered by a foreign court, or an international commercial arbitration located outside the Russian Federation" (emphasis added). Here, the parties had an arbitration agreement, meaning that the section was of questionable relevance in any event. 

Second, the contractor’s Russian law expert considered that the "Russian Court may not accept its exclusive jurisdiction under Article 248.1 if the parties have entered into an arbitration agreement…"

Third, there was no basis to argue that the arbitration agreement was unenforceable under Russian law, as was suggested: 

• The owner relied on Article 248.1(4) of the Procedural Code, which carved out jurisdiction for the Russian Courts where an arbitration agreement is unenforceable "due to the application, in relation to one of the persons participating in the dispute, of restrictive measures of a foreign state creating obstacles for such a person in access to justice". 
• The owner had claimed, among other things, that "Hong Kong, unlike mainland China, has a close connection to the UK, which is unfriendly towards Russia, which also limits the Claimant's access to justice" and that "the Claimant will not have full access to justice in the HKIAC for fair and impartial resolution of the Dispute". 
• The Court robustly rejected the notion that there would be any limitation on the owner's access to justice in Hong Kong: 
  • "55. In my judgment, the Defendant’s claims of its inability to gain access to justice and to obtain a fair trial by arbitration in Hong Kong are grossly exaggerated, if not totally based on false premises. First and foremost, the Sanctions have no legal effect in Hong Kong. Secondly, it is patently clear that the Defendant was able to have access to lawyers in Hong Kong, who have represented them from the time of the initial ex parte application for the HK Injunction until now. Thirdly, as the Plaintiffs have sought to highlight, our former Chief Justice, Geoffrey Ma, has been successfully appointed to the Tribunal upon the Defendant’s nomination in the Arbitration. There is no suggestion, and no basis for any complaint, that the Defendant has encountered any difficulties with the HKIAC in connection with the Arbitration, or with its representation in or conduct of the Arbitration. The Arbitration in Hong Kong is subject to and governed by the Arbitration Ordinance, under which arbitrators have duties to act independently, fairly and impartially and to treat the parties with equality. As the Plaintiffs pointed out, and I agree, the Defendant’s allegation that it will not be fairly represented or heard by the Tribunal, or that somehow it will be met with hostility were its claims to be pursued in Hong Kong, is highly fanciful. The Court cannot give credence to the Defendant’s unsubstantiated assertion, that the mere existence of the EU Sanctions will create obstacles for the Defendant to gain access to justice in Hong Kong, to render the arbitration agreement contained in the Contract unenforceable, under the Procedural Code or otherwise." (Emphasis added)

For these among other reasons, the Court ultimately found that jurisdiction belonged to arbitration in Hong Kong, rather than the Russian Courts.

Loss of security

The owner also argued that an anti-suit injunction would jeopardise the security provided by the freezing orders. Again, the Court rejected the defendant's position. 

The injunction in fact provided that the defendant "take all necessary steps to seek a stay of and take no further steps in" the Russian proceedings for recovery of the advance payment. But the Russian freezing order could remain in place. However, the judge noted that even if the Russian court could not preserve the freezing order, the anti-suit injunction would still be granted, given there was a contractual agreement to arbitration. The real injustice would be to deprive the contractor of that agreement by permitting the owner to thwart the arbitration agreement.

Enforcement

Finally, the owner had argued that any arbitration in Hong Kong would be futile because the prevailing sanctions meant that any award could not be enforced outside Russia. This too was dismissed by the Court. 

The sanctions had no effect in Hong Kong, and many other countries outside the European Union, where the plaintiff had assets. The Court also pointed out that the award would be enforceable in Russia, where both the plaintiff and the defendant had assets. "On that basis", it concluded, "it cannot be said that the Arbitration will be futile in the sense that it will not produce any ‘enforceable’ award."

It was also noted that as a matter of general principle, many arbitrations would result in awards without the possibility of any amount "recoverable or recovered by the successful party", but that this was no reason to not enforce an arbitration agreement. 

Background

On 12 January 2023, the Court granted leave to the Applicant (“Song”) to enforce in Hong Kong an arbitral award of the Chengdu Arbitration Commission (“Commission”) dated 11 October 2021 (“Award”). The award, in the applicant's favour, was for more than RMB 337 million, together with interest and costs. The Respondent, applied in Hong Kong to set aside the enforcement order pursuant to AO, s. 95 on grounds that: (i) the arbitration agreement was not valid, (ii) the Respondent was unable to present his case, (iii) the composition of the Tribunal or the arbitral procedure was not in accordance with the parties’ agreement, and/or (iv) enforcement of the award would be contrary to public policy (“Setting Aside Application”). 

The thrust of the respondent's case was that one of the arbitrators (referred to in the judgment as "QF") was disengaged:

"According to the inspection of the files of the arbitral proceedings and the materials Lee have so far obtained, QF was not physically present at the 2nd Hearing and had been attending the hearing remotely, but he was seen moving from place to place throughout the proceedings, in public, and using only his mobile telephone without any earphones. It is claimed that these facts are relevant to Lee’s application to set aside the Enforcement Order, on the ground that it would be contrary to public policy to enforce the Award, when the proceedings were conducted in such a manner."

On 22 March 2023, the respondent applied to the Court under the Arrangement, to seek assistance from the Mainland Court to obtain testimonies from QF and from the secretary to the Tribunal as to the arbitrator’s location and movements at the time of the second hearing and the nature of his participation at the hearing.

The Court dismissed the Respondent’s Summons.

Basis for assessing an application under the Arrangement

The Respondent sought to support his application with the argument that it was permissible under PRC law to direct an arbitrator to give evidence to a Mainland Court about the arbitration. Mimmie Chan J considered this was not relevant. Although PRC law governed (i) the parties' substantive contract, (ii) the parties' arbitration agreement, and (iii) the procedure of the Arbitration itself, the hearing of the Setting Aside Application was governed by Hong Kong law, including on questions of procedure and the admissibility of evidence. It followed that:

“The fact that the Mainland Court may have power… to direct an arbitrator or the secretary of the tribunal to provide evidence to the Mainland Court in Mainland proceedings does not mean that the Hong Kong Court has power to compel QF as one of the arbitrators to give evidence for the purposes of the Setting Aside Application before the Hong Kong Court”.

While the Arrangement did not set out the circumstances in which a Hong Kong Court could request assistance, the judge considered that a request should only be made if it would ultimately be admissible in the Hong Kong proceedings for which it was sought. Otherwise, the exercise would be a "waste of costs and resources". 

Arbitral immunity

As a starting point, the Court noted that there has been a "rapid growth" in the use of arbitration in recent decades, and that arbitrators essentially exercise a judicial or quasi-judicial function:

"Arbitrators appointed under the parties’ agreement are appointed to decide on their formulated dispute which has arisen, in lieu of having the matter litigated before the courts. Arbitrators decide the parties’ dispute on facts and on law, on the evidence presented to them and after hearing submissions and arguments made by and for the parties. The arbitration is conducted in accordance with rules of procedure agreed to by the parties, and arbitrators have the duty to act impartially and fairly. Their awards have to be reasoned to enable the parties to understand why the award was made against them. The parties agreed that such an award will be final and binding."

It followed that, for the same reason the Courts recognise judicial immunity, there is also a "need to protect the course of [arbitrators] independent judgment from threats of suit as well as from collateral attacks". The decision is consistent with a recent line of cases in Canada.

The Court also declined to carve out any discrete exceptions to immunity, holding that it would be contrary to the policy of arbitral autonomy if an arbitrator could be compelled to give evidence on even such matters as what had been included in the submission to arbitration, or for the purpose of deciding on the jurisdiction of the tribunal.

The respondent's challenge

The CFI held that it was within the power and discretion of the Tribunal to conduct the hearing remotely and for QF to participate as he did. However, it was not open for the Respondent to "compel QF as the arbitrator to justify or explain or to give evidence generally on his conduct of the process of the 2^nd Hearing…"

In any event, the Court held evidence as to QF’s conduct and the manner of his participation in the hearing could be established from the materials already available and inspected by the respondent’s lawyers. Therefore, it was possible for the respondent to advance his claim under AO, s. 95 without the testimony sought from QF in any event (not that it would have changed the outcome, had that been impossible for some reason). 

Background

In a nutshell, the respondent relied on 6 grounds for the Setting Aside Application:

1. Breach of duty of good faith of the applicant by not disclosing the contact details to the Tribunal.
2. Improper service of notice of arbitration.
3. The respondent being deprived of the opportunity to nominate an arbitrator to the tribunal.
4. The conduct of one of the arbitrators deprived the respondent of the opportunity to present his case and the right to a fair hearing, contrary to public policy.
5. The respondent was not given a copy of the Supplemental Submissions filed after the hearing, so he was not able to address the matters raised in the submissions . 
6. The underlying Contract and the arbitration agreement contained therein is invalid and unenforceable under PRC law.

Grounds 1 to 3: Complaints regarding Contact Methods, Service and Nomination

Mimmie Chan J considered the first three complaints together and held that the applicant had effectively served the notice of arbitration to the respondent according to the applicable rules of the Commission (CAC rules), which provided for deemed service of documents on the party served and applied notwithstanding the Respondent’s complaint that he had moved out and sold his old apartment.

In addition, the Respondent participated in the arbitration through his lawyer without any protest. Hence the Court accepted the submission that the Respondent had effectively “waived any irregularity concerning the service of the notice and documents of the Arbitration, and any irregularity in the constitution of the tribunal”.

Ground 4: Arbitrator’s conduct

Having carefully reviewed the video recording of the 2^nd hearing, the Court made several observations (in addition to those above):

"42. Approximately 6 minutes from the commencement of the Excerpt of the Video, Q could be seen walking out of the main door of the premises into an open public area. He remained standing there for a short period of time, and then went off-line at around 7:50 minutes after the commencement of the Excerpt. Q went online again at approximately 8:20 minutes, before going off-line again at around 8:28, and again at 9:14. When Q appeared online again at 9:56 minutes, he was seen inside a vehicle which appeared to be a private car as he was sitting in the front seat and adjusting his seatbelt. The video image froze again at 10:35 minutes of the Excerpt, and when Q appeared online at 10:58, the chairman of the tribunal could be heard asking if Q could hear him but there was no response whatsoever from Q for some time. At 11:25 minutes of the Excerpt, Q spoke for the first time to state that he had no reception as he was on or proceeding to the high-speed railway. The manner of Q’s attendance of the 2nd Hearing, by going outdoors where reception was poor, was obviously disruptive of the proceedings, to say the least.

43. It may well be Q’s claim that he had in fact heard the entirety of the proceedings of the 2nd Hearing throughout. It should be pointed out, however, that it does not appear from the Video that Q was using a headphone or any earpiece, so it can be inferred that he was only relying on the speaker of his mobile telephone or other handheld device. It can also be observed from the Excerpt that on at least 2 occasions when members of the tribunal or the secretary of the tribunal attending the hearing had spoken to ask if Q could hear them, or was online, Q had made no answer at all, nor had he made any indication or gesture that he had heard the questions. Neither did Q give any explanation for the times when he was disconnected, as to whether he had heard the proceedings, or otherwise.

44. During the time when Q was seen wandering around in the manner described above, Lee’s lawyer, and then Song’s lawyers, were addressing the tribunal. Significantly, as Counsel for Lee pointed out, Q’s movements took place during the time when the parties’ lawyers were adducing and challenging the evidence produced, and when members of the tribunal were asking questions as to the evidence and the parties’ respective case."

The Court referred to a number of cases concerning the importance of justice and fairness in the process of a trial or a hearing. The relevant standard of application was that of an objective and reasonable third-party observer. With these principles in mind, the Court specifically commented that, “… there is no apparent justice and fairness, when a member of the decision-making tribunal was not hearing and focused on hearing the parties in the course of the trial.”

Mimmie Chan J highlighted that Hong Kong Courts, being the enforcement forum, would apply their own standard and law when deciding whether it would be contrary to the public policy of Hong Kong (i.e. as opposed to the law of the supervisory jurisdiction). The Court found that the conduct of the 2^nd hearing lacked due process and fell short of the high standards expected by the Hong Kong courts for a fair and impartial hearing.

Grounds 5 to 6: Other complaints

Having found that the conduct of the hearing was a sufficient independent ground to set aside the enforcement order, it was not necessary for the Court to consider the final two grounds in any detail. 

Procedural history in the China Mainland

In the CIETAC arbitration, G claimed that X fraudulently induced him to sell his interests in an online music company at an undervalue. G later obtained a favourable award against X (“Original Award”), in which X was ordered to pay damages to G to the tune of RMB 660,752,667.05. Apparently dissatisfied, X then commenced setting aside proceedings on China Mainland (“Setting Aside Proceedings”), while G applied for leave to enforce the Original Award in both Hong Kong and China Mainland. Having considered that there were reasonably arguable grounds in the Setting Aside Proceedings, the Hong Kong Court granted a short adjournment of the Hong Kong enforcement hearing.

In the Setting Aside Proceedings, the Mainland Court found that the tribunal had collected two pieces of evidence which were not examined by the parties during the arbitration, namely, documents on the closing price and the number of certain shares as stated in the 2019 Annual Report of the company ("Evidence Issue").

As a result, the Mainland Court issued a notice to the tribunal to direct a re-arbitration (“Notice”) pursuant to Article 61 of the Arbitration Law of China Mainland. The new tribunal acknowledged that the re-arbitration was confined to the evidence issue as stated in the Notice, and only for the purpose of rectifying this procedural defect. The other parts of the Original Award were not to be examined. 

In the re-arbitration, the tribunal considered that the evidence in question was “true, legal and relevant”. It upheld the findings made by the original tribunal, and X remained liable to pay the damages ordered in the Original Award ("New Award"). 

Enforcement in Hong Kong

In the adjourned hearing in Hong Kong, X tried to resist enforcement on the ground that because of the re-arbitration, the Original Award was either not “binding” or had been “suspended” by the Mainland Court or under PRC law. It was not disputed by the parties that the re-arbitration had the effect of terminating the Setting Aside Proceedings according to PRC law. However, the issue in question was whether the Original Award itself also became invalid.

The Court rejected X’s argument and observed that the Setting Aside Proceedings in China Mainland had ended without an order setting aside the Award. Since re-arbitration was confined to the Evidence Issue, the only available conclusion was that the other grounds for setting aside the Award were not accepted by the Mainland Court. 

The Court also highlighted the difference between an order setting aside an award from a supervisory court and an order permitting or refusing enforcement of an award (potentially in another jurisdiction to the supervisory court), to explain that even if an award is set aside, enforcement can still be possible in certain circumstances. This disposed with the argument advanced by X, supported by a PRC law expert, that termination of enforcement proceedings results in the Award ceasing to be an "appropriate subject of enforcement" altogether. 

Having noted the similarity of Article 61 of the Arbitration Law and AO, s. 81(4), the Court stressed that “the suspension which may be ordered is in lieu of setting aside the award, the purpose being to enable the tribunal to take action to eliminate any ground for setting aside”. It also quoted an English case law[1] for the well-established principle that “the powers and duties of the arbitrator cannot exceed what is necessary to give effect to the order for remittal”.

In conclusion, the Court held that the re-arbitration had no effect on the Original Award, and X’s application was dismissed accordingly, with costs awarded to G on indemnity basis. 

X had also argued that the New Award was unenforceable, on the basis that the re-arbitration procedure had not followed the parties' arbitration agreement. The Court did not see any merit in this contention but held in any event that: (1) the challenge should be pursued separately; and (2) "In view of the delay to the enforcement of the Award which [have] already occurred as a result of what has transpired to be unmeritorious challenges to the Award", there should be no further delay pending any additional application by X to set aside the New Award.

Background

The central entities involved in the dispute were (using the letters given to them in the judgment):

• N: a BVI company with real estate business in China Mainland. As noted in the judgment, "N started life a high-tech company in Shenzhen, but evolved into a successful property investment company and became listed on the New York Stock Exchange".
• G: the largest shareholder of N, with about 23.9% of N's shares (and wholly-owned subsidiary of K).
• K: G's parent company, listed on the Hong Kong Stock Exchange.
• IZ: an American investment fund with shares in N. 

The substantive dispute started when the management of N made a decision to purchase some land in Dongguan without consulting N's board of directors. In light of this, IZ and some supporters proposed to call a shareholders’ meeting to consider a change of directors. N countered with an allotment of shares to G and another company WR, so as to give them enough votes to thwart IZ’s plan.

The share placement was made pursuant to a securities purchase agreement between G and N (“SPA”), which was challenged by IZ in the BVI Commercial Court. The SPA was held to be contrary to section 121 of the BVI Business Companies Act (“Section 121”) on the basis it was not made in the interest of the company and for an improper purpose. It was therefore void. However, the directors of N were not found to have breached their duties to act honestly and in good faith.

The Arbitration

As the placement was void and set aside, G sought to recoup the money it paid for the shares by making unjust enrichment and restitutionary claims in an arbitration in Hong Kong. N resisted by raising illegality as a defence, arguing that the claims should not be allowed since they arose in connection with a transaction held illegal by the BVI Court. 

 The different approaches regarding illegality

For nearly three decades, Hong Kong Courts had followed the “reliance approach” in Tinsley v Milligan [1993] UKHL 3, which established that remedy should be barred where the claimant has to rely on their own unlawful act to succeed. This general rule had been criticised as overly mechanical and producing unjust outcomes.

In 2016, this approach was replaced by the UK Supreme Court in Patel v Mirza [2016] UKSC 42, which preferred a “range of factors approach”. On this approach, the full circumstances of the case should be considered to determine whether public interest calls for the denial of relief. 

After Patel, the Hong Kong Courts noted the change in law in the UK, but declined to review the correctness of Tinsley as it was bound by the decision of the Court of Appeal to follow Tinsley. 

Having considered the parties’ submissions, the arbitrator applied the strict approach in Tinsley and dismissed G’s claim on the ground of illegality. However, in fact just 6 days before the publication of the award, the Court of Appeal had handed down its decision in Monat Investment Limited v All persons in occupation [2023] HKCA 479, where it clarified the position regarding illegality and held that the more holistic "range of factors" approach from Patel should be preferred in Hong Kong to the rigid Tinsley approach. As one can appreciate, the choice of approach was significant for G. Since G had been deprived of a very significant sum (approximately HK$ 1 billion), it could have been argued that barring G's claims based on illegality was overly harsh and disproportionate.

The setting aside application

Accordingly, G applied to set aside the awards in the Hong Kong Court. The difficult question was whether the tribunal’s application of Tinsley was (i) an error of law; or (ii) an erroneous view of public policy which is itself in conflict with public policy?

To respect party autonomy and the finality of arbitral awards, it is well-established that an error of law is not a breach of natural justice and the Court does not sit on appeal from the tribunal’s decisions. On the other hand, under AO, s. 81(1) or Article 34(2)(b)(ii) of the Model Law, conflict with public policy is a sufficient ground for setting aside an award.

The decision

In its decision, the Court held that it was entitled to review the decision, not because there was any error of law, but because of,

“…the Court’s power and duty to consider the issue of whether the Awards are contrary to the public policy of Hong Kong as at today, and whether the arbitrator’s consideration of public policy in his decision was made in accordance with the guidelines set out in Patel and now recognised by the Court of Appeal in Monat, to be applicable to Hong Kong on the question of illegality…”

The Court further explained that it was not interfering with the tribunal’s findings of law, but to determine whether there was any conflict between the award and public policy based on the findings of law. It relied on the two-stage analysis established by the Privy Council in Betamax v State Trading Corp [2021] UKPC 14:

N argued if this was a public policy issue, the tribunal merely followed a case which had been part of the law before Patel, so there was nothing shocking to the conscience of the courts to enforce the decision. The Court disagreed and emphasised that the public policy that it had to consider was as at the current date. 

In the end, the Court suspended the setting aside proceedings and remitted the matter to the tribunal for it to consider the decision again, this time taking into account the important judgment in Monat. 

Background

R, a Hong Kong company entered into a limited partnership agreement (“Agreement”) with A, a Cayman company. Due to a dispute on investment distributions under the Agreement, R commenced arbitration against A and B (B was a special purpose fund of which A is a general partner). 

However, a third-party C later applied to be joined as an additional party to the arbitration. C, a China Mainland resident, claimed that R in fact acted as her agent and signed the Agreement on her behalf, and accordingly, she was the principal and beneficiary under the Agreement. After hearing this as a preliminary issue, the tribunal subsequently issued a “Partial Final Award on Jurisdiction” and held that C was indeed the true principal and party to the Agreement.

Dissatisfied with the result, R applied under AO, s. 34(1)(3) to seek the Court’s declaration that the tribunal has no jurisdiction over C. 

The Tribunal’s ruling on jurisdiction

Under AO, s. 34(1)(3), the question of jurisdiction can only be decided by the Court if the tribunal has ruled that it does have jurisdiction. Therefore, the first question that the Court had to decide was whether there was in fact any ruling on jurisdiction. The Court held:

“There is no basis to characterize the Award and the ruling made therein as anything other than one on a true question of jurisdiction. It is a finding on the existence of a valid and binding arbitration agreement as contained in the 2nd Amended LPA, to which C was a true party and principal, as the Tribunal found.”

The Court also reaffirmed the general proposition that “a difference or disagreement over the proper parties to an arbitration agreement is a true matter of jurisdiction”.

The Court’s review

Having decided that there was in fact a ruling on jurisdiction, the Court proceeded with the second question of whether the tribunal was correct. A significant issue was the approach to new evidence. 

Here, C claimed that she had reimbursed R for the money paid for the investment pursuant to the Agreement. However, in Court R produced fresh evidence which purportedly showed that the money was paid for another purpose instead (evidence which it claimed had only recently become available).

The Court confirmed that when reviewing a decision on jurisdiction, the Court is entitled to consider evidence afresh. That means so long as it is “relevant and admissible, regardless of whether it had been adduced, or could have been adduced, before the tribunal”, it can be introduced to the Court. It held,

“… the Court must decide the question of jurisdiction on its own, and it does so on the admissible evidence before it.”

However, it should be noted that in a situation where a party withheld evidence during the arbitration without good reason, “the court may take the view that the source of the evidence is dubious, or that the evidence is not reliable, and attach little or no weight thereto.”

Considering the new evidence and C’s burden of proof, in the end the Court found that C was not a party to the Agreement and overturned the tribunal’s ruling on jurisdiction. Accordingly, the award was set aside, and R’s claim against A and B was to be resolved by the tribunal in the arbitration.