The previous year has been relatively quiet in China. While there have been few reported cases on the enforcement of arbitral awards, the decisions were fact-specific and do not appear to significantly alter earlier rulings of the courts, including the Supreme People's Court (SPC), and the stance of China in taking on the role of a global, internationalised player in the arbitration market. An interesting development is the promulgation by the Shenzhen Court of International Arbitration of its new arbitration rules that expressly provide coverage for investor-state disputes. Given more established and focused alternatives such as the ICSID and SCC, however, it is likely that it will take time before the SCIA (and such other arbitral commissions that follow suit) gain attention and traction in the field of investor-state disputes.
This year's chapter includes developments that have taken place in Hong Kong. Significantly, the Hong Kong government has implemented several important initiatives in its continued promotion of Hong Kong's pro-arbitration stance:
- a the introduction of a bill that, if passed, would permit third-party funding of arbitrations, whether seated in Hong Kong or elsewhere;
- b the introduction of a second bill that, if passed, would clarify the Hong Kong legislature's position that intellectual property rights disputes are arbitrable and related awards are enforceable in Hong Kong; and
- c the setting up of an Arbitration Unit within the Department of Justice that would dedicate efforts to promulgation and development of arbitration law.
Concurrently, the Hong Kong courts continued to deliver well-reasoned judgments that demonstrate fairness to parties and robustness in the proper construction of arbitration agreements.
II THE YEAR IN REVIEW
i Enforcement of arbitral awards in Mainland China
Refusal of enforcement on public policy ground
In last year's review, it was reported that according to the Report of the People's Republic of China on Public Policy as a Ground for Refusal of Enforcement of Arbitral Awards, there was only one case in which the Chinese court has refused to recognise and enforce a foreign arbitral award based on public policy ground.
In June 2016, however, in Wicor Holding AG v. Taizhou Haopu Investments Limited,3 the Taizhou Intermediate People's Court of Jiangsu Province (Taizhou Court) refused to enforce an ICC arbitral award based on the public policy ground.
In July 2011, the claimant (Haopu) commenced proceedings against the respondent (Wicor) in the Taizhou Court. The arbitration agreement provides that disputes shall be ‘arbitrated in accordance with ICC mediation and arbitration rules' and that the respondent shall choose the seat of arbitration. In 2012, the Taizhou Court held that the arbitration clause was invalid because it failed to specify the arbitral institution for the arbitration (Taizhou Court 2012 Decision). Under Chinese law, the arbitration agreement must specify the arbitral institution. The Taizhou Court 2012 Decision was endorsed by the SPC. In this regard, it appears that the Court's conclusion was based on the 1998 version of the ICC rules, given that the 2012 version has since provided that the ICC Court of International Arbitration is the only body authorised to administer arbitrations under those rules.
In November 2011, the claimant (Wicor) commenced arbitration proceedings in relation to a fresh dispute arising from the same agreement. As the respondent (Haopu) failed to designate the seat of arbitration, the tribunal concluded that Hong Kong should be the seat of arbitration. The tribunal rendered its award in 2014.
Upon the claimant's application to enforce the award in Mainland China, however, in 2016, the Taizhou Court held that given that the tribunal's decision was inconsistent with a predated domestic judgment granted by a Chinese court (i.e., the Taizhou Court 2012 Decision), the enforcement of the award shall be refused based on the public policy ground.
In our view, the above decision notwithstanding, such should not be taken as diminishing the Mainland Chinese courts' willingness to enforce arbitration awards. In 2013, the SPC declined to refuse enforcement of two foreign arbitral awards made in December 2010 and January 2011 in Castel Electronics Pty Ltd v. TCL Air Conditioner (Zhongshan) Co, Ltd.4 This is notwithstanding that, in December 2011, the Zhongshan Intermediate People's Court held that the arbitration clause in question was invalid. Presumably, the SPC considered that there was no legal impediment as the two awards were made prior to and predated the Zhongshan Court's decision. In that case, the SPC emphasised that unless any grounds for refusal under Article v of the New York Convention exist, the People's Court shall affirm and enforce the arbitral awards.
First CIETAC Hong Kong arbitral award enforced in Mainland China
In 2012, the China International Economic and Trade Arbitration Commission (CIETAC) established the CIETAC Hong Kong Arbitration Center (CIETAC HK). With effect from January 2015, CIETAC HK commenced provision of administering services in respect of arbitrations seated in Hong Kong.
On 13 December 2016, the Nanjing Intermediate People's Court of Jiangsu Province handed down a judgment permitting enforcement of an award made on 28 November 2015 in an arbitration administered by CIETAC HK pursuant to the 1999 Arrangement Concerning Mutual Enforcement of Arbitral Awards between Mainland China and Hong Kong.
Proposed adoption of the reporting system for international commercial arbitration judicial review in domestic arbitration cases
At present, a Mainland Chinese court intending to refuse to recognise or enforce an international arbitration award must report to the higher court and, ultimately, the SPC. The report must be affirmed by the SPC before the Mainland Chinese court could make a determination.
In a seminar hosted by the Beijing Arbitration Commission, the Beijing International Arbitration Centre, the Australian Centre for International Commercial Arbitration and the Arbitrators' and Mediators' Institute of New Zealand in August 2016, Justice Liu Jingdong, Associate Chief Judge of Civil Division No. 4 of the SPC, revealed a plan to explore the feasibility of extending the reporting mechanism to domestic arbitral awards.5
We anticipate that, if the plan were implemented such that local courts' decisions would come under the pressure of scrutiny by the SPC, there would be a reduction in the number of domestic arbitral awards that are declined enforcement. It would also promote consistency and uniformity between enforcement of domestic and international arbitral awards. This should be welcome by foreign parties who have agreed to domestic arbitrations even for foreign or foreign-related disputes.
ii Arbitrability of anti-monopoly disputes in Mainland China
In August 2016, the Jiangsu Provincial Higher People's Court of Mainland China held that anti-monopoly disputes are not arbitrable under the laws of China.
The claimant commenced proceedings in the Nanjing Intermediate People's Court (Nanjing Court) relating to a dispute arising out of two distribution agreements between the parties. The defendant disputed the jurisdiction of the Court to hear the dispute on the ground that the agreement provides for arbitration instead.
The Nanjing Court dismissed the defendant's jurisdictional claim on the ground that the distribution agreements did not specify one arbitral institution, but set out different arbitration institutions instead, which rendered the agreements void. The Nanjing Court, however, ruled that anti-monopoly disputes may be arbitrated if so provided for by the parties.
The Nanjing Higher People's Court confirmed the lower court's decision on the invalidity of the arbitration clause, but further ruled that civil anti-monopoly disputes between private parties are not arbitrable because the relevant laws in Mainland China expressly provide for litigation as a means to resolve such disputes, public interest favours litigation and public policy considerations override the parties' choice of arbitration over litigation as the mechanism for private dispute resolution.
iii Investor-state disputes
SCIA updates rules to administer investor-state arbitrations
The new Arbitration Rules of the Shenzhen Court of International Arbitration (SCIA Rules), effective from 1 December 2016, seek to expand coverage of the Shenzhen Court of International Arbitration (SCIA) to the administration of investor-state disputes. Article 2(2) of the SCIA Rules provides that ‘SCIA accepts arbitration cases related to investment disputes between states and nationals of other states'. Article 3 provides that ‘the SCIA shall administer the case in accordance with the UNCITRAL Arbitration Rules and the ‘SCIA Guidelines for the Administration of Arbitration under the UNCITRAL Arbitration Rules'. To date, the SCIA is the first arbitral commission in Mainland China to administer investor-state disputes.
SCIA guidelines provide that the default seat of arbitration shall be Hong Kong, meaning that the Hong Kong courts would have supervisory jurisdiction over such arbitrations. This may be because, under Chinese law, there is uncertainty whether investor-state disputes are arbitrable. In any event, it is submitted that Hong Kong is an appropriate seat. First, Hong Kong arbitrators are familiar with and experienced in conducting arbitrations according to the UNCITRAL Arbitration Rules. In this regard, there are 146 Hong Kong arbitrators on the SCIA's panel of arbitrators (accounting for 17 per cent of the total number of arbitrators).6 Secondly, in investor-state disputes involving complex issues with substantial amounts at stake, parties deserve the assurance of proper and quality oversight by the Hong Kong courts of the arbitration process.
It remains to be seen how the SCIA would proceed with the actual administration of an investor-state dispute, which traditionally has been perceived as a specialised form of arbitration commonly administered by ICSID and SCC. A Hong Kong office may well have to be set up to provide administration services from Hong Kong in respect of Hong Kong-seated arbitrations. Another challenge may be the ease of enforcement of a SCIA-administered arbitral award. The SCIA does not have the benefit of the ICSID Convention, ratified by 153 contracting states, which sets out a structured process for enforcement (among other things). As such, enforcement - in particular as against the state - may have to be pursued as if it were a normal commercial award. This could be problematic where the relevant state does not have a bilateral investment treaty or other arrangement pursuant to which the investor could initiate arbitration against the state and consequently the enforcement of an award against it. Insofar as China is concerned, in 2008, the SPC issued a judicial interpretation stating that the Chinese courts would only consider applying the New York Convention in respect of enforcement of arbitral awards regarding ‘contractual and non-contractual commercial disputes.'7 On the face of the interpretation, investor-state disputes do not appear to be covered. Secondly, the doctrine of absolute immunity applying in China may prevent enforcement in the absence of a bilateral investment treaty.
iv Hong Kong legal developments
Arbitration and Mediation Legislation (Third Party Funding) Amendment Bill 2016 (Third Party Funding Bill)
On 12 October 2016, the Law Reform Commission of Hong Kong published the Report on Third-Party Funding for Arbitration (Report).8 The Report recommends the legalisation of third-party funding in arbitration and related proceedings.
On 30 December 2016, the Hong Kong government introduced and gazetted the Third Party Funding Bill. If the Bill is passed, the Arbitration Ordinance (Arbitration Ordinance)9 would be amended to provide to the effect that third-party funding of arbitrations, whether seated in Hong Kong or elsewhere, does not contravene the law of champerty.
The common law rules against maintenance and champerty have survived to the present day, as confirmed by the Hong Kong Court of Final Appeal.10 Although the issue of whether those rules apply to arbitrations was expressly left open by the Court, in practice, no legal practitioner in Hong Kong would run the risk of conducting any arbitration under an arrangement that may fall foul of such rules. The Third Party Funding Bill, if passed, would provide certainty and an appropriate framework for legal practitioners to do so.
However, funding by legal practitioners or persons providing legal services would remain impermissible, whether such funding is provided directly or indirectly, in Hong Kong or elsewhere. As a result, conditional and contingency fee arrangements would still be illegal,11 and any agreement for contingency fee arrangements would be invalid.12
In conjunction with the proposed legalisation of third-party funding, the following safeguards have been proposed: a code of practice being issued setting out the standards and practices, including ethical and financial standards, expected of third-party funders; and that a funded party has the obligation to notify the other party in an arbitration and the arbitration body of the existence of the funding agreement. On the other hand, it is considered not necessary to grant the arbitral tribunal the power to order security for costs against the third-party funder.
The Third Party Funding Bill should be welcome by legal practitioners13 and the community alike. Third-party funding of international arbitrations has increasingly become popular and widely accepted. In Singapore, on 10 January 2017, legislation was enacted that legalised third-party funding in arbitrations. The Bill, if passed, would ensure that Hong Kong remains a ‘competitive' jurisdiction for arbitration and arbitration practice. This is, in particular, when the quality of Hong Kong arbitrators and practitioners have long enjoyed an international reputation and recognition that ought not be diminished by other, funding-related considerations in the parties' choice of their agreed forum to resolve disputes.
Arbitration Unit of the Hong Kong Department of Justice
On 30 May 2016, The Legal Policy Division of the Hong Kong Department of Justice (DoJ) established the Arbitration Unit. The Arbitration Unit shall be responsible for formulating policies on Hong Kong law of arbitration, dedicating to address the promotion and development of arbitration policies, monitoring the operation of the Arbitration Ordinance, developing specialised areas of arbitration, such as investment arbitration, maritime arbitration, intellectual property rights arbitration, and cooperating with the UNCITRAL.
In the latest policy address published by the Hong Kong government, it was noted that a Joint Dispute Resolution Strategy Office has been formed comprising the Arbitration Unit and the Mediation Team (under the Civil Division of the DoJ) for the purpose of enhancing the overall coordination of promotional work for mediation and arbitration services in the DoJ. According to the legislative council papers, under the One Belt One Road Initiative, it is anticipated that regular promotional activities will be conducted to promote Hong Kong's legal and arbitration services in some 60 overseas countries, and the Arbitration Unit will be heavily involved in the planning and liaison work, and other duties involved in these activities.
Arbitration of intellectual property rights (IPR) disputes in Hong Kong
The Hong Kong Arbitration (Amendment) Bill 2016 (Bill), introduced on 2 December 2016, seeks to clarify that under Hong Kong law, IPR disputes are capable of arbitration, and that such arbitral awards are enforceable in Hong Kong by registering and enforcing them as if they were Hong Kong judgments.
The Bill was introduced after the Hong Kong International Arbitration Centre announced a new Panel of Arbitrators for IPR Disputes. The Bill, if passed, would amend the Arbitration Ordinance and progressively come into force from 1 October 2017.
There has been continuing debate in various jurisdictions whether arbitration of IPR disputes is contrary to public policy. Some jurisdictions take the view that IPR are matters that affect public interest, and that therefore certain disputes, in particular validity and infringement disputes, should not be decided by private arbitration.
Neither the Hong Kong courts nor legislature have hitherto expressed any position on the issue. The introduction of the Bill now sets out the legislature's position. Interestingly, the Legislative Council Brief did not really state the reasons behind its position.14 Instead, it introduced the Bill as seeking to ‘clarify' the legal position regarding the arbitrability of IPR disputes and the enforceability of their awards in Hong Kong. This is once again indicative of Hong Kong's pro-arbitration stance.
v Hong Kong court decisions
Ambiguous arbitration clauses
There is no question that where an arbitration agreement provides that parties shall resolve their disputes by arbitration, then the parties must submit their disputes to arbitration.15
Question arose, however, in Incorporated Owners of Wing Fai Building, Shui Wo Street v. Golden Rise (HK) Project Co Ltd,16 where a Chinese arbitration agreement provided that either party ‘may' or ‘can',17 by notice in writing to the other party, refer the relevant dispute to an arbitrator to be agreed by the parties.
Construing the arbitration agreement in the relevant ‘factual matrix',18 in particular other clauses in the agreement, the court concluded that the word ‘may' shall be construed to bear its literal meaning in the permissive sense, and thus the parties have a choice whether to submit to arbitration or to entitle them to commence proceedings in court. At the same time, the court recognised that there is another line of cases that reached a contrary position upon construction of the arbitration agreement in those cases.
For instance, in Anzen Limited and others v. Hermes One Limited,19 the Privy Council held that the phrase ‘may submit' in the arbitration clause did not prevent either party from initially commencing proceedings in the courts, but gave both parties a right to apply for a stay of proceedings and compel the other party to submit the dispute to resolutions by arbitration.
In Bank of China Ltd v. Yang Fan,20 the High Court held that notwithstanding the word ‘may' in a jurisdiction clause, the parties agreed that the specified court in question has exclusive jurisdiction over the relevant dispute.
The lesson learnt is that, to create certainty in the effectiveness of an arbitration clause, it is incumbent upon the parties to expressly provide for mandatory arbitration if that is what they so intend. Unlike the word ‘may', which has created divergent case authorities, the word ‘shall' has proven effective in compelling parties to arbitration. Indeed, this is the word of ‘choice' in most, if not all, model arbitration clauses.
‘Good faith' and ‘choice of remedies'
A party who does not challenge jurisdiction in foreign arbitral proceedings may lose the right to resist enforcement of the award in its local jurisdiction on the ground that the arbitral tribunal loses jurisdiction. This is known as the ‘good faith' principle.
On the other hand, a seemingly contradictory principle, known as the ‘choice of remedies' principle, states that ‘passive remedies' would still be available to the award debtor who did not utilise his or her ‘active remedies'. An ‘active remedy' includes taking positive steps to invalidate an arbitral award, such as raising an application to challenge jurisdiction. A ‘passive remedy' includes resisting recognition or enforcement of an award in the jurisdiction where such enforcement is sought.
In Astro Nusantara International v. PT Ayunda Prima Mitra,21 the arbitral awards in question were made in favour of the claimant by a tribunal seated in Singapore. In the course of arbitration, the defendant reserved its position on jurisdiction of the tribunal to adjudicate the disputes, but did not otherwise raise a jurisdictional challenge in the arbitration. When the claimant sought to enforce the awards in Singapore, the respondent argued in the Singaporean court that the tribunal lacked jurisdiction. The Singaporean court agreed with the respondent and declined to enforce the awards.
The claimant then sought to enforce the awards in Hong Kong in 2010. The claimant was successful in obtaining leave to enforce the award at first instance, as the respondent failed to raise any ground of challenge. In January 2012, the defendant sought an extension of time to apply to set aside the orders granting leave to enforce the awards.
The Hong Kong Court of First Instance exercised its discretion to decline to application for an extension of time. The judge considered that the delay was deliberate and calculated, and that the respondent acted in bad faith in failing to raise a jurisdiction challenge when the claimant sought enforcement of the awards in Hong Kong in 2010.
The Hong Kong Court of Appeal upheld the Court of First Instance's decision. At the same time, the Court clarified the scope of the ‘good faith' principle. First, in determining whether the defendant acted in good faith, the court ought to take into account the ruling of the Singaporean court, and the law of the arbitration seat (i.e., Singapore) is of particular relevance. Secondly, the ‘good faith' principle and ‘choice of remedies' principle are not mutually exclusive but complementary. In particular, it is not the case that a failure to pursue active remedies would necessarily constitute bad faith. In exercising a court's discretion, regard should be had to the full circumstances as to why an active remedy was not pursued or other relevant considerations, such as whether there was a clear reservation of rights so that the opposite party was not misled. In this case, the defendant reserved its rights on jurisdiction throughout.
The case authority serves as a clear reminder to practitioners that while a party may legitimately choose between different routes at different stages of an arbitration, such acts must be taken in good faith in relation to the counterparty, including appropriate steps or measures taken to preserve its full rights.
Hong Kong court upholds ‘multi-tiered' dispute resolution clause
In Lim Choon Hock v. Hung Ka Hai Clement,22 the claimant commenced proceedings in the Hong Kong Court of First Instance against the defendants concerning disputes arising out of a shareholders' agreement signed between them. The defendants applied to stay the proceedings pursuant to the arbitration clause contained in the shareholders' agreement.
The agreement sets out a ‘multi-tiered' dispute resolution clause, which provides that any dispute arising under the shareholders' agreement shall first be referred to the ‘Chairman', and if such dispute is not resolved within a prescribed period of time, the ‘Chairman' shall refer the matter to a governing board constituted under the shareholders' agreement. If the dispute is not resolved after a further prescribed period of time, ‘any party to the dispute may refer the matter for final resolution to arbitration in accordance with and subject to the provisions of the Arbitration Ordinance (Cap 609) of the Laws of Hong Kong'.
The claimant argued that since the dispute between the parties had already been referred to the ‘Chairman' or the ‘Governing Board' for resolution, the mechanism for dispute resolution thereunder was already ‘exhausted' under the shareholders' agreement.
Rejecting the plaintiff's argument, the Court upheld the arbitration clause and stayed the proceedings for arbitration, noting that there were clearly residual disputes that have not been resolved, as indeed evidenced by the claimant's initiative to bring about a claim in Court.
III OUTLOOK AND CONCLUSIONS
With the SCIA taking the lead in providing administration services to investor-state disputes, one may expect other arbitral commissions, whether in Hong Kong or China, to follow suit. It is likely, however, that further effort and devotion of resources is required in order for it to become a serious contender, not only with respect to established commissions such as the ICSID and SCC, but also other new joiners. For instance, the Singapore International Arbitration Centre (SIAC) has already established a dedicated set of rules, the SIAC Investments Arbitration Rules, with effect from 1 January 2017.
In Hong Kong, if the Third Party Funding Bill becomes law, as now looks increasingly likely, higher demand for arbitrations, arbitrators and arbitration practitioners in Hong Kong can be expected. Established and renowned third-party funders are already actively marking their territory in Hong Kong. Significantly, with third-party funding attaching to higher value and complex claims, it can be envisaged that the availability of third-party funding will only add to the attraction of challenging arbitrations in Hong Kong.
1 Including Hong Kong.
2 Keith M Brandt is the managing partner and Michael K H Kan is a counsel at Dentons Hong Kong.
3 Wicor Holding AG v. Taizhou Haopu Investments Limited (Civil Action (2015) Tai Zhong Shang Zhong Shen Zi No. 00004).
4 Castel Electronics Pty Ltd v. TCL Air Conditioner (Zhongshan) Co, Ltd ((2013) Min Si Ta Zi No. 46).
5 Beijing Arbitration Commission and Beijing International Arbitration Commission, Arbitration Dialogue Promoted by China-Australia Trade, 13 September 2016.
7 Jie Wang, ‘Investor-state arbitration: where does China stand?', Suffolk Transnational Law Review, 31 October 2008.
9 Cap 609 of the Laws of Hong Kong.
10 Unruh v. Seeberger (2007) 10 HKCFAR 31. Justice Riberio PJ: ‘I leave open the question whether maintenance and champerty apply to agreements concerning arbitrations taking place in Hong Kong since it does not arise in the present case'.
11 This matter was the subject of separate consultation by the Law Reform Commission of Hong Kong in 2005.
12 Section 64 of the Legal Practitioners Ordinance (Cap 159 of the Laws of Hong Kong).
13 The Law Society of Hong Kong, Consultation on Third Party Funding for Arbitration Submissions, 5 January 2016; Hong Kong Bar Association, Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 Comments of the Hong Kong Bar Association, 10 April 2017.
15 Fiona Trust and Holding Corp v. Privalov  UKHL 40, as has been applied in Hong Kong.
16  HKEC 1492.
17 The translation of the relevant Chinese word into ‘may' or ‘can' are both permissible.
18 Investors Compensation Scheme Ltd v. West Bromwich Building Society  UKHL 28, as has been applied in Hong Kong.
19  UKPC 1.
20  3 HKLRD 7.
21  HKEC 2633.
22  HKEC 1899.