Wisdom Newsletter - Commercial Litigation (Issue 51)

Commercial Litigation

New law taking effect soon: Reciprocal Enforcement of Civil and Commercial Judgments between Hong Kong and Mainland China

Overview

On 26 October 2022, the Hong Kong Legislative Council passed the long-anticipated The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance, Cap 645 (the “MJREO”), which implements the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by Courts of the Mainland and of the Hong Kong Special Administrative Region signed on 18 January 2019 (the “2019 Arrangement”). As agreed between Hong Kong and the Mainland, the MJREO will take effect in both places simultaneously on 29 January 2024.

After the MJREO takes effect, it will apply to judgments made on or after the commencement date of MJREO. The existing regime under The Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 597) (the “2006 Choice of Court Arrangement”) will continue to apply to Mainland judgments made before the commencement of the MJREO, provided that there is exclusive jurisdiction agreement under a contract in favour of the Mainland courts.

The MJREO will enable Mainland court judgments to be enforced in Hong Kong by a simple registration procedure, which in terms improve the efficiency and effectiveness of enforcing Mainland judgments in civil and commercial matters. This article will highlight the key changes brought about by the MJREO and their implications.

Removal of the exclusive jurisdiction requirement

One of the most significant changes to the 2006 Choice of Court Arrangement is the replacement of the exclusive jurisdiction requirement with a jurisdictional test, where the parties to a contractual dispute in favor of the Mainland courts only need to show the dispute has a nexus with the Mainland and vice versa. In other words, under the MJREO, the parties need not agree to the exclusive jurisdiction clause in the underlying contract before they may reciprocally enforce and recognise judgments in the requested place (i.e. the place where judgment was sought to be recognized and enforced).

For example, if the party is to enforce a Mainland judgment in Hong Kong, the jurisdictional requirement will be satisfied if, first, the underlying contract is not subject to exclusive jurisdiction of the Mainland; second, at the time when the proceedings were accepted by the Mainland courts, the parties show a connection between the dispute and the Mainland, including any of the following qualities:
(a) the defendant’s place of residence be in the Mainland;
(b) the defendant’s representative office, branch, office, place of business or other establishment located in the Mainland;
(c) the place of performance of the disputed contract was in the Mainland;
(d) The place of commission of the tortious act was in the Mainland; or
(e) A dispute concerning interests in property, where the parties expressly agreed in writing that the courts in Mainland were to have jurisdiction over the proceedings and the places of residence of all the parties were in Hong Kong, with evidence that there was a connection between the dispute and the Mainland (e.g. the subject matter was situated in the Mainland or the contract was signed in the Mainland).

The MJREO marks a great leap from the 2006 Choice of Court Arrangement where only Mainland judgments for claims under a contract with an exclusive jurisdiction agreement in favour of the Mainland courts are recognisable and enforceable in Hong Kong. The removal of this exclusive jurisdiction agreement requirement allows contract parties, particularly lenders in international financing transactions to opt for asymmetrical exclusive jurisdiction clause in offshore financing transactions involving borrowers with a strong basis in the Mainland.

Expanded Scope of Applicability and Enforceable Relief

The MJREO now covers a wider range of judgments of civil and commercial nature, where previously the 2006 Choice of Court Arrangement only applied to judgments arising from contractual disputes. Since the MJREO adopts an “exclusion” list, it only expressly excludes judgments rendered by Mainland arbitral institutions and other authorized bodies, those related to corporate insolvency and debt-restructuring, non-judicial and judicial proceedings, and a few intellectual property matters. Unlike the 2006 Choice of Court Arrangement which only covers monetary relief, the MJREO also expands the categories of remedies to both monetary and non-monetary relief.

It is noteworthy that the MJREO only requires judgments to be “legally effective”, unlike the 2006 Arrangement, that being “final” and “enforceable”. This is a welcoming change as there is difficulty to determine whether a Mainland judgment is “final”, as they are technically subject to trial supervision procedures and thus not final.

The expanded scope in applicability and enforceable relief under the MJREO will further strengthen Hong Kong as the choice of venue for dispute resolution involving assets in the Mainland or otherwise having a Mainland connection.

Expanded Grounds for Setting Aside Registration of Judgment

Compared to the 2006 Choice of Court Arrangement, the MJREO provides for new and clearer grounds for courts to set aside the registration of a judgment. They include, but not limited to:
(a) the Court of the original proceedings lacks jurisdiction;he Court of the original proceedings lacks jurisdiction;
(b) the judgment was obtained by fraud;
(c) the judgment of the original proceedings has been accepted by a Mainland Court where the same cause of action was started in a Hong Kong Court; or
(d) the enforcement of the registered judgment is manifestly incompatible with the public policy of Hong Kong.

Comments

The MJREO introduces several measures to expedite the enforcement process, ensuring timely resolution of disputes. Since there is systematic procedure to handle all applications for the reciprocal enforcement of judgments in Hong Kong and the Mainland, it promotes a more efficient process and saves costs effectively.

It is foreseeable that parties to international transactions will appreciate the new MJREO, as asymmetric exclusive jurisdiction clauses will be allowed. Asymmetric exclusive jurisdiction gives one party the liberty to elect the jurisdiction where it brings proceedings, while limiting the other to submit to the exclusive jurisdiction of a certain court. Under the 2006 Choice of Court Arrangement, an asymmetric exclusive jurisdiction clause would not satisfy the exclusive jurisdiction requirement. Following the commencement of the MJREO, this situation will be reversed. In other words, the party adopting asymmetric exclusive jurisdiction clause will have the flexibility to pursue claims in a jurisdiction where the assets of the other party are situated.

The need for re-litigation will be reduced. Previously, if a party could not obtain reciprocal enforcement arrangement for a Mainland judgment in Hong Kong, the party would have to initiate new proceedings in Hong Kong. Since the MJREO now broadens the reciprocal enforcement arrangement between Hong Kong and the Mainland, the need for re-litigation will be much lower and thus saves costs. This would be a relevant factor to be taken into account in drafting dispute resolution provisions in commercial contracts, and further enhance Hong Kong’s as the heading dispute resolution center, especially for transactions with a Mainland connection.

In a very recent case Tang Gang & Anor v. Wong Sai Chung [2023] HKCA 1338, the Court of Appeal relying on the principles set out for common law enforcement action in Jet Holdings Inc v. Patel [1990] 1 QB 335, ruled that where fraud is alleged, the issue should be revisited in Hong Kong. It is not a matter of discretion of Court.

Under the 2006 Choice of Court Arrangement or Cap.597, it is a discretion of the court to set aside the registration of a judgment obtained by fraud under s.18(1)(g). This ground corresponds to s.6(1)(a)(iv) of the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap.319). In such cases, the court has discretion to direct the issue of fraud to be tried, as in WFM Motors Pty Ltd v Maydwell [1996] 1 HKC 444. The defendant must provide precise details of the fraud and establish it to the appropriate standard. Although the relevant wording under MJREO ss.21(1) and 22(1)(d) are unidentical, it is submitted that the substance shall be the same. The Court of Appeal in Tang Gang might be distinguished when the MJREO has come into effect.

Wisdom Newsletter - Arbitration (Issue 50)

Arbitration

Conflicting Decisions on Arbitrable Claims in Hong Kong

Re Shandong Chenming Paper Holdings Ltd, HCCW 175/2017, [2023] HKCFI 2065

Before Hon Harris J in Chambers

Date of Decision: 10 August 2023

Fact

Shandong Chenming Paper Holdings Limited (“Company”) filed a summons on 25 October 2022 to dismiss or adjourn a petition by Arjowiggins HKK 2 Limited (“Petitioner”) filed on 15 June 2017. The petition sought to wind up the Company based on alleged insolvency from non-payment of an arbitration award. After the Court of Final Appeal dismissed the Company’s appeal on 14 June 2022, the petition was re-listed.

On 20 June 2022, the Company initiated a second arbitration against the Petitioner, raising claims under the same agreement as the arbitration award in the petition. The hearing for the second arbitration is scheduled for May 2024.

During the 19 April 2023 hearing, the Company argued that a cross-claim in the second arbitration exceeded the debt established by the first arbitration award. The Company contended that the cross-claim should be resolved in the second arbitration, eliminating the need for a bona fide defense on substantial grounds. The hearing was adjourned until the Court of Final Appeal’s judgment in the Guy Lam appeal on 2 March 2023, expected to impact the Company’s main ground of opposition.

Ruling

In the decisions of Re Guy Lam, the Court of Appeal ([2022] 4 HKLRD 793), and the Court of Final Appeal ([2023] HKCFA 9), it ruled that the Court would generally dismiss or stay a bankruptcy/winding-up petition where the underlying dispute of the petition debt was subject to an exclusive jurisdiction clause (“EJC”), without requiring a bona fide dispute on the merits. In Re Shandong Chenming Paper Holdings Ltd [2023] HKCFI 2065, the court examined whether the same approach applied when the debtor raised an arbitrable cross-claim exceeding the petitioning debt.

The court’s attention was drawn to a decision by Madame Linda Chan in Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443, dated 30 May 2023, which raised the question of whether the Guy Lam ratio applied to arbitration clauses. In that case, Chan J found that the Guy Lam’s approach only applied to EJC and not arbitration clauses.

Chan J referred to the principles stated in the Court of Appeal’s judgments in But Ka Chon and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646, [33]-[39], and emphasized that the court should consider the requirements in Lasmos when deciding whether to dismiss or stay a petition where the parties have agreed to an arbitration clause.

In [94] of Guy Lam, French NPJ, concurring with the majority in the CA, held that the “Established Approach” requiring a debtor to demonstrate a bona fide defence on substantial grounds is not applicable when an Exclusive Jurisdiction Clause (EJC) or an arbitration clause is involved. Absent exceptional circumstances such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, both parties should be bound by their contractual obligations. The court would also assert that the same principle applies in ordinary cases involving an arbitration clause.

By reference to Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487 and French on Applications to Wind-up Companies, the court held that the Guy Lam’s approach did apply to arbitrable cross-claims. It was determined that there was no distinction between a claim and a cross-claim when considering a defence to a winding-up petition, and the higher courts in Guy Lam treated claims and cross-claims alike.

In addition to the domestic case law, the court also considered the decision of the Singapore Court of Appeal in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co [2020] SGCA 33; [2020] 1 SLR 1158. The Singapore court concluded that when faced with either a disputed debt or a cross-claim subject to an arbitration agreement, the prima facie standard should apply.

This means that winding-up proceedings will be stayed or dismissed if (a) there is a valid arbitration agreement between the parties, and (b) the dispute falls within the scope of the arbitration agreement, provided that the dispute is not being raised by the debtor in abuse of the court’s process. The court in AnAn emphasized that there is no basis for applying a different standard of review to cross-claims compared to disputed claims, and the tests for both situations must mirror each other.

The Petitioner argued that AnAn is wrong and that the conclusion was unreasoned dicta. However, the court noted that the decision in AnAn was clearly reasoned, as demonstrated by specific portions of the judgment, and it was consistent with established principles. The court found that the approach in AnAn further supported the application of the Guy Lam’s approach to arbitrable cross-claims.

Based on the above principles, and the application of the Guy Lam’s approach to cross-claims, the court stayed the winding-up petition given the long and torrid history of this matter and ordered the petitioner to pay the company’s costs for their summons.

Comments

1. Unlike Madame Linda Chan’s ruling in Simplicity & Vogue Retailing (HK) Co., Limited that the Guy Lam’s approach only applied to exclusive jurisdiction clauses (“EJC”) and not arbitration clauses, the court establishes a conflicting judgment that the same approach should be taken to both exclusive jurisdiction clauses and arbitration clauses. The court takes one step further to rule that Guy Lam also applies to arbitrable cross claims.

2. This correlates to our Issue 49 of Wisdom newsletter which provides the courts will likely stay/dismiss winding-up and bankruptcy petitions should an arbitration clause be present.

3. We consider Re Shandong Chenming Paper Holdings Ltd to be a more proper interpretation of Guy Lam. Given the conflicting views of Re Shandong Chenming Paper Holdings Ltd and Simplicity & Vogue Retailing (HK) Co., Limited, we await the CA or the CFA to clarify their preferred view.

4. The court does not provide a ruling as to whether Guy Lam’s approach is only applicable to cross-claim in the same transaction. Different from Linda Chan J’s ruling in Re Silver Base International Development Co Ltd [2022] HKCU 2768, it is our view that Guy Lam’s approach should also apply where a company has a genuine and serious cross-claim under a different contract against the petitioner greater than or equal to the petitioner’s debt.

Wisdom Newsletter - Arbitration (Issue 49)

Arbitration

Issues between exclusive jurisdiction clause and insolvency proceedings in Hong Kong Courts settled

Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9

Effect of an exclusive jurisdiction clause (“EJC”) on bankruptcy proceedings – Where a creditor’s bankruptcy petition is presented in Hong Kong, should it be allowed to proceed if the petition debt, which the debtor disputes, arises from an agreement which contains an EJC in favour of a foreign court? Does the same apply to an arbitration clause?

Fact

The case concerned a bankruptcy order against the Respondent, Mr. Lam, a Hong Kong resident and the founder of CP China Group, which provided aged care services. CP Global Inc (“CP Global”), a Cayman company, was the holding company of the CP China Group.

Tor Asia Credit Master (the “Petitioner”), CP Global, Mr. Lam and others entered into a credit and guaranty agreement (the “Agreement”) whereby the Petitioner lent US$29.5 million (the “Loans”) to CP Global, and Mr. Lam personally guaranteed the full payment of the Loans as primary obligor. The petition debt arose from the Agreement.

The Agreement contained an EJC in favour of the courts of New York “for the purposes of all legal proceedings arising out of or relating to this [Agreement] or the other [loan documents] or the transactions contemplated hereby or thereby”.

The Agreement was amended three times to extend the maturity of the Loans, with each of the amended agreements incorporating the EJC in full.

Subsequently, CP Global had difficulties in making payments and defaulted in payments. Negotiations between the parties failed, and the Petitioner presented a bankruptcy petition in Hong Kong against Mr. Lam for the unpaid debts under the Agreement. Mr. Lam took out proceedings in New York, seeking a declaration that his obligations under the Agreement were invalid.

(i) Court of First Instance

The Court of First Instance held that the Respondent had failed to show that there was a bona fide dispute on substantial grounds in respect of the debt and a bankruptcy order was granted.

The CFI also held that the EJC was not a bar to the creditor’s bankruptcy petition as none of the defences raised by the debtor disclosed any bona fide dispute. Further, Linda Chan J held that a contractual agreement between the parties does not fetter the jurisdiction of the Court to determine whether the company should be wound up, as the jurisdiction of the Court to wind up a company is conferred by statute.

(ii) Court of Appeal – Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2022] HKCA 1297

Mr. Lam appealed against the bankruptcy order on the sole ground that the petition should have been dismissed or stayed because the petition debt was disputed, and that Mr. Lam had raised a cross claim, which was subject to the EJC and in respect of which proceedings had commenced in New York.

The CA overturned the CFI decision and dismissed the petition on the basis of the EJC.

Further, it held that, where the debt on which a winding up or bankruptcy petition is based is disputed and the parties are bound by an EJC in favour of a foreign forum, the petition should not be allowed to proceed pending the determination of the dispute in the agreed forum, unless strong reasons can be shown.

Ruling

(i) Court of Final Appeal – Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9

The Court of Final Appeal considered the effect of EJCs in insolvency proceedings. On 4 May 2023, the CFA handed down its decision in the case and endorsed the CA’s finding that the court should respect the effect of an EJC in bankruptcy proceedings, just as it does in ordinary actions.

(ii) The CFA held that in an ordinary case where the underlying dispute of the petition debt was subject to an EJC, the Court should dismiss the petition unless there are countervailing factors, such as the risk of the debtor’s insolvency impacting third parties, the debtor’s reliance on disputes that border on the frivolous, or an occurrence of an abuse of process.

(iii) In so holding, the CFA noted that public policy considerations behind the bankruptcy regime carry less weight when the petition is brought only by one creditor with no evidence of the creditor community at risk. In essence, the appellant could have sued on the debt and applied for summary judgment in New York. The absence of other creditors pursuing the Respondent is an indicator that the public interest is unlikely to be adversely affected by such a delay.

Comments

(i) A creditor who wishes to present a bankruptcy (or winding up) petition of a disputed debt that arises out of an agreement containing a foreign EJC will find it more difficult to persuade the Hong Kong courts to hear the petition unless there are strong reasons for doing so.

(ii) This decision reflects the importance attached by the Courts to party autonomy and bargains freely struck between them.

(iii) Caution should be exercised in considering the scope of any EJC and in issuing proceedings in the correct forum in line with the parties’ agreement to save time and effort.

(iv) The is a welcome decision as it gives more certainty to the treatment of arbitration clauses in the context of winding-up and bankruptcy petitions as well. In these circumstances, the courts will likely stay/dismiss these proceedings should an arbitration clause be present, similar to the mandatory stay of other court proceedings where an arbitration clause is present. This position would be in line with Singapore and English decisions, such as AnAn Group (Singapore) Pte Ltd and Salford Estates.

Wisdom Newsletter - Arbitration (Issue 48)

Arbitration

Fresh Arbitration Salad in Hong Kong

 

Hong Kong is a very arbitration friendly jurisdiction. Despite the high degree of autonomy given by the courts to the contracting parties to govern their dispute resolution process, the courts in Hong Kong still maintain a supervisory role

This newsletter selected and summarized four decisions of the Court of First Instance pertaining to arbitrations handed down in the first quarter of 2023. The decisions reminded the contracting parties the court approach in exercising supervising power to arbitrations in different stages of arbitration.

A dispute – a pre-requisite

Before the parties submit the matter to arbitration, there must exist a dispute between the parties. Without a dispute, an arbitral tribunal does not have the jurisdiction to rule on the “matter”. This principle is illustrated in CMB v Fund [2023] HKCFI 760.

In CMB v Fund, CMB entered into an investment agreement with Fund and Cattle, the 1st and 2nd Defendants in this action, for a company (“HC”). L was the Managing Director of HC. X was an employee of HC. C was the controlling shareholder and a director of HC. In the meantime, Fund was represented by L and Cattle was represented by X in the dealings with CMB.

CMB commenced an action in Hong Kong against L, X, C and Management (3rd Defendant of this action), for making fraudulent misrepresentations to CMB which induced CMB to enter into the investment agreement with Fund and Cattle (“High Court Action”).

After the commencement of the High Court Action, Fund, Cattle, Management, L and X commenced arbitration against CMB pursuant to the investment agreement, requesting, inter alia, CMB to withdraw the High Court Action and a declaratory relief that Fund and Cattle had no liability to CMB in the High Court Action. A single arbitrator constituted the tribunal (“Tribunal”).

In the arbitration, CMB challenged the jurisdiction of the Tribunal on the ground that L, X and Management had no contract or arbitration agreement with CMB and CMB had no dispute with Cattle and Fund.

In the final award, the Tribunal found that L, X and Management were not parties to the investment agreement, and the Tribunal had no jurisdiction to grant relief for them.

The Tribunal however found that he had jurisdiction in respect of Fund and Cattle ‘in so far as they seek declarations of non-liability as regards their own position and made a declaration of non-liability of Fund and Cattle accordingly.

CMB commenced the present proceedings to set aside the award because of the lack of jurisdiction of the Tribunal.

In S Co v B Co [2014] 6 HKC 421, it was held the Court can review the correctness of the Tribunal’s finding as to its own jurisdiction on a de novo basis under Article 34 of the Model Law (section 81 of Arbitration Ordinance (Cap 609)).

While the Tribunal referred extensively on the legal principles of declaratory relief when reaching the decision, the Court came to a view that the Tribunal had confused the question of whether he had jurisdiction in the reference and whether he should exercise his power to grant the declaratory reliefs.

Turning to the issue of jurisdiction, the Court reiterates that the right of the parties to put an arbitration agreement into effect does not arise until and unless there is a dispute between the parties to the agreement. CMB commenced the High Court Action only against L, X, C and Management and had no dispute with Fund and Cattle in the High Court Action.

Absent of any dispute between CMB, Fund and Cattle, the Court held that the Tribunal did not have jurisdiction to make the declaratory reliefs and the award was set aside.

Choice of law – contractual interpretation comes before the closest connection test

In determining the governing law of a contract containing an arbitration agreement, the Court first looks for the intention of the contracting parties by contractual interpretation. Only when such attempt is futile, the Court will objectively look for a system of law which has the closest connection to the parties.

In China Railway (Hong Kong) Holdings Limited also known as China Railways Services (Hong Kong) Limited v Chung King Holdings Company Limited [2023] HKCFI 132, the Court, adopting the UK approach, determined the choice of law of a jurisdiction clause by contractual interpretation before proceeding to the “closest connection test”.

The Plaintiff and the Defendant entered into what essentially was a loan agreement where the Plaintiff would provide HK$40M to the Defendant, so as to allow the Defendant to construct a hotel in Hong Kong (“Initial Agreement”). The Initial Agreement contained a jurisdiction clause:

“本合同實施過程中,雙方如發生經濟紛爭,應通友好協商解決,如協商不成, 則循當地法律解決”

The parties subsequently entered into numerous repayment agreements, including a repayment agreement (“Repayment Agreement”), which contained, inter alia, the following jurisdiction clause:

“本合同如有未盡事宜,有關方協商後可以補充協議方式予以補充, 并(並)具同等法律效力。本合同及有關補充協議執行期間如產生糾紛或爭議,可通過協商解決。協商未果,[P]有權向[Jinyin]所在地仲裁委員會申請仲裁或向[Jinyin]所在地人民法院起訴”

Jinyin was located at Wuhan, PRC. It had been joined as a party to provide security for the repayment by mortgaging its properties in Wuhan in favour of the Plaintiff, but Jinyin later dropped out of the picture and was no longer a party in the subsequent amendments of the contract between the Plaintiff and the Defendant.

In determining the governing law of an arbitration clause, the starting point at common law is that the contracting parties are free to choose the system of law which is to govern the contract, subject to public policy. The choice of governing law can be either express or implied from other terms of the contract and the surrounding circumstances. Determining whether the parties have agreed on a choice of law to govern their contract is in every case a question of interpretation.

In the event that a choice of law cannot be identified by interpreting the contract, the contract will be governed by the system of law with which it has its closest and most real connection.

Insofar as the closest connection test applies, the law of the chosen seat of arbitration will likely apply. The Court adopted the reasoning in Enka Insaat ve Sanayi AS v OOO “Insurance Company Chubb” [2020] 1 WLR 4117.

In Enka, where the parties have not agreed what law is to govern their contract, it is reasonable to start from an assumption that all the terms of the contract, including an arbitration clause, are governed by the same system of law. Where, however, the parties have selected a place for the arbitration of disputes, there is authority for, as a general rule, regarding the law with which the arbitration agreement is most closely connected as the law of the seat of arbitration.

The Court, however, makes a reservation that the above approach (for an arbitration clause) may not apply in full force to jurisdiction clauses.

When considering the jurisdiction clauses in both the Initial Agreement and the Repayment Agreement, the Court held that only the Initial Agreement contained a choice of law clause. The Initial Agreement and the Repayment Agreement formed one debt agreement which the Plaintiff now sues. Applying Enka, the Court first looked for the parties’ intention and interpreted the contract. Given the whole context of the Initial Agreement, the reference to “當地法律” should refer to Hong Kong laws.

The Defendant argued that, since the Initial Agreement contains provision of security in Shanghai, “當地法律” meant the law applicable to the issue at hand (which may vary depending on the issue). The Court took the view that, unless there were good reasons to conclude otherwise, all terms in the contract are governed by the same law, to avoid inconsistency and uncertainty.

When considering the wordings in the jurisdiction clause in the Repayment Agreement, the Court would be slow to interpret that the parties had changed their minds unless such intention arose by clear implication from the surrounding facts.

The Court held that the jurisdictional clause in the Repayment Agreement was governed by Hong Kong law.

Implied promise to honour the award – a distinct cause of action

The successful party to the arbitration is entitled to enforce the award in courts. The cause of action in common law roots from the mutual implied promise between the parties to the arbitration to honour the arbitration award. This cause of action is distinct from the dispute being arbitrated.

Xu Hongbiao v Oasis Investment Group Limited [2023] HKCFI 860 concerns, inter alia, an application to set aside the order granting the Defendants’ leave to serve the counterclaim out of jurisdiction.

The Plaintiff and the Defendants had a dispute over property development projects in China. The dispute was submitted to arbitration. The tribunal issued the awards in late 2018 (“Award”). In the Award, the Tribunal ordered, inter alia, the Plaintiff and the Defendants to execute various contracts for sale of company shares and property with each other.

The parties had further disputes regarding the performance and enforcement of the Awards, leading to the present action. The Plaintiff commenced proceedings against the Defendants for breach of implied promise to comply with the Award. The 1st – 4th Defendants counterclaimed the Plaintiff and the 5th Defendant for their non-cooperation to comply with the Award. The 1st – 4th Defendants (referred to as “Defendants” hereinbelow)had obtained leave to serve their counterclaim out of the jurisdiction.

While agreeing the proper authority for leave to serve out of jurisdiction was Dynasty Line Ltd v Sukamto Sia [2009] 4 HKLRD 454, the Plaintiff argued that the Defendants failed to show a serious issue to be tried in their counterclaim. If the Plaintiff’s argument succeeds, the Defendants will necessarily fail when the “good arguable case” threshold (a higher threshold) is applied for the service-out application.

The Plaintiff submitted that the counterclaim disclosed no reasonable cause of action and therefore no serious issue to be tried because the Defendant misconceived the implied duty to comply with the arbitral award as a matter of law.

The Court summarized the nature of implied promise to honour an arbitral award in common law as laid down in Court of Appeal in Xiamen Xinjingdi Goup v Eton Properties Ltd [2016] 2 HKLRD 1106 and Court of Final Appeal in Xiamen Xinjingdi Goup v Eton Properties Ltd (2020) 23 HKCFAR 348.

A successful party can enforce an arbitral award either by a statutory process or by common law action. The implied promise to honour an arbitral award exists as a contractual obligation separate and distinct from the obligation created by the underlying contract. It is a new and independent cause of action. The essential elements for the cause of action are that (i) there was a submission; (ii) that the arbitration was conducted in pursuance of the submission; and (iii) that the award is a valid award. Ribeiro PJ further clarified that once the final award is made, the arbitrator’s mandate is exhausted. If the award is not complied with, a fresh cause of action arises, which lies within the enforcing court’s jurisdiction and is not within the power of the tribunal.

For the reasons above, the Court rejected the Plaintiff’s argument and held that the Defendants did have a cause of action to enforce the award in common law.

The Plaintiff further argued that the “losing party” did not have locus standi to bring a claim to enforce the Awards at common law. The Court disagreed with the Plaintiff that only the “successful party” had in law the locus standi to enforce the award because the nature of implied promise was mutual. Also, the cases and textbooks discussing the nature of the implied duty did not expressly mention that the “losing party” had no locus standi to enforce the award.

The Court further rejected other grounds raised by the Plaintiff and dismissed the Plaintiff’s Summons.

Refusal to enforce an award – egregious mistake

The Court’s power to enforce an arbitration award is an emblem of Court’s supervisory role in arbitration. Such power is only exercisable when there is a serious procedural impropriety which shocks the Court’s conscience to allow the award to stand and to permit its enforcement.

In Canudilo International Company Limited (“CIC”) v Wu Chi Keung [2023] HKCFI 700, CIC entered into two sales contracts with Apennine Holdings Limited (“Apennine”). The Respondents are the guarantors of the sales contracts. Disputes arose between CIC and Apennine with respect to the sales contracts. CIC commenced arbitration against Apennine and the Respondents. The Tribunal was consisted of one arbitrator. The parties first appointed the 1st Arbitrator (“1st Arbitrator”).

In the arbitration, Apennine did not take part in the defence because, owing to disagreement between controller and shareholders, Apennine did not engage legal representatives to represent the company independently. The 1st Arbitrator, finding in favour of CIC in the Interim Final Award, ruled that Apennine was liable to CIC under the sales contracts. However, the 1st Arbitrator made clear that the arbitration between CIC and the Respondents would continue and the 1st Arbitrator did not consider the dispute between CIC and the Respondents in the Interim Final Award.

The 1st Arbitrator subsequently resigned and a 2nd Arbitrator was appointed.

In view of the fact that the Interim Final Award had been issued, the 2nd Arbitrator stated that he would only consider the dispute between CIC and the Respondents. Having found that the sales contracts also binding to the Respondents, the 2nd Arbitrator concluded that he was bound by the Interim Final Award and the Respondents were liable to CIC.

The Respondents resisted the enforcement of the award before the Court.

While the Court found that the 2nd Arbitrator did not provide sufficiently detailed reason in the award, a poorly reasoned award and a failure to give adequate reasons for the award are not grounds to set aside or refuse enforcement of an award. In reliance of A v R [2009] 3 HKLRD 389, the Court was of the view that, by choosing arbitration, the parties must be deemed to have undertaken the risk that an arbitrator might get matters wrong in his decision.

The Court looked only at the structural integrity of the arbitral process, stepping in when there was an error so egregious that it would be shocking the conscience of the court to allow the award to stand and to permit its enforcement.

The Court found that the 2nd Arbitrator did not apply his own independent mind pursuant to the mandate given to him under the arbitration agreement to decide the dispute between the parties. It is particularly crucial that the 1st Arbitrator expressly stated in the Interim Final Award that it was not necessary for him to decide on the dispute between CIC and the Respondents, but the 2nd Arbitrator ruled, in the Final Award, that the Respondents should have made their case before the Interim Final Award.

The Court came to a view that the 2nd Arbitrator failed to consider and decide the Respondent’s defence in an impartial and independent manner. The 2nd Arbitrator failed to give the Respondents a reasonable opportunity to present their case on the binding effect of the Interim Final Award by assuming they were already so bound. Such deprivation of opportunity was contrary to the Court’s basic notions of justice and requirements for a fair hearing to enforce the Final Award.

The Court concluded that the procedural impropriety was so egregious that the award should be set aside and the Respondents were entitled to the reasonable and fair opportunity to present their case to the fact-finding tribunal and to have their defence properly and fairly determined.

Wisdom Newsletter - Arbitration (Issue 47)

Arbitration

Court of Appeal decided on the conundrum of exclusive jurisdiction clauses in insolvency proceedings

Re: GUY KWOK-HUNG LAM ( 林國雄) (Debtor) and Tor Asia Credit Master Fund LP (Petitioner (Creditor)), CACV 393/2021, [2022] HKCA 1297

Before Hon Barma, G Lam and Chow JJA in Court

Date of Judgment: 30 August 2022

Fact

By a Credit and Guaranty Agreement (“the Agreement”) entered into between, among others, the Petitioner (Respondent of this appeal), the Appellant, and a company solely owned by the Appellant (“the Company”), the Respondent agreed to advance term loans to the Company (“Loans”), and the Appellant agreed to guarantee the full payment of all amounts due from Company. The Agreement contained Exclusive Jurisdiction Clause providing that the Agreement shall be construed in accordance with and governed by the laws of the State of New York and each party thereto submitted to the exclusive jurisdiction of the United States District Court for Southern District of New York and of the Supreme Court/appellate court of the State of New York.

The Company failed to repay the Loans within the specified time frame. The Respondent issued statutory demand under the Bankruptcy Ordinance and presented this bankruptcy petition against the Appellant (as the guarantee of the Loans) in Hong Kong.

The Appellant raised 5 grounds in opposition to the petition:

(1) The Respondent was fully secured as a creditor and as such cannot petition for Appellant’s bankruptcy;

(2) There was no extant event of default under the Agreement because of Respondent’s waiver or an estoppel against the Respondent;

(3) Because of the Exclusive Jurisdiction Clause, the Respondent should first sue in the courts of New York to establish the Appellant’s liability;

(4) The Respondent had breached the provisions of the Money Lenders Ordinance (Cap 163) and the Agreement was not therefore enforceable against the Appellant; and
(5) The Appellant had raised a cross-claim against Respondent in the Texas proceedings for damages exceeding the amount of Respondent’s petition debt.

In the Court of First Instance, Linda Chan J was inclined to agree with the Exclusive Jurisdiction Clause argument of the Respondent, and held that:

There is a settled understanding of the law that an exclusive jurisdiction clause does not prevent a winding up or bankruptcy petition from being presented in an appropriate jurisdiction.

Whilst generally the court would give effect to the contractual bargain of the parties, it does not take away or fetter the jurisdiction of the court to determine whether a company should be wound up if the creditor has locus to present the petition. Liability to be wound up by the court is part of the conditions of incorporation.

A creditor has locus to present a winding up or bankruptcy petition if there is no bona fide dispute on substantial grounds in respect of the debt.

An arbitration clause or an exclusive jurisdiction clause is only a factor to be taken into account when considering a winding up or bankruptcy petition.

An exclusive jurisdiction clause does not prevent the court from considering whether the creditor has locus to present the petition, because “unless and until the company/debtor is able to demonstrate to the Court that there is a bona fide dispute on substantial ground in respect of the debt, there is no proper basis for the company to contend that there is a dispute which must be litigated in accordance with the contractually agreed forum”. It would be “a pointless exercise” to require the creditor first to obtain an award or judgment in the agreed forum when there is no real dispute on the debt.

A bankruptcy order hence was made against the Appellant and the Appellant appealed to the Court of Appeal.

Ruling

The Court of Appeal unanimously dismissed (Chow JJA on some different reasons) the bankruptcy petition against the Appellant on the ground that there was a dispute between the Appellant and the Respondent which should be first determined in accordance with the parties’ agreement in the Exclusive Jurisdiction Clause in the Agreement. It was held that:

1. A petition seeking an order for the winding up or bankruptcy of a party to the Agreement on the basis of a disputed indebtedness, would fall within legal proceedings arising out of or relating to the Agreement. In this context, the negative aspect of the Exclusive Jurisdiction Clause operates as an agreement not to present a bankruptcy petition unless and until the underlying dispute has been determined in the agreed forum.

2. It is not correct to say that on the hearing of a winding up petition there will definitely not be any determination of the dispute. The extent to which the court investigates the question whether or not the debt is disputed in good faith on substantial grounds is a matter of discretion. But where the court finds against the company, concluding that its defences do not raise any bona fide disputes on substantial grounds, there is no reason why that should not be regarded as a determination of the dispute which may give rise to an estoppel in relation to the issues decided.

3. The presence of an exclusive jurisdiction agreement between the parties in favour of another forum does not mean that the court is bound to stay or dismiss the petition. But, adopting the same approach as in ordinary actions, such an agreement should ordinarily be given effect unless there are strong reasons to the contrary. It follows that where the debt on which a winding up or bankruptcy petition is based is disputed and the parties are bound by an exclusive jurisdiction clause in favour of another forum precluding the determination of that dispute by the Hong Kong court, the petition should not be allowed to proceed, in the absence of strong reasons, pending the determination of the dispute in the agreed forum.

4. As in the case of ordinary actions, it is neither possible nor desirable to define what may constitute strong reasons. One can conceive of cases where the debtor may be incontestably and massively insolvent quite apart from the disputed petition debt, or it may for other reasons be a menace to commercial society if allowed to continue to trade, or there may be other creditors seeking a winding up whose debts are not subject to any jurisdiction agreement, or the assets may be in jeopardy, or there may be a need to investigate potential wrongdoings, or the effect of a dismissal or stay of the petition would be to deprive the petitioner of a real remedy or would otherwise result in injustice.

5. Under this approach the court retains flexibility to deal with the case as the circumstances require, taking into account other powers of the court that may become relevant, such as the power to allow the petitioner to be substituted by other creditors and the power to appoint a provisional liquidator or interim trustee.

6. In respect of creditors’ statutory right to petition for bankruptcy or winding up on the ground of insolvency, the Court was convinced that creditors’ rights are creatures of contract, not creatures of statute. There is no reason why a creditor’s voluntary surrender of rights to petition for winding up should be held unenforceable for being contrary to public policy.

Comments

There is an inherent conflict between party autonomy to choose exclusive jurisdiction clause (such as arbitration) and the statutory right of creditors to invoke the insolvency jurisdiction of the Courts. There are inevitably competing interest and a balance based on the specific facts of each case.

The traditional approach was a debtor opposing the petition is required to establish to the Court’s satisfaction the existence of a “bona fide dispute on substantial grounds” rather than mere assertions, for the Court to exercise its discretion to stay the winding-up petition in favour of arbitration. There is no automatic stay in favour of arbitration solely on the basis of the existence of an arbitration agreement (Re Simon (Hong Kong) Ltd., [2009] 5 HKLRD 487]. In cases where the dispute in relation to the debt is governed by an arbitration clause, the English courts should dismiss or stay the winding-up application in favour of arbitration, unless there are “wholly exceptional circumstances” (Salford Estates (No. 2) Ltd v Altomart Ltd. [2015] Ch 589).

The traditional approach was later varied in Re Southwest Pacific Bauxite (HK) Ltd, [2018] 2 HKLRD 449 where the Court of First Instance adopted a prema facie threshold and added a requirement of procedural steps. The court held that the winding-up petition should “generally be dismissed” if (i) the debt relied on by the petitioner is disputed by the company, (ii) the contract under which the disputed debt arose contained an arbitration clause covering the dispute relating to the debt, (iii) the company took the steps required under the arbitration clause to commence the contractually mandated dispute resolution process and filed an affirmation in accordance with Rule 32 of the Companies (Winding-Up) Rules (“Lasmos approach”).

In recent years, the Hong Kong court has been taken another approach departed from the Lasmos approach and effectively preferred the triable issue threshold under the traditional approach of “bona fide dispute on substantial ground”:

In Re Hong Kong Bai Yuan International Business Co., Ltd [2022] HKCFI 960, the Court of First Instance ordered the respondent company to pay the debt owed to the petitioner within 14 days if it wished to avoid a winding up order, notwithstanding that the debt was governed by an arbitration agreement. The court held that, whether under the prima facie standard (as adopted by the Singapore and English courts) or a bona fide dispute on substantial grounds (as adopted by the Hong Kong courts), it would be incumbent upon the debtor to demonstrate that there was a genuine dispute on the debt which required the determination of an arbitral tribunal. It would be pointless to require the parties to resolve a dispute unless it was a genuine dispute.

As observed in But Ka Chon v. Interactive Brokers LLC [2019] 4 HKLRD 85, the court would, in the exercise of discretion, give considerable weight to the existence of an arbitration agreement and other relevant circumstances. The discretion was not exercised only one way as discussed in Lasmos.

This Court of Appeal decision has become the new leading case on the issue of exclusive jurisdiction clauses in insolvency proceedings which departed from the mainstream approach Hong Kong Court has adopted in the recent years. It is important for the creditors to consider whether they have “strong reasons” to sue in the non-contractual forum before they commence any action in Hong Kong. Although the Court of Appeal did not define “strong reasons” in the judgment, the examples given by the learned Judge did shed some light as to what “strong reasons” look like: the creditors would be seriously prejudiced if they must wait for the determination of the dispute in the contractual agreed forum. In our view, it is an even stronger case to apply the said approach to the arbitration clause.

Wisdom Newsletter - Personal Injury (Issue 46)

Personal Injury

Dishonest plaintiff with an ulterior motive!

Lee v. Secretary of Justice sued for and on behalf of Director of Highways [2022] HKCFI 1569; HCPI 129/2019, Hon Au-Yeung J in Court, 27 May 2022

Fact

The plaintiff pleaded in the Statement of Claim (“SOC”) that her foot got caught against the metal edge of one of the steps of a footbridge. She tripped and fell and sustained knees and hip injury. On the ground of poor and flickering footbridge lighting condition, she sued the Director of Highways (“the Director”) in negligence and/or breach of statutory duty in the total sum of about HK$5.7 million.

However, the SOC failed to plead any breach of statutory provisions. The Court also disallowed the plaintiff’s Counsel to run an unpleaded case at the trial by putting forth various unpleaded allegations on the Director’s negligence.

Ruling

Did the accident occur?

Various dates and versions of the accident was given in the pleadings, hospital records, joint medical expert report and even the plaintiff’s own evidence in the witness box. When challenged with her evidence against the witness statement, she put the blame on her lawyer but the court did not accept the explanation. Given the inconsistency of evidence, the court ruled that no accident occurred on the pleaded date of the accident and found the plaintiff to be totally unworthy of belief.

 

Did the Director owe a duty of care to the plaintiff?

It was established in common law that the owner of land over which a public right of way passes is under no liability for negligent nonfeasance towards members of the public using it.

The Court has cited the case of Yang Yee Man, the administratrix of the estate of Lam Lok Kin, Deceased v. Leung Hing Hung [2014] HKCFI 796; [2014] 3 HKLRD 194; HCPI 443/2010 (25 April 2014), in which Bharwaney J commented that the common law rule absolving highway authority from liability for nonfeasance remains valid Hong Kong law. This contrasted with the Highways (Miscellaneous Provisions) Act of 1961 in the United Kingdom which abolished the immunity of highway authority for nonfeasance.

Applying the common law rule and the distinction between misfeasance (making things worse) and nonfeasance (not making things better), the Court held that as the footbridge was a public right of way, the Director owed no duty of care to the plaintiff. The failure to provide sufficient lighting by a public authority as pleaded by the plaintiff, was held to be nonfeasance rather than misfeasance, of which the case should be dismissed for lack of duty of care to the plaintiff.

Was there any breach of duty of care by the Director?

The Director has maintained a system of maintenance of the road network to ensure safety of users. There was contractor to conduct monthly inspection and it did not identify any defect 1 to 2 days before the alleged accident. The lighting at the footbridge was also operated in accordance with manual. EMSD was engaged to conduct patrols and function tests. The Court held that the Director has tried to make things better by ensuring better lighting and that faulty lights or road surface were repaired, but not making things worse. There was no breach of duty (if there was one) on the part of the Director.

Exaggerated quantum and ulterior motive

The plaintiff based her claim of HK$5.7 million on a subsequent traffic accident (which was 7 months afterwards) that caused her damages. She was condemned by the court as lack of credibility.

There was no causal link between the injuries the plaintiff sustained in the traffic accident and that in the current alleged accident. She was also found walking without any aid in the traffic accident case. The plaintiff’s pain was also exaggerated without support of any objective medical evidence nor the joint medical report. The hospital consultation summary even recorded that the plaintiff’s husband urged the senior medical officer to write a letter supporting their application for public housing with a wider flat and balcony. The plaintiff’s alleged income also did not match with the tax returns and she failed to look for jobs.

The Court held that the plaintiff has lied from liability to quantum and had an ulterior motive of claiming public housing unit under the pretense of being wheelchair bound. The court dismissed the case and penalized the dishonest plaintiff with indemnity costs.

Comments

The present case raises the issue of whether liability for negligence should be imposed on public authorities. The distinction of misfeasance and nonfeasance would be the determining factor.

In this case, the plaintiff’s Counsel made his submission based on the Director having “control” over the footbridge and on the question of fairness, justice and reasonableness in imposing a duty on the Director. However, the Court rejected the Counsel’s submission because such duty was not pleaded in the SOC in the first place. This clearly reflects that pleading cases with sufficient particulars is essential. In view of the Court’s comments, if the case had been pleaded properly with details of particulars, the Court might have considered if imposing the pleaded duty was justified and hence the outcome might have been different.

Further, given that the present case contained no investigation report or eye witness, the plaintiff’s credibility became utmost important. The court would no doubt scrutinize the contemporaneous documentary evidence against the probabilities and logicality of the plaintiff’s evidence. Worst still, the plaintiff was found to have exaggerated her injuries with ulterior motive – to obtain public housing. The court could hardly ignore such alarming indicator of incredibility. If a plaintiff is found dishonest, not only would he or she lose her claim, but also suffer further consequences such as the indemnity costs order. The Court even ordered the present judgment to be given to the Commissioner of Inland Revenue for appropriate action as the plaintiff lied about her income.

 

Wisdom Newsletter - Personal Injury (Issue 45)

Personal Injury

Price of exaggerating injuries?

Plaintiffs exaggerating their extent of injuries with a view to seek increased damages are no stranger to personal injuries action. But what can be the price of exaggeration?

In this issue of Wisdom Newsletter, we highlight several recent judgments to see how the Court scrutinized the Plaintiffs’ exaggerated claim in order to review defence strategy.

 

B K Anil Kumar v. J V Fitness LTD (Trading as California Fitness) [2022] HKCFI 946; HCPI 311/2015 (16 December 2021)

Fact

The Plaintiff brought a claim for loss and damage as a consequence of mild head injuries, abrasions injuries to his left shoulder and right hand when the ceiling structure of a steam bath got loosened and fell onto him. Amongst other things, the Plaintiff asserted that he suffered from permanent disabilities including:

(a) Post-concussional syndrome including headache and vertigo related to motion, dizziness and impairment of memory;

(b) Pain and hearing impairment on left ear;

(c) Inability to resume work during the 11 months of sick leave.

Surveillance captured that the Plaintiff worked in a restaurant during his sick leave period. Subsequent to the disclosure of the Surveillance, the Plaintiff revised and reduced his claims to HK$3,082,895.28 in the Re-Revised Statement of Damages.

Ruling

The Court placed full weight to the inconsistent claim in the medical evidence for loss of consciousness and hearing loss and the expert report to find the Plaintiff exaggerated his conditions. The Court concluded that the Plaintiff had concealed his post-accident work capacity and inflated the damages claimed, and thus reduced his sick leave period from 11 to 5 months and disallowed the claim for loss of earning capacity and future loss of earnings.

 

Yuen Ka Ho v. Wong Chin Man and Others [2022] HKCFI 942; HCPI 751/2018 (6 May 2022)

Fact

The Plaintiff, a passenger of a vehicle with his supervisor and employer on board, allegedly suffered from back pain, severe waist pain and left leg numbness 2 days after traffic accident when the rear part of his vehicle was hit by a public light bus from behind.

As a result of the rear-end collision, the Plaintiff alleged that he had to walk with the aid of a walking stick and with limping gait and sought sick leave of around 1,363 days. After six months of the accident, he started to suffer urinary and bowel incontinence.

Ruling

The Court found the Plaintiff a grossly exaggerating and dishonest witness:-

(a) Contrary to what he alleged in the pleadings, medical evidence showed that he walked unaided with normal readings for straight leg raising test (“SLR test”) when he received initial treatment at the Accident and Emergency Department 2 days after the accident.

(b) Whilst he walked with a stick slowly in subsequent medical examinations, he had no problem with the SLR test.

(c) He demonstrated limping gait at joint medical examination (“JME”) but the Waddell’s stimulation signs were strongly positive in all the maneuvers.

(d) After 28 months from the JME, the Plaintiff relied on the walking stick again.

Taking into account the medical expert’s opinion of heavy exaggeration and magnification with heavy features of inorganic element, the Court found that the Plaintiff’s alleged symptoms are not supported by medical evidence and he faked his symptoms before the treating doctors. Sick leave was allowed for 6 months and PSLA was awarded at HK$10,000 only. The Plaintiff’s action was dismissed as he had already received employees’ compensation which far exceeded the damages assessed. Having found that the Plaintiff faked his symptoms, the Plaintiff was ordered to pay the Defendants’ costs on indemnity basis. The Court also invited the Director of Legal Aid to consider seeking a wasted costs order against the solicitors acting for the Plaintiff.

 

Chan Siu Lung v. Yip Kam Shui and Others [2022] HKCFI 970; HCPI 354/2019 (4 April 2022)

Fact

The Plaintiff suffered from right epidural haematoma, fractured skull, abrasion over both knees, post-concussion syndrome, adjustment disorder and hip injuries after falling from the unguarded hop-up platform and landed on his occiput. He was given 1,598 days of sick leaves. The Plaintiff further alleged that he could not resume pre-accident job and was troubled by:

(a) Intermittent headache and dizziness, associated with disequilibrium, vertigo and nausea;

(b) Lower limbs weakness;

(c) Phobia of height, etc.

Under surveillance, the Plaintiff could walk with normal gait like ordinary people without any balance problem or any weakness in the lower limbs. He simultaneously manipulated his mobile phone in multiple steps without holding on handrails or support whilst walking upstairs. The Defendant’s neurological expert also found the inconsistencies in his alleged symptoms compared with the surveillance findings.

Ruling

The Court agreed that the Plaintiff brought along the walking stick to three JMEs to impress the experts despite that he could walk unaided and there was no explanation of the sudden deterioration at the time of the examinations, except the likelihood of malingering and exaggeration.

The Court found it inconsistent with someone complained of having occasional headache, dizziness and fear of height and the fact that the Plaintiff tended to exaggerate his symptoms or likely to be a malingerer cannot be ignored and should reflect on the findings of the extent of his residual impairment. Sick leave period was reduced from 53 to 36 months. No future loss of earnings was allowed.

Comments

Exaggeration of claims can have serious consequence for Plaintiffs and their solicitors, as in the case of Yuen Ka Ho. It can be pricey to them.

Close scrutiny to the medical evidence is the very first step to decide whether the Plaintiff tends to exaggerate his symptoms and conditions.

Proper discovery exercise shall follow.

When the claim size justifies, always considers engaging discreet surveillance to ascertain the Plaintiff’s conditions and employability which is a useful tool to attack the Plaintiff’s inconsistent claim such as B K Anil Kumar and Chan Siu Lung.

Favourable surveillance findings will certainly assist medical experts to take heed of potential exaggeration and malingering at the joint medical examination.

Last but not least, give a second thought on making generous settlement offer at pre-action stage, as it would pose difficulty to negotiate a realistic settlement thereafter.

 

Wisdom Newsletter - Arbitration (Issue 44)

Arbitration

Tensions between Insolvency and Arbitration

Re HongKong Bai Yuan International Business Co., Ltd [2022] HKCFI 960

HCCW 219/2021, Hon Linda Chan J in Court, 1 April 2022

Fact

ACTATRADE SA (“Petitioner”) and HongKong Bai Yuan International Business Co., Ltd (“Company”) entered into a series of contracts for the sale and purchase of methanol, including a Clarity Contract and a Honesty Contract. Subsequent dispute arose between the Petitioner and the Company, with the Petitioner alleging the Company for failing to repay the outstanding purchase price for methanol (“Debt”) under the Clarity Contract. The Petitioner lodged a petition for the winding up of the Company (“Petition”) on the basis that the Company had failed to comply with a statutory demand.

The relevant contract provided for all disputes, including those pertaining to the Debt, to be referred to CIETAC arbitration. The Company commenced arbitration with the CIETAC under the Honesty Contract before the Petitioner’s statutory demand but not under the Clarity Contract.

The Company sought to dismiss the Petition on the grounds that (a) there was a bona fide dispute on substantial grounds in respect of the Debt which should be referred to the CIETAC arbitration in accordance with the arbitration clause under the Clarity Contract and that (b) the Company had a cross claim against the Petitioner for its alleged breach under the Honesty Contract, which is larger than the Debt.

Ruling

Applicable principles

Hong Kong courts have adopted the approach that a petition may be dismissed if the company is able to demonstrate a bona fide dispute of the petitioned debt on substantial grounds (as shown in But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 (“But Ka Chon”)). As observed by Kwan VP in But Ka Chon, the Companies Court would in the exercise of discretion under the insolvency legislation give considerable weight to the fact that there is an arbitration agreement between the parties and other relevant circumstances.

In opposing the Petition, the Company argued that the Petitioner should not be allowed to subvert the arbitration agreement between the parties by serving a statutory demand instead of commencing arbitration as agreed in contract. In particular, it was submitted that the Court should follow the Singaporean and the English approach, which applies the prima facie standard applicable to a mandatory stay of an action to winding up proceeding even though the latter proceeding is not arbitrable under the relevant Arbitration Act.

Irrespective of the differing approaches in Singapore/ England and Hong Kong courts, the Court held that the discretion is not exercised only one way as discussed in in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos”), whereby the petition should “generally be dismissed” save in “exceptional” or “wholly exceptional circumstances” once the company satisfies the 3 requirements (i.e. (a) the debt is not admitted, (b) the dispute is covered by the arbitration clause, and (c) the company has taken step to commence arbitration).

Whether there is a bona fide dispute in respect of the Debt

The Company alleged that it was entitled to withhold payment of the Debt pending the determination of the cause of certain discoloration of the methanol, i.e., whether the discoloration was due to the fault of the Petitioner and/or the carrier.

The Court held that the Company had failed to show that there was a bona fide dispute (or a dispute on substantial grounds) on the Debt which requires determination of the CIETAC tribunal for the following reasons: Firstly, the Company had not identified any contractual provision that entitled it to withhold payment of the Debt. Secondly, the condition for payment of the Debt under the Clarity Contract had been fulfilled. Finally, the discoloration issue had already been settled between the carrier and the owner of the Cargo. The Company had not identified any basis or adduced any evidence to show that it had suffered any loss from the discoloration issue or that the Petitioner caused the discoloration.

Furthermore, the Court was of the view that the Company’s failure to take any step to commence arbitration in respect of the Clarity Contract is further evidence that it had no bona fide dispute in respect of the Debt.

Whether the Company has a serious cross-claim against the Petitioner

The Company’s contention of having a serious cross-claim against the Petitioner under the Honesty Contract was also rejected by the Court for the following reasons:

a) From the available evidence, the Company had evinced an intention not to perform the Honesty Contract, whereby the Petitioner was entitled to terminate the Honesty Contract and mitigate its loss by reselling the methanol under the Honesty Contract to another buyer.
b) The evidence adduced by the Company shows that the loss suffered by the Company was not caused by the alleged breach of the Honesty Contract.

Even if the Company does have a serious cross-claim against the Petitioner, the Court held that there was no valid basis for the Company to withhold payment of the Debt pending determination of its cross-claim:

a) There is no provision under the Clarity Contract which confers a right on the Company to retain the Debt, whether as a security or otherwise; and
b) The cross-claim arose out of the Honesty Contract has nothing to do with the Clarity Contract.

In light of the foregoing, the Court made an order the Company to pay the Debt within 14 days and that the costs of and occasioned by the Petition be paid to the Petitioner, to be taxed if not agreed.

Comments

In refusing to follow the Singapore/ England approach as argued by the counsel for the Company, the Court adopted the traditional approach instead. While the court would give considerable weight to the existence of an arbitration agreement between the parties in the exercise of its discretion, the Court placed more emphasis as to whether the debtor is able to show a genuine dispute on the debt requiring the determination of an arbitral tribunal. As shown from the present case, the existence of an arbitration agreement pertaining to the debt itself is not a sufficient ground for seeking a stay or dismissal of a winding up petition.

In delivering the judgment, it is our view that the Court wrongfully ruled on the merits of the Company’s cross-claim (which was a matter for the CIETAC arbitral tribunal to decide) and erred in holding that when there is a serious cross claim against the Petitioner (which is greater than or equal to the petitioned debt), the Company is still required to show a valid basis to withhold payment of the petitioned debt pending determination of its cross-claim. To clarify the unsettled principles when the petitioned debt is subject to an arbitration clause, the judgment is currently subject to appeal by the Company.

It remains to be seen whether the Court of Appeal would adopt the Singapore/ English approach as aforementioned or formulate an unique Hong Kong approach that maintains Hong Kong’s pro-arbitration stance without usurping her insolvency legislation.

Wisdom Newsletter - Shipping (Issue 43)

Shipping

Default Judgment Under in Rem Proceedings: Is Your Claim Well Founded?

Itiro Corporation BVI v The Owner and/or Demised Charterers of The Ship or Vessel “ANGELIC GLORY [2021] HKCA 1865

In this recent decision, the Court of Appeal (comprising of the Hon Kwan VP and G Lam JA) (“CA”) allowed the Plaintiff’s appeal of the decision of the Admiralty Judge in disallowing part of the claims in the Plaintiff’s application for judgment in default of acknowledgment of service under Order 75, rule 21 of the Rules of High Court.  In doing so, CA provided valuable insights on the application of the “well-founded” threshold under Order 75, rule 21.

This firm acted for the successful appellant (the Plaintiff) in this case.

Fact

The Plaintiff was the charterer of the ship or vessel “Angelic Glory” (“Vessel”) under a charterparty dated 7 March 2019 (“Angelic Glory Charterparty”).

On 12 November 2020, the Plaintiff commenced in rem proceedings against the Vessel. The Defendants failed to acknowledge service of the writ in rem of the Plaintiff. On 3 March 2021, the Plaintiff filed a notice of motion under Order 75, rule 21 for judgment in default of acknowledgment of service. The Admiralty Judge allowed all the claims of the Plaintiff except for, inter alia, the claim for the difference in the hire rate (“Claim”) between the Angelic Glory Charterparty and an addendum thereto signed in September 2019 (“Addendum”).

It is the Plaintiff’s case that:

(1) Angelic Glory Charterparty incorporated the terms of an earlier charterparty for a sister vessel “Angelic Peace” dated 31 January 2019 (“Angelic Peace Charterparty”). The recap of Angelic Peace Charterparty stated that the Angelic Peace Charterparty was on the same terms as an earlier charterparty of the Vessel entered in 2015 (“2015 Charterparty”), save that, among other things, Clause 63 of the 2015 Charterparty was altered to allow the carriage of sugar cargo. By mistake, an unamended 2015 Charterparty was attached to the recap of the Angelic Glory Charterparty (“Angelic Glory Recap”).

(2) The common intention of the parties was that Angelic Glory Charterparty incorporated the Angelic Peace Charterparty, including the provision in its recap which made sugar a permitted cargo under the Angelic Glory Charterparty.

(3) In breach of the Angelic Glory Charterparty, the Defendants declared in August 2019 that sugar was not a permitted cargo and alleged that carriage of sugar cargo would require an enhanced rate of hire.  The plaintiff was left with no alternative but signed the Addendum which provided for an enhanced rate. The Addendum was unenforceable for want of consideration or economic duress.

In support of its case, the Plaintiff provided, by way of affidavit, copies of the relevant charterparties, skype exchanges of the parties’ brokers, a witness statement of the Plaintiff’s broker in respect of mistaken attachment of the 2015 Charterparty to the Angelic Glory Recap and the email exchanges in August 2019.

In the first instance, the Admiralty Judge accepted that the material clause of the Angelic Peace Charterparty was amended to allow carriage of sugar cargo and that there was a reference in the Angelic Glory Recap to the Angelic Peace Charterparty. His Lordship was of the view that the said reference could not be divorced from the unamended 2015 Charterparty (which did not allow sugar cargo) attached to the Angelic Glory Recap. Thus, His Lordship thought that the Claim was “at best arguable”. Accordingly, the learned judge dismissed the Claim because he was not satisfied the same was well founded.

The Plaintiff appealed the said decision on the grounds that (1) the judge erred in law in applying the “well founded” threshold in Order 75 rule 21(7); and (2) the judge was plainly wrong in failing to hold that the plaintiff’s evidence met the “well founded” threshold.

Judgment

The Plaintiff submitted that the appropriate standard of evidence required in this context is “prima facie evidence” to substantiate the allegations in the statement of claim, and that such supporting evidence need not be definitive or conclusive.  The Plaintiff contended that the judge erred in law in requiring the plaintiff to prove its allegations by a standard higher than prima facie evidence.

CA explained that the specific purpose of the “well founded” requirement is to “ensure the default judgment does not compromise the rights of any other party who may have an in rem claim against the arrested vessel which is to be sold and the proceeds paid into court”.

CA did not consider it necessary or appropriate to put a glossing of the words “well founded”, as their meaning in this context is quite clear. However, CA referred to the decision of the Federal Court of Malaysia in The Fordeco Nos 12 and 17 [2000] 1 MLJ 449 concerning equivalent Malayasia provisions, which referred to the meaning of “well-founded” as “based on good evidence, having a foundation in fact or reason”. CA accepted that this seemed to be a working definition of the words “well founded”.

On the totality of the evidence, CA was satisfied that there was a well-founded claim that it was the common intention of the parties that the Angelic Glory Charterparty incorporated the provision in the Angelic Peace Charterparty which made sugar a permitted cargo under the Angelic Glory Charterparty, and it was due to a clerical mistake that the unamended 2015 Charterparty was attached to the recap of the Angelic Glory Charterparty.  There was a proper claim in law for rectification of the Angelic Glory Charterparty and the Addendum would not be enforceable for want of consideration and/or economic duress. Accordingly, the Court reversed the decision of the first instance judge and allowed the Claim.

Comments

Sometimes, the simplest of questions are left unanswered by clear authority. It is perhaps for this reason that there is no clear guidance from case law on the meaning of the “well founded” threshold under Order 75, rule 21 (or similar requirements in other common law jurisdictions). This decision therefore provides a rare opportunity for questions concerning the meaning and application of the “well founded” threshold under Order 75, rule 21 to be determined at the appellant level.

Although CA did not consider it necessary to “to put a glossing” over the words “well founded”, this case illustrates that the threshold is not a high one. Specifically, the requirement “having a foundation in fact or reason” in the working definition adopted by CA is not exceptionally difficult to meet and does not, for example, seem to require the Court to satisfy that there is no arguable defence to the plaintiff’s claim. This makes sense because it is up to the defendant to enter appearance and put forward its defence if it wishes to dispute the claim. Having said that, the plaintiff still needs to put forward good evidence that are sufficient to substantiate the claims pleaded in its statement of claim.