Wisdom Newsletter – Shipping (Issue 35)

The world is facing unprecedented challenge caused by Covid-19. Tsui & Co have adopted some contingent measures to ensure that our clients continue to receive professional advice and all the necessary support including any legal issues arising from this pandemic. We have also taken some appropriate steps to protect the safety and health of our staff and to minimize any impact on the cases being handled by us. Seeing that it is important to face the situation positively, we wish to keep you updated on laws by this newsletter. Stay safe and healthy, everybody!

Shipping

AN ARBITRATION AGREEMENT IS NOT AN UNBREAKABLE SHIELD IN WINDING-UP PROCEEDINGS

Dayang (HK) Marine Shipping Co., Ltd v. Asia Master Logistics Ltd, HCCW 14/2019, [2020] HKCFI 311, Deputy High Court Judge William Wong SC in Court, 12 March 2020.

A winding-up order has long been recognized as a draconian remedy. Many creditor-petitioners believe that presenting a winding-up petition is the most efficacious method of obtaining payment. However, it is not uncommon for a contract under which the debt is alleged to arise contains an arbitration clause which requires the dispute to be resolved by arbitration. In Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos”), Harris J held that in such circumstances, if the company disputes the debt and takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process, the winding-up petition should generally be stayed.

Despite these difficulties, we successfully acted for the Petitioner, the disponent owner of a vessel under a charterparty containing an arbitration clause, in obtaining a winding-up order against the charterer, the Respondent in this case.

Fact

The Petitioner, Dayang (HK) Marine Shipping Co., Limited, and the Respondent, Asia Master Logistics Limited, entered into a TCT charterparty whereby the Petitioner chartered its vessel, MV “Aoli 5” (the “Vessel”) to the Respondent. The amount of hire to be paid by the Respondent to the Petitioner is US$321,377.30 (the “Debt”). The Respondent did not deny that the Debt was due and owing, but it raised a counterclaim against the Petitioner in relation to an alleged breach of the fixture note. In particular, the Respondent alleged that during the unloading process, some bags of rice fell off. However, the captain of the Vessel was uncooperative and refused to follow the Respondent’s instructions in handling the cargo.

The Respondent further alleged that the Petitioner’s refusal to change the captain upon the Respondent’s request was in breach of the Petitioner’s duties under the fixture note, and the Petitioner should bear some responsibility for the losses it suffered by reason of the delay. It was submitted by the Respondent that the dispute should be dealt with by way of arbitration, pursuant to an arbitration clause contained in the fixture note.

Judgment

The Learned Judge made a finding that the Debt was not disputed by the Respondent in good faith and on substantial grounds. Firstly, the Learned Judge was of the view that there was prima facie no dispute to the Debt. The Respondent had given no particulars as to the duration of the alleged delay and the extent of loss it suffered by reason of the alleged breach of the fixture note on the Petitioner’s part. Secondly, the Court considered that the Respondent’s counterclaim appeared to consist of bare allegations without any concrete evidence to substantiate its claims.

In respect of the arbitration clause, the Court was of the view that up to the date of the hearing, the Respondent had not commenced any arbitration proceedings. The Learned Judge accepted that the Respondent, who merely sent a draft request form (Form 1) to the Petitioner’s solicitors and requested to see if the Petitioner would be willing to attempt arbitration, had no genuine intention to arbitrate and agreed that the draft Form 1 was not properly served on the Petitioner as the Petitioner’s solicitors were not duly authorized to accept service. In the circumstances, the Court rejected the Respondent’s submissions that the Petition should be dismissed because of the existence of the arbitration clause.

For the sake of completeness had the Respondent properly commenced arbitration proceedings, the Learned Judge considered that without express limitations, the scope of the arbitration clause did not preclude the Petitioner’s right to commence winding up proceedings against the Respondent. Having considered all the relevant authorities in Hong Kong, Singapore and the UK, the Court clarified by way of obiter the present state of the law to be, inter alia, that whether or not the debt had arisen from a contract incorporating an arbitration clause, a debtor-company which intends to dispute the existence of a debt must still show there is a bona fide dispute of a debt on substantial grounds before the Court could exercise its discretion to stay or dismiss the winding-up proceedings.

The fact that arbitration proceedings have commenced or would be commenced may be relevant evidence that there is a bona fide dispute, but this alone would not be sufficient to prove the existence of a bona fide dispute on substantial grounds.

The Learned Judge further considered that the winding-up proceedings do not have the effect of resolving the disputes. It is the liquidator who finally resolves disputes over the debt (subject to the possibility of appeal). Accordingly, the presentation of a winding-up order per se does not amount to a breach of the parties’ contractual obligation to resolve disputes by way of arbitration. It follows that commencing winding-up proceedings is not against the policy behind the Arbitration Ordinance and the object of that Ordinance.

Comments

The above ruling comes as a piece of good news to all creditor-petitioners who have hesitation to present a winding-up petition when there is an arbitration clause in the contract. The debtor-company must still show that there is a bona fide dispute over the debt on substantial grounds. However, creditors-petitioners are also warned about the adverse costs consequence of abusing the winding-up process. The Court has made it clear that if a creditor-petitioner knows that the debt is disputed in good faith and on substantial grounds, the creditor-petitioner may be liable to pay the debtor-company’s costs on an indemnity basis and it may also be at risk of liability under the tort of malicious prosecution.

To the debtor-companies who are in fear that the winding-up process may be abused by some creditors, they should make sure the arbitration clause in the contract is carefully drafted such that it contains express limitations on the creditor-petitioner’ rights to wind-up. The Court, however, alerted that agreements excluding the right to present a winding-up petition may potentially be unenforceable as a matter of public policy. That is a risk that a debtor-company would have to assume if it wishes to obtain better bargain when a dispute over the debt arises.

Overall, the present Judgment is welcome. The obiter resolves the inflexibility of the Lasmos principle and preserves the Court’s hitherto flexible discretion to make a winding-up order. The Court is not required to dismiss or stay a winding-up petition as long as the threefold conditions in Lasmos have been satisfied. That will ensure the creditor-petitioner will not be deprived of all tangible remedies if the assets of the debtor-company have been dissipated by the time the action for debt has been completed by arbitration. This is particularly useful in shipping disputes.

Wisdom Newsletter – Personal Injury (Issue 34)

Personal Injury

Who is more powerful?

Wong Chun Wah v. Chau Kwei Yin, Chow Yat Kuen, Employees Compensation Assistance Fund Board, FACV No. 6 of 2019, Chief Justice Ma, Mr. Justice Ribeiro PJ, Mr. Justice Fok PJ, Mr. Justice Stock NPJ and Madam Justice McLachlin NPJ, 20th December 2019.

TWO QUESTIONS OF GREAT PRACTICAL IMPORTANCE TO THE OPERATION OF THE EMPLOYEES COMPENSATION ASSISTANCE FUND BOARD (“ECAS”)

1. Whether the Courts have jurisdiction to make costs order against ECAS in certain proceedings to which it is a party?

2. Whether ECAS is empowered to enter into binding settlements regarding claims or potential claims for payments out of the fund which it administers?

Fact

The plaintiff was an interior decoration worker who sustained injuries at work. The 2nd defendant had been engaged by the 1st defendant to do the construction work. The plaintiff alleged that the 2nd defendant was his employer but brought proceedings against the defendants for compensation under the Employees’ Compensation Ordinance, Cap. 282 (“ECO”) and for common law damages. The case was discontinued against the 1st defendant in 2015 when he settled the plaintiff’s claims by payment of $80,000.

That left the plaintiff’s claims, which included one for over HK$4.7 million damages, against the 2nd defendant who had no insurance cover and who acted in person throughout. Accordingly, ECAS obtained leave to be joined as 3rd defendant in the proceedings, stating that it wished to participate in the assessment of damages. It proceeded in 2016 to commission a medical report jointly with the plaintiff and to file an answer to the plaintiff’s statement of damages, putting forward a lower assessment.

The plaintiff obtained judgment against the 2nd defendant for HK$602,380.00 before Deputy District Judge Chow in the ECO proceedings in September 2016. The common law action then came on for trial in May 2017 and at its commencement, the plaintiff and ECAS agreed to settle his potential claim under the Employees Compensation Assistance Ordinance, Cap., 365 (“ECAO”) for HK$1.42 million.

The 2nd defendant was not a party to the settlement and the trial proceeded against him before Deputy High Court Judge To, resulting in an award of damages in the sum of HK$2,110,927.00. Deducting the sums of HK$80,000.00 received from the 1st defendant and the ECO award of HK$602,380.00, the net amount of damages due to the plaintiff from the 2nd defendant was HK$1,428,547.00, which was marginally more than the settlement amount agreed with ECAS. The Judge ordered the 2nd defendant to pay the plaintiff’s costs but refused the plaintiff’s application for costs against ECAS as from the date of its joinder in the action, directing that there should be no order as to costs as between the plaintiff and the ECAS.

The plaintiff sought and obtained leave from the Court of Appeal to appeal against the direction of no order as to costs. By a respondent’s notice, ECAS sought to uphold the Judge’s order on the additional ground that the Court lacked jurisdiction to make any costs orders against it. The Court of Appeal dismissed the plaintiff’s appeal against the refusal of costs against ECAS and did not accept ECAS’s argument that there was no jurisdiction to order costs against it in such proceedings. ECAS was granted leave to appeal the captioned two questions of law to the Court of Final Appeal.

Ruling

Section 20B(3) of the ECAO does not deprive the Court of jurisdiction to order costs against ECAS in relation to proceedings in which it has been joined as a party. The power to make such costs orders is conferred by Section 52A of the High Court Ordinance, Cap. 4. Section 29 of ECAO also recognises the existence of such power.

In exercising its discretion regarding a possible costs order against ECAS, the principle that costs normally follow the event does not apply, given the ECAS’s statutory role and the starting-point is no order as to costs. Needless to say, the Court has a wide discretion and may depart from this if the circumstances warrant a different order.

Section 29 authorises ECAS to settle potential claims for relief payments in amounts it assesses to be reasonable, arriving at such assessments in good faith on available information considered sufficient after having made due inquiry. Settlement is an alternative means for disposing of a claim and obtaining relief. The settlement agreement constitutes a binding contract and is not affected by any Judgment which the employee may subsequently obtain against the employer. It should not generally be necessary to pursue that action after settling with ECAS.

The appeal was dismissed and although the outcome would normally entail making an order for costs against ECAS, the Court of Final Appeal took into account its special statutory role and accepting that there was a need for clarification of the legal position affecting ECAS’s operations hence the Court made no order as to costs.

Comments 

This judgment is indeed good news to the employee. By the operation of Section 29 of ECAO which empowers ECAS to strike a settlement with any party hence the employee does not have to go through the painful exercise of taking the matter to trial in order to obtain a judgment.

If ECAS is not joined as a party to the proceedings, Section 28 of the ECAO gives a wider power to ECAS to protect its costs and settle with the plaintiff if ECAS thinks that the plaintiff is or might be entitled to obtain payment from the Fund.

While ECAS is entitled to give pressure on plaintiffs to settle, it is unsatisfactory that there is no mechanise for the plaintiffs to make any sanctioned offer or Calderbank offer against ECAS to protect their costs. It is because there is “no event” between the plaintiffs and ECAS. Hence, ECAS is rarely asked to pay the plaintiffs’ costs unless its conduct is unreasonable or misconceived or unjustifiably antagonistic, unnecessarily prolonging its intervention or otherwise untoward.

In view of the Civil Justice Reform, our view is that the law should be changed such that the plaintiffs may give counter-pressure on ECAS to settle the actions as soon as possible and to protect the Fund. This proposed change is particularly important to the common law actions because unlikely Employees’ Compensation actions, any cost order against the employers in such proceedings, even if awarded on indemnity basis after effective sanctioned offers, is not recoverable from ECAS.

Wisdom Newsletter – Shipping (Issue 33)

Shipping

Bright Shipping Limited (P) v Changhong Group (HK) Limited (D) [2019] HKCA 1062, CACV No. 102 of 2019

 Background

On 6 January 2018, there was a collision between D’s cargo vessel “CF CRYSTAL” and P’s tanker “SANCHI” on the high seas but within the exclusive economic zones (“EEZs”) of the PRC, South Korea and Japan.

On 9 January 2018, D commenced inter-ship proceedings against P in the Shanghai Maritime Court (“SMC”) and applied to establish in the SMC 2 limitation funds, one for personal injury and one for property. At the same time, P commenced an in personam action against D in Hong Kong for collision liability and quantum because D is a Hong Kong incorporated company with a registered office in Hong Kong.

Against the above background that D made an application for staying P’s proceedings in Hong Kong on the ground of forum non conveniens (“FNC”).

 Held

Applying the Spiliada principles, it was accepted that Hong Kong was not the natural forum for the inter-ship litigation. The dispute concerns whether D was able to establish that SMC was clearly and distinctly more appropriate than Hong Kong as the forum for the trial of the inter-ship action. Two main arguments were advanced by D.

D first argued that the trial judge had made no reference to the national laws relating the exercise of the sovereignty of the PRC over the EEZ. However, the CA rejected the argument on the grounds that (1) the location of the collision lied within the EEZs of the PRC, Japan and Korea and (2) a state’s rights over EEZ under UNCLOS do not apply to navigation activity.

D also argued that lis alibi pendens (related proceedings abroad) was a material factor for the consideration of FNC. As expected, the CA held that the constitution of limitation funds by D in the SMC pursuant to the PRC Maritime Code is not a legal bar to bringing proceedings in Hong Kong because the PRC is not a state party to the Convention on Limitation of Liability for Maritime Claims, 1976 (“LLMC”). Also, the SMC’s inter-ship proceedings have not gone beyond the initial stage and P had not accepted service of the same.

The argument that D could bear liabilities up to 2 separate limits if the Hong Kong proceedings were not stayed did not assist D at all. The CA explained that a ship owner who has already paid a claim has a well-established right to take into account the sum he previously paid in the distribution of the limitation funds. Accordingly, D’s concern that it would be burdened with liability up to 2 separate limits was misplaced.

The CA, in its obiter, found that the significant difference in tonnage limitation between the PRC and Hong Kong (the relevant monetary limit in Hong Kong is roughly 3.6 times of that in the PRC because the Hong Kong limit takes into account the loss of value due to inflation) will deprive P of a legitimate juridical advantage and substantial justice will not be achieved in the SMC if a stay of the Hong Kong proceedings is granted. Such deprivation could be unjust to P and could be capable of being a decisive factor in refusing a stay.

 Comments

The Spiliada principles are settled law on FNC and involve an exercise of discretion. The court aims at finding out a forum which is suitable for the interests of all the parties and for the ends of justice. This is different from the Australian approach.

It can be seen from this case that the treatment of mainland Chinese courts has no material difference from other foreign courts. The quality of justice in mainland courts is not a factor to be taken into consideration. The logistic issues of witnesses play little importance.

Not surprisingly, the CA considered that while some weight was given, it was nothing unusual about limitation and liability actions taking place in different jurisdictions. In fact, even under Article 13 of the LLMC, it only bars a person having made a claim against the fund from attaching the assets of a person by or on behalf of whom the fund has constituted but P did not make such a claim. It is expected that the court is more inclined to stay if a fund is set up in a state party to the LLMC.

The CA reaffirmed the principle that it may only interfere with the exercise of a judge’s discretion in limited circumstances. It is therefore important to prepare well when FNC is argued before the judge of the 1st instance.

All in all, this action is a fair illustration of the “One Country, Two Systems” principle.

Wisdom Newsletter – Insurance (Issue 32)

Insurance

Good Faith and Valid Reasons in Claw Back Provisions

FWD Life Insurance Co (Bermuda) Ltd v Poon Cindy [2019] 3 HKLRD 455, [2019] HKCA 697, Court of Appeal Civil Appeal No 181 of 2015 Lam V-P, Cheung and Chu JJA 24 June 2019

This was an appeal by the defendant against the judgment of Deputy Judge Tony Poon concerning whether the defendant’s employment had been wrongfully terminated by the plaintiff-employer.

 Fact

The Defendant, Cindy Poon (“Cindy”) was engaged by the Plaintiff, FWD Life Insurance Co (Bermuda) Ltd (“FWD”) as an Agency Director. An individual Agent’s Agreement (“iAA”);  and an Agency Management Agreement (“AMA”) were signed for such engagement.

Upon the engagement, FWD paid Cindy a sum of $492,000 by way of Signing Fee (“SF”) and another sum of $492,000 by way of advanced payment of Performance Bonus (“PB”). Further, from March to August 2008, FWD paid Cindy a total sum of $328,002, a by way of Monthly Special Bonus (“MSB”) calculated at $54,667 per month. These payments were made under the terms of a Letter of Offer of 6 March 2008 issued by FWD in favour of Cindy except that the PB were paid in advance at the request of CIndy. According to those terms, these sums were repayable to FWD if Cindy’s engagement was terminated within 30 months (for SF and MSB) or 12 months (for PB) from the date of her contract.

 What happened next?

Cindy’s engagement was terminated by FWD within 12 months on 24 September 2008. Notice of termination was given in accordance with Clause 7.2 of the IAA which reads:

“7.2 Subject to any subsequent agreement to the contrary, this Agreement may be terminated by either party by giving to the other party a notice of termination in writing to such effect and the notice period, unless with the consent of the other party, shall not be less than six (6) days.”

A provision to similar effect can be found in the AMA at Clause 7:

“7. Either party shall be entitled to terminate this Agreement without any reasons being given thereof, by giving to the other six (6) days’ written notice of its intention to terminate the same.”

It followed that FWD demanded the repayment of SF, PB and MSB from Cindy.

 Judgment in the First Instance

FWD commenced proceedings against Cindy for repayment of SF, PB and MSB in the total amount of $1,312,00 pursuant to terms provided in the IAA, AMA and the Letter of Offer. FWD’s case on the cause of termination was that Cindy had failed to meet performance target set for Agency Director.

Cindy said that she had been wrongfully terminated. According to her, the 2nd Third Party Danny Chan had been receiving a commission (called override) in respect of Cindy’s management earning. However, he could not continue to do so after he failed to meet the performance for promotion to Agency Director because an Agency Director could not be a downline agent of an Agency Manager. The only way to maintain his entitlement to the override from Cindy’s earning was to demote Cindy from Agency Director to Agency Manager. But Cindy refused to accept the proposed demotion. As a result, Cindy claimed that she was terminated by FWD wrongfully.

Deputy High Court Judge Tony Poon (as he then was) made the findings that the cause of the termination of Cindy was her refusal to accept a demotion. However, he gave judgment in favour of FWD and held that FWD was not in breach of the IAA or the Letter of Offer in exercising its power of termination. FWD was therefore entitled to recover the Total Sum of $1,312,002 plus interests from Cindy.

Appeal in CACV 181/2015

Subsequently, Cindy obtained leave to rely on appeal on the argument that FWD’s power to terminate her employment or demote her was subject to an implied term of good faith and rationality (“Good Faith and Rationality Implied Term”).

Held: Allowing Cindy’s appeal and remitting the case to the Judge for consideration.

I. Good Faith and Rationality Implied Term

Lord Sumption set out the general rule in British Telecommunications plc v Telefónica O2 UK Ltd [2014] Bus LR 765 as follows:

“ As a general rule, the scope of a contractual discretion will depend on the nature of the discretion and the construction of the language conferring it. But it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously …. This will normally mean that it must be exercised consistently with its contractual purpose ….”

In view that the most relevant authorities in a similar context had not been decided when the trial took place and the Good Faith and Rationality Implied Term was not put forward during trial, the Court of Appeal took the view that it would not be just to deprive Cindy of the chance to rely on this implied term. Although further evidence might be adduced, it could not be said at this stage that Cindy’s case based on this implied term was unarguable.

It was thus held by CA that the question of whether the Good Faith and Rationality Implied Term could have arisen would be remitted to the Judge.

II. Valid Reason Implied Term

During the hearing in the First Instance, Cindy had argued that there was an implied term to the IAA that it would not be terminated without valid reasons and an implied term to the Letter of Offer that she would not be demoted from the position as Agency Director without any valid reasons (“Valid Reason Implied Term”).

The trial Judge did not give much consideration to the Valid Reason Implied Term against demotion since Cindy did not actually accept the demotion. He so held notwithstanding he was aware of the nexus of the proposed demotion and the termination.

The Court of Appeal was of the view that the Judge’s ruling on the Valid Reason Implied Term was erroneous. As mentioned above, the trial Judge had already made the findings that the cause of the termination of Cindy was her refusal to accept a demotion. It would thus be logical to deduce that if there was indeed a Valid Reason Implied Term for demotion, it would be relevant in establishing the Valid Reason Implied Term for termination since the termination was based upon her refusal to accept demotion.

It was thus held by CA that the question of whether the Valid Reason Implied Term could have arisen would be remitted to the Judge.

Comments 

Where life insurers or in fact any employers faced with the need for them to invoke the claw back provision provided in the agreements with contractual discretion, it would be advisable for them to adopt a rational approach concerning the termination with good faith.

Then what by means of being “rational”? The classic definition was given by Lord Diplock when summarising the grounds of judicial review in Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374, 410: “By ‘irrationality’ I mean what can by now be succinctly referred to as ‘Wednesbury unreasonableness’. … It applies to a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it.”

In practical terms, the employers are also advised to offer some proper explanation, such as not meeting certain performance standard or breach of certain employment terms, to the employees concerned when they are to invoke the claw back provisions by way of termination.

Let’s wait and see for the result of any re-trial by the Judge. But bearing in mind of the cost implications of a full-blown re-trial, as it might well be the case that the parties would settle!