Hong Kong has long been an arbitration-friendly jurisdiction. Since the Arbitration Ordinance took effect from June 2011, as seen from various precedents, the Hong Kong Courts have been very supportive for international arbitration. The Court is willing to grant emergency/interim relief to preserve evidence, assets and the status quo as and when the situation calls for such reliefs, pending the final resolution of the dispute by the arbitral tribunal. The Court’s supportive stance is on full display in the latest case Chen Hongqing v Mi Jingtian & Others (HCMP 972/2017).

Background

The Plaintiff and the Defendants as well as other third parties entered into a series of loan and share pledge agreements, whereby the Defendants pledged their shares in China Shanshui Investment Company Limited (a Hong Kong company) to the Plaintiff. Any transfer of the shares to third parties was expressly prohibited in the agreements. The Plaintiff and the Defendants had some disputes in relation to the exercise of voting rights, and in February 2017 submitted the matter to CIETAC for determination in accordance with the agreements.

In March 2017, the Defendants agreed to sell the shares to the Asia Cement Corporation (ACC). In order to protect his interests, the Plaintiff invoked section 21M of the High Court Ordinance (Cap. 4) and section 45 of the Arbitration Ordinance (Cap. 609) to apply for interim reliefs, including the appointment of receivers over the shares in question and an injunction to restrain the Defendants from taking further steps to transfer the shares.

On 27 June 2017, the Honourable Madam Justice Mimmie Chan handed down judgment, and granted the reliefs sought.

The Requirements for s.21M and s.45 Interim Reliefs

The requirements for granting interim reliefs include:-
1. A serious question to be tried;
2. Risks of dissipation of assets;
3. Balance of convenience (e.g. any delay on the part of the Applicant, third party interests);
4. Enforceability of judgment/award in Hong Kong; and
5. Undertaking as to damages.

In respect of the 1st requirement, there is dispute between the parties as to whether the pledge agreement relied upon by the Plaintiff is effective and legally valid. Since the governing law of the pledge agreement is PRC law, the Court is of the view that it is not appropriate to make factual findings on the above issues. Such issues shall be determined by the arbitral tribunal, and the role of the Hong Kong Courts is to grant appropriate interim reliefs in support of the arbitral proceedings. As it is common ground that the pledge agreement contains an express provision restricting the transfer of the shares in question, the Court agrees that there is a serious issue to be tried.

With respect to the 2nd requirement, the Defendants have already executed the sale and purchase agreements and completed all steps in relation to the transfer, and the only remaining step is for the shares to be registered in ACC’s name. It is clear that there are risks of dissipation.

As regards the 3rd requirement, having considered and struck a balance among various factors, including any third party interests, whether the receivership is an appropriate remedy, and the most appropriate forum, the Court was inclined to grant the reliefs sought.

It is inevitable that the appointment of receivers would involve and affect the third party’s control and disposal (if any) of the shares in question, and as such in this case, ACC (being the purchaser of the shares) as an interested party, was granted leave to intervene in the proceedings to make submissions and adduce evidence. Taking into account the duties of the receivers, the Court held that the receivers had the expertise and independence to preserve the status quo and the value of the shares. The Court was also of the view that if the shares are to be transferred and registered in ACC’s name, and the Plaintiff’s claims to the shares were ultimately accepted by the arbitral tribunal to be valid and enforceable, the transfer of shares in breach of the pledge agreement would defeat the Plaintiff’s security rights and the purpose of the share pledge. Since the share transfer was almost completed but for the last step of registration, receivership should be a necessary remedy to preserve the shares.

This case also showcases the willingness of the Court to grant supplemental reliefs to fill the void of the relatively limited remedies or the lack of equivalent interim measures available in the jurisdiction of the arbitral tribunal. The Defendants submitted that since the arbitral tribunal is within PRC jurisdiction, the PRC Courts should be the most appropriate forum to grant interim reliefs. However, in the instant case the shares are those of a Hong Kong company, in which case the usual protection to share pledge under PRC law becomes inapplicable, and the PRC Courts cannot therefore grant the interim reliefs in respect of a Hong Kong company. Coupled with the fact that ACC was not a party to the arbitration, the arbitral tribunal cannot grant interim reliefs against ACC either. In the circumstances, the Court affirmed the position that the appointment of receivers by the Hong Kong Court will not usurp the jurisdiction of the PRC Courts and in this case, the Court is in a position to grant the relevant supplemental interim reliefs in support of PRC arbitration.

The Court also found that the delay on the part of the Plaintiff would not frustrate his application. With the 4th and the 5h requirements being fulfilled, the Court granted the interim reliefs sought, i.e. the appointment of interim receivers over the shares and the relevant injunctions against the Defendants.

Significance of the Case

As explained above, the Court has carefully weighed various factors in the balance of convenience in great detail. This case could serve as some guidance and set a great example of how the Court shall approach different intricate factors and strike a balance. It is also shown that if it is necessary to preserve assets for the enforcement of arbitral awards, notwithstanding that the measures may affect the interests of third parties, the Court would appoint receivers as an interim relief without hesitation in appropriate cases. The Court also exhibits the willingness to grant supplemental measures in support of international arbitration.

Further, this case also demonstrates that since the available interim measures in the PRC courts are limited, the parties may consider seeking relief from Hong Kong court in aid of PRC arbitration, to preserve assets and maintain status quo.

The litigation team of Stevenson, Wong & Co., led by Partner Ms. Heidi Chui (Head of Dispute Resolution Department), assisted by Senior Associate Ms. Katy Lai, Associate Mr. Kyle Lo, and Trainee Solicitor Mr. Benson Cheung, acted for the Plaintiff in the application and successfully obtained the interim reliefs.

Please contact our Ms. Heidi Chui (heidichui.office@sw-hk.com) for any enquiries or further information.

The Legislative Council of Hong Kong concluded the third reading and passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 on 14 June 2017. The amendments once taken effect will permit third party funding in arbitration and mediation cases. The amended arbitration law will greatly enhance and strengthen Hong Kong’s status as a leading centre for international legal and dispute resolution services in the Asia-Pacific region. We will highlight the main features of this key breakthrough of the arbitration regime in Hong Kong below:-

1. The amendments apply to Hong Kong seated arbitration, the costs and expenses of services that are provided in Hong Kong in relation to the arbitration outside Hong Kong and mediation, reflecting the pro-mediation, pro-arbitration and international arbitration friendly approach adopted by the Hong Kong Courts.

2. The Arbitration Ordinance (Cap. 609) will be amended, after which common law offences of maintenance and champerty will cease to apply to third party funding in relation to arbitration and mediation. The amendments operate to permit a person who does not have an interest recognised by law in the arbitration to provide funds to a funded party in the arbitration, in return for a share in the financial benefit of the award if the arbitration is successful.

3. The mechanism for third party funding in Hong Kong is much more flexible than the Singaporean counterpart, in the sense that besides professional funders, any person “who is a party to a funding agreement” and “who does not have an interest recognised by law in the arbitration other than the funding agreement” can participate in arbitration funding. Upon compliance with the legal requirements under the new regime, in principle law firms can operate and set up a funding arm specifically providing the services for arranging and coordinating third party funding in Hong Kong.

4. To avoid conflict of interests, lawyers who in the course of the lawyers’ legal practice, act for any party in relation to the arbitration are not allowed to directly fund the arbitration.

5. To reinforce the rule of law and to avoid the abuse of the new regime, third party funding must fulfil a series of strict requirements, including signing and execution of a written funding agreement after the commencement of the regime.

6. The amended ordinance has yet to encompass a separate set of regulatory provisions at this stage. However, the Secretary for Justice has been empowered by the Government to appoint an “authorised body” to draw up a Code of Conduct and monitor the compliance of the funders, including but not limited to capital adequacy requirements, confidentiality, avoiding conflicts of interests.

7. The amendments are expected to take effect this year, keeping pace with the development of the Code of Conduct.

It is expected that the new regime will promote the development of mediation and arbitration in Hong Kong, strengthening Hong Kong as the hub for international law and disputes resolution centre in Asia. Providing a comprehensive legal service to our clients, Stevenson, Wong & Co. possesses profound experience in cross-border disputes resolution with a team of seasoned practitioners who always act in the clients’ best interests. Please contact our Mr. Eric Lui or Ms. Heidi Chui for any enquiries or further information about our services.

The Plaintiff suffered serious injuries while wakeboarding. The Plaintiff and her then boyfriend and three colleagues hired a boat owned by the 1st Defendant, and a coxswain named as the 2nd Defendant. At lunch, the Plaintiff drank 2 cans of beer and the coxswain also drank some beer. The Plaintiff wakeboarded once, and then she had a slight headache. After recovery, the Plaintiff wakeboarded the second time, when the accident occurred and serious injury ensued. The Plaintiff sued the owner of the boat for vicarious liability and negligence in failing to instruct the coxswain on how to perform his job safely, and the coxswain for negligence which caused the accident and her injuries. An interlocutory judgment in default was entered against the owner.

The Court found that the coxswain did not act negligently and hence was not liable to the Plaintiff for the injuries. There was no evidence that the coxswain was speeding or that the coxswain’s control of the boat was adversely affected under the influence of the alcohol. Since the Plaintiff’s then boyfriend (and the Plaintiff accepted to) instructed a coxswain only and not a wakeboarding instructor, the coxswain was not under any duty to provide sufficient personal safety equipment. With the Plaintiff having recovered from her earlier headache, there was no evidence that the coxswain knew that the Plaintiff was unfit for wakeboarding. The Court also found that the coxswain was not a duty or had the power to prevent the Plaintiff from wakeboarding. Since the sport of wakeboarding is commonly known as inherently risky, the mere occurrence of the accident alone would not be sufficient for an inference that the coxswain was negligent. Therefore, the Court concluded that the coxswain was not negligent on a balance of probabilities.

As for the claim of vicarious liability against the owner, since his employee, the coxswain, was found not to be negligent, the owner would not be found vicariously liable. It also appears that the Court considered the negligence arguments against the owner were in substance the same as the ones against the coxswain. Hence, the claim against the owner may likely fail too.

This case reiterates the principle that the employee has to be found negligent so that there is a basis for vicarious liability to set in. Also, the court, in holding that the coxswain was not under a duty to prevent wakeboarders from the activities after drinking, seems to place quite substantial responsibility on wakeboarders for taking care of their own safety. Wakeboarders should therefore ensure they are properly insured before riding a wakeboard.

Fact

The Plaintiff issued a writ of summons against the Defendant, a PRC resident in China, and obtained leave under O.11 r.1(1) of the Rules of the High Court to serve a concurrent writ out of the jurisdiction on the Defendant at his residential address. The Plaintiff then requested that the writ shall be served through the judicial authorities of China, pursuant to O.11 r.5A. The Plaintiff later made a similar application for service at a commercial address. Both of the attempts failed. The Plaintiff then applied for and the Court ordered substituted service in Hong Kong, but not in China, through delivering by hand the documents marked for the attention of the Defendant care of the Hong Kong office of the solicitors for the Defendant.

The Defendant appealed on the ground that the Court had no jurisdiction to bypass O.11 r.5A by ordering substituted service in Hong Kong; alternatively such an order contravened the Basic Law and was beyond the jurisdiction of the Court.

The Court dismissed the Defendant’s appeal

The Court adopted a purposive approach in interpreting O.11, and ruled that “the objective of substituted service was to bring knowledge of the writ to the defendant by such means that would reach him in all reasonable probability.” Therefore, although not expressly stated, substituted service was applicable to the service of process on a mainland Chinese resident.

The Court then categorised substituted service into two types, namely substituted service to be effected on the Mainland, or in Hong Kong.

As for the former kind, pursuant to O.11 r.5(2), such order or direction of the Court in Hong Kong must not contravene PRC law. If a particular mode of service was preferred by the relevant judicial authorities on the Mainland, the applicant must follow the same in his request with the Registry of the High Court. The applicant has to prove to both the Court in Hong Kong and a Higher People’s court on the Mainland that his proposed service method was appropriate.

The Court then justified the latter kind of substituted service. In reality, in most cross-border disputes, the parties would submit to the jurisdiction of the court or there is a substantial connection between the dispute and Hong Kong. Therefore, allowing substituted service is a pragmatic decision in the interests of efficient litigation. As a safeguard, the Court would also ensure the method of substituted service in Hong Kong would not authorise any conduct contrary to PRC law.

Implication

Apparently, the Court is prepared to take a pragmatic approach as far as service out of the jurisdiction is concerned. Acknowledging there being practical difficulties in serving out of the jurisdiction on a Mainland Chinese resident, the Court may go so far as to allow substituted service in Hong Kong, as opposed to that effected in China, when the Plaintiff can prove that such substituted service could make known to the Defendant the existence of the writ in all reasonable probability.

Company A, incorporated in Canada, held 75% of three operating companies in the business of mineral mining while Company B held the remaining 25%. Company A as guarantor entered into a borrowing facility with certain companies as borrowers. Company A also charged some shares in two companies in favour of the lender bank.

Company A went into financial difficulties. Subsequently, the lenders rights were transferred to Company C (within the same group of companies as Company B). A notice of acceleration was served on the borrowers. The initial security agent also resigned and was replaced by Madison, a Hong Kong company. As the matter went on, the discussions to resolve the financial difficulties failed and joint administrators were appointed by the High Court in London.

The administrators were concerned that Madison would sell the charged shares at an undervalue which will prejudice the equity of redemption. An application was made in London (the centre of main interests of Company A) and in Hong Kong in an attempt to stall the sale of the charged shares.

Court’s decision

The Court first considered the issue whether liquidators appointed in a jurisdiction (England in this case) other than the place of incorporation (Canada in this case) are recognised under Hong Kong law. The court supports (without deciding) the idea of recognising such liquidators and thus having the jurisdiction to render active assistance to overseas insolvency proceedings due to the commercial necessity of cross border insolvency.

The second issue is, in the lack of the statutory provisions, what types of orders are available to such liquidators under common law and equitable principles. The Court found that there were no statutory provisions which provided for a moratorium of the enforcement of the security. In the instant case, the application was not made on the ground that the proposed enforcement would prejudice the equity of redemption or the liquidated company subsequently had been able to fulfill the payment obligations. Hence, the application had no common law or equitable basis to rest on. On this basis, the court rejected the application.

Implications

The present case reflects the natural spread of modified universalism in cross-border insolvency cases, under which the court will endeavour to provide assistance to each other without awaiting sanctions as agreed by international conventions. Although liquidators not appointed in the place of the incorporation are recognised, the court still treads cautiously when it comes to granting restrictive sanctions to aid foreign insolvency proceedings.

The claimant initiated a litigation claim in Hong Kong in 2012 (Action 1). Subsequently, the action was stayed with consent and referred to arbitration according to the arbitration agreement at issue. In November 2013, the claimant obtained a favourable award from the arbitral tribunal in Shanghai.

The claimant obtained an order for enforcement of the arbitral award in Hong Kong in 2014. However, the Defendant did not take appropriate actions according to the order. Instead, he attempted to re-litigate the matter under Action 1.

The claimant restored Action 1 and a hearing was fixed in March 2016. Just five working days before the hearing, the Defendant applied to consolidate Action 1 with another separate High Court action. No evidence was filed by the Defendant in support of the consolidation and the Defendant also filed evidence in Action 1 after the designated time.

The Court rejected the consolidation and also decided for the claimant in Action 1. Specifically, the Court awarded indemnity costs to the claimant. The Court is of the view that although the Defendant did not directly challenge the arbitral award, the overall behaviours of the Defendant were “clearly an attempt to delay the enforcement” of the arbitral award. The Court considered that if the costs order was not on an indemnity basis, but rather a more lenient party-and-party basis, it would encourage people to employ similar strategies other than a direct challenge of the arbitral award to delay the enforcement.

This case reinforced the Court’s pro-arbitration stance. The Court’s position is that not only would a failed attempt to challenge or set aside an arbitral award result in an unfavourable costs order on an indemnity basis, but also where a party seeks to indirectly impede the enforcement of an arbitral award. Therefore, a party must carefully consider the binding effect of an arbitral award as recognized by the Court in Hong Kong when agreeing to an arbitration agreement.