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A time of change: recent arbitration developments in Hong Kong

2017 was nothing short of an eventful year across the globe. We saw the elections of Donald Trump and Carrie Lam elevate them into the White House and the Government House respectively, signaling a change in political landscapes. China also hosted its 19th National Congress, which enshrined President Xi Jinping's ideology into the Chinese constitution and rallied China to play a more substantial role on the international stage. Bitcoin saw its meteoric rise towards the end of 2017, and a celestial event of the century – a coast-to-coast solar eclipse – captured the hearts of many in the United States.

The legal world was equally vibrant during this time of change. Drawing from our expertise in international arbitration, we highlight some of the most important and interesting arbitration developments that took place in Hong Kong, and a refusal of enforcement decision in Mainland China.

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Third party funding and arbitrability of intellectual property disputes

One of the previous drawbacks of arbitrating in Asia is that typically there is no funding for a party that lacks the financial resources to bring a claim, except for jurisdictions which allow for contingency fees. This often leaves an aggrieved party with no means to seek recourse, even though it may have a legitimate claim. In Hong Kong, this situation was exacerbated by the uncertainty of whether the common law doctrines of champerty and maintenance – which prohibit an uninterested third party in providing financial assistance to a party – would apply to arbitrations seated in Hong Kong.

This uncertainty was addressed by an amendment to the Hong Kong Arbitration Ordinance (Cap 609) ("Arbitration Ordinance") on 14 June 2017. This amendment clarified that champerty and maintenance would not apply to arbitrations, mediations and related proceedings in Hong Kong, and that financial assistance from unrelated third parties – commonly referred to as "third party funding" – would be permitted under Hong Kong law. Before the provisions allowing third party funding come into force, a Code of Practice, which will apply to all third party funders, needs to be established.

The Arbitration Ordinance was further amended to clarify that disputes over intellectual property rights ("IPRs") can be resolved through arbitration, and that it is not contrary to Hong Kong public policy to enforce arbitral awards involving IPRs. This amendment is significant in that it gives a vote of confidence to holders of IPRs to refer their disputes to arbitration.

Do state-owned enterprises enjoy immunity from enforcement in Hong Kong?

With China's "Go Out Policy", the Belt and Road Initiative, and the increased levels of investment by Chinese companies, it is common to act for Chinese corporations – even a Chinese state-owned enterprise ("SOE") – in deals or see them on the other side. When a dispute with a SOE arises that is subject to arbitration, a common question for the counterparty to consider is whether it can successfully enforce an award against a SOE's assets.

The answer to this question will depend on the place of enforcement, but this question was tested in Hong Kong recently before the Hong Kong courts. A Chinese SOE in TNB Fuel Services SDN BHD v. China National Coal Group Corporation HKCFI 1016 ("TNB Case") attempted to resist the enforcement of an award on the basis of "Crown immunity", a doctrine set out in The Hua Tian Long (No.2) [2010] 3 HKLRD 611 ("Hua Tian Long Case") which held that absolute Crown immunity applies to the Central People's Government ("CPG") of the People's Republic of China ("PRC").

In the TNB Case, however, the Hong Kong Court of First Instance ("CFI") pragmatically rejected the Chinese SOE's assertion of Crown immunity. The CFI found that any assertion of Crown immunity must come from the Crown, or the CPG. On the facts, the Chinese SOE had not asserted that it had received such authorization. In fact, the Hong Kong and Macao Affairs Office of the State Council issued a letter to clarify that the Chinese SOE was an independent legal entity, carrying out activities of production and operation on its own with no special status or interests superior to any other enterprises. The final nail in the coffin for the Chinese SOE's case was the CFI's finding that there was no sufficient degree of control asserted by the CPG on the Chinese SOE, as the latter was an independent legal entity separated from the CPG.

This case is a positive decision by the Hong Kong courts in enforcing an award against a Chinese SOE's assets, finding that various requirements must be met before Crown immunity may even be considered. This decision should provide comfort to international investors doing business with Chinese SOEs.

Can arbitration and non-exclusive jurisdiction clauses co-exist in an agreement?

Parties may try to argue that the existence of two clauses – namely an arbitration clause and a litigation clause – would render them incompatible or the former invalid. This issue was raised in the CFI for its determination in Neo Intelligence Holdings Ltd v Giant Crown Industries Ltd [2017] HKEC 2530.

In this case, the parties concluded two agreements – the first agreement contained an arbitration clause while the second agreement contained a clause which states that the parties agree to refer their disputes to the "non-exclusive jurisdiction of the Hong Kong Special Administrative Region". The party that commenced court proceedings argued that the arbitration clause in the first agreement was superseded by this subsequent clause and was therefore inoperative, meaning the parties could litigate their dispute.

The CFI disagreed. Upon a proper interpretation, Deputy High Court Judge Sherrington found that it was clear from the subsequent agreement that the parties did not intend for it to replace the first agreement in its entirety. Furthermore, the arbitration clause and the non-exclusive jurisdiction clause had differing scopes, with the arbitration clause operating to govern the parties' agreement and the non-exclusive jurisdiction clause referring to e.g. the law of the seat of the arbitration, or for the purposes of post-arbitral enforcement.

The significance of this case is that, absent overwhelming evidence of an unequivocal waiver of an arbitration clause, court proceedings should be stayed in favour of arbitration notwithstanding the presence of a non-exclusive jurisdiction. In the words of the learned judge, to do otherwise would be to "usurp the function of the arbitral tribunal, which is empowered [by law] to rule on its own jurisdiction".

To finish – a recent Mainland China refusal of enforcement case

Party autonomy is one of the cornerstones of arbitration, to the point where its violation – such as not conducting the arbitral procedure in accordance with the parties' agreement – can result in an award to be set aside or its enforcement to be refused.

This was precisely what happened in Noble Resources International Pte. Ltd v. Shanghai Good Credit International Trade Co., Ltd. (2016) Hu 01 Xie Wai Ren No. 1, whereby the Shanghai No. 1 Intermediate People's Court ("Shanghai Court") refused to recognise and enforce a Singapore International Arbitration Centre ("SIAC") award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 ("New York Convention").

The arbitration was conducted pursuant to an agreement that provided for three arbitrators. The claimant filed a SIAC arbitration and applied to adopt its Expedited Procedure. Under Rule 5.2 of the SIAC Rules 2013 (the applicable version in this case), the Expedited Procedure provides for the appointment of a sole arbitrator unless the SIAC President determines otherwise. The SIAC President eventually decided to grant the application and referred the dispute to a sole arbitrator, notwithstanding the parties' agreement on a three-member arbitral tribunal.

The respondent then raised its objections in this regard and ceased to participate in the arbitration. An award was then rendered in the claimant's favour and it sought to enforce the award in the PRC. During the enforcement proceedings, the respondent resisted enforcement on the basis that the composition of the arbitral tribunal was not in accordance with the parties' agreement under Article V(1)(d) of the New York Convention.

The Shanghai Court agreed with the respondent. It found that SIAC's decision to appoint a sole arbitrator violated party autonomy. What the SIAC should have done was to refer the case to a three-member arbitral tribunal under the Expedited Procedure. Given this violation, the Shanghai Court refused to enforce the award.

This case illustrates that it is imperative for parties to note what is contained in the arbitration agreement, as even slight deviations from the terms agreed by the parties could lead to enforcement issues. The SIAC Rules have since been amended to incorporate a provision to the effect that by agreeing to arbitrate under those rules, the parties agree that the Expedited Procedure may override any contrary agreement by the parties. It is likely that the Shanghai Court would have reached a different conclusion if this provision was in the 2013 version of the SIAC Rules.

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Although there were major political changes around the world, what hasn't changed is Hong Kong's status as an arbitration friendly jurisdiction. The Hong Kong courts remain pro-arbitration, and legislative changes in confirming the arbitrability of IPR and allowing for third party funding are positive developments.