2011 was undoubtedly an interesting year for arbitration practitioners in Hong Kong. First, the new Hong Kong Arbitration Ordinance (Cap 609) came into force on 1 June 2011. Secondly, the Court of Final Appeal gave its landmark decision on sovereign immunity in Democratic Republic of Congo v FG Hemisphere Associates LLC (FACV Nos. 5, 6 & 7 of 2010), which in turn highlighted the important role that arbitration and agreements to arbitrate play when contracting with a foreign state or the Central People's Government. Thirdly, two judgments were handed down at first instance which sparked interest in arbitration circles: Pacific China Holdings Ltd (In Liquidation) v Grand Pacific Holdings Ltd (2011) HKLRD 611 in which the Honourable Mr Justice Saunders1 set aside an International Chamber of Commerce (ICC) award under (as was then) article 34 of the UNCITRAL Model Law; and Gao Haiyan & Anor v Keeneye Holdings Limited & Anor  HKCU 708 in which, in the context of PRC arbitration proceedings involving 'med-arb', the Honourable Mr Justice Reyes granted the respondents' application to set aside leave to enforce a Xian Arbitration Commission (XAC) award under section 40E(3) of the old Arbitration Ordinance, namely for being contrary to public policy.
These developments were discussed in more detail in the Hong Kong chapter of The Asia-Pacific Arbitration Review 2012.
2012 looks set to be just as interesting. The most significant development has been India's notification that the People's Republic of China (PRC), including the special administrative regions (SARs) of Hong Kong and Macao, is a territory to which the New York Convention applies under the India Arbitration and Conciliation Act 1996.
In addition, both the Pacific China case and the Keeneye case have gone to appeal.
This article discusses the effect of the India notification, and examines the Court of Appeal's decision in the Keeneye case, given at the end of 2011. At the time of writing, the Court of Appeal's decision in the Pacific China case had not yet been handed down.2
This article also highlights the Hong Kong International Arbitration Centre (HKIAC)'s proposals to revise its Administered Arbitration Rules (Rules).
On 19 March 2012, the Department of Legal Affairs of the Indian Government Ministry of Law and Justice issued a notification under section 44(b) of the India Arbitration and Conciliation Act 1996. This notification declared the PRC (including Hong Kong SAR and Macao SAR) to be a territory to which the New York Convention applies for the purposes of that Act in respect of any awards made in the PRC, Hong Kong or Macao on or after 19 March 2012.
This notification is important for Hong Kong. Although India is a signatory to the New York Convention, only awards made in territories that have been notified under the Official Gazette3 may be enforced in India under the New York Convention. Further, although notification had historically been made of over 40 states, notably, out of the Asian jurisdictions, the PRC (and Hong Kong) was absent from that list until now. In cases, therefore, where enforcement in India might be relevant, this notification reinforces Hong Kong's appeal as a seat for international arbitration.
Gao Haiyan v Keeneye Holdings Ltd  1 HKLRD 627
As a form of alternative dispute resolution, mediation has become increasingly popular in South East Asia and, in Hong Kong in particular, its increasing importance is reflected in the recent Civil Justice Reform, where mediation is actively promoted by the courts in its management of cases. Litigants - and practitioners - who fail unreasonably to engage in mediation face adverse costs consequences.
Similarly, one of the underlying intentions of the new Arbitration Ordinance is to encourage the use of mediation-arbitration (med-arb) (see section 32 of the new Ordinance), where a mediator is appointed to try to resolve the dispute before arbitral proceedings are commenced, and arbitration-mediation (arb-med) (see section 33 of the new Ordinance), where the arbitral tribunal assumes the role of mediator part way through the proceedings with a view to settlement of the dispute.
It was in this regard that the first instance decision in the Keeneye case generated concern over the use of med-arb (or arb-med) in arbitration proceedings, and whether this increased the risk that enforcement of any award would subsequently be refused.
A Chinese husband and wife, Gao Haiyan and Xie Heping, (claimants) entered into share transfer agreements with Keeneye Holdings Ltd and another BVI company (respondents). The agreements were governed by PRC law and provided for arbitration at XAC. The arbitration was governed by the XAC Rules. Article 37 of the XAC Rules provides that arbitration-mediation is to be conducted either by the tribunal or presiding arbitrator, or, by agreement of the parties, by any other third party.
The claimants' claim in the arbitration was that they had been influenced into entering into the agreements whilst in detention in China. They sought revocation of the agreements pursuant to Article 54 of the PRC Contract Law, arguing that the respondents had taken advantage of their hardship in inducing the claimants to enter into the agreements.
The tribunal had two sittings. After the first sitting, on its own initiative, the tribunal suggested that the parties settle the dispute by the respondents paying 250 million renminbi to the claimants in return for non-revocation of the agreements.
Then, before the second sitting, a purported arb-med took place in the form of a private meeting over dinner at the Xian Shangri-la hotel. The dinner was attended by Pan Junxin (XAC's Secretary General (Pan)) (who allegedly hosted the dinner) and Zhou Jian (the claimant-appointed arbitrator) (Zhou). Zeng Wei (Zeng), a third-party 'related to' (???) the respondent, also attended at Pan's invitation. The parties had not agreed to appoint Pan to conduct any form of arb-med. Further, neither the respondent-appointed arbitrator nor the presiding arbitrator attended.
During dinner, Pan told Zeng of the tribunal's 250 million renminbi settlement proposal and asked Zeng to 'work on' the respondents. Ultimately, however, the parties were unable to settle. Following the second sitting, the tribunal made an award in the claimants' favour and, at the same time, 'recommended' that the claimants should pay 50 million renminbi to the respondents (ie, the opposite of its settlement proposal, which proposed the respondents making payment to the claimants in order to keep the agreements alive).
The respondents did not at any time complain to the tribunal about the arb-med dinner, fearing that if they did so this would antagonise the tribunal. The respondents did, however, apply to the Xian Intermediate People's Court to have the award set aside on the grounds of bias. The Xian Intermediate People's Court refused to set the award aside.
The claimants then came to Hong Kong and obtained leave to enforce the award in Hong Kong from the Hong Kong court.
The respondents applied to set aside the leave to enforce the award under section 40E(3) of the old Arbitration Ordinance (now section 95(3) of the new Arbitration Ordinance), arguing that enforcement of the award would be contrary to public policy because the award was tainted by bias or apparent bias.
Decision of the Court of First Instance
The respondents were successful at first instance.
On the question of bias, the main issue before Reyes J was whether the award was made in circumstances which would cause a fair-minded observer to apprehend a real possibility of bias on the part of the arbitral tribunal.
Reyes J held that a fair-minded observer would 'apprehend a real risk of bias' and that 'what happened at the Shangri-La4 would give the fair-minded observer a palpable sense of unease.'
He based his conclusion on the following findings:
- The mediators made their proposal to an intermediary - Zeng - rather than to the respondents or the respondents' lawyers. As a result, 'the impartial observer would fear that Zeng was chosen as an intermediary because he was perceived as a person wielding influence over the respondents who could press the proposal of paying the applicants 250 million renminbi.'
- Asking Zeng 'to work on' the respondents to accept the settlement proposal suggested that the mediators were forwarding their own agenda rather than communicating a neutral plan.
- The mediators' 250 million renminbi settlement proposal was made 'without authorisation from the [claimants] or inkling as to whether the [claimants] were prepared to accept the same.' This suggested that the mediators were 'acting on their own on an initiative which favoured the [claimants].'
- There was no explanation for the lack of correspondence or proportionality between 50 million renminbi (said in the award to be the fair compensation payable to the respondents) and the 250 million renminbi settlement proposal (said to be what ought to be paid to the claimants in return for the agreements being treated as valid).
- The setting for the mediation was 'odd': 'A private dinner in a hotel has a connotation of 'wining and dining' a person to make a difficult proposal palatable.'
- Finally, 'the proof of the pudding is in the eating', in that eventually, when the respondents did not agree to settle by paying 250 million renminbi to the claimants, the award in the end went in the claimants' favour and, at the same time, merely recommended (but did not require) a payment to the respondents of 50 million renminbi.
Reyes J also cautioned that there was the 'potential for an appearance of bias' in the med-arb process, saying that 'the mediator who may be sitting as arbitrator in the same case must be particularly careful not to convey to one party or the other the impression of bias.'
Waiver and estoppel
On the question of waiver, Reyes J also held that the respondents had not waived any right to raise the issue of bias in Hong Kong. He accepted as valid the argument that the respondents were anxious not to antagonise the tribunal. Further, he felt that it was not until the award was actually published that 'a fair-minded observer might feel that one's uneasiness over the conduct of the mediation process was more than the product of an over-active imagination.'
On the question of estoppel, Reyes J held that the Hong Kong court was entitled to consider the question of bias from the viewpoint of Hong Kong policy because: 'Hong Kong public policy may well be different from public policy in Xian'.
Based on his findings above, Reyes J set aside the claimants' leave to enforce the award on the public policy ground.
The claimants appealed.
Decision of the Court of Appeal
The Court of Appeal allowed the claimants' appeal and permitted enforcement of the award.
Applying the leading authority, Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111 (which was also concerned with the enforcement of a Mainland award), the Court of Appeal confirmed that enforcement should only be refused if to enforce the award would be contrary to the fundamental conceptions of morality and justice of Hong Kong. The Court of Appeal said that the fact that holding a med-arb over dinner at a Chinese hotel might give rise to an appearance of bias in Hong Kong, would not justify refusal of enforcement in Hong Kong.
The Court of Appeal referred to the following comments made in the Hebei judgment:
However, the object of the Convention was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced….the provisions of Article V, notably Article V. 2(b) relating to public policy, have been given a narrow construction. It has been generally accepted that the expression 'contrary to the public policy of that country' in Article V.2(b) means 'contrary to the fundamental conceptions of morality and justice' of the forum…
(Sir Anthony Mason NPJ)
The expression public policy as it appears in s.44(3) of the Ordinance5 is a multi-faceted concept. Woven into this concept is the principle that courts should recognise the validity of decisions of foreign arbitral tribunals as a matter of comity, and give effect to them, unless to do so would violate the most basic notions of morality and justice. It would take a very strong case before such a conclusion can be properly reached, when the facts giving rise to the allegation have been made the subject of challenge in proceedings in the supervisory jurisdiction, and such challenge has failed…
In relation to the issue of proceedings in a supervisory jurisdiction, the Court of Appeal also placed weight on the fact that the Xian Intermediate People's Court, the supervisory court, had refused to set aside the award for bias.
The Court of Appeal referred to a English authority, Minmetals Germany GmbH v Ferco Steel Ltd  CLC 647, which was concerned with an application by Ferco Steel Ltd not to enforce a China International Economic and Trade Arbitration Commission (CIETAC) award on the basis, inter alia, that it was unable to present its case, CIETAC had breached its procedural rules and because enforcement would be contrary to English public policy. There was also an unsuccessful application to the supervisory court (Beijing) to set aside the award. The Honourable Mr Justice Colman stated:
In international commerce a party who contracts into an agreement to arbitrate in a foreign jurisdiction is bound not only by the local arbitration procedure but also by the supervisory jurisdiction of the courts of the seat of the arbitration. If the award is defective or the arbitration is defectively conducted the party who complains of the defect must in the first instance pursue such remedies as exist under that supervisory jurisdiction. That is because by his agreement to the place in question as the seat of the arbitration he has agreed not only to refer to all disputes to arbitration but that the conduct of the arbitration should be subject to that particular supervisory jurisdiction. Adherence to that part of the agreement must, in my judgment, be a cardinal policy consideration by an English court considering enforcement of a foreign award.
In a case where a remedy for an alleged defect is applied for from the supervisory court, but is refused, leaving a final award undisturbed, it will therefore normally be a very strong policy consideration before the English courts that it has been conclusively determined by the courts of the agreed supervisory jurisdiction that the award should stand.
The Court of Appeal also held that a clear case of waiver had been made out because the respondents had kept a complaint about an alleged irregularity up their sleeve for later use.
Article 5 of the Xian Rules provides that a party waives his right to object where that party participates in or proceeds with the arbitration knowing that a provision of, or requirement under, the XAC Rules has not been complied with.
Again, the Court of Appeal referred to Sir Anthony Mason NPJ's judgment in the Hebei case:
the factual foundation for the public policy ground arises from an alleged non-compliance with the rules governing the arbitration to which the party complaining failed to make a prompt objection, keeping the point up its sleeve, at least when the irregularity might be cured.
Whether one describes the respondent's conduct as giving rise to an estoppel, a breach of the bona fide principle or simply as a breach of the principle that a matter of non-compliance with the governing rules shall be raised promptly in the arbitration is beside the point in this case.
In this case, subsequent to the meeting at the Xian Shangri-la hotel, the respondents submitted a 'Supplemental Submission' dated 13 May 2012 to the tribunal. In that submission, the respondents argued that the agreements were not manifestly unfair nor made contrary to the claimants' intention, and concluded as follows:
The Arbitration Tribunal should dismiss the counterclaim of Xie and Gao according to law. Concerning the consideration of the share transfer, our company is willing to participate in mediation conducted by the Arbitration Tribunal. However, in light of Gao and Xie's personality, they will behave improperly whenever they have some money. We sincerely hope the Arbitration Tribunal gives Gao and Xie no more than RMB 60 million during mediation. We consider the offer very favourable given Gao and Xie are playing 'Karate'. He will laugh and wake up at midnight! Concerning people who don't know Gao and Xie and helped them to fight the lawsuits, we are willing to pay for all the costs they incurred. On 5th February this year in the afternoon, Xie Heping at a Hong Kong solicitor's firm said that he had spent costs of about RMB 7 million in the Xian Arbitration Tribunal case. We are willing to pay for that too.
There was also a hearing before the tribunal on 31 May 2010.
The Court of Appeal held that it was not the respondents' case that they had no apprehension of bias or impropriety, real or apparent, prior to the making of the award. Rather, the respondents were hoping for a satisfactory conclusion but feared that, should they antagonise the tribunal by complaining, that might result in an unfavourable or less favourable result. Nor was it is open to a litigant to wait and see how his claims turned out before pursuing his complaint of bias. The mischief in keeping silent had been identified by Sir Anthony Mason NPJ in his Hebei judgment in that it precluded an ascertainment in the arbitration of the respondents' complaint:
Moreover, had the question been raised, it is possible that action may have been taken by the Tribunal to remedy the situation, assuming that such action was necessary or desirable.
The Court of Appeal held that this was very much so in this case. Moreover, the tribunal and the Xian Intermediate People's Court would have been in a much better position to ascertain the facts and to decide whether those facts established a case of actual or apparent bias. As noted above, the Court of Appeal felt that such finding, though not binding, would be entitled to serious consideration by the Hong Kong courts.
The Court of Appeal also considered the factors listed by Reyes J relevant to his finding of apparent bias and concluded that a sufficient case of apparent bias had not been made out, contrary to the fundamental conceptions of moral and justice in Hong Kong.
The Court of Appeal felt in particular that due consideration must be given to how mediation is normally conducted in the place where it was conducted. This was another reason why weight had to be given to the decision of the Xian Intermediate People's Court refusing to set aside the award.
Further and specifically, taking into account the relevant facts of this case, the Court of Appeal: considered that Zeng had participated in the mediation with the agreement or on the authority of the respondents; did not agree that the difference between 250 million renminbi and 50 million renminbi would give rise to an apprehension by the fair-minded observer of apparent bias; and held that the expression 'work on' is a common expression in the Mainland.
Although the Keeneye case is rather unusual on its facts, the Court of Appeal's judgment demonstrates very clearly the long standing pro-enforcement attitude of the Hong Kong courts and their very narrow interpretation of what being contrary to public policy means. Moreover, this decision should reassure parties about the use of med-arb and arb-med as part of the arbitration process, so long as any procedure adopted is considered acceptable in the seat of the arbitration.
Revision of HKIAC Administered Arbitration Rules
On 1 September 2008, the Rules came into force. The Rules are for use by parties who 'seek the formality and convenience of an administered arbitration'6 and their intention was to offer a 'light touch' administered approach, inspired by the approach of the Swiss Rules of International Arbitration. The Rules, which were designed especially with Chinese-foreign disputes in mind, are issued in Chinese and English versions. As the then chairman of the HKIAC, Dr Michael Moser said:
The HKIAC Administered Arbitration Rules provide users with an additional option to consider when weighing different dispute solutions. The main impetus behind the Rules was a strong demand from parties in mainland China for a 'light touch' administered arbitration proceedings in Hong Kong.7
Three years after the implementation of the Rules, the HKIAC Council is considering what (if any) revisions should be made to the Rules. The HKIAC Council is not contemplating a wholesale revision of the Rules as the general view is that the Rules are working well. Rather, the aim is to modify the Rules drawing on just over three years' experience of their usage, as well as to take into account best practice in international arbitration and the provisions of the new Arbitration Ordinance.
In December 2011, the HKIAC posted a Consultation Paper on its website, and invited views from users on whether and to what extent amendments should be made. A number of firms and individuals have already submitted comments on the proposed amendments and the first consultation meeting was held on Wednesday, 28 February 2012 at the HKIAC.
The amendments which have been proposed include both modifications to the existing Rules and new provisions to ensure that the HKIAC is kept up to date with best trends in modern international arbitration practice.
The key possible proposed amendments to the already existing Rules have been identified as follows:
- Article 1 (Scope of Application, section I. General Rules): amending the scope of the Rules described in article 1.1. to address party disputes over whether the Rules do (or should apply) to the dispute in question.
- Article 8 (Appointment of Arbitral Tribunal, section III. Arbitrators and the Arbitral Tribunal): simplifying (and amending) the article 8.2 procedure for appointing arbitrators in a multi-party arbitration.
- Article 14 (General Provisions, section IV. Arbitral Proceedings): expanding the provisions in Article 14 regarding joinder.
- Article 24 (Interim Measures of Protection, Section IV. Arbitral Proceedings): amending article 24:
- to give more guidance on what interim measures an arbitral tribunal is able to grant. Proposals include either clarifying that the jurisdiction to order interim measures includes the jurisdiction to grant security for costs, (section 56 of the new Arbitration Ordinance gives the arbitral tribunal power to order a claimant to give security for the costs of the arbitration); or stating that the power to order security for costs is a separate power of the arbitral tribunal; and
- to bring it into line with sections 35 and 36 of the new Ordinance, which in turn incorporate articles 17 and 17A of the UNCITRAL Model Law (as revised in 2006), regarding the power of the tribunal to order interim measures, including the conditions for granting such measures.
- Article 36 (Fees and Costs, section V. The Award; including the Schedule of Arbitrators' Fees annexed to the Rules): considering whether the parties should in article 36.2 be permitted to decide how the tribunal's fees should be determined, whether by applying the fee schedule or the arbitrator's hourly rate. Factors raised during the initial consultation process include whether fees should be centrally controlled and/or fully transparent; and whether the fee schedule annexed to the Rules should be revised.
In addition, the HKIAC Rules Revision Committee has identified a number of new matters for possible incorporation into the Rules:
- Emergency Arbitrator Procedure: provisions to establish a procedure for appointing an emergency arbitrator who would consider applications for interim relief between the service of the Notice of Arbitration and the constitution of the arbitral tribunal. This proposal reflects the trend of arbitral institutions in providing parties with a means of resolving urgent situations before the arbitral tribunal has been constituted. For example, similar provisions can be found in the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce which came into force on 1 January 2010 (SCC Rules 2010), the Arbitration Rules of the Singapore International Arbitration Centre which came into force on 1 July 2010, the International Chamber of Commerce Arbitration Rules which came into force on 1 January 2012 (ICC Rules 2012) (noting that the emergency arbitrator provisions in the ICC Rules allow a party to make an application for emergency relief even before it has submitted its Request for Arbitration) and the Swiss Rules of International Arbitration which came into force on 1 June 2012 (Swiss Rules 2012).
- Expedited formation of an arbitral tribunal: provisions for the expedited formation of an arbitral tribunal.
- Consolidation of arbitration proceedings: provisions for the consolidation of arbitration proceedings. Again, provisions dealing with consolidation can be found in the ICC Rules 2012, the Swiss Rules 2012 and the SCC Rules 2010.
- Enforcement of award: a provision conferring an express duty on the arbitral tribunal (and by extension on the HKIAC) to do everything possible to ensure that the award is enforceable.
- The new Arbitration Ordinance: finally, the HKIAC Rules Revision Committee has undertaken to review the HKIAC Rules against the new Arbitration Ordinance, and to consider whether any further amendments are necessary or appropriate following the coming into force of the new Arbitration Ordinance.
The consultation process is on-going. At the initial consultation meeting on 28 February 2012 the HKIAC Rules Revision Committee stated that it would circulate a revised draft of the HKIAC Rules, taking into account the comments received and issues discussed to date, for further comment and consultation. It is hoped that the revised Rules will be in place before the end of 2012.
Conclusion - enter the dragon
Hong Kong's Year of the Dragon has had an auspicious start in the arbitration sector: any enforcement risks associated with enforcement in India have been removed by India's notification of China (and Hong Kong) as being a Convention territory for the purposes of the 1996 Arbitration and Conciliation Act; the Court of Appeal's decision in the Keeneye case has further confirmed that 'public policy' is a narrow concept and enforcement of an arbitral award should only be refused on the contrary to public policy ground where to enforce the award would be 'contrary to the fundamental conceptions and morality and justice of Hong Kong';8 and the HKIAC is taking steps to ensure that its Rules reflect best practice and, most importantly, work well for those using them.
Hong Kong already as an excellent reputation for being an arbitration-friendly jurisdiction. The recent developments discussed above can only enhance that reputation.
- The judge in Hong Kong then specialising in arbitration.
- The appeal was heard in March 2012 and judgment was due to be handed down on 9 May 2012.
- The PRC notification will be gazetted in the India Official Gazette.
- Reyes J proceeded on the basis that what happened at the Shangri-la was part of an unsuccessful mediation, 'albeit with serious reservations' because the procedure followed by the tribunal was not strictly in accordance with Article 37 of the XAC Rules.
- Section 44 of the old Arbitration Ordinance dealt with the enforcement of New York Convention awards, and followed the wording of section 40E.
- Introduction to HKIAC Administered Arbitration Rules.
- The Arbitration Law 1994 does not contain any reference to, or provision for, ad hoc arbitration and arbitration in the Mainland is essentially institutional, ie, administered by an arbitral institution such as CIETAC.
- In March 2012, the Court of Appeal refused to give the respondents leave to appeal to the Court of Final Appeal.