MoFo APAC Arbitration Update: October 2019

CICC ISSUES FIRST RULINGS, AFFIRMS DOCTRINE OF SEPARABILITY

In October 2019, the PRC Supreme People’s Court published the first rulings issued by the First International Commercial Court (“CICC”). The three rulings, which relate to the same transaction, are notable because they affirm the doctrine of separability within PRC law, which is codified in Article 57 of the PRC Contract Law. The doctrine holds that an arbitration clause within a contract is separable and independent from the contract within which it is contained. In the judgments, the CICC held that the parties had reached valid arbitration agreements even though the underlying contracts were never formally executed (i.e., affixed with a seal or signed by the legal representatives). The contracts concerned were a sale and purchase agreement between Lucky Treat Limited (the “Seller”) and Zhongyuan Cheng Commercial Investment Holdings Co., Ltd. (the “Purchaser“) and a debt settlement agreement between the Seller, its affiliates and the Purchaser in a sale of shares transaction (together, the “Contracts”). During the negotiations, the parties exchanged signed draft versions indicating that the Contracts would be governed by PRC law and that any disputes would be submitted to the Shenzhen Court of International Arbitration for administration. The negotiations failed and the parties did not sign the final versions of the Contracts.

A dispute arose between the parties and the Purchaser referred the dispute to arbitration. In response, the Seller and its affiliates applied to the Shenzhen Intermediate People’s Court for a ruling that the parties had not entered into valid arbitration agreements because the Contracts were never formed. The CICC considered the case significant and took it over. The CICC dismissed the Seller and its affiliates’ application, and ruled that the arbitration agreements were valid even though the final Contracts were never signed. The CICC’s reasoning included two points of significance for PRC arbitrations. First, the CICC considered a dispute over the existence of arbitration agreements a question of validity of the arbitration agreements under PRC law, and ruled the arbitration agreements exist in light of the parties’ agreement to submit disputes to arbitration. Second, the CICC affirmed the doctrine of separability of arbitration agreements under PRC law by recognizing that the existence and validity of an arbitration agreement are independent of the existence and validity of the contract within which the arbitration agreement is contained.

The recognition of the doctrine of separability and the recognition of the competence of an arbitral tribunal to decide the existence and validity of the underlying Contracts are welcome clarifications of PRC law.

SHANGHAI MARITIME COURT GRANTS FIRST INTERIM MEASURE IN AID OF HONG KONG-SEATED ARBITRATION UNDER NEW ARRANGEMENT

Following entry into effect on October 1, 2019 of the arrangement between Hong Kong and Mainland China on interim measures in aid of arbitration (the “Arrangement”), the Hong Kong International Arbitration Centre (“HKIAC”) reported on October 9, 2019 that it had already received five applications for interim measures to preserve assets located in Mainland China in support of ongoing Hong Kong arbitrations.

One of these applications related to a maritime dispute arising out of a charter agreement between a Hong Kong charterer and a Shanghai company. The charterer submitted the dispute for arbitration in Hong Kong on July 16, 2019. On October 1, 2019, the charterer filed an application through HKIAC under the Arrangement to seize and freeze the Shanghai company’s assets in Mainland China. Within just seven days, on October 8, 2019, the Shanghai Maritime Court granted the application—the first time a court in Mainland China has granted interim measures under the Arrangement.

STRUCTURAL CHANGES TO SINGAPORE'S COURT SYSTEM MAY MEAN QUICKER HEARINGS FOR ARBITRATION-RELATED APPEALS

On October 7, 2019, Singapore’s Ministry of Law tabled a number of legislative amendment bills in Parliament proposing changes to Singapore’s judicial system. The proposals include restructuring the Supreme Court, which currently consists of a High Court and a Court of Appeal, to include a new Appellate Division of the High Court (“Appellate Division”), which will share the current appellate caseload of the Court of Appeal. If the restructuring goes ahead, the High Court will consist of two divisions—the General Division of the High Court and the Appellate Division. The Appellate Division will hear all civil appeals that are not allocated to the Court of Appeal. If the bills are adopted, arbitration-related appeals will continue to be made to the Court of Appeal; however, the distribution of civil appeals to two different courts will likely mean that arbitration-related appeals will be heard more quickly. This is a welcome development that is likely to improve the efficiency of the judicial process supporting arbitrations seated in Singapore.

SINGAPORE MINISTRY OF LAW ANNOUNCES EXPANSION OF THIRD-PARTY FUNDING REGIME TO DOMESTIC ARBITRATIONS

On October 10, 2019, speaking at the official opening of the Law Society of Singapore’s new premises at Maxwell Chambers Suites, Singapore Law Minister K. Shanmugam announced that legislation permitting third-party funding will be extended to domestic arbitration, certain proceedings in the Singapore International Commercial Court, and related mediation proceedings. These changes will presumably have to go through the customary Singapore legislative procedure before being enacted. Singapore introduced changes to its Civil Law Act in early 2017 that permitted parties to obtain third-party funding for international arbitrations only—with the Singapore courts later confirming that the changes to the Civil Law Act permit parties to obtain third-party funding in the insolvency context as well. The existing legislation allows parties to engage financing companies that meet relevant criteria under the Civil Law (Third-Party) Funding Regulations 2017 to pay expenses related to the conduct of pursuing a claim, typically in exchange for the financing company receiving a proportion of any award. The Law Minister’s recent announcement follows what he reported were increasing requests for funding options since the 2017 amendment, and is yet another effort in a series of efforts by the Singapore government to improve Singapore’s legislative environment for dispute resolution.

KCAB TO BE FIRST FOREIGN ARBITRAL INSTITUTION TO OPEN AN OVERSEAS OFFICE IN VIETNAM

On October 11, 2019, the Korean Commercial Arbitration Board (“KCAB”) announced that it would open an overseas liaison office in Hanoi, Vietnam. The stated objective of the new liaison office is to promote KCAB’s services in the country, including arbitration and other forms of alternative dispute resolution. The opening of the liaison office is an auspicious moment in the relationship between South Korea and Vietnam. Trade between the two countries has increased significantly since 2000. Following the signing of the Vietnam-Korea Free Trade Agreement in 2015, South Korea is currently the top source of foreign direct investment in Vietnam. There are approximately 7,000 Korean firms operating in Vietnam, employing more than 700,000 workers, and contributing to approximately 30 percent of Vietnam’s exports. The opening ceremony for KCAB’s Vietnam office will take place on December 17, 2019 in Hanoi.

QUEEN’S COUNSEL DENIED PERMISSION TO APPEAR BEFORE SINGAPORE INTERNATIONAL COMMERCIAL COURT IN ARBITRATION-RELATED MATTER

On October 18, 2019, in Re Gearing, Matthew Peter QC [2019] SGHC 249, the Singapore High Court rejected an application to permit an English Queen’s Counsel to appear before the Singapore International Commercial Court (“SICC”) to resist an application to set aside an arbitral tribunal’s decision on jurisdiction arising from an investor-state arbitration. Although non-Singapore qualified lawyers are permitted to appear in “offshore” cases before the SICC, this is not true for international commercial arbitration-related matters that come within the SICC’s jurisdiction. This is because the Singapore courts and the Singapore Parliament have expressly stated that parties in arbitration-related matters before the SICC must be represented by local Singapore counsel unless admitted on an ad hoc basis.

Mr. Matthew Gearing QC made an application for ad hoc admission to appear in the setting aside proceedings. Although the High Court acknowledged that Mr. Gearing met the mandatory requirements for ad hoc admission, it found that it was not necessary to admit him. The court reasoned that the jurisdictional issues in the proceedings were not so complex as to be beyond the competence of local practitioners and there were competent local counsels available to try the matter.

MACAU PASSES NEW ARBITRATION LAW

On October 17, 2019, Macau's Legislative Assembly approved the general terms of Law no. 19/2019 on arbitration (the “New Arbitration Law”). The Legislative Assembly then passed the New Arbitration Law on November 5, 2019, which will come into force on May 5, 2020. The New Arbitration Law unifies the law governing domestic and international arbitrations seated in Macau by replacing Decree-Law 29/96/M (which governed domestic arbitrations) and Decree-Law 55/98/M (which governed international commercial arbitrations seated in Macau). It also implements the practices and standards of the Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law (the “UNCITRAL Model Law”) and expressly states that the courts and arbitral tribunals are permitted to consider the UNCITRAL Model Law when interpreting the New Arbitration Law. These steps seek to align local regulations with international standards and best practices, and to establish Macau as a viable seat for arbitrations between Chinese and Portuguese-speaking parties. The New Arbitration Law contains some noteworthy new features. These include the ability to opt into an emergency arbitrator mechanism in the arbitration agreement or in any other subsequent agreement, and a requirement that the Macau government, through the Directorate of Justice Affairs, must publish online arbitral awards involving the public administration.

SINGAPORE COURT OF APPEAL CLARIFIES COURTS’ POWERS TO MONITOR STAY OF COURT PROCEEDINGS IN FAVOR OF ARBITRATION

On October 22, 2019, the Singapore Court of Appeal delivered its judgment in Rex International Holding Ltd v Gulf Hibiscus Ltd [2019] SGCA 56 concerning the Singapore courts’ case management powers to manage stays of court proceedings where there is an alleged arbitration agreement. The appellants had obtained from the Singapore High Court a stay of court proceedings commenced by the respondent, relying on an arbitration agreement between the respondent and the appellants’ subsidiary, Rex Middle East Limited (“RME”). At the time of the granting of the stay, no party had commenced arbitration. Subsequently, the judge lifted the stay on the basis that no progress had been made towards resolving the dispute since the original stay order was made. The appellants objected to the lifting of the stay. The appellants’ main contention was that if they wanted a continuance of the stay, they would be required to undergo the burden of moving RME to commence arbitration in pursuit of a declaration of non-liability, which, the appellants argued, did not make sense when it was the respondent who would be alleging wrongs on the appellants’ and RME’s part.

The Court of Appeal observed that the court below should not have granted the stay in the first place because the arbitration clause relied upon by the appellants only covered disputes between the respondent and RME, not between the appellants and the respondent. The Court of Appeal did not consider that the court proceedings could give rise to case management issues because there was no overlap between the parties in the putative arbitration and court proceedings, no overlap in the issues, and no overlap in the potential remedies. The Court of Appeal reasoned that a case management stay would only be justified if required to achieve a fair and efficient resolution of the dispute as a whole. The Court of Appeal further held that there was no good reason to prevent the respondent from framing its claim as it saw fit. As such, the Court of Appeal lifted the stay.

HONG KONG TO STUDY OUTCOME-BASED FEES FOR ARBITRATION

On October 22, 2019, during Hong Kong Arbitration Week, Secretary of Justice Teresa Cheng SC announced that the Hong Kong Law Reform Commission would form a sub-committee to study outcome-related fees arrangements. At present, Hong Kong law prohibits lawyers from charging outcome-related fees. However, there is increased interest in flexible fee structures across the region, particularly for arbitration. On October 25, 2019, the Hong Kong Law Reform Commission announced that it had established the sub-committee to consider whether reform is needed to the relevant law and regulatory framework to allow outcome-related fee structures for arbitration and, if so, to make recommendations for reform. The announcement follows the commencement by the Singapore Ministry of Law of a public consultation on conditional fee arrangements for arbitration in August 2019.

HONG KONG COURT REFUSES TO ENFORCE MAINLAND CHINESE AWARD DUE TO MISSED TIME LIMIT

On October 24, 2019, the Hong Kong Court of First Instance handed down a judgment in the case of Wang Peiji (“WP”) v Wei Zhiyong (“WZY”) [2019] HKCFI 2593 setting aside an order enforcing an arbitral award. The underlying arbitration had resulted in the issuance of an award in favor of WZY by the Guangzhou Arbitration Commission on April 20, 2009 (the “Award”). On November 21, 2010, the Panyu People’s Court ordered enforcement of the Award. WZY recovered a portion of the total award from WP through execution. The enforcement procedures before the Panyu People’s Court came to an end in December 2018 as WP had no further assets in the jurisdiction available for execution. On April 17, 2019, WZY applied to the Hong Kong courts for leave to enforce the Award on ex parte basis. On May 14, 2019, the Hong Kong courts granted an enforcement order (the “Enforcement Order”).

WP applied to set aside the Enforcement Order based on two grounds. First, WP argued that WZY’s April 2019 application to enforce the Award was time barred by section 4(1)(c) of the Limitation Ordinance, which provides that actions to enforce an award shall not be brought after the expiration of six years from the date on which the cause of action accrued. WP further argued that the six-year limitation period was not suspended as a result of WZY’s enforcement efforts in China. Second, WP argued that the principle of res judicata applied because WZY had pursued the same claims in prior Hong Kong court proceedings, but those claims were withdrawn.

In response, WZY argued that the Award was executed under seal and was thus subject to the twelve-year limitation period in section 4(3) of the Limitation Ordinance applicable to “actions upon a specialty,” which refers to either (a) contracts under seal, or (b) causes of action based on statute. WZY further argued that time must have been suspended for the whole of WZY’s (partially successful) enforcement efforts. WZY argued that the prior decision in CL v SCG to set aside an enforcement order due to a missed time limit was distinguishable because enforcement efforts failed in that case. By contract, WZY’s enforcement actions in the PRC were partially successful, and a successful plaintiff could not be expected to have stopped enforcement efforts which were bearing fruits.

The court rejected both of WZY’s arguments, finding that section 4(3) of the Limitation Ordinance concerns whether the underlying contract was executed under seal and that CL v SCG was directly applicable. As a result, the court allowed WP’s application to set aside the Enforcement Order on the basis that WZY’s enforcement application was time barred. This case serves as an important reminder to prevailing parties of the importance of promptly enforcing arbitral awards in Hong Kong because the limitation period continues to run while enforcement efforts are made in other jurisdictions.