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Hong Kong Court of Appeal rules that Arbitral Tribunal is to determine whether pre-arbitration conditions have been fulfilled

Many contracts provide that before a dispute is to be resolved by arbitration, certain conditions are to be first fulfilled, such as a requirement to mediate before commencing arbitration.  The Hong Kong Court of Appeal in the recent decision in C and D (Arbitration) [2022] 3 HKLRD 116 held that where the parties have agreed for a dispute to be referred to arbitration, the court will presume that the parties also agreed that the arbitral tribunal, and not the court, is to determine whether pre-arbitration conditions have been fulfilled, unless the arbitration agreement provided otherwise.

C and D (Arbitration)

The decision concerned an arbitration agreement which stated that prior to any reference to arbitration, there should be a request in writing for negotiation between the parties (the condition precedent to arbitration).

The parties agreed that the relevant dispute fell within the scope of the arbitration agreement, but disagreed on whether the condition precedent was satisfied in the circumstances, and on whether the court or the arbitral tribunal should determine whether the pre-arbitration conditions were fulfilled (the procedural issue).

The Court of First Instance of the High Court decided that the procedural issue was an issue of admissibility of claim, rather than an issue of jurisdiction of the arbitral tribunal.  Overseas case law has defined an issue of admissibility to be whether a claim is admissible before the arbitral tribunal and is to be decided by it, and an issue of jurisdiction to be whether the arbitral tribunal has jurisdiction at all to hear the claim, such that the claim is to be decided instead by the court.

The main ground of appeal was that the learned Judge erred in two respects.  First, the court ought not adopt the distinction between ‘admissibility’ and ‘jurisdiction’, because such distinction is not found in Article 34(2)(a)(iii) of the UNCITRAL Model Law (adopted in Hong Kong by Section 81 of the Arbitration Ordinance).  The argument was the statute only provided that an arbitral award may be set aside if ‘the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration’.  Second, even if such a distinction existed, the pre-arbitration conditions in question were jurisdictional in nature, because in contract law, where an agreement is subject to a condition precedent, before the occurrence of such condition, there is no duty on either party to perform as agreed.

The Court of Appeal held that, although the distinction between ‘admissibility’ and ‘jurisdiction’ is not found in Article 34(2)(a)(iii), it is a concept rooted in the nature of arbitration itself and may properly be relied upon for the interpretation and application of Section 81.  The distinction can be given proper recognition through statutory construction, namely, that a dispute which goes to the admissibility of a claim rather than the jurisdiction of the tribunal should be regarded as a dispute ‘falling within the terms of the submissions to arbitration’ under Article 34(2)(a)(iii).  Ultimately, the test is whether or not the parties intended the question of fulfilment of the condition precedent is to be determined by the arbitral tribunal.

The Court of Appeal further held that whether the pre-arbitration procedural requirement has been fulfilled is usually to be decided by an arbitral tribunal, to give effect to the parties’ presumed intention to have any dispute arising out of their relationship to be decided by the same tribunal, and to achieve a quick, efficient and private determination of their dispute by arbitration.  Such presumed intention is only rebutted if the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.

The full judgment can be found here.

Takeaway

Whether an issue went to the ‘admissibility of claim’ or ‘jurisdiction of the arbitral tribunal’ is to be decided by whether the parties intended for the issue to be determined by the arbitral tribunal.  If the parties intend to restrict the scope of disputes to be referred to arbitration, that needs to be written clearly in the dispute resolution provision.

Our trainee solicitor Adrian Luk assisted in preparing this article.

 

 

Date:
28 November 2022
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Presentation for members of The Hong Kong Federation of Insurers on “The Insurance Authority’s Power of Inspection and Investigation”

On 4 November 2022, our Senior Associate Iris Cheng presented a webinar for the members of The Hong Kong Federation of Insurers on “The Insurance Authority’s Power of Inspection and Investigation”.  The session was attended by nearly 80 participants including Board members, C-suite executives and legal and compliance functions from various insurers.

We are pleased to have received feedback that the webinar has provided practical tips, was very useful and that the speaker is very well-prepared and knows the subject well.

Date:
7 November 2022
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Re NewOcean Energy: Revisiting the Second Requirement to Wind Up Foreign Companies

Further to our news article published on 28 June 2022, the Honourable Madam Justice Linda Chan revisited the second requirement under Section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) (“Second Requirement“) in Re NewOcean Energy Holdings Limited [2022] HKCFI 2501 on 8 August 2022. In granting the winding up order against the Bermuda-incorporated and Hong Kong-listed NewOcean Energy Holdings Ltd (“Company“), the Court indicated that it will readily make a winding up order against Hong Kong-listed foreign companies with substantial assets in Hong Kong.

The Second Requirement

The issue in this case was whether the assets of the sub-subsidiaries of the Company (“Hong Kong Subsidiaries“) in Hong Kong could be considered as a “benefit” in satisfying the Second Requirement. In this regard, the Honourable Madam Justice Linda Chan observed that,

  • First, the recognition of foreign liquidators is a question of fact.
  • Since the Company had already been wound up in its country of incorporation by the Court of Appeal in Bermuda, there was no basis to suggest that Bermuda-appointed liquidators would not be recognised in BVI, the country of incorporation of the immediate holding company of the Hong Kong Subsidiaries (“BVI Company“).
  • Secondly, the assets and directors of the Hong Kong Subsidiaries were subject to the jurisdiction of Hong Kong courts. Therefore, even if the Hong Kong directors were unwilling to cooperate, liquidators appointed by Hong Kong courts under Cap.32 would be able to bring proceedings against the Hong Kong Subsidiaries and tap into their underlying assets. The making of a winding-up order would thus serve some “useful purpose” to the creditors and was considered as a “benefit” in satisfying the Second Requirement.

Reconciliation with Re China Huiyuan

Earlier, in Re China Huiyuan Juice Group Limited [2020] HKCFI 2940, the Honourable Mr Justice Harris decided that the common law default position was that the court will recognise only the authority of a liquidator appointed under the law of the country of incorporation of the company. The limited exception to the default position related to the recognition for the purpose only for a foreign liquidator introducing a scheme of arrangement (see Re China Huiyuan at [37-38]).

Against this backdrop, one of the creditors in Re NewOcean Energy relied on Re China Huiyuan to assert that Hong Kong-appointed liquidators would not be recognised in BVI and thus would not be able to get control of the BVI Company. However, the context of Re NewOcean Energy distinguishes from Re China Huiyuan in that the present proceedings concerned an ancillary liquidation where the Company had already been wound up in its country of incorporation. Thus, the two cases are not in conflict as the recognition of foreign liquidators is, as mentioned above, ultimately a question of fact.

In fact, the Honourable Madam Justice Linda Chan’s approach can be seen from her decision earlier this year in Re Up Energy Development Group Limited [2022] HKCFI 1329 where she held that in a Hong Kong ancillary liquidation, it would be “unreal or artificial to suggest that the Hong Kong Companies Court should ignore all the affairs carried out by the company in Hong Kong … and leave the control and supervision over the winding up to the court of the place of incorporation. This is particularly so where the company was incorporated in offshore jurisdictions like the BVI, Cayman Island and Bermuda which do not require the company to carry on any business or meaningful activity in the place of incorporation …” (see Re Up Energy at [48]).

As more and more overseas companies with similar corporate structure come before the Hong Kong Companies Court, the judgment in Re NewOcean Energy consolidates the reasoning in Re Up Energy and seemingly so, has reduced Hong Kong courts’ deference to the courts of the country of incorporation when considering whether to wind up a foreign company. This judgment is of importance as it demonstrates that the Hong Kong courts will readily wind up foreign companies with directors and assets located in Hong Kong, particularly when liquidators are likely to benefit from the exercise of their powers under Hong Kong legislation.

Date:
4 November 2022
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REMINDER: Personal liability for failing to pay employees

It is apt to remind employers and their responsible persons (e.g. directors, secretaries, managers, etc.) of the liability imposed on them under the Employment Ordinance (EO) where an employee is not timeously paid the payments due to him under the ordinance.  The liability could extend to the responsible persons personally, if the offence for non-payment by a corporate employer had been committed with the consent or connivance of such persons, or was attributable to any neglect on their part.

The EO prescribes the time limits for employers to make various payments to employees – for example:

  1. Section 23 of the EO provides that wages shall become due on the expiry of the last day of the wage period and shall be paid as soon as is practicable but in any case not later than 7 days thereafter.
  2. Section 25 of the EO provides that, generally, where a contract of employment is terminated, any sum due to the employee shall be paid to him as soon as is practicable and in any case not later than 7 days after the day of termination.
  3. Section 11E of the EO provides that, generally, end of year payment shall be paid as soon as is practicable but in any case not later than 7 days after the last day of the payment period (or 7 days after the due date specified in the employment contract).
  4. Section of the 43P of the EO provides that, generally, any sum payable under the award of a tribunal (including the Labour Tribunal (LT)) (shall be paid to the employee within 14 days after the date of the award.

It is a statutory offence committed by the employer if it fails to pay its employees on time.  Under the EO, a responsible person could also be personally liable for the offence committed by the employer in the circumstances described above.  The personal liability may well be a severe one, extending to imprisonment.

The Labour Department has in the past prosecuted corporate employers and their responsible persons for offences under the EO.  The Department continues to do so, in an effort to send a strong message to all employers and their responsible persons that they have to pay wages to employees in accordance with the EO.

The Department has spared no such effort in its recent prosecutions.  On 30 September 2022, the Labour Department issued a press release, informing that Cititop failed to pay four employees their wages in accordance with the EO within seven days after the termination of employment contracts (i.e. contravening section 25 of the EO) and the awarded sums which Cititop and its two responsible persons were ordered to pay jointly and severally within 14 days after the date set by the Labour Tribunal (LT) award (i.e. committing an offence under section 43P of the EO).  In addition, Cititop and its two responsible persons were also fined $60,000 by the Magistrate.

On 7 October 2022, the Labour Department issued another press release, informing that Berlinetta failed to pay wages to three of its employees within seven days after the expiry of the wage periods (i.e. contravening section 23 of the EO), and end-of-year payments within seven days after the day specified in the employment contract for paying end-of-year payments (i.e. contravening section 11E of the EO). Similarly, the corporate employer and its director were prosecuted and convicted for wage offences under the EO.  They were fined $58,800.

In more serious commission of offences under the EO, responsible persons may not only be liable to pay fines – they may also face the possibility of imprisonment, for example, in the situations where an employer fails to pay the LT award (or fails to do so within 14 days after the due date), or, perhaps, when the employer continues to employ the staff when it knew full well that the company could not possibly pay for the staff’s wages. It is important that employers make timely payments to the employees, in compliance with the EO.

Date:
24 October 2022
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Competition Commission’s first enforcement action on resale price maintenance against The Tien Chu (Hong Kong) Company Limited

On 15 September 2022, the Competition Commission (the “Commission“) commenced proceedings in the Competition Tribunal (the “Tribunal“) against The Tien Chu (Hong Kong) Company Limited (“Tien Chu“) for imposing minimum resale prices in the supply of a monosodium glutamate (“MSG”) powder to its two main local distributors.

Notably, this is the first case brought by the Commission against an undertaking for its engagement in resale price maintenance (“RPM“), which occurs whenever a supplier establishes a fixed or minimum resale price to be observed by the distributor when it resells the product affected by the RPM obligation.  Vertical price restrictions of this kind are regarded by the Commission as having the object of harming competition at both the supplier and distributor levels, thereby in contravention of the First Conduct Rule of the Competition Ordinance (Cap. 619) (the “Ordinance“).  For example, RPM arrangements may undermine suppliers’ incentives to offer lower prices to distributors as well as distributors’ incentives to negotiate lower wholesale prices, which may result in end-customers paying higher prices than they would absent the RPM arrangements.

The Commission’s case is that Tien Chu continued to give effect to and/or engage in RPM arrangements since the Ordinance came into effect on 14 December 2015 until at least 27 September 2017 by establishing minimum resale prices for its MSG powder to be charged by its two main local distributors at the time.  Specifically, Tien Chu signed distribution agreements containing a requirement to “avoid improper price competition” with each of the distributors, and subsequently issued notices, reminders and warnings to ensure that the distributors would not sell the MSG powder for less than a particular price.  Further, in response to the complaint by one of the distributors in 2016 that the other was snatching customers with lower pricing, Tien Chu took action to secure compliance with the minimum resale prices it had set by using, among other things, disincentives, threats and/or penalties.

The Commission is of the view that Tien Chu intended to, through the above RPM arrangement, prevent its two distributors from offering sub-distributors a discount on the resale price set by Tien Chu for the MSG powder.  It has reasonable cause to believe that Tien Chu has contravened the First Conduct Rule and engaged in serious anti-competitive conduct (as defined in section 2 of the Ordinance).

The Commission is seeking before the Tribunal, among other things, an order for pecuniary penalty to be imposed on Tien Chu, and has decided not to pursue the two distributors.

Date:
26 September 2022
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