On 13 March 2024, the Court of First Instance of the High Court (“Court“) in A v B and others [2024] HKCFI 751 refused to enforce an arbitral award on the ground that the arbitrator had failed to give reasons.

Background

On 25 August 2022, the sole arbitrator (“Arbitrator“) granted an arbitral award (“Award“) in favour of the Applicant (“A“) at the International Center for Dispute Resolution under the Rules for International Commercial Arbitration of the American Arbitration Association (“Arbitration“).

Under the Award, the Respondents were held to be jointly and severally liable to pay to A royalty fees and other charges under the licence agreements entered into between A and the 1^st Respondent. The licensee, and the 2^nd and 3^rd Respondents, were prohibited from engaging in any educational business in Hong Kong.

On 12 May 2023, the Court granted leave to A to enforce the Award (“Leave“).

Ground to set aside the Leave – Failing to give reasons

On 23 June 2023, the Respondents applied to set aside the above leave on the ground that the Arbitrator had failed to give any reasons for her decisions. The Award simply made findings and conclusions, without any analysis of the decisions.

Mimmie Chan J in her judgment noted the principles set out in R v F [2012] 5 HKLRD 278, Z v Y [2019] 1 HKC 244, and LY v HW [2022] HKCFI 2267, that awards are to be read generously, in a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it. Mimmie Chan J also noted the policy of minimal curial intervention as highlighted in AI & ors v LG II [2023] 4 HKC 135. Any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable.

However, Mimmie Chan J concluded that, however generously the Award in the case was read, objectively read and in the context of the issues raised and submissions and arguments made before the tribunal, the arbitrator failed to adequately explain in the Award the reasons for her conclusions on the key issues raised in the Arbitration, of the applicable governing law of the Agreements, on the effective date of termination of the Agreements, and on the enforceability or the reasonableness of the non-compete covenant, all of which were disputed by the parties.

Analysis

In the course of reaching the above conclusions, Mimmie Chan J held that the Respondents, as parties who had submitted their disputes to the tribunal for arbitration and determination, were legitimately entitled to expect key issues which affected their rights and liabilities to be dealt with and explained with sufficient reasons in the Award.

Likewise, the procedural law governing the Arbitration required the Arbitrator to give reasons of her decisions. Under Article 33 of the International Arbitration Rules, the tribunal “shall” state the reasons upon which an award is based, unless the parties have agreed that no reasons need be given. Paragraph 5 of the Supplementary Procedures for International Commercial Arbitration of the American Arbitration Association contains an identical provision. There was no suggestion that the parties had waived the need for reasons. Thus, the Award did not comply with the aforementioned rules as no reasons were given, and had not been made in accordance with the procedure of the Arbitration to which the parties had agreed.

In line with R v F [2012] 5 HKLRD 278 and A v B HCCT 40/2014, 15 June 2015, Mimmie Chan J emphasised that the Respondents were entitled to query whether the key issues in the Arbitration had been considered by the Arbitrator, and if considered, why the issues were determined against them. It would be contrary to public policy to enforce and recognise the Award when those important issues, which the parties were entitled to expect to be addressed in the Award, were not in fact addressed or explained.

Hence, Mimmie Chan J was satisfied that failing to give reasons was sufficiently serious to affect the structural integrity of the arbitral process, and to have undermined due process and then set aside the Leave accordingly.

Takeaways

It is observed that although the Hong Kong courts hold a pro-arbitration approach in enforcing arbitral awards, the courts do uphold the structural integrity of the arbitral process.

The same requirement of stating the reasons in the arbitral award is stated under section 67 of the Arbitration Ordinance (Cap. 609) (Article 31 of the UNCITRAL Model Law) that “the award shall state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given or the award is an award on the agreed terms under article 30“. Article 35.4 of the Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules (2018) contains the same requirement.

Please see full judgment here.

On 19 April 2024, The Stock Exchange of Hong Kong Limited (the “Exchange“), published conclusions to its Consultation Paper on Enhancement of Climate-related Disclosures under the Environmental, Social and Governance (“ESG“) framework. As a result of receiving broad-based support from the market, the Exchange will adopt its proposals to introduce new climate-related disclosure requirements (the “New Climate Requirements”), and amend the Environmental, Social and Governance Reporting Guide (to be renamed as the Environmental, Social and Governance Reporting Code) (the “ESG Code“) set out in Appendix C2 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Rules Governing the Listing of Securities on GEM (collectively, the “Listing Rules“).

Some key features of the New Climate Requirements are as follows:

1. Enhanced climate-related disclosures in the ESG reports

The existing climate reporting requirements are modelled on a “comply or explain” regime. Under the amended Listing Rules, a new Part D will be introduced to the ESG Code to comprehensively set out all climate-related disclosures (i.e. the New Climate Requirements), which will include both mandatory disclosures and disclosures under the “comply or explain” regime.

The New Climate Requirements will substantially adopt the latest international standards on climate-related disclosures developed by the International Sustainability Standards Board established by the International Financial Reporting Standards Foundation (the “ISSB Climate Standard“). In line with the ISSB Climate Standard, the New Climate Requirements will focus on climate reporting on the following four areas:

(1) Governance – the governance process, controls and procedures an issuer uses to monitor, manage and oversee climate-related risks and opportunities;

(2) Strategy – an issuer’s strategy for managing climate-related risks and opportunities;

(3) Risk management – the process an issuer uses to identify, assess, prioritise and monitor climate-related risks and opportunities; and

(4) Metrics and target – the metrics and targets an issuer uses to understand its performance in relation to climate-related risks and opportunities, including progress towards any climate-related targets that it has set, and any targets that it is required to meet by law or regulation.

Some of the relatively more challenging disclosures under the New Climate Requirements include disclosure of Scope 1, Scope 2 and Scope 3 greenhouse gas (“GHG“) emissions (the disclosure of Scope 3 GHG emissions being newly added in the amended ESG Code), quantification of climate-related financial effects, and the setting of climate targets.

The Exchange has also issued an Implementation Guidance to assist issuers in understanding and interpreting the New Climate Requirements, and to provide issuers with practical guidance for preparation of climate-disclosures in accordance with the amended ESG Code.

2. Implementation by phases

The amended Listing Rules will become effective on 1 January 2025. The Exchange will adopt a phased approach in implementing the New Climate Requirements as summarised below:

(1) all Main Board and GEM listed issuers will be required to make mandatory disclosures of Scope 1 and Scope 2 GHG emissions for the financial years commencing on or after 1 January 2025;

(2) all Main Board issuers are required to comply with the New Climate Requirements (other than those relating to Scope 1 and Scope 2 GHG emissions which are mandatory) on a “comply or explain” basis for the financial years commencing on or after 1 January 2025;

(3) LargeCap Issuers (i.e. issuers that are Hang Seng Composite LargeCap Index constituents throughout the year immediately prior to the relevant reporting year) are required to comply with the New Climate Requirements on a mandatory basis for the financial years commencing on or after 1 January 2026; and

(4) all GEM listed issuers are encouraged to comply with the New Climate Requirements (other than those relating to Scope 1 and Scope 2 GHG emissions which are mandatory) for the financial years commencing on or after 1 January 2025 on a voluntary basis.

Issuers are advised to review the New Climate Requirements in detail and seek legal advice when preparing disclosures under these new requirements.

On 12 April 2024, The Stock Exchange of Hong Kong Limited (the “Exchange“) published the consultation conclusions on Proposed Amendments to Listing Rules Relating to Treasury Shares (“Consultation Paper“). Receiving support from the market, the proposals set out in the Consultation Paper will be implemented with only minor modifications. Please see below for a summary of the major changes to The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules“).

1. Removal of the requirement to cancel repurchased shares

The requirement to cancel repurchased shares will be removed and issuers may hold these shares in treasury, subject to the laws of their places of incorporation and their constitutional documents.

The Exchange further clarifies that whether treasury shares may be held by an issuer’s subsidiary or an agent or nominee on behalf of the issuer or its subsidiary would also be subject to the laws of the issuer’s place of incorporation and its constitutional documents. For example, shares repurchased by an issuer incorporated in Bermuda and the Cayman Islands have to be held in its own name to be classified as treasury shares under the relevant laws, while there is no similar requirement in the PRC laws for treasury H shares.

2. Application of the current requirements for issue of new shares to resale of treasury shares

The Listing Rules will be amended such that certain requirements that currently apply to issue of new shares will apply to resale of treasury shares as well, for example:-

(i). similar pre-emption requirement under Rule 13.36, where a resale of treasury shares shall be offered to all shareholders on a pro-rata basis, or alternatively, approved by shareholders under a specific mandate or a general mandate;

(ii). requirements under Chapter 17 in relation to share schemes funded by treasury shares to be treated as the same funded by new shares;

(iii). connected transaction requirements under Chapter 14A;

(iv). disclosure requirements for resale of treasury shares and movement in the number of treasury shares under Chapters 11 and 13 and Appendix D2; and

(v). documentary requirements under Chapter 9.

3. Imposition of moratorium period

A 30-day moratorium period will be imposed on:-

(i). a resale of treasury shares (whether on-market or off-market) after a share repurchase; and

(ii). any share repurchase on the Exchange subsequent to a resale of treasury shares on the Exchange.

Note, however, that in relation to (i) above, the moratorium period does not apply to (a) capitalisation issues and (b) grants of share awards or options under a share scheme that complies with Chapter 17 or a new issue of shares or a transfer of treasury shares upon vesting or exercise of share awards or options under the share scheme.

4. Dealing restrictions for resale of treasury shares on the Exchange

Resale of treasury shares on the Exchange is prohibited in the following circumstances:-

(i) where there exists undisclosed inside information;

(ii) during the 30-day period preceding any results announcement; and

(iii) where it is knowingly made with a core connected person (but note that on-market resale of treasury shares to a connected person without knowledge is fully exempt).

The amendments to the Listing Rules will come into effect on 11 June 2024. Issuers are advised to review these amendments in detail, seek legal advice and amend their constitutional documents where necessary.

In the recent judgment of AAA, BBB, CCC v DDD [2024] HKCFI 513, the Court of First Instance (‘CFI’) has handed down important guidance on determining the scope of an arbitral tribunal’s jurisdiction, particularly when disputes have arisen out of multiple related contracts, each containing a distinct dispute resolution clause.

1. Facts of the Case

The facts are as follows. To help a borrower acquire shares in a company, the lender, borrower and his guarantors entered into a set of interrelated agreements. This included a Loan Agreement and a Promissory Note (which acted as security for the loan).

Upon default of the borrower, the lender commenced arbitration against the borrower and his guarantors pursuant to the arbitration clause contained in the Loan Agreement. In the Notice of Arbitration and the Statement of Claim, the claim and relief for the loan amount was essentially phrased as one under the Loan Agreement. Little reference was made to the Promissory Note at all, although the lender reserved its ‘full rights to add to, expand or modify the claims and relief set out herein’ in the Notice of Arbitration.

The lender later purported to seek relief under the Promissory Note as well, and the tribunal ruled that it has jurisdiction to hear the disputes. By an application made pursuant to section 34 of the Arbitration Ordinance (Cap 609), the CFI is now asked to consider whether the tribunal’s decision regarding its own jurisdiction was correctly determined.

1. Approaches to Different Conflicting Dispute Resolution Clauses Situations

From the outset, Deputy High Court Judge Reyes SC contemplated three broad paradigms where conflicting dispute resolution clauses can feature (but emphasised that the paradigms are not meant to be exhaustive). In particular, certain presumptions may or may not apply depending on the paradigm the court is dealing with, although the end goal should always be to objectively interpret the parties’ intentions in each case.

B1. The Basic Paradigm (Applying the ‘Fiona Trust Presumption’)

The first situation, known as the ‘Basic Paradigm’, occurs when there is a single contract containing more than one conflicting dispute resolution clauses.

In this situation, unless there is evidence to the contrary, the convenient starting point is to apply the ‘Fiona Trust presumption’ (coined after Lord Hoffmann’s dictum in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40), which provides that ‘parties, as rational businessman, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal‘.

Hence, if one clause of an agreement provides that disputes should be resolved by the courts, but another clause enables parties to refer disputes to arbitration if they wish, if the parties have elected to commence arbitration, the court will presume that all disputes which may subsequently arise would be determined by the same tribunal.

B2. The Intermediate Paradigm (Applying the ‘Extended Fiona Trust Principle’)

The second situation, known as the ‘Intermediate Paradigm’, occurs where there are multiple related contracts, but only one of the contracts contains a dispute resolution clause (while the others are silent on this).

Here, ‘multiple related contracts’ refers to ‘agreements that appear to form a package aimed at achieving some objective‘, which ‘typically will have been executed at about the same time and the parties to the contracts will be the same or nearly the same’.

Unless there is evidence to the contrary, the applicable starting point here is the ‘extended Fiona Trust principle’ (Where the application of the Fiona Trust presumption was stretched in Terre Neuve SARL & Others v Yewdale Limited & others [2020] EWHC 772 (Comm), which provides that a ‘jurisdiction agreement contained in one contract may, on its proper construction, extend to a claim that is made under another contract’.

Hence, where multiple related contracts were entered into but only one of the contracts contains a dispute resolution clause, there would be a common-sense presumption that the parties must have intended for all disputes arising out of their commercial package to be resolved under the same dispute resolution clause.

B3. The Generalised Paradigm (Applying the ‘centre of gravity’ approach)

The current dispute concerns the last situation, known as the ‘Generalised Paradigm’. This involves multiple related contracts, where each of them contained a separate dispute resolution clause.

The distinguishing feature of this paradigm is that it involves multiple and often inconsistent dispute resolution clauses. The difficulty in applying the ‘extended Fiona Trust principle in this paradigm is that it would be difficult to presume (as a matter of ascertaining parties intention) which of the dispute resolution clauses is intended to subsume or take precedent over the others in a given situation. Hence, the ‘extended Fiona Trust principle’ is not applicable here.

Instead, DHCJ Reyes SC applied what is known as the ‘centre of gravity’ approach, which was adopted from an earlier English decision. The exercise is essentially to locate the ‘centre of gravity’ of the particular dispute to assess which of the resolution clauses come ‘closer to that dispute’. It follows that the resolution clause ‘closer’ to the dispute will be the relevant arbitration clause which the tribunal must be convened under, for it to have the requisite jurisdiction.

That said, DHCJ Reyes SC acknowledged that expressions such as ‘centre of gravity’ and ‘closer to an issue or dispute’ are more of an art than science, but went on to opine that a useful test might be to look at the ultimate relief sought in connection with that issue. Hence, if granting the ultimate relief being sought falls within the scope of the arbitration agreement under which a tribunal was appointed, the issue could be regarded as coming within the tribunals jurisdiction.

Applying the ‘centre of gravity’ approach to the present case, the court concluded that claims under the Promissory Note would properly fall within the ‘centre of gravity’ of the dispute resolution provision under the Promissory Note. Hence, the tribunal’s decision that it has the requisite jurisdiction was set aside. 

1. The Problem of Contradictory Outcomes and Fragmentation

The troubling feature of this case is that, the Loan Agreement and the Promissory Note are intertwined documents. Particularly, the Loan Agreement contains important references to the Promissory Note. Hence, when determining issues arising out of the Loan Agreement, the tribunal might touch upon issues that properly concerns the Promissory Note. If any peripheral issues on the Promissory Note arises during the determination of the claim under the Loan Agreement, DHCJ Reyes SC was of the opinion that the Tribunal convened under the Loan Agreement would be competent in deciding such issues as well.

The practical implication is that, following the decision, issues concerning the Promissory Note and the Loan Agreement might now be determined in separate forums, potentially resulting in contradictory outcomes and fragmentation.

To address the problem of contradictory outcomes, practical solutions were suggested by DHCJ Reyes SC moving forward:

• The parties may consider invoking an issue estoppel arising from findings already determined by the previous arbitration tribunal;
• The parties might invite the HKIAC to appoint the same tribunal in the two related arbitrations;
• A party may apply for consolidation of the two arbitrations;
• A party may apply for stay of proceedings in one of the arbitrations pending the outcome of the other.

1. Takeaways

The problem of conflicting dispute resolution clauses is not uncommon in the commercial world today. This is particularly relevant to the construction field where multiple contractual documents governing a myriad of parties are often involved, occasionally incorporating inconsistent dispute resolution clauses.

This is exactly what has happened in H v G [2022] HKCFI 1327, where a Building Contract (entered into between the property developer and the main contractor) and the Warranty in respect of a waterproofing system (jointly executed by main contractor and its sub-contractors) contained different dispute resolution clauses, and the arbitral tribunal’s jurisdiction was whereby challenged. In fact, back then the court in H v G has already applied the ‘centre of gravity’ approach propounded by the English authorities in resolving the disputes.

Parties faced with similar situations should therefore be reminded to carefully review all applicable dispute resolution clauses, as well as to consider all practical solutions to minimise the risk of contradictory outcomes and fragmentation, before considering commencing any legal proceedings against the relevant parties.

The full judgment of AAA, BBB, CCC v DDD [2024] HKCFI 513 can be viewed here.

On 28 March 2024, the District Court dismissed an application (the ‘Application‘) by KONE Elevator (HK) Ltd for leave to appeal the Court’s previous decision on KONE’s Statutory Appeal (as defined below) against a levy imposed by the Construction Industry Council (‘CIC‘).

The previous decision

Under the Construction Industry Council Ordinance (Cap. 587) (‘CICO‘), a ‘Construction Industry Levy’ has to be paid by contractors to the CIC in respect of construction operations with a value exceeding $3 million.  The levy is calculated as a percentage of the value of the construction operations in question.

KONE, a prominent player in the lift and escalator industry, objected to a levy imposed on them regarding certain lift and escalator maintenance works.  This objection was referred to the Objections Board established under the CICO, which affirmed the levy.

Dissatisfied with the Objections Board’s decision, KONE appealed further to the Court, which was the first-ever statutory appeal against a levy decision made by the CIC pursuant to section 57 of the CICO (the ‘Statutory Appeal‘).

In the Statutory Appeal, KONE had 3 broad complaints – (1) allegations of bias and procedural unfairness against the Objections Board, (2) challenge to the constitutionality of the Objections Board’s proceedings, and (3) claims that the CIC did not have power or jurisdiction to issue the levy payment notice as the works performed by KONE were not ‘construction operations‘ within the meaning of the CICO.

Previously, the Court dismissed KONE’s Statutory Appeal in a decision dated 30 November 2023.  KONE subsequently applied for leave to appeal on the below 4 grounds, as well as on the ‘some other reason in the interests of justice‘ ground pursuant to section 63A(2)(b) of the District Court Ordinance (Cap. 336).

The Application

The grounds pursued by KONE and the Court’s reasoning are set out as follows:

1. Ground 1: KONE criticised the Court’s approach in determining whether the lift and escalator maintenance operations covered by the levy payment notice qualified as ‘construction operations‘ under the CICO. KONE considered that the Court should have taken a more strict approach to interpreting Schedule 1 of the CICO, which lists the types of work included in the definition of ‘construction operations‘. The Court rejected this ground, holding that it had taken a correct approach by construing the CICO purposively, and realistically analysing the particular facts and circumstances.  KONE also claimed that the Court failed to take into account industry practice or expert evidence, but the Court held that whether lift and escalator maintenance operations were ‘construction operations‘ was a matter of statutory interpretation based on a faithful construction of the relevant provisions, not of industry practice or expert evidence.

2. Ground 2: KONE claimed that ‘construction operations‘ were limited to works requiring the appointment of an ‘authorized person‘ pursuant to the Buildings Ordinance (Cap. 123), and that as no authorized person had been appointed, the relevant works were not construction operations. The Court held that KONE’s contention was based on a misreading of the definition of ‘authorized person‘ at section 2(1) of the CICO, which was not limited to only authorized persons appointed under the Buildings Ordinance.  The Court also expressly rejected KONE’s proposed definition of ‘construction operations’ as confined to work requiring the appointment of an authorized person.

3. Ground 3: KONE criticised the Court’s rejection of its expert evidence on the industry meaning of the terms ‘stage‘ or ‘part‘. KONE’s expert had not been cross-examined in the earlier Statutory Appeal and the CIC had not adduced contrary expert evidence.  The Court held this complaint without merit, as it had already held in its previous decision that the relevant point was a matter of law for which expert evidence was inadmissible.  KONE also complained that it should have been notified that the Court did not accept KONE’s expert evidence and given a chance to respond, but the Court found that this had been addressed during the oral closing.

4. Ground 4: Regarding whether certain identified items fell within the definition of ‘construction operations‘, KONE argued that the Court erred by placing the burden of proof on KONE to demonstrate why the works were not ‘construction operations‘, instead of on the CIC to justify charging a levy. The Court referred to its previous decision on this issue, in which it held that the CIC did bear the burden of justifying the levy, but that there was sufficient evidence before the Court to make a finding one way or another without having to refer to burden of proof.  KONE also argued that it had given sufficient factual evidence whether certain items did not amount to ‘construction operations‘.  The Court referred to numerous deficiencies in the witness statement that had been identified in its previous decision, and rejected this argument.

The Court overall found no merit in KONE’s arguments, considering them a rehash of their previous trial positions.  It further concluded that there was no justifiable reason to hear the appeal on the ‘some other reason in the interests of justice‘ ground, despite KONE’s assertion that the case may be ‘the first of its kind‘ and could have ‘far-reaching consequences for other contractors or property owners‘.

The Court’s dismissal of the Application and its previous decision may nonetheless provide useful judicial guidance as to various aspects of the construction regulatory regime in Hong Kong, particularly as CICO cases seldom come before the courts.  The definition of ‘construction operations‘ is often a contested issue in matters under the Construction Workers Registration Ordinance (Cap. 583), which is also administered by the CIC.  The CIC’s regulatory role and the practices of the Objections Board were also discussed at some length in the previous decision, which may have implications on various similarly-structured appeal procedures for other CIC-run schemes.

The full judgment can be accessed here.