HONG KONG COURT GRANTS ANTI-ARBITRATION INJUNCTION TO PROTECT ENFORCEMENT OF PRIOR AWARD

The Hong Kong Court of First Instance ("CFI") has taken the rare step of granting an anti-arbitration injunction to restrain claims which sought to undermine the enforcement in Hong Kong of a prior arbitral award (廈門新景地集團有限公司 formerly known as 廈門市鑫新景地房地產有限公司 v. Eton Properties Ltd and Another [2023] HKCFI 1327).

The decision is the latest in the long-running proceedings between Xiamen Xinjingdi Group Co Ltd ("XJ") and Eton Properties Limited and others (together "EP"), which have been addressed in three of our previous blog posts (see here, here and here).

In the most recent proceedings, XJ (the award creditor) applied for an anti-arbitration injunction to restrain a new Mainland PRC-seated CIETAC arbitration commenced by EP (the award debtor).

The CFI refused to grant a blanket injunction restraining the arbitration in its entirety, even though there were good grounds to find that the arbitration was vexatious, oppressive and abusive. This was because certain claims being advanced for the first time in the new arbitration (which had not been determined or foreclosed by the findings of previous tribunals or courts) fell within the scope of the arbitration agreement.

The CFI did, however, grant an injunction restraining claims in relation to a number of matters which did not fall within the scope of the arbitration agreement and had already been determined by the Hong Kong courts in the context of proceedings to enforce the prior award. The CFI concluded that any arbitration of such claims would seek to attack judgments of the Hong Kong courts and undermine enforcement of the prior award, and would therefore be an abuse of process. The circumstances were therefore sufficiently exceptional to justify the granting of an injunction restraining those claims.

Background

XJ and EP entered an agreement to develop a piece of land in China ("Agreement"). The Agreement was governed by PRC law and contained an arbitration clause providing for CIETAC arbitration seated in the Mainland.

Under the Agreement, XJ was to pay EP for the possession of land held by a subsidiary of EP. XJ would build and sell apartment blocks on the land, and EP would then transfer their shareholding in the subsidiary to XJ. However, before the shareholding was transferred, EP purported to terminate the Agreement and their subsidiary developed the land itself.

XJ commenced arbitration and obtained an award in its favour ("First Award") which ordered, amongst other things, that EP perform their obligations under the Agreement by completing the transfer of the shareholding to XJ.

Unbeknown to the arbitral tribunal and XJ, EP had carried out a restructuring which they later claimed prevented them from effecting the transfer. EP commenced arbitration against XJ seeking a determination that the Agreement could not be performed and that the parties should be discharged from performing it. The arbitral tribunal refused to make such a finding and rendered an award which stated that it was not satisfied that the Agreement could not be performed ("Second Award").

In the meantime, XJ commenced a common law action in the Hong Kong courts by way of enforcement of the First Award, seeking damages for EP's breach of their implied promise to honour the First Award ("Common Law Enforcement Action"). The CFI dismissed XJ's claim, but the case was appealed through the Court of Appeal to the Court of Final Appeal. The Court of Final Appeal found in XJ's favour and allowed the claim, and the Common Law Enforcement Action was returned to the CFI to determine the quantum of damages.

In the course of the Common Law Enforcement Action, the Hong Kong courts held (among other things) that:

• It was not impossible to perform the Agreement, as alleged by EP;
• The Common Law Enforcement Action was for breach of EP's promise to honour the First Award, which was a separate cause of action independent from the cause of action for breach of the Agreement;
• The Common Law Enforcement Action was governed by Hong Kong law (as the lex fori) rather than PRC law, which governed the Agreement; and
• Damages in the Common Law Enforcement Action were therefore to be governed by Hong Kong law.

During the preparations for trial on quantum in the Common Law Enforcement Action, EP commenced a new arbitration against XJ on the Mainland ("New Arbitration"). EP claimed that the New Arbitration was commenced because of a new provision of the PRC Civil Code, Article 580, which came into effect on 1 January 2021 and which allowed any party to an agreement (regardless of whether it was the party in breach or the innocent party) to terminate the agreement in certain circumstances.

The relief sought by EP in the New Arbitration included, among other things, an order confirming that the Agreement was terminated pursuant to the PRC Civil Code (the "PRC Law Termination Claim").

EP also alleged in the request for arbitration that (i) XJ's claim for damages in the Common Law Enforcement Action was in substance a claim for damages under the Agreement, (ii) that claim was brought in breach of the arbitration agreement in the Agreement, and (iii) the damages claimed should be assessed under PRC law as the governing law of the Agreement (the "Enforcement-Related Claims").

XJ applied to the CFI for an anti-arbitration injunction to restrain EP from pursuing the New Arbitration and to compel EP to discontinue it. The application was heard by Mimmie Chan J.

Legal principles

The CFI discussed the legal principles which are applicable to the grant of anti-arbitration injunctions in Hong Kong. These include the following:

• The Court has the jurisdiction and power under section 21L of the High Court Ordinance to grant either an anti-suit injunction or an anti-arbitration injunction, where it appears to the Court to be just or convenient to do so.
• Following SA v KB [2016] 2 HKLRD 1249, the power to grant an anti-arbitration injunction must be exercised not only with great caution and in circumstances which can be shown to be wholly exceptional, but also with due and proper regard to the objectives and principles of the autonomy, independence and finality of arbitration as enshrined in the Arbitration Ordinance, bearing in mind the policy of minimal curial intervention.
• As observed by the English Court of Appeal in Sabbagh v Khoury [2019] EWCA Civ 1219, an anti-arbitration injunction involves an interference with the fundamental principle of international arbitration that courts should uphold, and therefore not interfere with, arbitration agreements. Where the dispute in question is clearly within the terms of a valid arbitration agreement, the court should not interfere.
• The applicant has to establish that: (i) the continuance of the arbitration would be oppressive, vexatious or an abuse of process, such as to affect the legal or equitable rights of the applicant (which would include the right not to be harassed by abusive proceedings); and (ii) the grant of the injunction will not cause injustice to the claimant in the arbitration.
• The fact that there may be a significant degree of duplication and overlap between concurrent court proceedings and the arbitration will not be sufficient to warrant the deprivation of the claimant of its right to arbitrate issues which are subject to the arbitration agreement.
• There is a need for caution in the grant of anti-arbitration injunctions in relation to arbitrations outside the jurisdiction, because such matters are generally best left to the relevant supervisory courts in the seat of the arbitration.

Decision

The CFI declined to grant an injunction restraining the New Arbitration in its entirety, but did grant a narrower injunction restraining EP from pursuing any claim or assertion in relation to the Enforcement-Related Claims. In doing so, the CFI noted the unusual facts of the case and the competing interests which were in play.

As a starting point, the CFI considered that it would be abusive and vexatious for EP to be permitted to advance the Enforcement-Related Claims in the New Arbitration. This would amount to a collateral attack on the findings of the Hong Kong courts on those matters. There were therefore good grounds to find that the New Arbitration ought to be restrained to protect XJ's rights to enforce the First Award.

Before exercising its power to grant an anti-arbitration injunction, however, the court needed to consider whether EP's rights would be unjustly deprived or prejudiced, and whether it would be just to restrain the New Arbitration. The Court could not ignore the ringing reminders in the authorities of the need for caution and restraint, particularly in relation to foreign-seated arbitrations such as the one in this case.

It had to be borne in mind that the First Award was for the Agreement to be continued to be performed, and there was not yet any order by any tribunal or court to the effect that it had been terminated, or that the parties had been discharged from performance. EP therefore had a right to invoke the arbitration clause in the subsisting Agreement and to submit the PRC Law Termination Claim for determination. If the contractual rights of EP had continued to subsist under the Agreement, it could not be said that EP were vexatious or abusive in submitting those rights to the tribunal in the New Arbitration for determination.

Accordingly, the PRC Law Termination Claim should be determined by the tribunal in the New Arbitration. Whether EP's rights under PRC law to seek termination had been affected by the findings made by the tribunal in the First Award and the Second Award, or by the Hong Kong courts as to the alleged impossibility of performance of the Agreement, was a matter that would have to be decided by the tribunal. In this context, the Court must recognise and accept that it was within the jurisdiction of the tribunal to decide questions of res judicata or issue estoppel.

However, it would be right and just to grant an injunction to restrain EP from pursuing claims or assertions in the New Arbitration in relation to the Enforcement-Related Claims. XJ had clearly shown that those issues were not within the scope of the arbitration agreement. Any arbitration of them would be vexatious, oppressive and an abuse of process, in seeking to attack the judgments of the Hong Kong courts and undermine or hamper enforcement of the First Award in Hong Kong.

Comment

The decision highlights the exceptional nature of anti-arbitration injunctions and the reluctance of the Hong Kong courts to encroach on the jurisdiction of arbitral tribunals.

It is notable that the injunction in this case was granted for the purpose of safeguarding the enforcement of an award rendered in arbitral proceedings which had already concluded, and in relation to which the Hong Kong courts had made extensive rulings. This was very different, therefore, from a case in which the Hong Kong courts sought to restrain an arbitral tribunal from exercising jurisdiction in relation to the underlying or original dispute in order that the Hong Kong courts could themselves decide the matter.

The decision makes clear that if the relevant claims are obviously covered by an arbitration agreement, this will almost certainly be fatal to an application for an anti-arbitration agreement (although the CFI appeared at one point to qualify this principle with the words “unless strong reasons are established”, no submissions appear to have been made before it as to the circumstances, if any, which would constitute such strong reasons). This will apply even if questions of res judicata and issue estoppel arise in relation to those claims, since it is for the tribunal, and not the court, to determine such matters.

Finally, in taking the exceptional step of granting an anti-arbitration injunction, the Hong Kong courts will go no further than is absolutely necessary. If some but not all of the claims fall outside the scope of the arbitration agreement, the Hong Kong courts are very unlikely to grant a blanket anti-arbitration injunction in respect of the entire arbitration, and any injunction is likely to be limited in its application to only those claims which fall outside the scope of the arbitration agreement.

For further information, please contact Kathryn Sanger, Partner, Aaron McDonald, Registered Foreign Lawyer (England and Wales), Martin Wallace, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Martin Wallace

Professional Support Consultant

+852 21014134