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Paul Starr, Suraj Sajnani, Dong Long, King & Wood Mallesons, give some top tips for Hong Kong companies’ dispute management following the signing of a ground-breaking arrangement that broadens the scope of judgments which may be enforced between Mainland China and Hong Kong.

On 18 January 2019, the Government of the Hong Kong Special Administrative Region and the Supreme People’s Court of the People’s Republic of China signed a ground-breaking arrangement that broadens the scope of judgments which may be enforced between Mainland China and Hong Kong, namely, the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region (New Arrangement). At the time of writing, the New Arrangement is not yet in force and is due to come into effect on a date yet to be nominated.

While Hong Kong is within the PRC, Mainland China and Hong Kong are separate legal jurisdictions. As such, judgments from the Mainland can only be enforced in Hong Kong, and vice-versa, by way of a special arrangement. Currently, the 2006 Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned (2006 Arrangement) permits such enforcement, but only if certain, often difficult to satisfy, criteria are met. Those criteria include that:

  • the judgment must be for money only, and
  • the judgment must arise out of a choice of court agreement which essentially requires that the parties had entered into an exclusive jurisdiction agreement (Choice of Court Agreement), prior to the dispute, agreeing that all disputes would be referred exclusively to PRC or Hong Kong courts, as the case may be.

The New Arrangement significantly broadens the scope of judgments that may be enforced between the two jurisdictions. Its top eight features are listed below.

  1. The New Arrangement operates by way of an excepted list, which means that all legally effective commercial and civil judgments are enforceable other than in specific areas listed in the Arrangement. Those areas include: bankruptcy/insolvency, family, matrimonial, probate, maritime, and certain patent/intellectual property cases. For commercial disputes, the exclusion of bankruptcy/insolvency is most significant as this means that enforcement against a cross-border company by way of winding-up continues to have limited impact, as recognition of such winding-up will continue to be fraught with difficulty.
  2. Monetary and non-monetary judgments can be enforced under the New Arrangement. Importantly, this would include orders for specific performance. However, anti-suit injunctions or interim relief from Hong Kong courts and preservation measures from PRC courts are not enforceable under the Arrangement.
  3. A court where enforcement is sought may, before or after accepting an application for enforcement, impose property preservation measures.
  4. The New Arrangement only applies to ‘legally effective judgments’, which in the case of the Mainland means a second instance judgment or a first instance judgment which cannot be appealed, or for which the appeal time limit has expired. For Hong Kong, even if a judgment remains appealable, it is still enforceable. However, enforcement may be stayed pending the appeal.
  5. The party requesting enforcement must seek from the court where judgment was originally sought a certificate that the judgment is legally effective and enforceable, and in the case of a default judgment, certification that the party against whom enforcement is sought was properly summoned.
  6. The ‘Choice of Court Agreement’ requirement under the 2006 Arrangement has been abolished. In its place is a jurisdictional test which can be satisfied without parties’ prior agreement to an exclusive jurisdiction clause, at the time of contract formation. In essence, provided that the place where enforcement is sought did not have exclusive jurisdiction of the dispute and the courts of the place where judgment was granted properly exercised jurisdiction (by way of one of the means referred to in the New Arrangement), the jurisdictional test is satisfied.
  7. Similar to the approach taken for enforcement of arbitral awards pursuant to the New York Convention, there are limited grounds upon which enforcement can be refused, including: improper exercise of jurisdiction, fraud, breach of natural justice, and breach of basic principles of law or public policy.
  8. Costs and interest awards can be enforced under the New Arrangement.

Dispute resolution management tips

When the New Arrangement comes into force, Hong Kong and Mainland China will have several versatile schemes under which to mutually recognise and enforce judgements, arbitration awards, and other civil and commercial decisions. The most significant change from the 2006 Arrangement to the New Arrangement is the scope of judgments that can be enforced – the New Arrangement applies to a much broader scope of judgments than those which were enforceable under the 2006 Arrangement as it does not strictly require an exclusive jurisdiction clause in the underlying contract in order for cross-border enforcement under the arrangement to be pursued. Non-contractual causes of action may now also be pursued and enforced cross-border under the New Arrangement. This is particularly significant in light of the limited mechanisms and consequent difficulty generally encountered when enforcing judgments from other jurisdictions in Mainland China.

The following dispute resolution management tips will hold Hong Kong companies in good stead to take advantage of the benefits of the various cross-border enforcement mechanisms available, including the New Arrangement.

Ensure the inclusion of robust and appropriate governing law and dispute resolution clauses

At the time of contract formation, negotiation and drafting of governing law and dispute resolution clauses should be afforded as much weight as secondary commercial terms. They can be the difference between a speedy, effective resolution process at the time of dispute which allows commercial relationships to be maintained, and an arduous, ineffective, public dispute. The following are our tips to achieve commercial certainty, cost-control and effective resolution.

  • Make an intentional, well-thought out choice of governing law. Often parties agree to a governing law because of perception of the state of law, without considering its appropriateness to the specific contract, for example the choice of ‘English law’. However, in a Hong Kong-Mainland cross-border trade matter, the choice of English law may result in higher costs at the time of dispute resolution due to the need to find English law qualified lawyers and experts to assist in resolution of the matter.
  • Choose a dispute resolution mechanism that is appropriate for the matter. Choices can include: exclusive court litigation (allowing enforcement under the New Arrangement); arbitration (allowing cross-border enforcement under the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and Hong Kong (Mutual Arbitration Enforcement Arrangement); mediation (potentially allowing enforcement through the yet-to-be signed United Nations Commission on International Trade Law (UNCITRAL) Convention on Enforceability of Settlement Agreements Resulting from International Commercial Mediation); or other less common forms of resolution. The above methods can also be crafted in a ‘tiered’ format so as to allow parties first to attempt quicker, less formal and less costly methods, before embarking upon more formalised methods.
  • Consider whether the benefits of alternative dispute resolution can be reaped for the deal at hand. For instance, arbitration affords parties with more flexibility, confidentiality, and party autonomy, while providing the benefits of cross-border enforcement. Arbitration may also avoid the dilemma of having to consider whether the ultimate enforcement court has ‘exclusive jurisdiction’ within the meaning of Article 11 of the New Arrangement, in order for enforcement to be pursued under the New Arrangement.
  • Specify the language of the dispute resolution process and of documents to be used in that process. A huge amount of time and costs can be saved by agreeing to language requirements that parties will be comfortable with at the outset, without arguing about this at the time of dispute or being tied down to an inappropriate express choice of language or a default choice of language in court/arbitration rules that necessitates astronomical translation costs.
  • Most of the time, consistent or connected dispute resolution clauses provide the best cost-control for resolution of disputes arising out of related contracts. These allow for comprehensive resolution of disputes which may arise out of different agreements and which may otherwise be subjected to different resolution fora (for instance, a dispute resolution clause under a trade agreement may point to Hong Kong arbitration, but that under a related financing agreement may point to New York courts). Under certain arbitration rules, the parties may consolidate disputes so as to achieve time and cost efficiencies, and a consistent result.
  • As a matter of course, ensure that dispute resolution opinions are sought, in addition to standard legal opinions, to safeguard against being tied into an inappropriate or ‘Frankenstein’ clause which borrowed elements from various drafts or precedents but does not work for the deal at hand, resulting in skyrocketing costs and time for parties at the time of dispute.

Use of corporate governance manuals

To ensure that a consistent approach will be taken within a company through possible changes in management, one helpful tool to consider is a corporate governance manual on contracts for employees to follow. The manual should include the information listed below.

  1. The company’s primary or preferred position on dispute resolution: litigation, arbitration, etc. This may change depending on a number of factors, one of which includes the identity of the counterparty. If it is a Mainland Chinese entity, or a Hong Kong company with a Mainland China parent (or the ultimate control of which is within Mainland Chinese parties), a company may have one approach, such as Hong Kong litigation which can be enforced under the New Arrangement. However, for counterparties from other countries, the company might choose arbitration to allow enforcement in various other countries.
    Consider putting together a flowchart for company personnel’s reference that will include the company’s default or preferred position on contracting and dispute resolution mechanisms and reminders to seek proper internal and/or external legal advice at the various appropriate junctures on specific issues.
  2. What the primary language of transaction documents is. Again, from a legal perspective, this can change costs significantly when seeking advice or dealing with disputes.
  3. The maximum liability the company will take on.
  4. Whether parent company guarantees are provided and what are the circumstances/thresholds for the provision thereof.

Significance of the New Arrangement

As stated above, the New Arrangement is not yet effective and will come into effect on a date to be nominated. Upon its entry into force, it will terminate the 2006 Arrangement, which will continue to apply only to Choice of Court Agreements signed before the commencement of the New Arrangement. The New Arrangement will apply only to enforcement of court judgments and does not affect the recognition or enforcement of arbitral awards, which continue to be enforced through the Mutual Arbitration Enforcement Arrangement.

The New Arrangement signals yet another step in the direction to solidify Hong Kong’s role in the Belt and Road Initiative and Greater Bay Area as the prime location for dispute resolution, ahead of other jurisdictions which are not privy to any special agreements whereby national judgments can be enforced against assets in Mainland China. Indeed, this role has been confirmed in the PRC Government’s Outline Development Plan for the Guangdong-Hong Kong-Macau Greater Bay Area.

The New Arrangement adds to the growing range of assets for Hong Kong companies looking to resolve their Belt and Road and Greater Bay Area disputes in Hong Kong, such as the recent Hong Kong International Arbitration Centre 2018 Rules.

Paul Starr, Suraj Sajnani and Dong Long
King & Wood Mallesons
More information (including a briefing on Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and Hong Kong) is available on the King & Wood Mallesons website: www.kwm.com.

SIDEBAR: Model dispute resolution clause

The following is an example of a comprehensively-drafted dispute resolution clause based on the model arbitration clause of the Hong Kong International Arbitration Centre (HKIAC), within which we have identified elements to the clause that will help with the efficient conduct of any dispute resolution process. While several of these matters, as a matter of procedure, can be agreed after a dispute has arisen, they almost never are because of the warring states of
the parties which form upon the genesis of a dispute.

Any and all disputes arising out of or in connection with this Agreement, including the existence, validity, interpretation, performance, breach, or termination thereof(1) shall be referred to and finally resolved(2) by arbitration administered by the HKIAC(3) under the HKIAC Administered Arbitration Rules in force at the time the Notice of Arbitration is submitted(4). The seat of the arbitration shall be Hong Kong(5). The Tribunal shall be a three-person Tribunal. Each party shall nominate one arbitrator and the two party-nominated arbitrators shall nominate the presiding arbitrator(6). The language of the arbitration shall be English(7). The law of this arbitration clause shall be Hong Kong law(8).

As one can see, the above clause includes the following elements.

  1. Identifies the scope of disputes very broadly, so that there will be little room to argue that a particular claim does not fall into the dispute resolution clause.
  2. Includes the words ‘finally resolved’ when referring disputes to arbitration, such that there is no room to argue that a decision made by a Tribunal is subject to further appeal.
  3. Selects the administering arbitration institution.
  4. Specifies the arbitration rules applicable to the arbitration proceedings. This may be done by reference to a specific set of rules, for example the HKIAC 2018 Rules, or agreeing that the rules at the time that the Notice of Arbitration is filed shall apply.
  5. Specifies the seat of the arbitration.
  6. Sets out the procedure for selecting and appointing arbitrators. In most institutional rules, however, there is usually a set of rules that will help determine the tribunal in the absence of specific party agreement.
  7. Specifies the language, and only one language, of the arbitration. Lack of agreement about the language of the arbitration or the agreement of more than one language will both lead to unnecessary time and costs being incurred. When considering which language to be used for the arbitration proceedings, have regard to the language of the contract, the likely language of communication between the parties (that is, the likely language that evidence and documentation will be in).
  8. Specifies the law of the arbitration clause, to avoid arguments on applicable law to the arbitration clause – there are arguments to support various positions.
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