Key Takeaways
A party that has agreed to refer its disputes to HKIAC arbitration will be held to that agreement including, if necessary, by means of an anti-suit injunction (“ASI”).
In Bank A v Bank B [2024] HKCFI 2529, the Hong Kong Court of First Instance (“CFI”) ordered an ASI in favour of a German bank to restrain a sanctioned Russian bank from pursuing Russian proceedings that were in breach of a HKIAC arbitration agreement.
In doing so, it soundly rejected the Russian bank’s arguments that Hong Kong Courts did not have jurisdiction over the German bank’s claims because they were contrary to PRC foreign policies.
However, it remains to be seen whether the result would be different if foreign sanctions were to affect the rights or property of any Mainland or Hong Kong entity.
Background
This decision is the latest in a series of recent Hong Kong and English cases[1] regarding (1) the effect on commercial contracts of EU sanctions against Russian entities and (2) the increasing adoption of ASI against parties attempting to sidestep their arbitration agreements.
The plaintiff, Bank A, is a German bank under solvent liquidation and subject to the supervision of German regulators. The defendant, Bank B, is a Russian state-owned bank currently holding most of the shares in the plaintiff.
Following the Russian invasion of Ukraine and the consequent EU sanctions, both parties entered into a Termination and Settlement Agreement (“TSA”). This terminated all the rights and obligations under an ISDA Master Agreement which the parties had previously entered into. Crucially, the TSA contained an arbitration clause which provided for disputes to be referred to HKIAC arbitration, to be seated in Hong Kong but governed by English law.
Upon the plaintiff’s failure to pay the defendant under the TSA, the defendant commenced Russian court proceedings against the plaintiff. The Russian court granted a freezing order over the plaintiff’s Russian bank account and an ASI prohibiting the plaintiff from initiating arbitration and/or court proceedings against the defendant in Hong Kong.
Consequently, the plaintiff applied to the CFI for an ASI restraining the defendant from pursuing foreign proceedings, an anti-enforcement injunction against the Russian proceedings, and other associated relief.
Decision
Mimmie Chan J ruled in favour of the plaintiff and granted the anti-suit and anti-enforcement injunctions on the following grounds:
Applicable legal principles
The Court emphasised the default position that it will ordinarily exercise its discretion to grant an ASI to restrain the defendant from initiating foreign proceedings in breach of an arbitration agreement unless the defendant can show “strong reasons” to the contrary (at [34]).
The rationale is to uphold the plaintiff’s prima facie entitlement to enforce the contractual bargain. This includes both a positive promise to arbitrate disputes and a negative right not to be vexed by any other proceedings.[2]
The Court also contrasted contractual ASIs which it does not feel much “diffidence” in granting in the present case, with ASIs on forum non-conveniens grounds where issues of comity and the most appropriate forum needed to be considered.
“Acts of state” ground
The crux of the defendant’s submissions was that granting an ASI amounted to recognition and enforcement of EU sanctions in Hong Kong. It argued that such a decision would conflict with PRC foreign policies and unfairly prevent the defendant from seeking relief from the Russian Court. Relying on Articles 13 and 19 of the Basic Law, and the seminal Court of Final Appeal decision in Democratic Republic of Congo v FG Hemisphere Associates LLC (No 1) [2011] 14 HKCFAR 95 (“Congo”), the defendant submitted that (1) these were all questions of fact concerning acts of state and (2) a certificate from the Chief Executive pursuant to Article 19(3) of the Basic Law (the “Certificate”) was therefore required.
The CFI held that there was neither a “state” nor “acts of state” involved as the dispute was merely between two private parties, neither of which was acting as a state entity (at [50]).
The CFI also clarified that, under Congo, the ambit of Article 19(3) was narrow as a Certificate would only be needed if:
- there is a question of fact concerning an act of state, and
-
the resolution of this question is necessary to adjudicating the dispute.
In the Court’s view, neither applied because the only pertinent question was whether there was a valid and binding arbitration agreement between the plaintiff and the defendant covering the dispute between the parties and the claims made in the Russian proceedings.
“No dispute” ground
The defendant further contended that anti-suit relief should be refused on the basis that there was no dispute. Specifically, both parties already agreed that the payment of the amount owing under the TSA would be rendered impossible by EU sanctions. However, the CFI rejected this suggestion. It was held that there was a dispute between the parties because the plaintiff claimed but the defendant denied a breach of the arbitration agreement under the TSA by the defendant pursuing Russian proceedings (at [73]).
Futility of arbitration ground
The defendant expressed concern as to the effectiveness of arbitration in Hong Kong. It suggested that whatever the arbitral tribunal decided on the impact of EU sanctions on the obligations under the TSA would be rendered moot by the by the fact that these sanctions would block payment from the plaintiff. However, the CFI agreed with the plaintiff’s submissions that both parties had intentionally provided for English law to govern the TSA. If English law allowed EU sanctions to alter payment obligations under the TSA, this was simply the natural consequence of the defendant’s consent to the arbitration agreement.
“Access to justice” ground
The defendant raised the issue of access to justice by submitting that EU sanctions had cut it off from the SWIFT banking system, thereby creating obstacles to engaging and paying for legal representation in the arbitration. The CFI dismissed this argument. It held that the defendant could have, and in fact had, used alternative banking systems developed by Russia and Mainland China, that EU sanctions have no effect in Hong Kong, and that the defendant had successfully procured legal representation in the proceedings.[3]
Public policy grounds
The defendant asserted that Hong Kong Courts need to “speak with one voice” and “work in harmony with the executive” in matters of foreign and public policy. It argued that such public policy considerations outweigh the parties’ contractual choice.
The CFI rejected these public policy arguments:
- The Court reiterated that it was not ruling on the validity, lawfulness or applicability of EU sanctions outside the EU. The CFI is solely concerned with whether there is a valid and binding arbitration agreement between the parties enforceable by an ASI.
- The Court further held that as EU sanctions did not affect the rights or property of any Chinese or Hong Kong entity, it would not be contrary to public policy to grant an ASI and uphold the arbitration agreement.
- The Court would not decide on the merits of the underlying dispute under arbitration, e.g. the effect of EU sanctions on payment obligations under the TSA.
- An ASI is an order in personam against the defendant, and is not addressed to or binding upon a foreign court. Therefore, arguments based on the jurisdiction of foreign courts are irrelevant to the CFI’s determination.
Accordingly, the CFI concluded that there was no “strong cause” or reason not to grant the injunctions and relief sought by the plaintiff (at [104]).
Commentary
The CFI decision of Mimmie Chan J should be welcomed for reaffirming the following:
- The Hong Kong Courts will maintain its strong pro-arbitration approach in rigorously upholding arbitration agreements.
- The Hong Kong Courts will take a narrow approach to the need for a Certificate under Article 19(3) of the Basic Law. This will only be required if (a) a question of fact concerning an act of state exists and (b) its resolution is necessary for adjudicating the dispute.
- The Hong Kong Courts will give short shrift to arguments based on the jurisdiction of foreign courts because an ASI is an order in personam against the defendant and is not binding upon a foreign court.