Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – An Injunction Should Be Granted To Protect The Parties’ Bargain Under An Arbitration Clause.

1 June, 2015

 

 

Summary

 

The Plaintiff sought to continue an ex parte anti-suit injunction on the ground that proceedings in Turkey were being brought in breach of an exclusive jurisdiction clause providing for arbitration in Hong Kong.

 

Held:

 

  • The injunction was continued until further order of the court;
  • The key principle in relation to anti-suit injunctions is that an injunction should be granted to protect the parties’ bargain under an arbitration clause provided that the relief is sought promptly, before the foreign proceedings are too far advanced, and where there are no good reasons as to why the Court’s discretion should not be exercised in such a way. In addition, the defence of unclean hands on the part of the applicant may be raised.
  • On the facts, there was no good reason why the courts discretion should not be exercised, there had been no delay and the Court could not find that the Plaintiff had come to equity with unclean hands.

 

Facts – Overview

 

  • The Plaintiff was a BVI-registered company and owner of a Panamax bulk carrier, the MV Ever Judger (the “Ship”)
  • The Defendant was a Turkish-registered company and a producer of semi-finished and finished iron and steel goods
  • The Defendant bought steel wire rods for transport in the Ship
  • There was a dispute over condition of the cargo on arrival in Turkey
  • The bills of sale incorporated Hong Kong arbitration clauses
  • The Defendant arrested the Ship in Turkey, which was released after security was paid
  • D brought proceedings in Turkey for damages as a result of damaged cargo
  • The Plaintiff brought an anti-suit injunction in the Hong Kong High Court

 

Facts – Detailed

 

The Defendant’s contract for sale was with an intermediary, “MT Metals and Trading” (MTI) and the seller was a Chinese steel mill, Jiangsu Shagang.  The Defendant’s contract with MTI provided for payment by L/C against presentation of inter alia a full set of 3/3 original clean on board ocean bills of lading.  The contract allowed for bills of lading with remarks such as “’atmospherically rusty’ and/or ‘wet before loading’ and/or ‘wet during loading’ and/or ‘stored in open area’ and/or ‘some straps or binding rods broken’ and/or similar acceptable’.

 

At around the same time, a related company to the Defendant (Yucel) sourced a cargo from Jiangsu Shagang.

 

On 6 October 2014, the Plaintiff entered into a Voyage Charter to carry cargo of 15,000 MT hot rolled coiled steel and 30,500 MT wire rods +/-5% MOLCO from PRC to Turkey. Clause 18 provided for the Charter to be under English law with arbitration in Hong Kong in accordance with the Hong Kong Arbitration Ordinance.  There was subsequently two sub-charters.  Both sub-charters included English law as the governing law and Hong Kong arbitration clauses.

 

On 25 October 2014, four bills of lading were issued after loading: one B/L – 15,145.01MT steel coils – Yucel was the notify party; 3 B/Ls – 30,884.061MT wire rods – D was the notifying party.  All four bills of lading were issued on the CONGENBILL (1994) form. The conditions of carriage provided that all the terms and conditions of the Charter parties were incorporated, including the law and arbitration clause.

 

On 18 November 2014, 3 bills of lading were endorsed to D after presentation to bank and subsequent payment.  On 21 November 2014, upon discharge in Turkey, the Surveyor noticed that large proportion of the cargo was severely rusted, dented, deformed or damaged. It was also noted that the holds were not properly lashed, the dunnage boards were not thick enough and that the cargo was stacked too high, damaging the bottom coils.

 

On 26-28 November, the Defendant and the Master issued letters of protest concerning cause of damage.

 

On 10 December 2014, the Defendant arrested the Ship in Turkey. The Turkish Court ordered US 3.1m in security, which was paid by Plaintiff.  The Ship was released.

 

On 8 January 2015, the Defendant brought a claim in Turkey, claiming damages of US$3.93m due to 50% of the cargo being damaged due to the poor loading/stowage.

 

On 30 January (served 3 February) 2015, the Plaintiff wrote to the Defendant and Yucel providing notice of the commencement of arbitration in Hong Kong pursuant to the governing law clause of the bills of lading.

 

On 5 February 2015, the Plaintiff’s solicitors wrote to P stating that the dispute should be arbitrated in Hong Kong and that they should immediately withdraw and vacate the proceedings in Turkey. D’s Turkish lawyers responded by stating that as the holder of the B/Ls, D had a right to arrest the Ship to obtain security under Turkish law and as such, the arresting court gained full competency and subsequently, Turkish law applies to dispute itself.

 

On 12 February 2015, the Plaintiff’s solicitors wrote to the Defendant and Yucel arguing that Hong Kong was the proper and agreed forum and that the security could be transferred to Hong Kong.  The Defendant’s response was that there was no valid arbitration agreement, that the Plaintiff had submitted to Turkish jurisdiction and that the notice of arbitration had been defective.

 

On 27 February 2015, the Plaintiff applied for an ex parte anti-suit injunction in Hong Kong, which was granted.  This was followed, on 2 March 2015, by an application by the Plaintiff in the Turkish action together with objection to jurisdiction and in Hong Kong filed an inter partes summons to continue the ex parte injunction.

 

Analysis

 

1.  Jurisdiction To Grant Anti-Suit Injunction On The Basis Of An Arbitration Clause
 

Lam J considered (obiter) the question of the source of the Court’s jurisdiction to award anti-suit injunctions where the injunction is sought to force a party to comply with an exclusive jurisdiction clause for arbitration.

 

Lam J was uncertain as to whether Section 45 Arbitration Ordinance (Cap 609), particularly sections 35, 45(2) and 45(9) (the power for the court to award interim measures), or section 21L of the High Court Ordinance provided the power, on the basis of: 

 

(i) the nature of an anti-suit injunction not being in relation to arbitral proceedings themselves, but in relation to the arbitration agreement (AES Ust-Kamenogorsk Hydropower Plant LLP);

 

(ii) it is unclear as to whether anti-suit injunctions are interim measures within the specific meaning of Section 35 of the Arbitration Ordinance or an interlocutory injunction for final relief under section 21L High Court Ordinance; and

 

(iii)  it is difficult to see how anti-suit injunctions fall within the Arbitration Ordinance due to the specific wording of sections 45 and 35 – anti-suit injunctions exist to enforce contractual agreements as to jurisdiction, not to stop prejudice to court proceedings in such a situation.

 

2. Principles Governing The Exercise Of Power
 

Lam J then went on to review some of the key cases in the area of anti-suit injunctions.

 

It has been held in various cases that an anti-suit injunction should not be granted where strong reasons are shown by the opposite party: Donohue v Armco Inc [2002] CLC 440 and Aggeliki Charis Cia Maritime SA v Pagnan SpA (The Angelic Grace) [1995] 1 Lloyd’s Rep 87.  It was held in the Angelic Grace that the English Court should feel no diffidence in granting an injunction to restrain a party from proceeding in a foreign court in breach of an arbitration agreement governed by English law, provided that the relief is sought promptly, before the foreign proceedings are too far advanced, and where there are no good reasons as to why the Court’s discretion should not be exercised in such a way.

 

Importantly, it was held by Lord Millett in The Angelic Grace that there is no difference between injunctions to restrain proceedings for breach of an exclusive jurisdiction clause and one to restrain a breach of an arbitration clause.

 

In Compania Sud Americana de Vapores SA v Hin-Pro International Logistics Ltd (CACV 243/2014; 11 March 2015), the principles in The Angelic Grace were noted, though an application for an anti-suit injunction in Hong Kong to stop proceedings in China to enforce an exclusive jurisdiction agreement in favour of the English Courts was refused.

 

As such, Lam J held that the Court should ordinarily grant an injunction to restrain the pursuit of foreign proceedings brought in breach of an agreement for Hong Kong arbitration where the injunction has been sought without delay and the foreign proceedings are not too advanced, unless the defendant can demonstrate strong reason to the contrary (at §45).

 

3. Unclean Hands
 

The Defendant argued that the Plaintiff had come to equity with unclean hand on the basis that the Master had issued clean bills of lading fraudulently, as he must have known (based on the mate’s receipts) that the goods had been damaged when they were loaded on board the ship. The mate’s receipts stated that “all coils scratched slightly on the surface locally”, “all coils rust stained slightly on the surface locally”, “3560 coils rusty on the surface”, and “[5300, 119 and 17] coils each with 5-15 winding twisted slightly locally”. The Defendant argued that there was a fraudulent misrepresentation by the Plaintiff through issuing the clean bills of lading and that they were colluding with Jiangsu Shagang.

 

A key principle in this respect is that the impropriety or misconduct of the party seeking relief “must have an immediate and necessary relation to the equity sued for”. Refusing an injunction on the ground of unclean hands is distinct from the “strong reason” not to grant the injunction: Royal Bank of Scotland plc v Highland Financial Partners LP [2013] 1 CLC 596, a case concerning false evidence leading to summary judgment in the UK and subsequent application for anti-suit injunction against fraud proceedings in Texas. In that case, the applicants had relied on false evidence in the course of anti-suit proceedings and it was held that the misconduct could not be more immediately related to the equity sued for.

 

Lam J held that P had come to equity with clean hands on the basis that: 

 

(i) it was for the Master to form an honest and reasonable non-expert opinion on the apparent condition of the cargo from his own observations. This is a matter of his own judgment and the obligation imposes “a duty of a relatively low order but capable of objective evaluation”: The David Agmashenebeli [2003] 1 Lloyd’s Rep 92; 

 

(ii) the mate’s receipts evidenced only minor superficial problems with the goods and the evidence suggested that such conditions are not uncommon with steel cargo. In addition, the sales contract allowed for bills of sale with remarks such as “atmospherically rusty”; 

 

(iii) though argued by the Defendant, the case was different to The Saga Explorer [2013] 1 Lloyd’s Rep 401. In that that case clean bills were issued where they should not have been and there was severe rust to the goods. The decision was after trial and the judge had had the opportunity to hear witnesses of fact, which he disbelieved. Lam J felt unable to infer fraud simply on the basis that the remarks on the receipts did not make their way to the bills of lading; 

 

(iv) there can be other, honest, explanations for the discrepancy between the mate’s receipts and the bills of lading. Some consequences may be serious, whilst others may be not so serious, and a mate’s receipt may be erroneous;

 

(v) there was no contractual obligation, unlike in other cases raised by the Defendant, for the bills of lading to correspond with the notes on the mate’s receipts; and

 

(vi) the ship’s own P&I club had not refused to cover the ship because clean bills of lading were issued – it had in fact only reserved its position.

 

4. Reasons Against Grant Of Injunction
 

Existence Of Other Proceedings

 

The Defendant argued that a strong reason not to grant an injunction was because of related proceedings in Turkey between the Defendant and their insurers out of the refusal to provide cover due to pre-voyage damage. There was also the main case against the Plaintiff in a different Turkish Court. 

 

It was argued by the Defendant that the issues would overlap and that the grant of the injunction would cause the dispute to fragment and be duplicative at vast cost.  The Defendant relied on Donohue v Armco Inc, Citi-March Ltd v Neptune Orient Lines Ltd [1996] 1 WLR 1367 and The ‘El Amria’ [1981] 2 Lloyd’s Rep 119 in this respect. In Donohue v Armco Inc it was held that “where the interests of parties other than the parties bound by the exclusive jurisdiction clause are involved or grounds of claim not the subject of the clause are part of the relevant dispute so that there is a risk of parallel proceedings and inconsistent decisions”, the English court may well decline to grant an injunction.

 

Lam J held that as the two sets of proceedings in Turkey were in entirely different courts in different provinces of Turkey, with no suggestion that the two cases could be consolidated and tried before a single court in Turkey, the case differs from the three that D relied on. In those cases (above), there was the opportunity for a “single composite trial”, a chance for the cases to be “tried together” or a “composite trial”.

 

In any event, Lam J held that even if there were no injunction granted, that would not stop the Plaintiff pursuing the arbitration in Hong Kong.

 

Jurisdictional Challenge In Turkey

 

The Defendant argued that as the Plaintiff had already issued a challenge to jurisdiction of the Turkish courts in Turkey, the Hong Kong courts should not determine whether the anti-suit injunction should continue, i.e. the Turkish courts should be left to decide whether to decline jurisdiction.

 

Lam J refused to follow this argument on the ground that the anti-suit injunction acts only to uphold the contractual bargain made between the parties to litigate in a chosen jurisdiction: The Angelic Grace and XL Insurance Ltd v Owens Corning [2001] 1 All ER (Comm) 530. The purpose of the anti-suit injunction was not to assert that Hong Kong was a superior or better forum.

 

Delay

 

The Defendant argued that the Plaintiff had delayed in their application for the injunction.

 

Lam J held that the initial arrest proceedings in Turkey did not constitute the date of the breach of arbitration agreement, as they constituted proceedings for security. The breach of the arbitration agreement was in filing the main Turkish action on 8th January. The ex parte application for the injunction was on 27th February. As such, there was no delay.

 

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For further information, please contact:

 

Phillip Rompotis, Partner, Stephenson Harwood

phillip.rompotis@shlegal.com

 

Homegrown Dispute Resolution Law Firms in Hong Kong  

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