Case update

Constitutionality of section 20(8) of the Arbitration Ordinance upheld

In another pro-arbitration decision, the Hong Kong Court confirmed the constitutional validity of section 20(8) of the Arbitration Ordinance (Cap 609).

Section 20(8) removes the right of a party to appeal a decision of the court that requires the parties to arbitrate their dispute (as opposed to have the matter continue before the court). This means that, in opposing a stay application, a party arguing seeking to have the substantive dispute remain before the court only has one chance to convince the court that that is the appropriate course. If they lose, they cannot appeal the decision. If they win, the other party can appeal. Section 20(8) is a form of failsafe to ensure that matters are properly referred to arbitration.

In this case, Wing Bo argued that section 20(8) was unconstitutional. It argued that it took away its right of appeal and disproportionately restricted the power of final adjudication of the Court of Final Appeal under article 82 of the Basic Law. The Court rejected this argument and held that section 20(8) was proportionate and constitutional. The Arbitration Ordinance (including section 20(8)) is the way the law makers in Hong Kong have implemented the policy to promote the use of arbitration, to facilitate the fair and speedy resolution of disputes without unnecessary expense, and to promote Hong Kong as an arbitration friendly jurisdiction.

This decision once again shows the commitment that the Hong Kong courts have to the implementation of the objectives of the Arbitration Ordinance. Parties selecting Hong Kong as the seat of their arbitrations can be confident that their decision to arbitrate disputes will be respected.

[Wing Bo Building Construction Co Ltd -v- Discreet Ltd [2016] HKEC 642]

English Court considers IBA guidelines on conflicts of interest

A decision of the English Commercial Court has highlighted the importance of ensuring that the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines) are not applied too rigidly.

The Claimant had challenged two LCIA awards on the basis of the arbitrator's conflict of interest and "apparent" bias. The arbitrator was a partner in a medium-sized Canadian law firm but sat almost exclusively as an international arbitrator. The arbitrator described himself as a "separate department within the firm", with virtually no client contact or role in running the firm. The claimant argued that the arbitrator was biased because one of the firm's regular clients was part of the same corporate group as the defendant following a corporate acquisition which took place shortly after the arbitrator's appointment. It relied on the non-waivable list in the IBA Guidelines which stated that there would be a conflict of interest where:

"the arbitrator or his or her firm regularly advises the party, or an affiliate of the party, and the arbitrator or his or her firm derives significant financial income therefrom".

In dismissing the challenge, the judge examined the IBA Guidelines, which are non-binding but informative on issues of conflicts of interest in international arbitration, and highlighted two weaknesses.

First, it was incorrect not to differentiate between (1) the arbitrator and his or her firm, and (2) a party and its affiliate. This provision as drafted meant that an arbitrator could be found to be biased even where (a) he or she has no knowledge or involvement in the provision of his or her firm's advice to a particular client; and (b) the entity which his or her firm advises is not a party to the arbitration.

Second, he pointed to more serious examples of bias that were in the Waivable List. This raised the question of why parties should not be able to waive less serious matters (such as those in the present case) once they had been disclosed. In his view, cases of this type should be dealt with on a fact-specific basis to establish whether the IBA Guidelines' general standards of independence and impartiality had actually been compromised.

Compare this case with another recent decision of the English court which also considered the IBA Guidelines. In this case 18 per cent of the particular arbitrator's appointments, and 25 per cent of his income over the last three years had come from cases involving the claimant. Unsurprisingly, he was found to be biased. Unlike the case above, the arbitrator here was aware of the circumstances which gave rise to the allegations of bias, but did not recognise their significance.

Arbitrator bias is increasingly being used as a basis on which to challenge arbitration awards, and the IBA Guidelines are regularly relied on. These decisions will therefore be of wider interest.

[W Limited -v- M SDN BHD [2016] EWHC and Cofely Ltd -v- Bingham [2016] EWHC 240 (Comm)].

Contracts procured by bribes are enforceable

This case is interesting given the increased reliance on allegations of corruption as a defence to contractual claims. Here an English court dismissed challenges to an arbitral award that were based on allegations that the (otherwise legal) contract had been procured by bribery and corruption.

The case concerned a long-term gas supply and purchase contract between the National Iranian Oil Company (NIOI) and Crescent Petroleum (CP). It was governed by Iranian law. A dispute arose and was referred to London arbitration.

In the arbitration, NIOI alleged that the contract was invalid as it had been procured by bribery and corruption. The tribunal disagreed and confirmed that it was valid. It therefore awarded in CP's favour.

The award was challenged by NIOI on the basis that:

• the arbitrator lacked jurisdiction to hear the claim; and
• a "serious irregularity" had occurred, in that "the way in which the award was procured was contrary to [English] public policy".

As to the first issue, the court confirmed that the fact that a contract is not governed by English law does not automatically disapply the separability provisions of section 7 of the Arbitration Act 1996 (as the law of the seat). A more specific agreement would be required. As a matter of English law, the arbitration agreement could be considered separate from the underlying contract. As such, the tribunal had jurisdiction to decide the issue of the contract's validity.

In relation to the second issue, the court reached the following conclusions:

• English public policy requires a court to refuse to enforce an illegal contract (e.g. a contract to pay a bribe) but does not require a court to refuse to enforce a contract procured by bribery.
• There is no English public policy to refuse to enforce a contract which has been preceded, and is unaffected by a failed attempt to bribe, on the basis that the contract or any of its parties have been "tainted" by that conduct. The concept of "tainting" an otherwise legal contract would create uncertainty and undermine party autonomy.

[National Iranian Oil Company -v- Crescent Petroleum Company International Ltd & Anor [2016] EWHC 510 (Comm)]

Not contrary to public policy to enforce a New York Convention award which included a penalty

The dispute concerned a contract under which the claimant had sold the registration rights to a football player to the defendant football club. The contract provided that, should the buyer fail to pay any of the instalments of the purchase price, all the remaining amounts would become due together with a penalty equating to double the sum outstanding.

The contract referred disputes to the Court of Arbitration for Sport (CAS) according to Swiss Private law. Upon such referral, the CAS awarded the claimant the outstanding amounts owed, plus an additional sum which represented 25 per cent of the penalty claimed. The reduced penalty was upheld on appeal by the Swiss courts.

The issue for the English court was whether, under the Arbitration Act 1996, it would be contrary to English public policy to enforce the reduced penalty. The English court found that the award should be enforced in its entirety. Its reasoning was twofold.

First, after considering various common law authorities, it confirmed that there was a "strong leaning towards the enforcement of foreign arbitral awards." An English court would only refuse to enforce an award on public policy lines if it would be "injurious to the public good" to uphold it.

Second, the CAS had exercised its power to vary and reduce the payment obligation so that it was no longer excessive or objectionable under Swiss law, the governing law of the contract. This was upheld by the Swiss courts, and as the English court was not ruling on the enforceability of the clause itself (only the tribunal's award) this should be respected.

The English courts will rarely interfere with arbitral decisions, and will only do so in very narrow circumstances. As such, New York Convention awards will be enforceable in England even where the obligations of the underlying contract would not be enforceable under English law as penalties. Despite the recent Makdessi¹ judgment reinforcing the English law approach to such clauses, this was not a "universal principle of morality" sufficient to permit the courts to refuse enforcement of a foreign arbitral award.

[Pencil Hill Ltd -v- US Citta di Palermo Spa [2016] EWHC (QBD) (unreported).]

_{Notes
¹ Cavendish Square Holding BV -v- Talal El Makdessi [2015] UKSC 67.}