A Cautionary Tale - case commentary on X v Y: a rare Hong Kong non-enforcement decision
Reporters: Nathaniel Lai and Dennis Wu, Sidley Austin
The recent Hong Kong Court of First Instance decision in X v Y  HKCFI 2782 clarified the principles regarding the proper interpretation of arbitration agreements, and provided an important reminder to tribunals to be careful not to stray beyond the parties’ pleaded cases.
X is a Taiwanese insurance company (“X”). As X’s investment options were limited under Taiwanese law, X’s officers sought to work with the respondent bank (“Bank”) under which the Bank would manage its assets under a discretionary management mandate. To this end, X established a unit trust structure “AB Portfolio SA” (“AB Trust”) in 2008 pursuant to a trust deed executed by VC Trustee Limited (“Trustee”), under which X subscribed to units issued by the Trustee by transferring assets (being insurance premiums paid by policyholders) into the Trustee’s account (“Account”) held with the Singapore branch of the Bank.
Upon constitution of AB Trust, the Trustee pledged the assets held in the Account to the Bank as continuing security for loans made by the Bank to a subsidiary of X (being a special purpose vehicle used by X to run X’s investments; “Subsidiary”). The pledge (“Pledge”) was governed by Singapore law and provided for disputes to be resolved in the Singapore courts.
After constitution of the Trust and the execution of the Pledge, X and the Bank also executed a Taiwanese law governed discretionary management mandate (“Mandate”) for the management of the assets held in the Account. The arbitration clause of the Mandate (“Arbitration Clause”) provided that “any dispute out of or in connection with this Mandate, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by The Arbitration Association of the Republic of China”.
In 2014, X was put into receivership. The receivers claimed that Subsidiary was used by X’s officers to defraud X and misappropriate insurance premiums paid by policyholders through investment structures planned and devised by the Bank. The receivers terminated the Mandate and requested the Bank to return monies of X, including assets in the Account. The Bank claimed that it was entitled to assets in the Account pursuant to the Pledge.
The receivers commenced arbitration seated in Taiwan under the Mandate to recover, among other things, assets paid by X into the Account and subject to the Pledge. The Bank on the other hand commenced Singapore court proceedings under the Pledge. The Bank applied to the Tribunal for a stay of arbitration pending resolution of the Singapore proceedings, but was unsuccessful.
In the arbitral award, the Tribunal held that X’s subscription to AB Trust contravened Article 143 of the Taiwan Insurance Act (which prohibits assets of an insurance company from being pledged to secure the debts of a third party) so the execution of the Pledge was void. It further held that Article 146 of the Taiwan Insurance Act (which limits the permitted range of foreign investments that insurance companies can undertake) was a “validity provision”, the violation of which rendered X’s investment into AB Trust void ab initio. Given that both X’s subscription to AB Trust and the execution of Pledge were void under Taiwanese law, the Bank was required to request the Trustee to return the assets for delivery to X. In this connection, the Tribunal held that it was not necessary to examine the validity and enforceability of the Pledge under Singapore law. Accordingly, in its award the Tribunal ordered the Bank to pay a sum of approximately USD 194 million plus interest to X.
Application to set aside Hong Kong enforcement order
X sought to enforce the award in Hong Kong against the Bank. Thereafter, the Bank applied to set aside the enforcement order on two grounds: that the Award dealt with a dispute beyond the scope of the submission to arbitration, and that the Bank was unable to present its case.
Did the Tribunal exceed its jurisdiction?
The Bank submitted that the issues in dispute between the Parties were (i) the validity of the Pledge, and (ii) whether the Bank could rely on the Pledge to retain the assets upon the termination of the Mandate. In this regard, the Trustee and the Bank had specifically agreed that any question as to validity of the Pledge should be determined by Singapore courts under Singapore law. As the Mandate and the Pledge were separate, independent and distinct agreements, the Tribunal exceeded its jurisdiction in finding that the Pledge was invalid.
Madam Justice Mimmie Chan accepted the Bank’s submissions. The Court held that where parties have entered into multiple related agreements which deal with different aspects of their relationship, the test in ascertaining the proper forum would be to identify the agreement which was at the centre of gravity of the dispute (applying Trust Risk Group SpA v AmTrust Europe Ltd  1 CLC 456). In this connection, the Court noted that the Pledge was executed before the Mandate, such that the Bank and X were fully aware that any dispute under the Pledge should be submitted to the Singapore courts by the time they signed the Mandate (which contained the Arbitration Clause).
Further, the fact that the Pledge may be invalid under Article 143 was not conclusive as to its enforceability or validity as a matter of Singapore law; the invalidity under Taiwanese law is the first step, but by no means the last step, of any Singapore law analysis. After finding that the deployment of X’s assets contravened the relevant provisions of the Taiwan Insurance Act, the Tribunal had no jurisdiction to make further findings to bind the Bank and X that the Pledge of X’s assets was invalid. The enforceability or validity of the Pledge under Singapore law should have been referred to and be subject to the final determination by the Singapore courts.
Was the Bank unable to present its case?
The Bank complained that it was unable to present its case in the Arbitration on two key issues: (i) the nature of Article 146 and its effect on the validity of X’s subscription to the AB Trust, and (ii) the consequences of such subscription being held to be invalid.
The Court noted that the parties’ Taiwanese law experts shared the common view that Article 146 was an “enforcement provision”, the breach of which only led to administrative fines and penalties. However, the Tribunal departed from the common view. It determined that Article 146 was a “validity provision” and found that breach of Article 146 would render X’s subscription to AB Trust void, such that the assets subject to the Pledge remained with X at all times. In the Court’s view, the tribunal’s departure was problematic as (i) both the Bank and X argued the case on the basis that the validity of the Pledge was governed by Singapore law, and (ii) there was no indication at all from the Tribunal during the proceedings that it was considering the possibility of taking a view which contradicted the experts’ common ground. Critically, the Bank was not given any opportunity to address the Tribunal’s alternative view. The Tribunal’s ruling therefore took the Bank completely by surprise. The Court held that the Bank had been denied its due process rights and declined to enforce the award.
In its seminal judgment Fiona Trust & Holding Corp v Privalov  UKHL 40, the House of Lords confirmed that arbitration agreements should be construed liberally, and that when ascertaining whether a dispute falls within the scope of a particular arbitration agreement, the applicable presumption is that parties are not likely to have intended that some questions be submitted to arbitration while others decided by national courts.
The House of Lords’ ruling gave rise to a “one-stop shop” presumption in construing arbitration agreements, which has been reinforced by the proliferation of “joinder” and “consolidation” clauses in various institutional rules over the past decade. Against this backdrop it is easy to discount the fundamental principle that an arbitral tribunal’s jurisdiction arises from the parties’ agreement, and that the scope of its power is limited to what is granted to it as a matter of construction of the arbitration agreement. X v Y is a reminder that users of arbitration should proceed with caution where the matrix of contracts contains two or more different choices of dispute resolution forum. Instead of approaching the issue with the Fiona Trust presumption, one should adopt a careful and commercially-minded construction of the agreements and enquire which dispute resolution mechanism is closest to the “centre of gravity” of the particular claim. This is especially relevant where the Parties’ commercial relationship (and the contracts entered into) has evolved over time. Indeed, in X v Y, one factor that the Court considered salient in finding that the Tribunal exceeded its jurisdiction was the fact that the Pledge had been executed before the Mandate and the arbitration agreement therein (under which the Tribunal was constituted).
The Court’s finding that the Bank was unable to present its case also serves as a cautionary tale for arbitrators on the need to provide parties with a reasonable opportunity to present their cases. While major arbitral jurisdictions (such as Hong Kong, England & Wales, Singapore, Switzerland) do have some notion of the doctrine of iura novit curia (“the tribunal knows the law”) and allow arbitral tribunals to take initiative in ascertaining the facts and law, such power remains subject to the parties’ rights to be heard. Tribunals straying from the parties’ pleaded cases or the chain of reasoning adopted by the parties can give rise to due process issues, the point being that due process requires that parties have an opportunity to comment on and respond to points or reasoning to be adopted by the Tribunal in reaching its findings.
The views and opinions expressed in this article are those of the authors and do not reflect the views of Sidley Austin or its clients.
 See Section 56(7) of the Arbitration Ordinance which provides that “[u]nless otherwise agreed by the parties, an arbitral tribunal may, when conducting arbitral proceedings, decide whether and to what extent it should itself take the initiative in ascertaining the facts and the law relevant to those arbitral proceedings.”; See also Lim, Z.J.J. and Lai, N. J., ‘Iura Novit Curia in Hong Kong Arbitration Law’, in Ferrari, F., Cordero-Moss, G. (ed.) Iura Novit Curia in International Arbitration, JurisNet, LLC (April 16, 2018)
 See Sections 34(1) and (2)(g) of Arbitration Act 1996 which provide that “(1) It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter… (2) Procedural and evidential matters include – (g) whether and to what extent the tribunal should itself take the initiative in ascertaining the facts and the law.”; See also Mistelis, L. and Potocnik, M., ‘Iura Novit Arbiter in England and Wales’, in Ferrari and Cordero-Moss, Iura Novit Curia in International Arbitration.
 Koh, S.Y. Lau, K., ‘The Incidence of Iura Novit Arbiter in Singapore Arbitration Law’, in Ferrari and Cordero-Moss, Iura Novit Curia in International Arbitration.
 Bonomi, A. and Bochatay, D., ‘Iura Novit Arbiter in Swiss Arbitration Law’, in Ferrari and Cordero-Moss, Iura Novit Curia in International Arbitration.
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