The Hague Court of Arbitration for Aviation (HCAA) took flight in mid-2022. Seated in The Hague, Netherlands and administered by the Netherlands Arbitration Institute, the HCAA is Europe’s first arbitration centre that specialises in resolving commercial and private aircraft related contract disputes.
Many international industries, such as shipping and sports, have specialised arbitration centres to resolve disputes in their respective areas. Although there are other aviation arbitration centres – such as the Shanghai International Aviation Court of Arbitration which was established in mid-2014 – international commercial aviation disputes are still often resolved by way of court litigation.
The HCAA is therefore a welcome step towards providing the international aviation industry with another option for resolving commercial aviation disputes.
For international commercial aviation disputes especially, arbitration may provide significant advantages over court litigation. Parties may choose an arbitrator that has relevant knowledge of the aviation industry. The dispute can be adjudicated in a forum that is neutral to the parties, rather than in the courts of one parties’ home state. Moreover, arbitration centres like the HCAA are specifically geared towards resolving disputes in the aviation industry. Arbitral awards also have a practical advantage over court judgments for international disputes, as arbitral awards are widely enforceable worldwide under the New York Convention.
Eugene Kwok regularly acts for and advises parties in commercial aviation disputes. In 2022, he advised an aircraft manufacturer on a multi-jurisdictional claim for repossession under the Cape Town Convention of an aircraft sub-leased to a Russian cargo service company, after the lease and its sub-leases were terminated due to issues arising from the conflict in Ukraine.
Eugene Kwok was trial counsel for the 3rd Defendant in Macro Charm Ltd v Phoenix Nicaragua S.A. & Others  HKCFI 1822.
The case concerned a contract to conduct logging operations in Nicaragua over forests affected by Hurricane Felix in 2007, entered into by the Plaintiff (a special purpose vehicle set up by a natural resources conglomerate) and the 1st and 2nd Defendants (both Nicaraguan companies). The contract envisaged that the 1st and 2nd Defendants would provide the Plaintiff with access and logging rights to 150,000 hectares of forest land belonging to indigenous landowners known as the “10 Communities”, who were said to have legal rights over a total 339,900 hectares of forest land. However, the Plaintiff alleged that the 10 Communities only had title to 31,958 hectares, and sued the 1st and 2nd Defendants for breach of contract.
The 3rd Defendant – who signed the contract on the 1st and 2nd Defendant’s behalf – was sued for fraudulent misrepresentation (or the tort of deceit). The Plaintiff alleged that the 3rd Defendant had fraudulently made false statements concerning, amongst other things, the extent of the 10 Communities’ land ownership rights.
Neither the 1st nor 2nd Defendant entered an appearance and default judgment was entered against them in 2012. The case proceeded to trial against the 3rd Defendant, which took place in September 2017. Judgment was handed down in June 2022.
There were a number of elements which the Plaintiff had to prove in its claim against the 3rd Defendant, including: (1) whether the 3rd Defendant had made the alleged statements (or representations) in question; (2) if so, whether they were false; (3) if so, whether he had made them fraudulently; (4) if so, whether the fraudulent misrepresentations had induced the Plaintiff into entering the contract; (5) if so, the loss or damage suffered by the Plaintiff as a result.
A number of factual and expert witnesses were called to testify on, amongst other things, who said what, the extent of the Plaintiff’s knowledge, and the 10 Communities’ land ownership rights under Nicaraguan law. Ultimately, however, much of the Plaintiff’s case came undone during cross examination of the Plaintiff’s sole factual witness, as he ended up accepting that it was possible that another person – rather than the 3rd Defendant – had made the alleged false statement which formed the crux of the Plaintiff’s case.
There were also a number of alleged misstatements said to have been made by the 3rd Defendant in email. However, the judge accepted that not all misstatements are actionable. For instance, where the circumstances are such that a certain amount of hyperbole in the description of goods, property or services would be expected such that a reasonable person would take such descriptions “with a large pinch of salt”. In this case, the judge did not consider any of the 3rd Defendant’s statements in his emails to give rise to an actionable representation.
The Plaintiff’s case against the 3rd Defendant for fraudulent misrepresentation was therefore dismissed with costs (to which security had previously been ordered to be paid into court).
Many companies in Hong Kong are not incorporated there. Nonetheless, the Hong Kong court has statutory jurisdiction (under section 327 of the Companies (Winding Up and Miscellaneous Proceedings) Ordinance) to wind up a foreign company. However, recognising that the most appropriate jurisdiction to wind up a company is the place where it is incorporated, the court has imposed requirements which have to be satisfied before it will exercise that jurisdiction. These requirements are commonly known as the three core requirements, and they are:
1. there must be a sufficient connection with Hong Kong, but this does not necessarily have to consist of the presence of assets within the jurisdiction;
2. there must be a reasonable possibility that the winding-up order would benefit those applying for it; and
3. the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.
In Shangdong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited  HKCFA 11, the appellant (Shangdong) was subject to an arbitral award requiring the payment of damages to the respondent (Arjowiggins), which the Hong Kong court had also granted an order to enforce. When Shangdong did not pay, Arjowiggins issued a statutory demand, followed by a winding up petition, against Shangdong in Hong Kong.
Shangdong was incorporated in the People’s Republic of China. It had no assets in Hong Kong, but it was listed on the Hong Kong Stock Exchange and was registered under the Companies Ordinance as having a place of business in Hong Kong. Although the first (and third) core requirements were not in dispute, the Court of Final Appeal (CFA) noted that these factors made it clear that Shangdong had a sufficient connection with Hong Kong. The second core requirement only came into play once a sufficient connection was established.
At issue was the second core requirement – whether a winding up order would benefit Arjowiggins. Shangdong argued that, as it had no assets in Hong Kong, there was nothing a Hong Kong liquidator could realise for the benefit of Arjowiggins.
The CFA noted that:
(1) The use of a creditor’s winding up petition as a means of applying commercial pressure to seek payment of an undisputed debt was legitimate.
(2) The possible benefits are not limited to the making of a winding up order, but include the setting in motion of the winding up procedure in Hong Kong. A benefit will exist where setting those procedures in motion results in the payment of an undisputed debt – i.e. leverage to pressure the company into paying. That benefit could continue even if a winding up order was ultimately made since the court could stay the winding up upon payment of the debts owed to the petitioning and supporting creditors.
In the present case, there was leverage – and thus benefit to Arjowiggins – given the adverse consequences of the winding up procedure on Shangdong’s listing status on the Hong Kong Stock Exchange. The second core requirement was therefore satisfied.
An important caveat to keep in mind is that the above only applies to an undisputed debt (which it was in this case since the debt was the subject of an arbitral award). Using the winding up procedure as leverage for a disputed debt is not legitimate, regardless of whether it is against a Hong Kong or foreign company, and may amount to an abuse of process.
It is not unusual for arbitration agreements to contain pre-arbitration procedural requirements, such as negotiation or mediation, which the parties must attempt before proceeding to arbitration. These are commonly known as “tiered” or “escalation” arbitration agreements – you have to escalate the dispute through each tier before you can go to arbitration. Disputes may arise as to whether these pre-arbitration procedural requirements have been fulfilled.
In C v D  HKCA 729, the Hong Kong Court of Appeal held that, unless the arbitration agreement expressly said otherwise, it was for the arbitral tribunal (and not the court) to decide whether such pre-arbitration procedural requirements had been fulfilled.
In that case, D brought arbitration proceedings against C. C disputed the arbitral tribunal’s jurisdiction on the basis that certain pre-arbitration procedural requirements had not been fulfilled. The tribunal considered, but rejected, C’s objection to jurisdiction, and went on to issue a partial award on liability in favour of D. C then applied to the Hong Kong court to set aside that partial award under Article 34 of the UNCITRAL Model Law. The court refused to do so.
The Court of Appeal noted (at paragraphs 61-63) that the parties had agreed to submit their dispute to arbitration. There was no reason to confine the scope of arbitrable disputes to substantive disputes arising out of or in relation to the agreement between them – in other words, arbitrable disputes would include disputes as to whether pre-arbitration procedural requirements had been fulfilled, unless expressly excluded by the parties. As these had not been expressly excluded, it was within the arbitral tribunal’s jurisdiction to decide whether the pre-arbitration procedural requirements had been fulfilled.
This decision is significant as it is from an appellate level court in a Model Law jurisdiction.
Eugene Kwok represented the 8th Defendant in Lesnina H. D.O.O. v Wave Shipping Trade Co Ltd  HKCFI 1070. The 8th Defendant was allegedly a second-tier recipient of the Plaintiff’s funds which had been wrongly paid out as a result of an email fraud. The 8th Defendant asserted that it had no knowledge of the alleged fraud, and that it had received the funds as payment from a customer for products sold to it by the 8th Defendant.
As is common in cases of email fraud, the Plaintiff’s claim was based on constructive trust (knowing receipt) and restitution.
The Plaintiff applied for summary judgment, but this was refused by Deputy High Court Judge Dawes SC. The judge noted that it was necessary for the Plaintiff to show, for a claim in knowing receipt, “unconscionable knowledge” on the part of the 8th Defendant. Given the absence of evidence that the 8th Defendant had any knowledge of the alleged fraud, whether the 8th Defendant had such “unconscionable knowledge” was a triable issue (paragraph 38 of the judgment). Although not directly mentioned by the judge, lack of “unconscionable knowledge” may also potentially affect the Plaintiff’s claim in restitution (with respect to the “unjust” component of unjust enrichment).
The 8th Defendant also asserted the defence of being a bona fide purchaser for value without notice. However, the funds which the 8th Defendant had received from its customer were allegedly paid via the “underground banking” system – basically, a black market foreign exchange transaction used to circumvent the capital control laws of the People’s Republic of China. The Plaintiff relied on previous court decisions, notably Barros Mattos Junior v General Securities & Finance Ltd  1 WLR 247 and DBS Bank (Hong Kong) Ltd v Pan Jing  4 HKC 395, to argue that the illegality behind this payment precluded the bona fide purchaser defence because: (1) the 8th Defendant could not be considered to have provided value for an illegal contract; and (2) the illegality negatived any good faith on the part of the 8th Defendant.
The Plaintiff had a respectable argument in this regard on the face of Barros and Pan Jing. However, the judge accepted that the absolute approach taken in those cases – that all kinds of illegality (save perhaps for de minimus ones) would preclude reliance on the bona fide purchaser (and also change of position) defences – was an “overly blunt application” of the illegality principle. Instead, “a preferable approach would be one that measures the gravity of the defendant’s criminal conduct against the impact of allowing the defence” (paragraph 57). Consequently, the alleged illegality concerning the remittance of funds via the PRC underground banking system raised triable legal issues.
In addition, the 8th Defendant had not participated in any underground banking activity itself (being merely the recipient of funds paid over by the customer who, presumably, was the one who did engage in any alleged underground banking activity). The judge considered this to be a triable issue as well, specifically, whether a mere recipient of alleged illegally paid funds would be prevented from relying on the bona fide purchase defence (paragraph 61).
As a result of the triable issues raised, the case was not suitable for summary judgment and would have to proceed to trial in the usual way.
This is not the only case to have dialled down the approach taken in Barros and Pan Jing. For example, in Solyda S.R.L. v Wu Ge  HKCFI 1825, Deputy High Court Judge Le Pichon stated that, “It has been said that the issue to what extent illegal conduct precludes a defendant from relying on the defence is a ‘developing point of law’” (paragraph 32). In Tokic, D.O.O. v Hong Kong Shui Fat Trading Ltd  HKCFI 217, Deputy High Court Judge Laurence Li SC noted that an illegal transaction was not necessarily void or even voidable, and that, “If the law does not automatically void the transaction, I cannot imagine why or how it would automatically void the value given in the transaction” (paragraph 47). In other words, good value could still be given for an illegal transaction if the illegality did not render the transaction void under law.
Eugene Kwok advised and acted for Hong Kong Optical Company Limited, the operator of the venerable “Hong Kong Optical” chain, which was today wound up by the court on a petition issued by the company itself.
The company issued the petition pursuant to a resolution of its directors, who were authorised by way of an ordinary resolution of its shareholders. Most practitioners will be aware that the Companies (Winding Up and Miscellaneous Provisions) Ordinance expressly allows a company to petition for its own winding up if it has, by special resolution (i.e. 75% or more of the shareholders), resolved to do so. This is a discrete ground in itself, but is not often used (since a company with 75% of its shareholders in favour can pursue a voluntary winding up instead).
Less well known is that, if another statutory ground for a compulsory winding up exists (e.g. the company is unable to pay its debts), the directors may consider and pursue that if they are authorised by way of only an ordinary resolution (i.e. 50% or more of the shareholders), so long as it does not contravene the articles of association of the company. This may be helpful where you have legitimate grounds to seek a compulsory winding up but can only get 50% of the shareholders to agree.
Eugene Kwok acted for the respondents in Re Lucky Legend Industries Limited; Re Vintage Wine Cellar Limited  HKCFI 2004, a decision which serves as a reminder to all practitioners of the need to take a little bit of extra care when instituting shareholder proceedings. Largely due to technical and procedural problems, the unfair prejudice petition in this case was dismissed at its first return date hearing. The court refused the petitioner’s applications to try and remedy those problems, instead directing that the dismissal of the petition be without prejudice to the petitioner instituting fresh proceedings in respect of the same subject matter – i.e. “please try again”.