Author: Deacons
Service Area: Litigation & Dispute Resolution
Date: October 2011
Country: Hong Kong


Litigation & Dispute Resolution Newsletter 
Issue 2 of 2011: October


HK$6 Million Fine for Late Reporting to SFC
by Robert Clark (

On 3 October 2011 the SFC announced that it had reprimanded Citigroup Global Markets Asia Limited ("Citigroup") and fined it HK$6 million.

The rationale for the reprimand and the fine was Citigroup's failure to immediately report the misconduct of a former licenced representative employed by Citigroup who was involved in what appears to be a ponzi scheme similar to that of Bernard Madoff.

Citigroup's failure to report was compounded by the fact that although it initially reported to the SFC that the representative had been dismissed for gross misconduct, and informed the SFC that an internal investigation was in progress, in fact in so doing, Citigroup misled the SFC because at that time it had already obtained a preliminary report which revealed important information in relation to the representative's apparent fraudulent scheme.

Citigroup delayed the provision of this report to the SFC until a follow up investigation by its external auditor was complete. By the time the report was provided to the SFC, the representative had left Hong Kong and he has not returned.

The delay therefore in reporting to the SFC meant that the SFC and other law enforcement agencies had no opportunity to interview the representative or secure his whereabouts pending the completion of an investigation.

SFC's director of enforcement, Mark Steward said:

"Citi Asia not only failed to detect a Ponzi Scheme operating under its nose, despite having the opportunity to do so, but then failed to report the Scheme to the SFC in a timely way, thus making the investigation of this case more difficult given Mr. X's decision to leave Hong Kong after he had been dismissed by Citi Asia"

"Intermediaries know they have a duty to report misconduct to the SFC immediately upon discovery, not when they have plumbed the bottom of it. Delay in reporting simply helps the wrongdoer. This public reprimand should make it clear that the SFC condemns such delay in the strongest terms."

This was an expensive lesson for Citigroup, and one which should be readily avoidable.

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Beijing's View of State Immunity in Hong Kong
by Robert Clark (

As reported in our previous newsletter the Court of Final Appeal's decision that state immunity in Hong Kong is absolute, rather than restrictive, was "provisional" because it had to be referred to the Standing Committee of the National People's Congress ("SCNPC").

On 26 August 2011 the SCNPC formally ruled and confirmed that state immunity in Hong Kong is absolute.

To finalise the position, on 8 September 2011 the Court of Final Appeal accordingly followed the interpretation issued by the SCNPC. Consequently the Judgment that the Court of Final Appeal handed down on 8 June 2011 was also declared final.

So, we have now have some clarity but also some peculiarity.

Interestingly Li Fei, Deputy Director of the Legislative Affairs Commission of the SCNPC was reported in the South China Morning Post as stating that the interpretation will not affect Hong Kong's business environment and that diplomatic immunity will not be taken advantage of by China's state owned enterprises to evade debts in Hong Kong, as it only applies to foreign entities.

The peculiarity, therefore, is that a foreign state is immune from suit in Hong Kong, whereas, at least according to Mr. Li, the People's Republic of China is not, nor are its state owned enterprises ("SOE").

Furthermore, other writers have indicated that the large SOE that still dominate the Chinese economy are probably excluded from immunity because Chinese law states that such entities have separate legal character.

This commentary is consistent with the Hong Kong Court of First Instance ruling in Intraline v The Owners of the Ship or Vessel "Hua Tian Long" which found that SOE's independent and autonomous management distinguishes them from companies that are merely under state control.

So state immunity is absolute, unless the state is the PRC.

State immunity can, however, be waived "in the face of" the Hong Kong Court. An agreement entered into by the defendant State (or its entity) in a contract in which the parties agree that the state or its entity waive all rights to immunity from the jurisdiction of the Hong Kong Courts will not be effective. This is because the provision does not waive immunity "in the face of" the Hong Kong Court.

On the other hand, a state which is sued in Hong Kong and which submits to the jurisdiction of the Hong Kong Court (for example by participating in the Court proceedings in Hong Kong) would be taken to have waived its immunity from suit.

Finally, the additional good news is that the ruling does not affect the jurisdiction of a Hong Kong arbitration tribunal over a state or SOE. It appears that all commentators agree that the immunity is immunity from suit in the Courts of Hong Kong, not immunity from the jurisdiction of an arbitral tribunal.

More complex issues arise in the context of the supervisory jurisdiction of the Courts of Hong Kong over an arbitration.

There is further considerable comfort to be taken from the fact that enforcement proceedings and execution proceedings, founded upon the fact that the state concerned is a party to the New York Convention on the Recognition and Enforcement Foreign Arbitral Awards in 1958 ("the New York Convention"), would still be possible in the Hong Kong Courts.

So, the lesson to be learned from this case appears to be that when entering into commercial relations with a state or a wholly state owned entity one should avoid a Hong Kong Court jurisdiction clause and rather adopt a Hong Kong arbitration clause.

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Enforcement of Hong Kong Judgments & Arbitration Awards in Mainland China
by Cheung Kwok Kit (

Since 2008, a Hong Kong judgment has been directly enforceable in Mainland China by virtue of "An Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region pursuant to Choice of Court Agreements between Parties Concerned" ("the Arrangement").

In order to benefit from the Arrangement, parties have to provide in their contract that the Mainland Court has exclusive jurisdiction over any disputes arising out of the contract. Whilst we have drafted such provisions for our clients from time to time, since implementation of the Arrangement, enforcement of Hong Kong judgments in Mainland China pursuant to the Arrangement is not common. We understand that there was a successful application for enforcement of a Hong Kong judgment in a Shanghai Court early this year, but such cases appear to be rare.

In the absence of a specific provision in the contract (as mentioned above), a party would have to commence legal proceedings in Mainland China afresh, relying on the Hong Kong judgment as evidence of the defendant's liability, in order to enforce a Hong Kong Judgment in Mainland China.

The lack of popularity of the Arrangement may be due to the requirement to have a specific provision in the contract. Since 2000, arbitration awards made in Hong Kong are directly enforceable in Mainland China, pursuant to an agreement for mutual recognition of arbitration awards between Hong Kong and Mainland China. Hong Kong is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Awards, by virtue of China's accession to that treaty. By virtue of that treaty, Hong Kong arbitration awards are not only directly enforceable in Mainland China, but also in many other countries, such as the United States, United Kingdom and Japan. For this reason, rather having an exclusive jurisdiction clause, parties may choose to have an arbitration clause in their contract.

The procedure for enforcement of Hong Kong arbitration awards in Mainland China is relatively simple. The applicant applies to the Intermediate People's Court in the place where the respondent is domiciled or has property. If the Intermediate People's Court intends to dismiss the application for enforcing the Hong Kong award, it must first refer the application to the Higher Court for review. If the Higher Court is of the same view as the Intermediate People's Court, it must further refer the application to the People's Supreme Court in Beijing and no decision to dismiss the application can be made until the decision of the Supreme Court is sought. This process exists to alleviate the concern of some foreign parties that awards may not be enforced in Mainland China due to local protectionism.

From our experience, applications for enforcement of Hong Kong arbitration awards in Mainland China are reasonably successful. However, the application can take from three months to over a year, depending on whether the case has to be considered by the People's Supreme Court, as mentioned above.

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Statements of Truth – The consequences of not complying
by Karen Dicks (

Under the new court rules, brought in by the Civil Justice Reforms on 2 April 2009, all pleadings (including Further and Better Particulars of pleadings), witness statements and expert reports must be verified by a Statement of Truth. This is a statement (usually endorsed on the pleading, witness statement or expert report), verifying that the contents of the document are believed to be true.

The consequences of signing a Statement of Truth, without an honest belief that the contents of the document in question are true, are serious, namely contempt proceedings, which may result in a fine and/or imprisonment.

A recent District Court decision shows that the court takes a tough stance in relation to anyone signing a false Statement of Truth.

The Facts
The Plaintiff had sued the 1st and 2nd Defendants for the outstanding price of goods (timber) sold and delivered ("the Civil Action").

Statement of Truth
The Defendants defended the Civil Action on the grounds that the timber was sub-standard and pleaded in the Defence that that they had made numerous complaints to the Plaintiff about the quality of the timber. The Defence contained a Statement of Truth, signed on the 1st and 2nd Defendants' behalf by their solicitor. In response to the Plaintiff's Request for Further and Better Particulars of the Defence, the Defendants filed Further and Better Particulars of the Defence and relied on a letter of complaint, which they said had been sent to the Plaintiff. The Further and Better Particulars of the Defence contained a Statement of Truth, again signed on the 1st and 2nd Defendants' behalf by their solicitor.

The 1st and 3rd Defendants also made witness statements, which referred to the complaint letter. The 1st and 3rd Defendants signed Statements of Truth on their witness statements.

Following the exchange of documents between the parties in the Civil Action, the Plaintiff's solicitors examined the complaint letter and formed the view that it was a false document. They therefore now brought these proceedings against the Defendants for contempt of court, on the basis that they had made false statements in documents verified by Statements of Truth, without an honest belief in their truth.

The court accepted that the applicable legal principles are as follows:-

Applicable Legal Principles

1. Where a person is prosecuted for contempt for verifying a false Statement of Truth, the Plaintiff must prove beyond a reasonable doubt:
  (i) The falsity of each statement in question;
  (ii) That the statement has, or if persisted in would be likely to have, interfered with the course of justice in some material respects; and
  (iii) That at the time the statement was made, the maker of it had no honest belief in its truth and knew of its likelihood to interfere with the course of justice.
2. Given the quasi-criminal nature of contempt proceedings, any doubt must be resolved in the defendant's favour.
3. It is not necessary to prove specific intent to interfere with the administration of Justice. It is enough if the action complained of is inherently likely to so interfere.

The Court's decision
The court found that the Plaintiff had proved beyond a reasonable doubt that the complaint letter was not authentic. The court held that the 1st Defendant had committed contempt of court for causing his solicitor to sign the Statement of Truth on the Further and Better Particulars of the Defence and also for signing the Statement of Truth on his witness statement. It held that the 3rd Defendant had committed contempt of court for signing the Statement of Truth on his witness statement. The court found that the complaint made in relation to false statements in the Defence was not made out because the Defence did not specifically refer to the complaint letter, but only to the Defendants having made complaints to the Plaintiff, which the court could not rule out having happened.

The court held that a case for contempt had not been made out against the 2nd Defendant (who was the wife of the 1st Defendant) because it was possible, on the evidence, that she had put forward the Further and Better Particulars of the Defence on the basis of what her husband had told her. The 2nd Defendant had not made any affirmation or witness statement in the Civil Action, but the court said that if she had done so and stated that she personally knew of the existence of the complaint letter, she would have been found guilty of contempt.

In terms of penalties, the court said that in deciding such it should make reference to cases involving perjury (for which the maximum penalty is 7 years imprisonment), but should also take into account any indemnity costs order which may be made because that would also serve as a kind of punishment. The court said:

"Like the commission of the offence of perjury, the giving of a false statement verified by a statement of truth would underline the whole process of our system of justice and the Court will not tolerate such an act. A clear message has to be sent to all litigants that they must not lie when they put forward their case in the form of pleadings or witness statements."

The court said that its general approach in perjury cases is that a person found to have committed the offence must receive an immediate custodial sentence, unless there are exceptional circumstances. The starting point, adopted in those cases, the court said, was from five months to two years, depending on the circumstances.

In respect of the 1st Defendant, the court said that this was not a case where he, out of a split second of evil thought had made up something while giving evidence in the witness box. His reliance on the complaint letter was a pre-meditated move to bolster his defence. Further, it was clear that when he signed his witness statement, the 1st Defendant knew that making a false statement would bring serious consequences, but he went ahead and signed it nonetheless.

Taking into account that the 1st Defendant was liable to pay indemnity costs to the Plaintiff in the contempt proceedings, the court adopted 6 months' imprisonment as the starting point. The court gave him a one month discount to take into account his personal circumstances and the fact that he was now remorseful and had abandoned his defence and submitted to judgment in the Civil Action, before knowing the result in these contempt proceedings. The court sentenced the 1st Defendant to five months' imprisonment for each of the two acts of contempt, to run concurrently.

The court said that the position of the 3rd Defendant was even worse than that of the 1st Defendant because he was not personally involved as a party in the Civil Action. He had assisted the 1st Defendant in giving false evidence against the Plaintiff. The court said that this was an aggravating factor, to be taken into account when determining the length of prison sentence. The court adopted a starting point of six months and refused to give any discount. Accordingly, the 3rd Defendant was given an immediate custodial sentence of six months.

This decision shows that the court views the signing of a false Statement of Truth very seriously and will have no hesitation in handing down a custodial sentence for such. This applies not only where a person signs a Statement of Truth themselves, but also where they mislead their solicitors into signing it on their behalf.

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A Mediation Ordinance and other proposals of the Working Group on Mediation
by Karen Dicks (

Progress so far
In the 2007-08 Policy Address, the Chief Executive announced the establishment of a cross-sector Working Party on Mediation ("the Working Party"), headed by the Secretary for Justice, Mr Wong Yan Lung SC. The purpose was to review the current development of mediation and provision of mediation services in Hong Kong, make recommendations on ways to facilitate and encourage the wider use of mediation and ensure the quality and standard of such.

The Working Party, published its report on 8 February 2010, containing 48 recommendations, covering three main areas, namely (1) public education and publicity; (2) accreditation and training; and (3) regulatory framework.

Some of the more notable recommendations are detailed below.

Public Education and Publicity
Mediation First Pledge
Companies, trade associations and organisations were invited by the Working Party's Public Education and Publicity Sub-group to subscribe to a "Mediate First" pledge and a new website was launched, "". As at February 2010, over 70 companies and 40 trade associations or organisations had signed the "Mediate First" pledge and affirmed their commitment to consider the use of mediation to resolve disputes, before pursuing other Alternative Dispute Resolution processes or court litigation. The Working Party recommended that, given its initial success, the "Mediate First" pledge be encouraged within the business and commercial sector, and promoted to different sectors of the community. Pilot mediation schemes are recommended for suitable areas such as in the workplace and employment, intellectual property, banking and financial services, medical malpractice and healthcare, child protection, environmental, urban planning, land use and re-development.

The Working Party recommended that special efforts be made to promote mediation to unrepresented litigants in court, including promotion of the "Mediate First" website through the Information Office and Resource Centre for Unrepresented Litigants at the High Court.

Schools and Law Faculties
The Working Party noted the importance of introducing the mediation process to young people in Hong Kong and the potential introduction of mediation education in primary and secondary schools. It suggests that the question of mediation being incorporated into compulsory courses in law faculties be revisited when the mediation landscape is more mature. It suggests that the Law Society and Bar Association consider mediation training for their members and whether such training should be compulsory.

Educating the General Public
Mediation publicity, targeting the general public, is recommended, via television (including an Announcement in the Public Interest ("API")), radio and printed media, with special efforts made to approach TV stations and script writers to consider including mediation in their TV dramas.

Accreditation and Training
Accreditation of Mediators
The Working Party noted that mediators in Hong Kong are accredited by different mediation accrediting organisations, each adopting its own training and accreditation requirements. Further there is no disciplinary mechanism to regulate mediators' professional conduct and no requirement for mediators to undergo continuing professional development.

The Working Party recommended as desirable the establishment of a single body for accrediting mediators, but considers that it is not the right time to prescribe a standardised system for such. Instead, the current emphasis should be on the provision of appropriate mediation information to potential mediation users, to better enable them to decide whether to use mediation and assist them to choose a competent mediator.

Mediation Code
The Working Party's Accreditation and Training Sub-group has produced a Hong Kong Mediation Code, consisting of a draft Code of Conduct for mediators and a sample Agreement to Mediate. The Sub-group has received overwhelming support for the Code from mediation service providers. The Working Party has therefore recommended wide promulgation of the Code and that mediation service providers be encouraged to adopt it and set up robust complaints and disciplinary processes to enforce the Code. The Mediation Code is included in the mediation section of the Hong Kong International Arbitration Centre's website.

Regulatory Framework
A Mediation Ordinance
The Working Party recommended the enactment of a stand alone Mediation Ordinance, rather than the introduction of legislative provisions into the existing Arbitration Ordinance or other Ordinances. It is recommended that the new Mediation Ordinance set out its objectives and underlying principles, key terminology such as "mediation" and "mediator", but not legislative provisions dealing with enforcement of a mediation agreement. Further, it is recommended that the new Mediation Ordinance should not include provisions dealing with the mediation process, except for a provision dealing with the appointment of a mediator and a provision allowing non-lawyers and foreign lawyers to participate in mediations conducted in Hong Kong.

It is recommended that the new Mediation Ordinance include provisions dealing with confidentiality and privilege. It is considered unnecessary to include a provision suspending the running of limitation periods during the mediation process or the granting of immunity to mediators from civil suits. It is also considered unnecessary to include provisions for enforcing mediated settlement agreements. Instead, it recommends that, where necessary, enforcement of mediated settlements can be left to the court, as in the ordinary cases of enforcement of contracts.

Compulsory Mediation
The Working Party recommends that at this stage the judiciary should not provide mediation services and that compulsory referral to mediation by the court should not be introduced. It is suggested that this issue be readdressed once mediation in Hong Kong is more developed.

Mediation Rules
The Working Party has no objection to the new Mediation Ordinance including a set of mediation rules, but recommends that such serve as a guide only and not be mandatory, so as to maintain flexibility and leaving the parties free to adopt such mediation rules as they deem fit.

Legal Aid
The Working Party recommends that Legal Aid be provided to legally aided persons who are willing to mediate.

Consultation Period
Following a three month consultation period, a Mediation Task Force, chaired by the Secretary for Justice, was set up to review the Working Party's recommendations and submissions received during the consultation period, and to advise on how the recommendations be modified (where necessary) and implemented. The Mediation Task Force was also charged with liaising with professional bodies, mediation service providers and other stakeholders in relation to public education and promotion of mediation, accreditation and training and regulatory framework.

The Task Force reported as follows in April 2011:-

Public Education and Publicity Initiatives

1) There was general support for the Working Party's recommendations in respect of public education and publicity for mediation in Hong Kong. Currently, the Task Force and its Public Education and Publicity Group is proceeding to implement the following initiatives:

  • Proposal to hold a second Mediation In Hong Kong Conference in 2012; and
  • Proposal to produce an API to be broadcast on television for the promotion of mediation.

Accreditation Body

2)The majority of submissions received during the consultation period urged the setting up of a single accreditation body and as soon as possible, rather than reviewing the need for such in five years time. As there are a number of mediation service providers, it is important for them to work together on the formation of an accreditation body and agree on mutually acceptable professional standards, including training standards.

3)It was premature to provide a statutory scheme for establishment of a single accreditation body at this stage, but a non-statutory, industry led, single accreditation body should be supported. The Accreditation Group of the Task Force is deliberating on the terms and conditions of settling up such industry led accreditation body.

Mediation Ordinance

4)There was overwhelming support from the public consultation for the enactment of a Mediation Ordinance. The Task Force and its Mediation Ordinance Group is now working on the contents of the proposed Mediation Ordinance.

5) The Task Force considers that the Mediation Ordinance will primarily (i) provide clarification on what is meant by "mediation"; (ii) cover confidentially provisions; and (iii) cover privilege in mediation.

6) The Task Force will seek to introduce the Mediation Bill into Legislative Council towards the end of 2011.

Task Force's Work Programme
The Task Force's programme for the following two years is to:-

  • Work with mediation stakeholders to keep in view the development of the system of accrediting mediators;
  • Work out the details of the proposed mediation legislation, taking into account the development of the mediation landscape. It is envisaged that the legislation will set out a framework for the conduct of mediation;
  • Work with relevant stakeholders to oversee the adoption and implementation of the Hong Kong Mediation Code and to review the operation of the Code in the light of experience;
  • Work with mediation service providers, professional bodies, community organizations, other stakeholders and Government Bureaux and Departments to take forward the various public education and publicity initiatives recommended by the Working Group, including the production of an API on mediation, identifying community venues for mediation users, and fostering the wider use of community mediation; and
  • Work with relevant parties to further explore the opportunities for initiating pilot mediation schemes in different sectors.

With the proposed widespread publicity for mediation and its introduction into education and training, it is likely that mediation will become increasingly popular as a means of resolving disputes. The fact that a large number of companies and organizations have already signed a "Mediate first" pledge, shows that businesses in Hong Kong are at least willing to try mediation first, before resorting to other alternative dispute resolution processes or court proceedings.

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.