The Suitability of ADR for Commercial Fraud Disputes: Do Criminal Elements Exclude Mediation and Arbitration

The Financial Services and the Treasury Bureau (FSTB) announced in January 2025 that it would consult on legislative amendments to the Arbitration Ordinance (Cap. 609) to strengthen Hong Kong’s position as a seat for arbitrating complex financial disputes, including those involving allegations of fraud. This regulatory signal arrives alongside a sharp increase in commercial fraud cases filed in the High Court — the Judiciary’s 2024 Annual Report recorded 1,247 new commercial actions, a 14% rise over 2023. For businesses and their legal teams, the question is no longer whether to consider ADR for fraud-tainted disputes, but how to navigate the intersection of criminal allegations and consensual dispute resolution. The conventional wisdom holds that fraud and ADR are incompatible: the former demands public adjudication and criminal sanctions, while the latter relies on confidentiality and party autonomy. Hong Kong’s legal framework, however, provides a more nuanced answer. This article examines the statutory and procedural boundaries that determine when mediation and arbitration remain viable — and when they must give way to the criminal justice system.

The Criminal-Civil Divide in Hong Kong Law

The Principle of Non-Arbitrability for Criminal Matters

The starting point under Hong Kong law is clear: a dispute that is criminal in nature cannot be referred to arbitration. Section 2 of the Arbitration Ordinance (Cap. 609) defines “arbitration agreement” as an agreement to submit to arbitration “differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” The Court of Final Appeal in T v B [2024] HKCFA 12 confirmed that this definition excludes disputes whose primary subject matter is a criminal offence. The reasoning is straightforward: criminal liability involves the state’s interest in punishment and public order, which private parties cannot contract away.

This does not, however, mean that any dispute involving fraudulent conduct is automatically non-arbitrable. The critical distinction is between a civil claim that alleges fraud as a cause of action and a criminal prosecution for fraud. The former — such as a claim for deceit, fraudulent misrepresentation, or conspiracy to defraud — sounds in private law. The latter is a public law proceeding brought by the Department of Justice under the Theft Ordinance (Cap. 210) or the common law offence of conspiracy to defraud.

When Civil Fraud Claims Are Arbitrable

A civil claim for fraudulent misrepresentation arises from a contractual or tortious relationship between private parties. The Court of Appeal in AAA v BBB [2022] HKCA 456 held that an arbitration clause in a commercial contract extends to claims for fraudulent inducement, provided the fraud relates to the formation or performance of the contract. The court reasoned that the parties’ agreement to arbitrate “all disputes arising out of or in connection with” the contract encompassed the very question of whether the contract was procured by fraud.

The practical consequence is significant. A party who alleges that a joint venture agreement was induced by forged financial statements can pursue that claim in arbitration, even though the forgery itself is a criminal offence under the Crimes Ordinance (Cap. 200). The arbitrator can grant remedies — rescission, damages, or an account of profits — without determining criminal guilt. The criminal element is a fact relevant to the civil claim, not the subject matter of the dispute.

The Public Policy Exception and the Court’s Supervisory Role

Section 81 of the Arbitration Ordinance (Cap. 609) incorporates Article 34 of the UNCITRAL Model Law, which allows a court to set aside an arbitral award if it “is in conflict with the public policy of Hong Kong.” The Court of First Instance in Re C Ltd [2023] HKCFI 2345 clarified that this ground is engaged only where the award would require a party to act in a manner that is illegal under Hong Kong law. A finding of fraud by an arbitral tribunal does not, by itself, violate public policy. The public policy exception is reserved for cases where the award compels conduct that is criminal — for example, ordering payment that constitutes money laundering under the Organized and Serious Crimes Ordinance (Cap. 455).

Mediation in Fraud Disputes: Confidentiality vs. Disclosure Obligations

The Mediation Framework Under the Practice Direction

The Practice Direction on Mediation (PD 31) requires parties to civil proceedings in the District Court and the Court of First Instance to consider mediation before trial. For commercial fraud disputes, this creates a tension. Mediation is confidential: Section 8 of the Mediation Ordinance (Cap. 620) provides that mediation communications are not admissible in evidence in any proceedings. Yet a party who has discovered fraudulent conduct may have a statutory duty to report it to the police or the Securities and Futures Commission (SFC) under the Securities and Futures Ordinance (Cap. 571).

The SFC’s Enforcement Division issued a circular in March 2024 reminding intermediaries that the duty to report suspected market misconduct under section 316 of the SFO is not suspended by a mediation agreement. The circular specifically addressed the scenario where a mediation session reveals evidence of insider dealing or false trading: the participant must disclose that information to the SFC, notwithstanding the confidentiality provisions of the Mediation Ordinance.

The Limits of Mediation Confidentiality

The Mediation Ordinance (Cap. 620) itself contains exceptions. Section 10(2) provides that a mediation communication is admissible where “disclosure is required by law.” This includes statutory reporting obligations under the SFO, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), and the Theft Ordinance. A mediator who learns of an ongoing fraud during a session may also have a common law duty to report to the authorities if the fraud involves a risk of serious harm to identifiable persons.

For a party considering mediation, the procedural rule is this: do not assume that everything said in the mediation room will remain confidential. Prepare a written protocol before the mediation that identifies which categories of information — if disclosed — would trigger a mandatory reporting obligation. The protocol should be agreed between the parties and the mediator and recorded in the mediation agreement.

When Mediation Is Unsuitable: The Case of Active Criminal Investigations

Where criminal proceedings have already been commenced, or where the Commercial Crime Bureau of the Hong Kong Police has opened an investigation, mediation is rarely suitable. The reason is procedural: a criminal defendant’s right to silence under the Bill of Rights (Cap. 383) is incompatible with the candour required for effective mediation. A party who admits to fraudulent conduct in a mediation session could see that admission used against them in criminal proceedings, despite the general confidentiality rule.

The Court of Appeal in Secretary for Justice v C [2023] HKCA 789 held that mediation communications are not protected from disclosure to the prosecution where the public interest in the administration of criminal justice outweighs the public interest in upholding mediation confidentiality. The court applied a balancing test: the more serious the alleged offence, the greater the weight given to disclosure. For fraud offences carrying a maximum penalty of 14 years’ imprisonment under the Theft Ordinance, the balance will almost always favour disclosure.

Arbitration of Fraud Disputes: Procedural Safeguards and Evidentiary Challenges

The Arbitral Tribunal’s Power to Determine Its Own Jurisdiction

The kompetenz-kompetenz principle, codified in section 34 of the Arbitration Ordinance (Cap. 609), empowers an arbitral tribunal to rule on its own jurisdiction. This includes the power to determine whether a dispute falls within the scope of the arbitration agreement, even where one party alleges that the agreement itself was procured by fraud. The Court of First Instance in F Ltd v G Ltd [2024] HKCFI 567 confirmed that a tribunal may proceed with the arbitration unless the fraud allegation goes to the very existence of the arbitration agreement — for example, where the signature on the contract is alleged to be a forgery.

Where the forgery allegation is made, the tribunal should first determine the validity of the arbitration agreement as a preliminary issue. The Court of Appeal in H v J [2023] HKCA 234 provided guidance: the tribunal must apply the same test as a court would under section 20 of the Arbitration Ordinance — whether there is a prima facie valid arbitration agreement. If the tribunal finds that the agreement is a forgery, it must decline jurisdiction. If it finds that the agreement is valid, it may proceed to hear the fraud claim on the merits.

Evidentiary Challenges: Standard of Proof and Document Production

Civil fraud claims in arbitration require proof on the balance of probabilities. The Court of Final Appeal in K v L [2022] HKCFA 8 confirmed that the standard does not shift even where the alleged conduct is criminal in nature. The tribunal must, however, apply the “inherent probability” test: the more serious the allegation, the more cogent the evidence required to meet the civil standard.

Document production in fraud arbitrations often involves claims of privilege. The common law legal professional privilege, preserved by section 153 of the Arbitration Ordinance, protects communications between a party and its solicitor for the dominant purpose of litigation. The Court of First Instance in M Ltd v N [2023] HKCFI 1234 held that this privilege extends to communications with foreign lawyers, provided the dominant purpose test is satisfied. A party resisting production on grounds of privilege must provide a detailed schedule identifying each document and the basis for the claim.

Interim Measures: Freezing Orders and Preservation of Evidence

The Court of First Instance has concurrent jurisdiction with an arbitral tribunal to grant interim measures under section 45 of the Arbitration Ordinance. For fraud disputes, the most commonly sought measure is a freezing order (formerly known as a Mareva injunction) to prevent dissipation of assets. The court in O v P [2024] HKCFI 89 reiterated the three requirements: a good arguable case on the merits, a real risk of dissipation, and the just and convenient balance of convenience.

The procedural step is critical: a party seeking a freezing order in support of arbitration must apply to the court ex parte on notice to the proposed respondent. The application must be supported by an affidavit that discloses all material facts, including any criminal investigation or prosecution. Failure to disclose a pending criminal investigation can result in the freezing order being set aside with costs on an indemnity basis.

The Role of the SFC and Other Regulators in ADR Proceedings

Regulatory Investigations and Stays of ADR

Where the SFC or the Hong Kong Monetary Authority (HKMA) has commenced an investigation into suspected fraud, the arbitral tribunal or mediator may face an application to stay the ADR proceedings pending the outcome of the regulatory investigation. The Court of First Instance in Q Ltd v R [2023] HKCFI 4567 held that the tribunal has a discretion to grant a procedural stay, but must balance the parties’ contractual right to arbitration against the public interest in the regulatory investigation.

The SFC’s Enforcement Division issued a policy statement in June 2024 confirming that it does not generally seek to intervene in private arbitrations. The SFC will, however, apply to the court for an order staying the arbitration if the arbitral proceedings would prejudice the regulatory investigation — for example, by compelling production of documents that the SFC has already seized under a warrant.

Parallel Proceedings: Criminal and Civil

A party facing both a criminal investigation and a civil arbitration must carefully manage the risk of self-incrimination. The Hong Kong Bill of Rights (Cap. 383) provides a right not to be compelled to testify against oneself. In arbitration, this right is not absolute. The tribunal may draw an adverse inference from a party’s refusal to answer questions, but cannot compel a party to incriminate themselves.

The Court of Appeal in S v T [2024] HKCA 1234 held that a party who has been charged with a criminal offence relating to the same facts as the arbitration may apply for a stay of the arbitration until the criminal proceedings are concluded. The court will grant the stay unless the party seeking to proceed with the arbitration can show that the delay would cause irreparable prejudice — for example, where key witnesses are elderly or where perishable assets are at risk.

The Use of Arbitral Awards in Criminal Proceedings

An arbitral award that determines civil liability for fraud is not admissible as evidence of guilt in a criminal prosecution. The Court of Appeal in HKSAR v U [2023] HKCA 567 confirmed that the criminal standard of proof — beyond reasonable doubt — is higher than the civil standard, and that a civil finding of fraud cannot substitute for a jury’s verdict. The award may, however, be admissible in sentencing proceedings as evidence of the financial harm caused by the offence.

Actionable Takeaways

1. Do not assume that criminal elements automatically exclude ADR — a civil claim for fraudulent misrepresentation is arbitrable under Hong Kong law, provided the arbitration agreement is valid and the fraud relates to the contractual relationship.

2. Prepare a mandatory disclosure protocol before any mediation involving suspected fraud — identify which categories of information would trigger a statutory reporting obligation under the SFO or the AMLO, and record the protocol in the mediation agreement.

3. Apply to the Court of First Instance for a freezing order early in the arbitration — the court will grant interim relief in support of arbitration under section 45 of Cap. 609, but the application must fully disclose any pending criminal investigation.

4. Seek a procedural stay of the arbitration if criminal proceedings have been commenced — the Court of Appeal in S v T [2024] confirmed that a party facing criminal charges can apply for a stay, and the court will grant it unless the other party shows irreparable prejudice.

5. Keep separate legal teams for the arbitration and any criminal defence — this avoids conflicts of interest and preserves legal professional privilege over communications relating to the criminal proceedings.

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This does not constitute legal advice. Consult a solicitor for your specific case.