Court Refuses Enforcement Of Mainland Awards In Hong Kong.
In A v R1 [2024] HKCFI 1511, the court set aside the Enforcement Order, whereby the Applicant (A) had been granted leave to enforce two Mainland arbitral awards in Hong Kong, under section 95 of the Arbitration Ordinance (AO). Under s.95, the court may refuse to enforce Mainland awards on specified grounds. During the arbitration, A had obtained, on an ex parte basis, an Approval from the tribunal to extend the time limit to render the 1st Award and had reached an agreement with the Shenzhen Court of International Arbitration (SCIA), which was administering the arbitration, to pay the arbitration fee by instalments.The court held that these failings were sufficiently serious to affect the structural integrity of the arbitration proceedings.
Background
The Arbitration
A commenced arbitration proceedings against the Respondents in relation to a share transfer agreement in October 2019 (1st Arbitration). The hearing before the tribunal took place in January 2012, but the 1st Award was not issued until January 2019. The tribunal found in A’s favour and the Respondents were held liable to pay A RMB11.7 million together with interest (up to the date of the Notice of Arbitration) and costs, totaling RMB74.6 million. A subsequently obtained a further award (2nd Award) in a 2nd Arbitration for additional interest on the sum outstanding under the 1st Award and costs.
Enforcement of arbitral awards
After the Awards were issued, no attempt was made to set them aside in the Mainland. A’s enforcement actions against the Respondents in the Mainland were unsuccessful, as they had no assets in the Mainland and the Mainland enforcement proceedings were concluded in in June 2023.
An obtained leave from the Hong Kong court to enforce the arbitral awards against the Respondents in Hong Kong.
R2’s application to set aside Enforcement Order
R2 applied to the court under section 95 of the Arbitration Ordinance (Cap 609) to set aside the Enforcement Order on the following grounds:
(i) Defective Procedure Ground: (a) inordinate delay of 7 years in rendering the 1st Award; and (b) continuation of the 1st Arbitration, notwithstanding A’s failure to pay (in full) the arbitration fees;
(ii) Due Process Ground: throughout the 1st Arbitration, in breach of the rules of natural justice, the Respondents were kept in the dark in relation to the Approval (which extended the time limit to render the 1st Award) and the Deferral Agreement (whereby A reached an agreement with SCIA to pay the arbitration fee in two instalments). R2 was therefore unable to address the Tribunal as to: (a) its position on the undue delay in rendering the 1st Award and (b) why the 1st Arbitration should have been terminated upon A’s payment default of the arbitration fees. R2’s position was that the Approval, obtained on an ex parte basis, granted undue leniency and leeway in A’s favour.
(iii) Public Policy Ground: there is a public policy against enforcement of the 1st Award, which was improperly rendered and inordinately delayed.
Underpinning the above grounds were the following undisputed matters:
- The 1st Arbitration was governed by the 2011 SCIA Rules which provide that the tribunal is required to deliver its award within 5 months of the tribunal being constituted. Here, the 1st Award was issued over 7 years after the tribunal was constituted.
- In the 1st Award, the tribunal’s explanation for the timing of the award was stated to be that the case could not be concluded in time and that with the tribunal’s approval, the time limit had been extended to 18 January 2019 (Approval);
- Under Article 15 of the SCIA Rules, applications to commence arbitration proceedings are treated as having been withdrawn where an applicant fails to settle payment of the required fees within the time limit prescribed in the Notice of Acceptance issued by SCIA;
- R2 was never involved in or consulted on the Approval.
- SCIA’s Notice of Acceptance of the 1st Arbitration issued on 19 October 2011 expressly stated that the arbitration fees (RMB615,359) had to be paid in full by 24 October 2011, failing which the 1st Arbitration would be treated as withdrawn. A’s case was that it had reached an agreement with SCIA to pay the arbitration fees in 2 instalments (Deferral Agreement).
Section 95 of the Arbitration Ordinance
Section 95 of the Arbitration Ordinance sets out the grounds upon which the court may refuse to enforce a Mainland arbitral award.
The court said that in section 95 applications, the court is concerned with the structural integrity of the arbitration proceedings and the conduct complained of “must be serious, even egregious”, before the court will find that there was an error sufficiently serious so as to have undermined due process. Even if sufficient grounds are made out to refuse enforcement of an award, the court has a residual discretion and may nevertheless enforce the award, despite the proven existence of a valid ground.
The court said that here, the key issue was whether the Approval, which was interwoven with the Deferral Agreement, had affected the structural integrity of the 1st Arbitration.
Had the structural integrity of the arbitral proceedings been affected?
The court concluded that there was a clear breach of the parties’ agreed procedure in how the Approval was obtained and granted. There is nothing in the 2011 SCIA Rules, the court said, which permits the ex parte process adopted by both the tribunal and SCIA in processing the Approval, and as a result, R2 was deprived of the opportunity to present its case on the issues, in particular when it was plain that R2 had presentable arguments to make.
The court found that, on the evidence, the 7-year extension was granted only because of A’s financial condition and it seemed self-evident that respectable counter arguments were available to R2, including accrual of a limitation defence. The court found those failings sufficiently serious to affect the structural integrity of the arbitral process and to have undermined due process. Further, there was no issue of waiver or breach of good faith on R2’s part.
As regards public policy, the court said that the opportunity for a party to present his case and a determination by an impartial and independent tribunal which is not influenced, or seen to be influenced, by private communications, are basic to the notions of justice and morality in Hong Kong. The court commented that it may be said that, in the arbitral context, a more informal procedure may be adopted for procedural matters, but such informality should not be extended to permit dealing with the matter on an ex parte basis.
The court held that enforcement of the 1st Award in Hong Kong would violate the basic notions of justice in our forum. Accordingly, the Enforcement Order was set aside and enforcement of the 1st and 2nd Awards refused.
Comments
It is a cardinal principle in arbitration that communications with the arbitration body and arbitral tribunal must be copied to the other party to the arbitration at the same time, no matter whether it is expressly required by the arbitration rules or not. The failure of the party to comply with such requirement was fatal to the enforcement of the arbitral award in this case, as it involved an agreement with the tribunal/SCIA not to strictly enforce the arbitration rules.
For further information, please contact:
Justin Yuen, Partner, Deacons
justin.yuen@deacons.com
