China – No Extension Of Time To Set Aside Order For Enforcement Of Mainland Award.
In KZ v KY [2024] HKCFI 1880, the Hong Kong Court refused the Respondent’s application for an extension of time to set aside the Enforcement Order, whereby the Applicant had been granted leave to enforce a Mainland arbitral award in Hong Kong. There had been substantial delay in making the application (44 months) and the Court found no justification for the delay and no merit in the intended application to set aside the Enforcement Order.
The dispute and arbitration award
The Applicant brought arbitration proceedings in the Mainland against his brother, the Respondent, claiming he had entrusted the Respondent to hold shares in a family company (F International) on his behalf, and that in breach of the Share Entrustment Agreement, had failed to transfer the shares back to him. The Xiamen Arbitration Commission made an Award in the Applicant’s favour, entitling him to terminate the Share Entrustment Agreement and to have the shares transferred from the Respondent’s name into his.
The Respondent applied to the Xiamen Intermediate People’s Court to set aside the Award, on the ground that it contained matters beyond the scope of the arbitration agreement contained in the Share Entrustment Agreement, and that the arbitration was conducted contrary to the agreed procedure or procedure prescribed by law. That application was dismissed by the Xiamen Court on 23 August 2019.
Hong Kong and Mainland court proceedings
Following the Award, various proceedings were commenced in Hong Kong by both parties and there were proceedings in the Mainland, including an action by the Respondent against the Applicant and his other siblings, in which the Respondent claimed that the shares in F International were assets forming part of the estate of their parents and that he had a one-sixth share in the estate (Mainland Succession Action). The Respondent’s claims in the Mainland Succession Action were dismissed by the Mainland Fujian Court on 24 November 2023 and judgment was pending on the appeal.
Enforcement Order
The Applicant had obtained leave from the Hong Kong court in September 2019 to enforce the arbitral Award as a judgment of the Hong Kong court (Enforcement Order). The Enforcement Order stated that the Respondent could apply to set it aside within 14 days after it had been served on him. It was served on the Respondent on 20 March 2020, but it was only on 11 December 2023 that he applied for an extension of time to set it aside.
Extension of time application
In dealing with the Respondent’s application for an extension of time to set aside the Enforcement Order, the court said it had to look at all relevant matters and consider the overall justice of the case, the relevant factors including (but not restricted to) the length of delay, whether the party who had permitted the time limit to expire was acting reasonably in the circumstances, whether the other side had contributed to the delay, and would by reason of the delay suffer irremediable prejudice in addition to the mere loss of time, and the strength of the application.
The Respondent’s application was 44 months out of time, which the court regarded as significant delay, bearing in mind the yardstick of 14 days provided in the Enforcement Order. The Respondent’s explanation for the delay was that the Enforcement Order was made ex parte, without notice to him and without his knowledge, and that it was only in mid-March 2023 that he learned of the Enforcement Order and separate Order granted by the court on 12 July 2021 authorizing the Applicant’s solicitors to execute the instrument of transfer and board resolution approving the transfer of shares. The court found the Respondent’s excuse disingenuous and that given the history of the proceedings and various steps taken by him in 2023, it was unbelievable that he was not aware of the effect of the Award by virtue of the Enforcement Order made in September 2019. His failure to apply to set aside the Enforcement Order earlier must have been a conscious and deliberate choice, the court said. Instead of taking any action in relation to the Enforcement Order, he had chosen to start other proceedings in Hong Kong in relation to his alleged interests in the shares in family companies and a Succession Action on the Mainland, and to focus on those and there was no good reason for the significant delay in the application to set aside the Enforcement Order. Nor had the Applicant in any way contributed to the Respondent’s delay in making the application.
Merits of the intended application to set aside – Was the dispute arbitrable?
The essential thrust of the Respondent’s case was that the dispute over the Applicant’s alleged interests in the shares of F International was in fact a succession dispute and as such, under PRC Succession Law, the matter would be handled in accordance with legal succession and the subject matter of the dispute between the Applicant and Respondent in relation to the F International shareholding was not therefore arbitrable.
The court held that firstly, the mere fact that the disputes as to the shareholding in the family companies should be considered and dealt with under PRC Succession Law did not mean it must only be dealt with by the Mainland Court, and could not be arbitrated and decided by the tribunal in accordance with the Succession Law. Secondly, the Mainland Court had already decided this issue against the Respondent in the Mainland Succession Action. Thirdly, the non-arbitrability of the dispute had not been raised in either the arbitration, or before the Mainland Court in the Mainland Succession Action.
The court said that as the underlying Share Entrustment Agreement and arbitration which was held in the Mainland were governed by PRC law, the court would give due regard and weight to the Xiamen Court’s findings and dismissal of the application to set aside the Award on the grounds of procedure and alleged failure to comply with PRC law, and to the Fujian Court’s judgment for the dismissal of the Mainland Succession Action. It said, the Mainland Courts’ decisions were evidence of the applicable Mainland law, and whether there was breach of such law. According to the Xiamen Court, there was no breach of the law on the procedure and scope of the submission to arbitration. According to the Fujian Court, the shares in F International did not constitute assets of the estate of the mother or father.
The court did not find the Respondent’s argument as to the subject matter of the dispute being non-arbitrable persuasive at all. It said that there was nothing in the Fujian Court’s judgment which held or could be inferred to mean that the dispute as to the shareholding in F International was not arbitrable. Nor was any such contention made by the Respondent to the Mainland Courts.
Further, the court pointed out that the Respondent did not claim in the arbitration that the subject matter of the dispute between the Applicant and himself, as to the interests in and ownership of the shares in F International, was not arbitrable. Nor did the Respondent claim, in his application to the Xiamen Court to set aside the Award, that the dispute was not arbitrable under PRC Succession Law.
The court said that the Respondent should be treated as having waived, or to be estopped from objecting to the arbitrability of the dispute and to the jurisdiction of the tribunal. It had been open to him to make such challenge or objection but he had failed to do so, either to the tribunal or to the supervisory court. He had thereby deprived the tribunal of the opportunity to consider the question of its jurisdiction and of the arbitrability of the dispute. This was a matter, the court said, which would justify the court of enforcement enforcing the award.
This court concluded that there was little if any merit in the Respondent’s claim that the dispute was not arbitrable under Mainland law. The court found that the Award determined the rights and obligations of the Applicant and Respondent as parties to the Share Entrustment Agreement, and was binding on them as to the ownership of the shares in F International. The Award did not, the court said, lack utility to render the subject matter of the dispute non-arbitrable.
Having given consideration to the substantial delay, lack of justification for the delay, lack of merits of the intended application to set aside the Enforcement Order, and the prejudice to the Applicant who had obtained a final and binding Award and been deprived of the fruits of the Award, the court refused to extend the time for the Respondent to set aside the Enforcement Order.
Comments
It should be noted that the court may not grant any extension of time for setting aside an arbitral award lightly, unlike that for interlocutory matters e.g. filing pleadings. In this case, the delay in making the application was extraordinarily long. Coupled with the lack of merits on the setting aside application, it is unsurprising that no extension of time was granted to the losing party.
This case also illustrates that mandatory injunctions granted by the arbitral tribunal compelling the losing party to do certain acts (transfer of shares in the present case) is enforceable in Hong Kong, which may be even more effective than enforcement in the Mainland, although it is not clear from the judgment why the transfer had not been completed a few years after the granting of the injunction.
For further information, please contact:
Justin Yuen, Partner, Deacons
justin.yuen@deacons.com
