9 January, 2019
As discussed in this post, Xiamen Xingjingdi Group Co Ltd (XJ) and various co-defendants affiliated with Eton Properties Ltd (together, EP) have been involved in a long-running dispute in multiple fora, including a PRC-seated CIETAC arbitration and several Hong Kong court proceedings. The case appears now to have come to an end, with the Court of Appeal (Court) confirming its position on common law actions to enforce arbitral awards and rejecting both parties’ applications for leave to appeal the Court’s 15 April 2016 judgment.
Background
XJ and EP entered into an agreement in 2003 (Agreement), under which EP would sell the right to develop a plot of land to XJ. The transaction was structured as an indirect purchase, with XJ to buy all shares in the EP entity holding the right over the land. However, shortly after entering into the Agreement, EP had a change of mind and decided to terminate the Agreement. XJ did not accept the termination and initiated CIETAC arbitration proceedings. The tribunal found in favour of XJ and ordered EP to “continue to perform the agreement“.
When XJ attempted to enforce the award (under statute) in Hong Kong in 2007, it became aware that EP had restructured the group during the course of the arbitration proceedings. As a result of the restructuring, the shareholding in the entity that was to be transferred was heavily diluted. Performance of the order in the terms of the award would therefore have been ineffective in transferring the right over the land to XJ.
XJ subsequently initiated a common law action in the Hong Kong courts seeking (among other things) damages from EP in lieu of the performance order in the award. The High Court dismissed the claim in full. On appeal, however, the Court held that XJ was entitled to claim for such damages (even though damages had not been awarded by the tribunal). It reasoned in its judgment that, whenever parties submit a dispute to arbitration, they create a new ‘implied contract’ that is separate from the contract underlying the dispute. This implied contract contains a promise, implied by law, that the losing party will honour the award. The Court found that a common law cause of action had accrued in favour of XJ as a result of EP’s failure to perform the award and the resulting breach of the implied contract. XJ could therefore claim for damages under this cause of action.
Leave to appeal
In the present application, the Court considered the parties’ requests for leave to appeal to the Court of Final Appeal. The plaintiff and the defendant each sought to appeal different parts of the Court’s judgment, on the ground that the questions raised were of “great general or public importance” for the purposes of s.22(1)(b) of the Hong Kong Court of Final Appeal Ordinance. Both parties’ requests were ultimately rejected, with the Court holding that the questions were not of sufficient public importance and/or not reasonably arguable. Two of the defendant’s suggested questions to the Court of Final Appeal (and why they were rejected) are particularly interesting. The defendant proposed to ask:
- Whether damages for loss of bargain may be granted to the plaintiff in a common law action to enforce an award which merely stipulated continuance of performance of contract?
- Whether the Court should have stayed the proceedings and required the plaintiff to go to arbitration if it wished to bring such a claim for damages?
The Court found that both of these questions were based on the mistaken premise that, when awarding damages in an action on the award, the Court is awarding damages for loss of bargain of the Agreement (which contains the arbitration clause). Instead, the Court noted, any damages awarded are to compensate for breach of the implied contract rather than for breach of the Agreement.
Addressing question 1, the Court commented that damages may well be different from the loss of bargain under the Agreement, as the causes of action are different. The Court also considered that it was not limited to giving judgment in terms of the award: the full range of remedies is available to the plaintiff for a breach of promise in the implied contract.
Regarding question 2, the Court held that the matter clearly concerned enforcement rather than a determination of the merits. As such, the action was a matter within the courts’ remit, rather than a matter for the arbitral tribunal to decide.
In principle, either party may now apply directly to the Court of Final Appeal for leave to appeal the Court’s judgment. Subject to any such application, this long running case appears to have come to an end.
Comment
The Court’s decision not to grant leave to appeal cements its findings on enforcement at common law and the consequences of a party’s breach of the implied contract to honour an award. The Court’s reasoning confirms that parties claiming under this cause of action may request remedies that differ from those provided for in the original award. This position is welcomed for its ability to protect parties who were successful in an arbitration, but are not able to enforce the award under statute, which can occur for various reasons.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
