Court of Appeal provides clarification on “good faith” principle in the context of enforcement of arbitral awards

Hong Kong courts have a discretion to enforce foreign awards under the New York Convention (“NYC“) even though a ground for resisting enforcement has been established. The courts may exercise the discretion where a party has breached the “good faith” principle which is deemed to be enshrined in the NYC. Estoppel is regarded as a fundamental principle of good faith. The principle may, for example, be invoked against a party resisting enforcement where it has failed to raise an objection with the tribunal and carried on with the arbitration, keeping the point up its sleeve and only raising it at the enforcement stage.

This article discusses a recent decision of the Court of Appeal rendered in Astro Nusantara International v PT Ayunda Prima Mitra (CACV 272/2015) on 5 December 2016 in which the court provided clarification of the “good faith” principle. It also discusses the takeaway points from the court’s decision to uphold the decision of the Court of First Instance not to extend time but to grant enforcement although there was no valid arbitration agreement.

The Singapore arbitration

The underlying dispute arose from a joint venture agreement between companies belonging to the Indonesian Lippo group and companies within the Malaysian Astro group. The latter commenced arbitration in Singapore. In the arbitration, three of the eight claimants were added to the arbitration by the tribunal (“Additional Parties”), although they were not parties to the arbitration agreement. First Media (“Respondent“) objected to the tribunal’s joinder order, but did not seek immediate court review of the tribunal’s decision pursuant to Article 16(3) of the UNCITRAL Model Law (“UML“).^[1] Instead, the Respondent defended the arbitration. In 2009 and 2010, the tribunal ultimately rendered five awards in favour of the claimants.

The decision of the Singapore Court of Appeal refusing enforcement

The Respondent chose not to exercise the “active remedy” of setting aside the awards in Singapore; instead the Respondent exercised the “passive remedy” of resisting enforcement after the claimants sought to enforce the awards in Singapore later in 2010. In October 2013, the Singapore Court of Appeal (“SCA“) refused enforcement of the awards as between the Additional Parties and the Respondent on the ground that there was no valid arbitration agreement and the tribunal lacked jurisdiction over the Additional Parties.

Importantly, the SCA concluded that although the Respondent did not seek immediate court review of the tribunal’s ruling on jurisdiction under Article 16(3) of the UML (noting that this is not a “one‑shot” remedy) or challenge the awards, it was not prevented from raising the objection at the enforcement stage. This is because the “choice of remedies” principle enshrined in the UML gives an objecting party the right to reserve its position and raise its objections if and when enforcement is sought.

The decision of the Court of First Instance

In October 2010, the claimants sought to enforce the awards in Hong Kong. The Respondent did not resist enforcement within the 14-day time limit under Hong Kong law. Only in January 2012, around 14 months too late, did the Respondent apply for an extension of time to allow it to resist enforcement, as it had transpired that it may have assets in Hong Kong.

In February 2015, Chow J refused the Respondent’s application. Although Chow J accepted that the tribunal lacked jurisdiction and that Hong Kong recognizes the “choice of remedies” principle, he refused to extend time because the delay was substantial and the result of a deliberate and calculated decision by the Respondent. Moreover, Chow J concluded that even if he had extended time, the Respondent would have been precluded from relying on grounds for refusal because it had breached the “good faith” principle. Chow J specifically found in this regard that the Respondent breached its duty to act in good faith because it took a deliberate decision to defend the claim on the merits in the hope that it would succeed and to keep the jurisdictional point in reserve to be raised in the enforcement court only, despite being fully aware of the grounds for objection.

The decision of the Court of Appeal

The Court of Appeal (“CA“) upheld Chow J’s decision not to extend time, but disagreed with Chow J’s reasoning on the “good faith” principle:

• First, in considering whether the “good faith” principle may be successfully invoked to resist enforcement, the SCA’s finding that the awards were made without jurisdiction had to be taken into account. Had Chow J taken the fundamental defect of the awards into account, he could only have exercised his discretion to refuse enforcement.
• Secondly, in considering whether a party’s conduct of the arbitration was in breach of the “good faith” principle, it is particularly relevant to consider the law of the seat and the ruling of the supervisory court. As conclusively determined by the SCA, the Respondent was entitled to act in the way because it did not remain silent about is jurisdictional objection, but expressly and effectively reserved its rights: although the Respondent did not seek court review of the tribunal’s decision on jurisdiction or challenge the awards, it was not prevented from raising the objection at the enforcement stage, because the “choice of remedies” principle allows an objecting party to reserve its position and raise its objections if and when enforcement is sought.
• Thirdly, it is important to have regard to the “choice of remedies” principle that gives parties a right to choose between the “active” and “passive” remedies. The principles of “good faith” and “choice of remedies” are not mutually exclusive, but complementary. In applying the “good faith” principle, the court should not adopt a dogmatic approach, but give regard to the full circumstances why an “active” remedy is not pursued or to other relevant circumstances, such as whether a party clearly reserved its rights so that the opposite party was not misled.

 Takeaway points

• Under Hong Kong law, parties to an arbitration have a duty to act in good faith. If a party objects to the tribunal’s jurisdiction, it will not be held in breach of the “good faith” principle if it invokes the objection at the enforcement stage, provided it has effectively reserved its rights in the arbitration and not misled the opposite party into the belief that it will not raise the objection at a later stage.
• Unless an award is set aside by the supervisory court at the seat, it remains final and binding between the parties. Once recognised and declared enforceable in Hong Kong, the award can be enforced in the same manner as a local court judgment.
• Chow J’s decision not to extend time, which was a discretional one and upheld by the CA, illustrates the drastic consequences of a deliberate decision by a party who has effectively reserved its rights in the arbitration not to resist enforcement in Hong Kong within the statutory time limits on the assumption that it has no assets there. A debtor may well come into possession of assets at a later stage (for example, it may become entitled to a monetary claim against a third party in the jurisdiction). If the award creditor manages to locate these assets after substantial time has passed since the award was recognised and declared enforceable, it will be too late for the award debtor to resist enforcement, even if it can demonstrate that the award has a fundamental defect.

This might not be the end of the case in Hong Kong, as it might proceed to the Court of Final Appeal. We will continue to monitor this case and provide an update in due course.

[1] Under Article 16(3) of the UNCITRAL Model Law, if a party objects to the tribunal’s jurisdiction and the tribunal rules, as a preliminary question, that it has jurisdiction, a party “may”, within 30 days, request the supervisory court to review the tribunal’s decision. The Singapore Court of Appeal found that this was not a “one-shot remedy” and that a party can still seek court review at the setting aside or enforcement stage.