The Hong Kong courts consistently adopt a robust and purely mechanistic approach to applications resisting enforcement of awards, but they will refuse enforcement in appropriate circumstances.
In the case of A v R1 and Another [2024] HKCFI 1511, the Court of First Instance (CFI) refused to enforce two related Mainland awards because various failings in the first arbitration seriously affected the structural integrity of the arbitral process and undermined due process, and the basic notions of justice have been violated in both arbitrations as a matter of Hong Kong public policy.
The circumstances of the case are rather unusual. They involve ex parte communications between the claimant, the administering institution and the tribunal resulting in a 7-year delay of the first arbitration. After the claimant was awarded a substantial sum, it started a second arbitration in which a different tribunal awarded the claimant a significant sum of interest starting to run from the commencement of the first arbitration, without considering the respondents’ argument that the delay of the first arbitration was solely caused by the claimant.
Background
The dispute arose out of a cooperation agreement entered into in April 2010 between SZ and A on one hand, and R1 and R2 on the other. Rs agreed to sell their company shares and land development rights to SZ and A for approx. RMB 234 million. SZ and A agreed to pay a 50% deposit. Any party in breach of its obligations would pay liquidated damages of 10% of the total consideration.
After SZ and A paid the deposit, the parties entered into a settlement agreement in December 2010. R1 and A agreed to discharge their obligations under the cooperation agreement. R1 agreed to repay the deposit to A and A agreed not to claim liquidated damages if R1 complied with the repayment schedule. However, R1 failed to comply, leaving approx. RMB 60 million outstanding.
A commenced Arbitration 1 against Rs on 9 October 2011, seeking payment of the outstanding sum and liquidated damages. The arbitration was administered by the Shenzhen Arbitration Commission (now known as the Shenzhen Court of International Arbitration or SCIA) under its 2011 Arbitration Rules. When accepting the arbitration, SCIA informed the parties that the arbitration fees had to be paid in full by 24 October 2011, failing which the arbitration would be treated as withdrawn.
The tribunal was constituted in December 2011 and an oral hearing was held in January 2012. In May 2012,the 5-month deadline under the 2011 Rules for the tribunal to render the award lapsed.
Seven years later, on 7 January 2019, the tribunal finally issued Award 1, finding in favour of A. However, Award 1 was only delivered to P and R2 respectively on 2 and 4 July 2019. The tribunal held Rs jointly and severally liable for a total sum of around RMB 74.6 million (including the outstanding sum, liquidated damages, interest for a short period in 2011, and costs).
In Award 1, the tribunal’s explanation for the timing of the award was that the case could not be concluded in time due to A’s own circumstances and that SCIA’s Director had approved an extension until 8 January 2019 for the tribunal to render the award despite A’s failure to pay (“Approval“).
On 31 March 2020, A then commenced Arbitration 2 against Rs, claiming interest upwards of RMB 77 million on the outstanding sum awarded under Award 1 from 9 October 2011 (commencement of Arbitration 1) to 31 March 2020. A different tribunal was appointed in Arbitration 2 and a hearing was held in April 2021.
The tribunal rendered Award 2 in August 2021. It held R1 liable to pay interest for around 8 years until August 2019. R2 was again held jointly and severally liable.
The setting aside application
R2 did not seek to set aside any of the awards in the Mainland. A’s enforcement actions in the Mainland were unsuccessful as Rs did not have assets there.
On 20 March 2023, A obtained leave from the CFI to enforce the awards in Hong Kong. On 11 April 2023, R2 applied to the CFI for an extension of time to set aside the enforcement order. On 23 August 2023, R2 applied for the setting aside of the enforcement order.
In the evidence filed in the enforcement proceedings, A’s case is that it had reached a deferral agreement with SCIA (“Deferral“). A did not provide any particulars, but the evidence showed that A paid the fees in two instalments. While A paid the first instalment in October 2011, it only paid the second instalment on 2 July 2019, following which the tribunal rendered Award 1. None of A, SCIA or the tribunal informed R2 of the Deferral.
R2 relied on three grounds to resist enforcement of the two Mainland awards under section 95 of the Arbitration Ordinance (Cap. 609). Its complaints were mainly directed at Award 1, as Award 2 was parasitic upon Award 1.
First, the procedure of Arbitration 1 was not in accordance with the parties’ agreement because:
- Applications to commence arbitration proceedings are treated under the 2011 Rules as having been withdrawn where an applicant fails to pay the fees within the prescribed time limit.
- The tribunal’s failure to render the award within the prescribed time had the effect of depriving the tribunal of its mandate and jurisdiction.
- A 7-year extension was inappropriate and, in any event, A’s inability to fully pay the fees could not have been a special circumstance justifying such a lengthy extension.
- The Deferral did not comply with SCIA’s fee rules which required payment before the hearing.
Second, R2 was unable to present its case in Arbitration 1 because it was kept in the dark of the Deferral and the Approval. It was therefore unable to address the tribunal on the undue delay and why Arbitration 1 should have been terminated upon A’s default. R2 suffered substantial prejudice because of the “snowballing” of interest, which had exceeded RMB 77 million by the time A claimed interest in Arbitration 2.
Third, it would be against Hong Kong public policy to enforce the awards because Award 1 was improperly rendered and inordinately delayed, and Award 2 failed to address R2’s complaint that the accrued interest was a result of A’s own delay of Arbitration 1.
In opposing these points, A argued that:
- SCIA’s Approval was within its case management powers which are not open to court intervention.
- The fee rules relied on by R2 did not apply to Arbitration 1 as they only took effect in 2016.
- Delay in rendering an award cannot per se be a good ground to set aside the award. R2 must demonstrate that the delay might have made a difference.
- R2 is deemed to have waived any procedural irregularity by failing to raise the issue before Award 1 was issued. R2 also failed to raise any objection to the tribunal or the Mainland Court thereafter, which constituted a breach of the principle of good faith.
The CFI’s decision
The CFI reiterated the relevant principles[1] on applications for extending time to set aside an enforcement order and for setting aside of that order:
- There is a need to promote enforcement of time limits for the expeditious dispatch of litigation in the public interest. But an applicant should not ordinarily be denied adjudication of its claim on the merits because of a procedural default, unless the default causes prejudice to its opponent which cannot be compensated by costs. The court will look at all relevant matters and consider the overall justice of the case. The primary aim is to secure the just resolution of disputes in accordance with the substantive rights of the parties.
- When considering enforcement, the court is concerned with the structural integrity of the arbitration. The conduct complained of “must be serious, even egregious”, before the court would find that there was an error sufficiently serious so as to have undermined due process. Even if sufficient grounds are made out, the court has a residual discretion and may nevertheless enforce the award.
Applying these principles to the circumstances of the case, the CFI retrospectively extended time for R2 to apply to set aside the enforcement order and refused enforcement of both awards.
The CFI concluded that R2’s complaints relating to the Approval and Deferral were made out under all three grounds relied on by R2:
- As to SCIA’s Approval, which was interwoven with the Deferral, the key issue was whether it affected the structural integrity of Arbitration 1. R2’s overarching complaint was that the Approval, which was obtained ex parte, granted undue leniency and leeway to A.
- Noting the paucity of evidence from A and SCIA, the CFI concluded that the Approval must have been obtained after the hearing in January 2012 based on ex parte submissions made by A to the tribunal, following which SCIA granted a 7-year extension. Depending on the timing of A’s submissions, Rs’ rights could have been substantively affected as the limitation period for civil claims in the Mainland is 2 years.
- There was no waiver or breach of good faith. R2 did not know during Arbitration 1 that the Approval was obtained ex parte. Award 1 was not delivered to R2 until July 2019. R2’s decisions not to seek to set aside Award 1 or object to enforcement in the Mainland were consistent with the choice of remedies principle under Hong Kong law.[2] As to Award 2, Rs raised the issue of delay in rendering Award 1 in Arbitration 2, but Award 2 did not deal with this complaint.
- A 7-year delay may not be sufficient to set aside Award 1 without more, but there was a clear breach of the Parties’ agreed procedure in how SCIA’s Approval was obtained and granted. Nothing in the 2011 Rules permitted the ex parte process adopted involving both the tribunal and SCIA. As a result, R2 was deprived of the opportunity to present its case on the issues, in particular when R2 had plainly presentable arguments. The extension was granted only because of A’s financial condition and R2 had respectable counterarguments, including the accrual of a limitation defence.
- The foregoing failings were sufficiently serious to affect the structural integrity of the arbitration and to have undermined due process. Enforcement of Award 1 would also violate the basic notions of justice in Hong Kong. This is because the opportunity of a party to present its case and a determination by an impartial and independent tribunal which was not influenced, or seen to be influenced, by private communications are basic to the notions of justice and morality in Hong Kong.[3]
The CFI then briefly dealt with R2’s complaint that enforcing Award 2 would be against public policy. The CFI accepted R2’s complaint, finding that Award 2 failed to deal with an issue put to the tribunal which failure caused substantial prejudice to R2. That is, the tribunal did not deal with R2’s “snowballing” of interest complaint caused by A’s malicious delay of Arbitration 1. R2 was left to guess whether the tribunal had dealt with this issue or overlooked it. The CFI also noted that on the evidence, A was allowed to claim interest exceeding RMB 77 million during the extended period during which the awarded interest had accrued, on the basis that A was unable to pay 40% of the fees (i.e., the meagre sum of approx. RMB 246,000 which it only paid in July 2019).
Takeaways
- Engaging in ex parte communications with a tribunal and/or the administering institution can seriously affect the structural integrity of the arbitral process and undermine due process. This may ultimately result in the setting aside and/or unenforceability of an award.
- Parties should generally abstain from any ex parte communications with an arbitrator or the institution, unless such communications are clearly permitted. For example, the 2024 HKIAC Rules expressly permit ex parte communications between a party or its representatives and a candidate to be designated as its arbitrator to advise the candidate of the general nature of the dispute, to discuss the candidate’s qualifications, availability, impartiality or independence, or to discuss the suitability of candidates for the designation of a third arbitrator where the parties or party-designated arbitrators are to designate that arbitrator.
[1] See Canudilo International Company Limited v Wu Chi Keung and Another [2023] HKCFI 700 and KB v S [2016] 2 HKC 325.
[2] Summarised in Song Lihua v Lee Chee Hon [2023] 5 HKLRD 488at¶¶9-10.
[3] Citing Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111 and Song Lihua at ¶¶9-10.
