The only recourse for a party seeking to challenge a Hong Kong award is to apply to the Hong Kong Court of First Instance (“Court“) for the setting aside of the award. The grounds under Hong Kong law mirror the setting aside grounds under the UNCITRAL Model Law and the grounds for refusing enforcement under the New York Convention.
In dealing with setting aside applications or applications to refuse enforcement, the Court is concerned with the structural integrity of the arbitration proceedings. 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 denied due process. Even if sufficient grounds are made out either to set aside an award or refuse enforcement, the Court has a residual discretion to enforce the award despite the proven existence of a valid ground.
In X v Jemmy Chien, the Court heard an application by the plaintiff (P) to set aside an award (“Award“) and a cross-application by the defendant (D) to enforce the Award. P asserted that there was no valid arbitration agreement and the Award was in conflict with public policy. The case is yet another example of the robust position the Court takes when considering setting aside applications or applications to refuse enforcement.
This article discusses how The Honourable Madam Justice Mimmie Chan, the judge in charge of arbitration-related court proceedings, approached P’s challenge as well as an application by D for an order that P gives security pending the outcome of the challenge.
- Underlying dispute and arbitration proceedings
In April 2010, P and D entered into a service agreement (“SA“). D agreed to provide certain services against a commission of 5% on payment received from P’s customers. The SA was governed by PRC law and contained an arbitration clause providing for arbitration with a sole arbitrator in Hong Kong.
A dispute arose over payment of outstanding commission under the SA. D referred the dispute to arbitration, claiming around USD 1.7 million. P challenged the arbitrator’s jurisdiction, alleging that there was no valid arbitration agreement between the parties, as D had signed the SA as agent for one Mr. Chen (“C“), who was the true party to the SA. P alleged that D and C proceeded this way to conceal that C had an interest in the SA: P argued that on the one hand, C was the Vice President of a third-party company (“TP“), which acted as an intermediary that ordered products from P’s group and resold them to its customers; on the other hand, C was to perform the SA which was prejudicial to TP’s interests and in conflict with C’s duties to TP. D denied these allegations, stating that it had merely delegated the performance of the duties under the SA to C.
On 25 February 2019, the arbitrator issued his award on the merits, ruling in favour of D and ordering P to pay the commission. On jurisdiction, the arbitrator ruled that D was the true party to the SA, having considered PRC law as well as Hong Kong law (which governed the arbitration agreement).
P applied to the Court to set aside the Award on the grounds that (i) there was no valid arbitration agreement and (ii) the Award was in conflict with the public policy of Hong Kong.
In July 2019, D applied for leave to enforce the Award and an order requiring P to pay security as a condition for allowing P to pursue its setting aside application. Chan J heard the security application in August and dismissed it in September 2019. On 4 March 2020, Chan J also dismissed the setting aside application.
- Decision upholding the Award
In deciding the application, Chan J had to (i) review the arbitrator’s jurisdictional decision that D was the true party to the arbitration agreement and (ii) consider whether enforcing the arbitration agreement and Award would be in conflict with the public policy of Hong Kong.
There was a valid arbitration agreement between the parties
On reviewing the arbitrator’s jurisdictional decision, Chan J noted that the standard of review was one of correctness (in the sense that the arbitrator was correct in finding that he had jurisdiction), limited to true questions of jurisdiction. Chan J was conscious that it was not the role of the courts to review the merits of the tribunal’s findings of credibility and fact.
Chan J concluded that the arbitrator did not make any mistake in finding that there was a valid agreement between P and D personally. The decision on whether, on construction of the SA as a whole, D was a party to the SA, was a finding of law made on the basis of the facts. The facts were in turn found by the arbitrator on the basis of the parties’ evidence. The arbitrator was the best person to decide on questions of the parties’ intention, on the basis of witnesses testimony and documentary evidence.
Enforcement of the arbitration agreement and Award not contrary to public policy
Chan J then went on to consider whether enforcing the arbitration agreement and allowing the Award to stand would be contrary to public policy.
At the hearing before Chan J, counsel for P argued that it was illegal under Taiwanese law for C and P to enter into a contract for the performance of the services by C, as it would put C in breach of his fiduciary duties to TP. The SA was a sham agreement because the parties’ real intention at the time of the contract was to hide the illegality of C contracting with P. When P was not intended to be the true party, he could not have been intended to have the benefit of the arbitration agreement either.
However, P’s supporting affidavit only asserted that if the Court allowed the Award to stand, it would give effect to a sham agreement, as D was never meant to be the true party to the SA. Similarly, a legal opinion submitted with the affidavit merely dealt with a breach of fiduciary duties.
Chan J concluded that the public policy ground was not made out:
- Since an arbitration clause in a contract was an agreement separate from the underlying contract, allegations of fraud or illegality affecting the contract do not automatically render the arbitration agreement null and void. The real question was whether the arbitration clause could be impeached by the existence of fraud or illegality.
- Even if the services under the SA were intended to be performed by C, this did not affect the validity of the arbitration agreement. It was still open to P and D to separately agree that any dispute as to performance and payment under the SA was to be arbitrated between P and D.
- The supporting affidavit was to state precisely and with the necessary particulars the facts and grounds relied upon in the setting aside application. However, P’s affidavit did not mention at all illegality and in particular not the allegations raise by P’s counsel, and the legal opinion did not state that performance of the SA involved the commission of a criminal offence or illegal act in Taiwan.
- Moreover, even if the SA was a sham to hide the true transaction between P and C, this occurred with the agreement of P acting in concert with D. Accordingly, setting aside the Award would mean to allow P to rely on its own wrongdoing and avoid payment for services rendered to it. Chan J made clear that for this reason, she would exercise her residual discretion to uphold the Award, even if P had made out the public policy ground.
- Decision dismissing D’s application for security
D had applied for security as a condition for the further conduct of P’s setting aside application which Chan J dismissed. In reaching her decision, Chan J had to consider two important factors:
- First, Chan J had to consider the strength of the argument that the Award was invalid, as perceived on a brief consideration by the Court. If the Award was manifestly invalid, the Court should adjourn the matter and not grant security; if it was manifestly valid, the Court should either grant immediate enforcement or substantial security. In between, there were various degrees of plausibility in the argument for invalidity and the Court had to be guided by its preliminary conclusion on the point. P argued that the Award was manifestly invalid. For reasons similar to Chan J’s findings on upholding the Award, she was not satisfied that the Award was manifestly invalid.
- Second, Chan J had to consider the ease or difficulty of enforcement of the Award and whether it would be rendered more difficult, for example, by movement of assets or by improvident trading, if enforcement is delayed. P submitted evidence to show that it only had assets outside of Hong Kong. The lack of assets in Hong Kong was a relevant consideration and the focus should be on whether difficulty of enforcement was increased due to the delay. This is because security was not to facilitate the enforcement process by requiring assets to be brought into Hong Kong where there were none before.
Since the hearing of P’s setting aside application was only three weeks away and there was no evidence of any risk of dissipation or delaying tactics by P, Chan J concluded that there was no real risk that enforcement in Hong Kong would be more difficult as a result of the interim delay.
- Key takeaways
- When signing a contract, parties should ensure that the execution clause leaves no doubt as to who are the contracting parties and in what capacity persons are signing it.
- An affidavit in support of the setting aside application must state the grounds relied upon precisely and with the necessary particulars; careful consideration of the grounds should be given before filing an application, as formulating a ground in more detail at the hearing may come too late.
- The Court will intervene only in rare circumstances where there is a true question of jurisdiction. In reviewing a tribunal’s jurisdictional decision, the Court will not to stray into the merits of findings of fact and law made by the tribunal and findings on issues not necessary for the question of jurisdiction.
- The public policy ground is often invoked by parties as a supportive “catch-all” ground in conjunction with other grounds. However, Hong Kong courts have always construed this ground narrowly and it has rarely been invoked successfully.
Award creditors, who are seeking enforcement of an award while defending a setting aside application, should carefully consider what assets the award debtor has in Hong Kong and assess whether there are grounds for applying for security if the Court is minded to await the outcome of the setting aside application rather than ordering immediate enforcement.
 The only exception is where parties have agreed to allow an appeal on a question of law under Section 5 of Schedule 2 to the Arbitration Ordinance (Cap. 609). In addition to the setting aside grounds, parties can agree that the award may be challenged on the ground of serious irregularity pursuant to Section 4 of Schedule 2 to the Arbitration Ordinance. Parties to international arbitration usually do not make use of these two options.
 See Grand Pacific Holdings Ltd v Pacific China Holdings Ltd  4 HKLRD 1 (CA)
 See Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111
 X v Jemmy Chien  HKCFI 286. P also challenged an subsequent award on interest and costs. For reasons of simplicity, the article only refers to the award on the merits.
 X v Jemmy Chien  HKCFI 2172
 The parties were not in dispute over the legal principles applicable to setting aside applications concerning the existence of an arbitration agreement and the arbitral tribunal’s jurisdiction. These principles are set out in Dallah Real Estate and Tourism Co v Ministry of Religious Affairs of the Government of Pakistan  1 AC 763 and were applied by the Hong Kong Court of First Instance in S Co v B Co  6 HKC 421
 The applicable principles, which were not in dispute between the parties, are as set out in Soleh Boneh International Ltd v Government of the Republic of Uganda  2 Lloyd’s Rep 208 at 212 and have been applied in Hong Kong in Guo Shun Kai v Wing Shing Chemical Co Ltd  3 HKLRD 484 and Dana Shipping and Trading SA v Sino Channel Asia Ltd  1 HKC 281