The 10 Commandments Of Enforcement Of Awards in Hong Kong

Phillip Rompotis reviews the Hong Kong High Court’s decision in KB v S and Others [2015] HKCFI 1787, where three companies sought to set aside an order granting leave to enforce two arbitral awards made against them in a Hong Kong arbitration subject to the repealed Arbitration Ordinance Cap 341. The decision has generated considerable comment because it provides useful guidance to the Court’s approach to facilitation of the arbitral process and enforcement of arbitral awards.

Facts

KB (“Applicant”) entered into an agreement consisting of a Letter of Intent (“LOI”) with the three respondent companies (R1, R2 and R3, collectively, “Respondents”).  R1 wholly owned R2 which in turn wholly owned R3.  Under the LOI, R1 agreed to sell to the Applicant R1’s entire shareholding in R2 on the basis that R2 would be holding R3, which would own certain assets.  The LOI provided for Hong Kong law to be the governing law, with arbitration in Hong Kong.

Disputes arose between the parties under the LOI, and the Applicant subsequently commenced arbitration in Hong Kong.  The Respondents claimed that the LOI had either been terminated under its terms or was repudiated by the Applicant’s conduct.  The Applicant contended that the LOI remained valid and subsisting.  The Tribunal issued three awards: the 1st Award which dismissed the Respondents’ jurisdictional challenge, the 2nd Award, which held that the LOI was valid and subsisting (and, since the relevant proceedings on the Mainland were then under appeal, it was open to the Tribunal to make an award in favour of the Applicant) and, the 3rd Award, relating to the appropriate remedies and relief to be granted to the Applicant, holding that the Respondents should specifically perform the LOI.

Prior to the hearing that led to the making of the 3rd Award, the Respondents applied to set aside the 2nd Award, an application which was dismissed.  After the 3rd Award was issued, the Applicant applied for leave to enforce the 2nd and 3rd Awards as a judgement or order of the court, with leave being granted.  The Respondents then issued a summons to set aside the order granting leave, followed by the Applicant’s application to strike out the Summons.

The parties’ contentions

The Applicant argued that the Respondents’ Summons was made out of time, in addition to arguing that the Respondents were abusing the court process since the Summons was issued without a supporting affidavit.  As a result, the Summons should be struck out.

The Respondents argued that the Order granting leave should be set aside on the ground that the Awards were not valid and not in a form which could be entered as a judgement.  In particular, the Respondents claimed that the Tribunal had ignored the presence of R3 at the hearing of the issues which constituted the subject matter of the 3rd Award, the Tribunal had failed to consider the position of R3 properly, or at all, and to consider the position between all the parties to the Arbitration as a result of which the 3rd Award and any related court order will not be recognised or enforced by any court on the Mainland, and that R3 had been deprived of the right to present its case in the Arbitration and to raise its concerns as to the enforceability of the 2nd and 3rd Awards on the Mainland.

The Court

The Court set out its approach towards enforcement of arbitral awards:

  • The primary aim of the court is to facilitate the arbitral process and to assist with enforcement of arbitral awards.
  • Under the Arbitration Ordinance, the court should interfere in the arbitration of the dispute only as expressly provided for in the ordinance.
  • Subject to the observance of the safeguards that are necessary in the public interest, the parties to a dispute should be free to agree on how their dispute should be resolved.
  • Enforcement of arbitral awards should be “almost a matter of administrative procedure” and the courts should be “as mechanistic as possible” (Re PetroChina International (Hong Kong) Corp Ltd [2011] 4 HKLRD 604).
  • The courts are prepared to enforce awards except where complaints of substance can be made good. The party opposing enforcement has to show a real risk of prejudice and that its rights are shown to have been violated in a material way (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd [2002] 4 HKLRD 1 (CA)).
  • In dealing with applications to set aside an arbitral award, or to refuse enforcement of an award, whether on the ground of not having been given notice of the arbitral proceedings, inability to present one’s case, or that the composition of the tribunal or the arbitral procedure was not in accordance with the parties’ agreement, the court is concerned with the structural integrity of the arbitration proceedings. In this regard, 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 (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd [2012] 4 HKLRD 1 (CA)).
  • In considering whether or not to refuse the enforcement of the award, the court does not look into the merits or at the underlying transaction (Xiamen Xingjingdi Group Ltd v Eton Properties Limited [2009] 4 HKLRD 353 (CA)).
  • Failure to make prompt objection to the tribunal or the supervisory court may constitute estoppel or want of bona fide (Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKCFAR 111).
  • Even if sufficient grounds are made out either to refuse enforcement or to set aside an arbitral award, the court has a residual discretion and may nevertheless enforce the award despite the proven existence of a valid ground (Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKCFAR 111, 136A-B).
  • The Court of Final Appeal clearly recognized in Hebei Import & Export Corp v Polytek Engineering Co Ltd that parties to the arbitration have a duty of good faith, or to act bona fide.

Summons without supporting affidavit

The Court noted that it was an abuse of process to issue a summons to set aside an order granting leave to enforce an arbitral award without a proper supporting affidavit, more so if the summons did not disclose a ground for setting aside.  The same considerations apply for an application to set aside an order granting leave to enforce and arbitration award and an application to set aside an award.  The court emphasised that the relevant rules under O 73 of the Rules of the High Court setting out the timetable and requiring affidavits in support to be filed with the summons were there to achieve quick resolution of the status of arbitral awards, as parties using arbitration as their dispute resolution method were entitled to expect.

As a note to practitioners, the Court stated that it was bad practice for solicitors to make affidavits on behalf of their clients when facts pertinent to a dispute have to be deposed to.

Summons out of time

The Court found that, contrary to RHC O 73 r 10(6), the Summons was only issued after the expiry of 14 days from the due service of the Order at the registered office of R1 and R2.  The Summons was clearly made out of time, so far as R1 and R2 are concerned.  Yet, R1 and R2 failed to apply for leave to make their Summons out of time.  Even if they did, the Court was unable to find compelling reasons to allow such leave, particularly in view of the lack of merits in the Respondents’ application.

R3’s application to set aside was made within 14 days of the service of the Order on it.  The more pertinent question was therefore whether it had shown that there were grounds to set aside the Order and for not enforcing the 2nd and 3rd Awards.

Lack of merits in the application to set aside the order

The Court held that there was no basis for the Respondents to claim that the 2nd Award was invalid since the Court had rejected the Respondent’s application to set it aside under HCCT 18/2014.  The 3rd Award was founded on the 2nd Award which remained as a valid arbitral award in Hong Kong.

R3’s claim that it was unable to present its case in the Arbitration was not a ground stated in the Summons, hence there should have been an application to amend the Summons to raise this ground.  However, the Respondents did not provide any compelling reasons for the amendment, nor had they made any application to amend the Summons.  The Court considered that even if such application had been made, they would have failed to establish this ground based on the evidence adduced.  In particular, R3 did not identify any issue which had not been presented to and dealt with by the Tribunal such that it could be said to have been prejudiced in a material way.  In addition, R3 did not draw to the attention of the Tribunal and the Court that its position had been “ignored”, or it had not been able to present its case, and that by staying silent and keeping the complaint up its sleeve, R3 was not acting bona fide.

It was held that the claims were attempts to seek the Court’s review and determination of the merits of the 2nd and 3rd Award, which are never permissible in an application to set aside an arbitral award or in an application to set aside an order granting leave to enforce an award, the Court’s concern being with the structural integrity of arbitration proceedings and not the substantive merits.

The Court considered that the burden was on the Respondents to clearly formulate and state the precise grounds of their application to set aside the Order.  It was held that there were no merits in the Respondents’ application to set aside the 2nd Award and the 3rd Award on the grounds stated.

The Respondents’ breach of their duty of good faith

The Court rejected the Respondents’ argument that it had residual discretion to remit or set aside an arbitral award for uncertainty.  Even if there was any residual discretion, such discretion would not be exercised in view of the Respondents’ conduct, including their failure to state the precise grounds on which they relied, as well as the lack of merits in their application to set aside the Order.  The Court concluded that the Respondents had simply been employing delaying tactics to frustrate the enforcement of the arbitral awards.

The Court held that the Summons was held to be an abuse of process, that the Respondents had failed to act bona fide and that they were in breach of their duty of good faith.  The Summons was struck out and the Respondents were ordered to pay costs to the Applicant on an indemnity basis.

Conclusion

The decision provides another example of the Hong Kong Court’s support for enforcement of arbitral awards and the high burden faced by parties seeking to resist enforcement.  While the bona fide and good faith concepts in arbitration enforcement proceedings echoed previous decisions raising these issues, little clarity was provided in formulating the parameters of the concept.  Nonetheless, the decision highlights the importance of adhering to relevant procedures when resisting enforcement, the difficulties of mounting an attack at the enforcement stage and the continued practice of the court in imposing indemnity costs orders on parties that bring unsuccessful challenges to arbitration awards.

CLICK HERE FOR A PDF

See also the following articles in respect of the case:

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

View

Leave a Reply

Your email address will not be published. Required fields are marked *