HK Refuses Set Aside and Rejects Public Policy Argument

In X v Jemmy Chien [2020] HKCFI 286, the Hong Kong Court of First Instance dismissed an application to set aside an arbitral award, finding that the plaintiff’s argument that the underlying service agreement between the plaintiff and the defendant was valid and not a sham, as alleged, and rejected the argument that enforcement of the award would be contrary to public policy.

Edward Chin, Pupil Barrister, provides the following summary of the case.

Background

The arbitral award concerned a service agreement between the plaintiff company and a Taiwanese defendant. The plaintiff contended that the defendant was not the true party to the service agreement, rather, the agreement was a sham to conceal the identity of a Taiwanese third party, Mr Chen, whom the plaintiff had been dealing with. The plaintiff further argues that this breached Taiwanese laws, thus the enforcement of the award would give effect to a sham and would be contrary to public policy in Hong Kong (although nothing mentioned violated Hong Kong laws). After hearing the evidence, the arbitrator concluded that the defendant was the true party to the service agreement.

The plaintiff then applied to set aside the award on the grounds that there was no valid arbitration agreement between the parties and the award conflicted with public policy of Hong Kong.

Valid arbitration agreement?

The plaintiff argued that prior to the execution of the service agreement there had been no relationship between the defendant and the plaintiff and the Group of which the plaintiff formed part of, rather, the plaintiff had all along been dealing with the third party. The defendant signed the service agreement as the representative of the contacting party. The plaintiff argued that the defendant: did not participate in the negotiation of the service agreement, had little knowledge of its terms and the duties and obligations in the service agreement, and never had any communication with plaintiff or the Group. In contrast, the third party had performed the services under the agreement. The plaintiff argued Taiwanese law did not allow this. It should be noted that the service agreement was governed by PRC law, whereas the arbitration agreement contained in clause 7 of the service agreement is governed by Hong Kong law. However, the arbitrator found on the merits that the defendant was the true party to the service agreement, and, as a result, a true party to the arbitration agreement.

During these proceedings, the Plaintiff argued that the arbitrator erred in how it applied the “literal approach” when construing the service agreement. However, the judge ruled that the arbitrator’s decision was based on the evidence presented during the arbitration, and the court found no reason to disturb that decision.

The court was clear that even if there were “[a]llegations of fraud or illegality affecting the underlying contract” it does “not render an arbitration agreement null and void, or render the dispute unarbitrable.” Thus, Chan J held that there was an arbitration agreement between the parties.

The Court stated [21]:

“In deciding on the correctness of the arbitrator’s decision on the existence of the Service Agreement and the Arbitration Agreement between the Plaintiff and the Defendant, and his consequential conclusion on jurisdiction, it is not the role of the Court to review the merits or correctness of the arbitrator’s findings of credibility and of fact. On reading the Award on merits, I cannot conclude that the arbitrator had made any mistake in finding that there was a valid agreement between the Plaintiff and the Defendant personally.”

Contrary to public policy in Hong Kong?

The court noted that public policy grounds should be narrowly construed. And most importantly, the “[n]on-enforcement of awards has to be balanced against other public interests of upholding parties’ agreement to arbitrate their dispute, facilitating enforcement of arbitral awards, and observing obligations under the New York Convention for enforcement of arbitral awards”

In this case, the plaintiff had knowledge the defendant attempted to conceal Mr Chen’s identity, a breach under Taiwanese law, by entering into the service agreement. The plaintiff continued without objection. Thus, by setting aside arbitral award, it would affirm the Plaintiff’s own wrongdoing by proceeding with the service agreement.

Even if the public policy ground was made out, stated the court, the court still has the residual discretion to not set aside the award. As a result the court did not set aside the award on public policy grounds.

At [29-31], the Court stated:

“What is pertinent is that if it was true, that the Service Agreement was made between the Plaintiff and the Defendant in the circumstances claimed by the Plaintiff: allegedly as a sham and smokescreen to hide the true transactions between the Plaintiff and Chen and to divert business away from the 3rd Party, this was all with the agreement, to the knowledge and with the assistance of the Plaintiff acting in concert with the Defendant. To accept the Plaintiff’s application of resisting enforcement of the Award is tantamount to permitting the Plaintiff to rely on its own wrongdoing and to avoid payment for the services rendered to it under the Service Agreement. I fail to see how public policy interests would justify the Court so doing.”

“…the ground on public policy has always been narrowly construed by the Court. Non-enforcement of the Awards has to be balanced against other public policy interests of upholding parties’ agreement to arbitrate their dispute, facilitating enforcement of arbitral awards, and observing obligations assumed under the New York Convention for enforcement of arbitral awards.”

“In short, I am not satisfied that the Award should be set aside as the Plaintiff seeks. Even if the ground of public policy was made out, I would not in the exercise of my residual discretion (as recognized by the Court to exist, per Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, 136A-B), and for the reasons set out in paragraph 29 above, set aside the Award.”

Other matters

In addition, the court also ruled on a pleading point. All applications to set aside an arbitral award under O 73 r 5(4)(b) Rules of High Court required that the grounds must be set out in the affidavit precisely and with the necessary particulars with the originating summons. The relevant parts of the affidavit in this case stated that “if the Arbitration Agreement contained in the Service Agreement is enforceable, the Court would be enforcing a sham agreement whereby the Defendant was never meant to be the true party”. There was no mention of the illegality of the service agreement and that Mr Chen’s acts were illegal. Instead, the originating summons only stated that the award was in conflict with the public policy of Hong Kong.

The court held that an O 73 r 5(4)(b) application could only be based on the grounds set out in the originating summons, which in this case, neither the originating summons nor the affidavit contained what the plaintiff argued.

Conclusion

The key takeaway of this case is that the Hong Kong Courts is reluctant to disturb arbitral awards on policy grounds. It firmly believes that “the arbitrator was the best person to decide on question of the parties’ intention, on the basis of the testimony from the witnesses he heard, and the documentary evidence which the parties produced in the course of the arbitration. It is not the role of the Court to review the merits or correctness of the arbitrator’s findings of credibility and of fact”

See also review of this case by Herbert Smith Freehills

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 Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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