Would the Court set aside an arbitral award based on procedural irregularity and public policy?
Introduction
In the case of COG v ES [2023] HKCFI 294, the
Hong Kong Court of First Instance (the “CFI”)
dismissed an application to set aside an enforcement order of an arbitral award
on the grounds that the applicant was unable to present its case in the
arbitration and that enforcement of the award is contrary to public policy. This
case again illustrates that Hong Kong Courts are slow to intervene in the enforcement
of arbitral awards.
Procedural background
The arbitration (“Arbitration”) was commenced pursuant to an arbitration clause
contained in a Sales Contract dated 21 November 2014 (“Contract”) made
between the Applicant and the Respondent, whereby the Applicant agreed to sell
to the Respondent a quantity of goods (“Products”). Disputes arose
relating to the Respondent’s failure to pay the purchase price of
US$25,572,360.54 for the Products delivered by the Applicant under the Contract.
An oral hearing was held before the arbitral tribunal (“Tribunal”) on
9 July 2021 (“1st Hearing”), which was attended by the
legal representatives of both parties. After the 1st Hearing,
both parties submitted supplementary materials to the Tribunal, and the Award
was issued on 11 November 2021.
On 24 June 2022, the CFI granted leave to
the Applicant to enforce an arbitral award dated 11 November 2021 issued by
CIETAC (“Award”) made in the Arbitration between the Applicant and the
Respondent. Under the Award, the Respondent was
ordered to pay to the Applicant US$21,072,360.54 (“Principal Sum”),
liquidated damages of 3.85% per annum on the Principal Sum, legal fees and an
arbitration fee.
On 12 July 2022, the
Respondent applied by summons to set aside the Order of
24 June 2022 (“Enforcement Order”), on the stated grounds that it had
been unable to present its case in the Arbitration, and that enforcement of the
Award would be contrary to public policy (“Setting Aside Application”).
By the summons, the Respondent applied
alternatively for an order that enforcement of the Award be stayed pending
resolution of a new arbitration to be commenced by the
Respondent on the Mainland.
In response to the
Respondent’s application to set aside the Enforcement
Order, the Applicant applied by summons
for the Setting Aside Application to be dismissed, with an order for immediate
enforcement of the Award. Alternatively, the
Applicant sought an order for security of US$26 million
to be furnished by the Respondent by payment into
court, failing which the Respondent should be prohibited from further conducting the Setting Aside
Application.
Issues
In its Setting
Aside Application, the Respondent claims that the parties had been engaged in
the sale and purchase of the Products since 2010, and that there had been a
total of 64 contracts made between the parties between January 2011 and
December 2014, with multiple deliveries and payments. the Respondent claims
that the Arbitration and the Award were isolated to one of the 64 contracts,
and alleges that it has a set-off or counterclaim against the Applicant under
the 64 contracts “overall”.
In gist, the
Respondent complained of the following alleged irregularities in respect of the
conduct of the Arbitration:
1.
the
Respondent claims that it was deprived of a fair opportunity to present its
case in the Arbitration on the question of “the involvement and calculation of
the purchase price of the multiple transactions across the 64 contracts”;
2.
the
Respondent did not have sufficient time
before the 1st Hearing to prepare its case in view of the complexity
of the Issue and the volume of documents and evidence involved;
3. in view of the issues raised in the submissions
filed after the 1st Hearing, it was inappropriate for the
supplemental submissions, the new evidence, and the new issues raised to be
dealt with on paper, without a further oral hearing; and
4. while the Respondent had applied to the Tribunal for a second oral hearing, its
application was rejected by the Tribunal without any justification or reason
given.
Legal principles
The parties accepted that the legal
principles applicable to the determination of an application for security are
those set out in Soleh Boneh International Ltd v Government of the
Republic of Uganda [1993] 2 Lloyd’s Rep 208 (“Soleh Boneh”) at 212 (applied in Guo Shun Kai v Wing
Shing Chemical Co Ltd [2013] 3 HKLRD 484) which include (i) the
strength of the argument that the award is invalid and (ii) the ease or
difficulty of enforcement of the award and whether it will be rendered more
difficult if enforcement is delayed.
Citing Soleh Boneh, the
CFI held that if the award is manifestly invalid, there should be an
adjournment and no order for security, and if it is manifestly valid, there
should be either an order for immediate enforcement, or else an order for
substantial security.
Ruling
1. Insufficient preparation time
The CFI held that it was open to the Respondent to seek an adjournment from the Tribunal if it considered that more time was required but the Respondent failed to do so, whether at or before the 1st Hearing. It should not be permitted now to claim that the preparation time was “grossly insufficient”.
2. The Tribunal’s decision of not having a further hearing
The CFI considers that the Tribunal was fully entitled and empowered under the governing arbitration rules to decide not to permit a further or oral hearing for the parties to examine the supplementary evidence. Article 42 of the CIETAC Rules provides that where evidence is submitted after the hearing, and both parties have agreed to examine such evidence by means of writing, they may so do. After the 1st Hearing, the Applicant and the Respondent had (through their representatives) agreed that they would examine further evidence by means of writing. There is no injustice or surprise that such procedure should be followed.
3. Justification of the Tribunal’s decision
The Respondent argued that the Tribunal had failed to
adequately explain its decision not to conduct a further hearing, and that this
undermined due process and was contrary to the basic notions of justice and
fairness, to entitle the Court to refuse enforcement of the Award. The CFI held
that there is no basis in this case to set aside the Enforcement Order on any
alleged ground of public policy.
Citing R v F [2012] 5
HKLRD 278, the CFI held that an award has to be read and understood in the
context of how the issue was laid and argued before the tribunal. An award made in the arbitration process is intended to be read by the
parties only, which parties would be familiar with the background and how the
issues had been argued.
The particular issue decided by the Tribunal
was whether to hold a further hearing after the 1st Hearing,
and when supplemental submissions and materials had been presented by both
parties. In the context of this particular case, the reason given by the
Tribunal, that it “had considered the actual circumstances of the case” and the
opinion expressed by both parties, and that it did not agree that a further
hearing was necessary, was held by the CFI to be proportionately adequate and
sufficient to enable the
Respondent to understand why
the Tribunal rejected its application.
The CFI added that
the Tribunal’s decision not to conduct a further hearing after the 1st Hearing
was a case management decision which it was entitled to make in the light of
the submissions made by the parties, the issues in dispute in the Arbitration
and all the circumstances of the case before the Tribunal. It is not a decision
which the CFI should lightly interfere with, in the absence of what the court
can find to be a serious denial of natural justice.
In response to the Respondent’s reliance of section 86(1)(c)(ii) of the Arbitration Ordinance (“Ordinance”),
the CFI explains that the applicable provisions should be section 95(2)(c)(ii) of
the Ordinance instead. Section 95(2)(c)(ii) of the Ordinance permits the
Court to refuse enforcement of an award if a party was “unable to present” its
case. The CFI held that what the courts seek to enforce and protect under
sections 86(1)(c)(ii) and 95(2)(c)(ii) of the Ordinance is a standard
of due process which can satisfy basic minimum requirements and are generally
accepted as essential to a fair hearing. A party’s right under the Ordinance is
to have a reasonable opportunity, as opposed to a “full opportunity” to present
its case, and that such a right is not unlimited in scope and breadth, to
entitle a party to make unreasonable demands and to ignore other relevant
principles and aims of efficiency and speedy resolution of the dispute.
The CFI concludes
that the
Respondent was given and had the reasonable opportunity to present its case, and it
did so in the manner agreed and decided by its legal advisers. The CFI
therefore dismissed the Respondent’s Setting Aside Application and awarded
costs on indemnity basis to the Applicant.
Key takeaways
The CFI decisions illustrates that challenging an arbitral award is very
difficult as the court would not lightly interfere with the Tribunal’s decision
in the absence of serious denial of natural justice. Parties and legal advisers are
reminded to be prudent in the conduct of their arbitration proceedings,
including making interim applications in a timely manner and considering
thoroughly whether they are agreeable to the procedures of the arbitration for
instance disposing of the proceedings on paper or with a hearing.
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
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Published by ONC Lawyers © 2023 |