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Would the Court set aside an arbitral award based on procedural irregularity and public policy?

2023-02-28

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 cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2023


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