U v. S

HCCT 1/2018

[2018] HKCFI 2086

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 1 OF 2018

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REASONS FOR DECISION

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1.  On 6 February 2018, this Court granted the ex parte application made by the Applicant under s 92 of the Arbitration Ordinance (“Ordinance”) for leave to enforce an arbitral award made in a CIETAC arbitration dated 30 June 2017 against the Respondent (“Award”). The Award was for the Respondent’s payment to the Applicant of a sum of US$20 million, with interest and costs.

2.  On 20 April 2018, the Respondent applied under s 95 of the Ordinance to set aside the order for such leave (“Order”) (“Setting Aside Application”). The grounds relied upon are that the Respondent was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings, that the Award contains decisions on matters beyond the scope of the submission to arbitration, and that it would be contrary to public policy to enforce the Award. The Respondent also applied to adjourn the Setting Aside Application until the final disposal of its application to the supervisory court on the Mainland to set aside the Award (“Adjournment Application”). The application to the supervisory court had been duly made on 24 July 2017, a hearing has taken place, and a decision is pending. On 23 May 2018, the Applicant and Respondent applied, by consent, for the Adjournment Application to be heard prior to the hearing of the Setting Aside Application, which consent application was granted by the Court.

3.  After hearing the parties on 6 September 2018, I acceded to the Adjournment Application, on condition that the Respondent should make payment into court of US$2 million within 28 days, in default of which the Setting Aside Application be dismissed. The following are my brief reasons for the decision.

4.  The parties do not dispute the principles applicable to the Setting Aside Application and the Adjournment Application, which are clear, and need not be repeated here (Soleh Boneh International v Uganda and National Housing Corp [1993] 2 Lloyd’s Rep 208, Guo Shun Kai v Wing Shing Chemical Co Ltd [2013] 3 HKLRD 484, Dana Shipping and Trading SA v Sino Channel Asia Ltd [2017] 1 HKC 281, L v B, unreported, HCCT 41/2015 5 May 2016).

5.  The Respondent’s Setting Aside Application is made on the following grounds to oppose enforcement of the Award in Hong Kong:

(1)   the Respondent had not been properly served with the notice of arbitration dated 30 September 2015 which initiated the arbitration which took place on the Mainland and led to the Award, nor with the documents relating to the arbitration, so as to be deprived of the right to appoint an arbitrator (“lack of notice Ground”);

(2)   the arbitration dealt with the same subject matter as an earlier arbitration which was initiated in August 2012 between the Applicant and Respondent, and which had led to a 1^st award dated 30 December 2013 (“1^st Award”) (“non bis in idem Ground”);

(3)   the findings of the Tribunal made in the Award were inconsistent with the 1^st Award;

(4)   the Award contains decisions on the contractual rights and interests of a third party which fell outside the scope of the submission to the arbitration; and

(5)   it would be contrary to public policy to enforce the Award, by reason of the above matters.

6.  The Applicant and Respondent were parties to an Agency Agreement dated 4 March 2005 (“Agency Agreement”), whereby the Applicant agreed to act as agent to facilitate the Respondent’s acquisition (“Acquisition”) of shares in a company referred to as PK Corporation (“PK Shares”). Under clause 5 of the Agency Agreement, the Respondent agreed to remunerate the Applicant for its services by payment of agency fees (“Fees”), which were stated to be payable upon the completion of the Acquisition at a price acceptable to the Respondent. Disputes arose between the parties as to the Fees payable and, pursuant to the arbitration clause contained in the Agency Agreement, the Applicant filed a request for arbitration with CIETAC on 30 August 2012 to claim for the Fees alleged to be due (“1^st Arbitration”).

7.  It is not disputed that the 1^st Arbitration led to the 1^st Award, by which the arbitral tribunal (“1^st Tribunal”) dismissed the Claimant’s claims, on the basis that the conditions stipulated in clause 5 of the Agency Agreement for payment of the Fees had not been satisfied at the time of the commencement of the 1^st Arbitration.

8.  Then on 30 September 2015, the Applicant served notice of a second arbitration (“2^nd Arbitration”), on the basis of “new facts” having arisen since the 1^st Award, and this led to the Award made on 30 June 2017, whereby the Respondent was ordered to pay US$20 million and interest to the Applicant in respect of the Fees payable under the Agency Agreement.

9.  The Respondent claims that the notice of arbitration in respect of the 2^nd Arbitration was purportedly served on Mr A (“A”), the former legal representative of the Respondent, at the business address of the Respondent in Beijing. A had actually been replaced as legal representative of the Respondent on 19 December 2014, and he had ceased to be an employee of the Respondent’s parent company “Parent” since July 2015. The Respondent claims that it had not actually received any of the documents served on A in relation to the 2^nd Arbitration, because A had (since October 2015) been detained by the disciplinary authority of the Communist Party on the Mainland, and all documents addressed to A had been directed by the relevant authority to be sent to and retained by the Parent, and to be left unopened. Hence, the arbitration documents served at the Respondent’s business address had all been re-directed to the Parent, and it was not until August 2016 - after the arbitral tribunal in the 2^nd Arbitration (“2^nd Tribunal”) had been empanelled without the Respondent’s involvement and after the first substantive hearing of the 2^nd Arbitration had been held - that the Respondent received notice of the existence of the 2^nd Arbitration for the first time, when CIETAC served an amended notice of arbitration to the Respondent via the Respondent’s registered legal representative.

10.  The Respondent had on 15 August 2016 applied to CIETAC to raise procedural objections regarding the commencement of the 2^nd Arbitration and the composition of the 2^nd Tribunal, but such objections were overruled by CIETAC in October 2016. The Respondent claims that it had no alternative but to file its Statement of Defence in the 2^nd Arbitration, reserving its rights to object to the procedural flaws, and thereafter to participate in the further hearing in the 2^nd Arbitration.

11.  After the 2^nd Award was issued on 30 June 2017, the Respondent also took steps to apply to the Beijing Court on 24 July 2017 to set aside the 2^nd Award, substantially on the same grounds as those relied upon in the Setting Aside Application. The Applicant opposed the Beijing proceedings, and after a hearing on 9 November 2017, a decision is still pending.

12.  In deciding whether enforcement of the Award should be recognized or refused in Hong Kong, the Court applies Hong Kong law, particularly in deciding whether enforcement of the Award would be contrary to the public policy of Hong Kong. Of course, this involves consideration of the strength of the arguments that the award sought to be enforced is invalid, as perceived on a brief consideration by the Court. In this case, the Agency Agreement is governed by PRC law. The two CIETAC arbitrations were held on the Mainland, in accordance with the CIETAC Rules of Arbitration. The validity of the Award and the procedures of the arbitrations would be governed by PRC law.

13.  The Hong Kong enforcement court would give “due weight” to the decision of the supervisory court on the Mainland in the Respondent’s application to set aside the Award (Gao Haiyan v Keeneye Holdings Ltd [2012] 1 HKLRD 627). If the supervisory court accedes to the Respondent’s application, the Award is set aside, and enforcement of the Award may be refused under s 95 (2) (f) (ii) of the Ordinance. If the supervisory court does not set aside the Award, the Hong Kong Court may still refuse enforcement if to do so is against public policy in Hong Kong.

14.  Having reviewed the evidence and the 2 Awards, I am satisfied that the application made on the Mainland to set aside the 2^nd Award has real, ie realistic, prospects of success. Despite the 2^nd Tribunal accepting that “new facts” existed after the date of the 1^st Award, such new facts appear to consist only of the Applicant’s demands, made in 2015 and after the 1^st Award, for information as to the steps which the Respondent had since taken, and as to the status of the Respondent’s Acquisition of the PK Shares from Y. It is not disputed that Y had acquired the PK Shares in October 2005, before the 1^st Arbitration and 1^st Award - as the Applicant and the 1^st Tribunal well knew. On the basis of such “new facts”, the 2^nd Tribunal construed clause 5 of the Agency Agreement and concluded that the condition for payment of the Fees had in fact been satisfied, since the Respondent had indirectly acquired the PK Shares through Y. The 2^nd Tribunal further considered that the Respondent had been “indolent” or inactive in pursuing its claims and interests against Y in respect of the PK Shares, such that after a lapse of time from the date of the 1^st Award, the condition for the Respondent’s payment of the Fees should be deemed to have been satisfied under the PRC Contract Law. These, as the Respondent has highlighted, are findings which contradict the findings made in the 1^st Award. According to the Respondent’s expert evidence on PRC law, the 2^nd Award is invalid by virtue of Article 274 of the PRC Civil Procedural Law, as being against the non bis in idem principle.

15.  The findings in the 2^nd Award further proceeded on the basis that the Respondent had enforceable rights and claims against Y in respect of the PK Shares, and was negligent or indolent in not pursuing such rights and claims, in contradiction to the 1^st Tribunal’s finding that the Respondent had not obtained any concrete interest in the PK Shares, to be considered indolent in pursuing its interests.  The Respondent pointed out that the matters and evidence concerning the relationship and dealings between the Respondent and Y had been argued before and were considered by the 1^st Tribunal, but in any event, the 2^nd Tribunal’s findings as to the dealings and relationship between the Respondent and Y were beyond the scope of the 2^nd Arbitration submitted to the 2^nd Tribunal, to which Y was not a party.

16.  As for the Respondent’s arguments on the lack of notice Ground, the relevant documents including the notice of arbitration had been delivered to the business address of the Respondent, and the Applicant pointed out that this was in accordance with the CIETAC Rules which governed the 2^nd Arbitration, as the parties had agreed under the arbitration agreement. The fact that it was redirected internally by the Respondent to the Parent, and was left unopened, was a matter of the Respondent’s internal management. The respondent in the 2^nd Arbitration is the corporate Respondent, and not the individual A named as its legal representative. The facts of the present case are entirely distinguishable from the facts of Sun Tian Gang v HK & China Gas (Jilin) Ltd [2016] 5 HKLRD 221.

17.  As can be perceived from the evidence available at this stage, I agree that the Respondent has realistic prospects of succeeding in its application to set aside the Award on the Mainland. Although the Respondent’s arguments on the lack of notice Ground are not as persuasive as the non bis in idem Ground, I cannot say that the Award is “manifestly valid”.

18.  Even if the law on the Mainland should have a more liberal approach towards re-litigation or reopening the findings made in the 1^st Award upon new facts, the Respondent has a good case to argue that the Award should not be enforced as involving a serious error which undermines due process, or as being contrary to fundamental concepts of justice, on the basis that the 2^nd Award is re-adjudication of the same claims which had been the subject matter of the 1^st Arbitration, and which had been dismissed by the 1^st Tribunal.

19.  I am satisfied that the Respondent’s applications to set aside the Award and the Order are not mere delaying tactics to frustrate enforcement.

20.  The application to set aside before the Beijing court has already been heard, although it is uncertain when the decision will be available. The Respondent is a wholly owned subsidiary of the Parent, the largest oil and petrochemical products supplier, and the second largest oil and gas producer on the Mainland.  Its assets in Hong Kong are the shares of a company which has a substantial share capital and is engaged in investment holding in Hong Kong.  There is no evidence to suggest difficulty in enforcement as a result of the adjournment.

21.  In all the circumstances, I consider that it would be appropriate to adjourn the Setting Aside Application in Hong Kong for a period of 6 months, with liberty to the parties to apply in the interim, to lift or extend the stay upon good grounds being shown. The adjournment, which entails delaying enforcement of the Award, is conditional upon the Respondent’s payment into court within 28 days of security in the sum of US$2 million. This should impose incentive to the parties to proceed with the relevant proceedings without unnecessary protraction, and also reflects the need to balance the interests of the Applicant in the enforcement of a final and binding arbitral award.

22.  The payment of security is subject to the usual order that in default of compliance with the order for security by payment into court, the Respondent’s application to set aside the Order will be dismissed.

23.  The costs of the Adjournment Application are to be in the cause of the Setting Aside Application.