XCHRX SHANGHAI CITY FOUNDATION WORKS CORPORATION v. SUNLINK LTD.

HCCT 83/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.83 OF 2000

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D E C I S I O N

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1. By this summons, the defendant applies to set aside ex parte orders dated 2 August 2000 by which Yam J granted leave to the plaintiff to enforce an arbitration award made by the China International Economic and Trade Arbitration Commission dated 10 October 1999 and entered judgment thereon.

2. It is a mainland award to which Part IIIA of the Arbitration Ordinance, Cap.341 applies. No point is taken by the defendant as to the regularity of the proceedings leading up to the award. The sole point at issue concerns the existence or otherwise of an "overriding agreement" between the parties. It is the defendant's submission that if the existence of the overriding agreement is proved, then it would be against public policy to enforce the award in Hong Kong. Although not specifically stated in the defendant's summons, they rely on section 44(3) of Cap.341. None of the discretionary grounds for refusal in section 44(2) apply. Section 44(3) provides a residual discretionary ground for refusing to enforce an award because it would be contrary to public policy to do so.

3. It is the defendant's case that prior to the commencement of arbitration proceedings in the mainland, the parties had agreed that whatever the outcome of the arbitration proceedings, the outstanding contract sum would only be payable after issuance of the final account and upon settlement on the final account by the 1st respondent in the arbitration, namely "Xuhui" and, further, that any damages for stoppage would also only be payable after payment of such damages by Xuhui.

4. It is accepted by the defendant that this overriding agreement was only oral and was not brought to the attention of the arbitrators in the mainland. The reason given for it only being oral was that it was highly confidential and was not to be known by Xuhui. The reason given for the arbitrators not being told about it was that it was unnecessary to do so because it only related to enforcement.

5. Not surprisingly, the existence of the overriding agreement is disputed. Stark factual conflicts appear in the competing affirmations. Ms Terry Chan, counsel for the defendant, submits that if the existence of the overriding agreement is proved, it is arguable that the award should not be enforced on public policy grounds. In other words, if the prior agreement did take place, section 44(3) of Cap.341 could apply. It is thus her primary contention that the court should hear oral testimony on the factual issue as to the existence of the prior overriding agreement.

6. Having considered the competing submissions as to whether this court should adjourn for the purpose of hearing oral evidence, I have come to the conclusion that it should not.

7. In support of her application, Ms Chan has referred me to the case of J.J. Agro Industries v. Texana International Ltd [1994] 1 HKLR 89 in which Kaplan J, in 1992, decided to hear testimony, in relation to an allegation of fraud relevant to the same ground of "public policy" as is being advanced here. The fact that this was the only authority referred to is an indication that acceding to an application to hear oral evidence is the exception rather than the rule. Mr Lo, for the plaintiff, points out that the Agro case involved serious allegation of fraud and was an exceptional case. I agree. Furthermore, Order 73, rule 10, section 6A (HK) Hong Kong Civil Procedure 2001, which was introduced in 1995, provides for the setting aside of such orders to be by summons supported by affidavit. This does not preclude the reception of oral evidence but the lack of specific provision for oral evidence, indicates that the usual case will be determined by affidavit or affirmation. I do not consider this case to fall into any special category.

8. In my judgment, the real difficulties which the defendant faces in this case are that the alleged overriding agreement :

(i) was never put into writing;

(ii) was not relied on or referred to in the arbitration proceedings;

(iii) only emerged as an issue after the defendant had lost in arbitration; and

(iv) is inherently unusual in its alleged terms.

9. As to (i) above, the defendant says this was so because it was highly confidential. The mere fact that an agreement is confidential does not prevent its reduction into writing. Confidentiality and importance are two reasons why it should have been documented, rather than reasons why it should not have been.

10. As to (ii) and (iii) above, these are factors which support the credibility of the party which contends its non-existence at the material time.

11. As to (iv), it is inherently unusual because it amounts to a secret agreement to go to the time and expense of an arbitration which would be a charade if the defendant lost. The successful plaintiff would merely have an unenforceable award.

12. The meaning of "public policy" was considered in Hebei Import & Export Corporation v. Polytek Engineering Company Limited [1999] 1 HKLRD 665, a decision of the Hong Kong Court of Final Appeal.

"This [s.44(2)] gives recognition to the principle that the legal validity of an award is, primarily, a matter for the court of the supervisory jurisdiction to decide. We then come to sub-s.(3) which says :

(3) Enforcement of a Convention award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to enforce the award.

As can be seen, refusal of enforcement on public policy grounds in sub-s.(3) is a residual remedy. It would be an unusual case where the 'competent authority' in sub-s.2(f) has ruled in favour of the validity of the award, yet the court in the enforcement jurisdiction nevertheless concludes that enforcement should be denied for public policy reasons, the practical result, as counsel for the appellant Ms Audrey Eu SC points out, can be extremely unjust : The claimant cannot enforce the award because the award has, in effect, been nullified in the eyes of the enforcement court, yet it cannot ask for the arbitration to be instituted afresh in the supervisory jurisdiction because the court in that jurisdiction has upheld its validity.

The expression public policy as it appears in s.44(3) of the Ordinance is a multi-faceted concept. Woven into this concept is the principle that courts should recognise the validity of decisions of foreign arbitral tribunals as a matter of comity, and give effect to them, unless to do so would violate the most basic notions of morality and justice." (per Litton PJ)

"In my view, there must be compelling reasons before enforcement of a Convention award can be refused on public policy grounds. This is not to say that the reasons must be so extreme that the award falls to be cursed by bell, book and candle. But the reasons must go beyond the minimum which would justify setting aside a domestic judgment or award." (per Bokhary PJ)

Amongst other things, the case held that :

"(3) Further, a failure to raise the public policy ground in proceedings to set aside an award could not operate to preclude a party from resisting on that ground the enforcement of the award in the enforcing court of another jurisdiction. That was because each jurisdiction had its own public policy.

(4) However a party might be precluded by his failure to raise a point before the court of supervisory jurisdiction from raising that point before the court of enforcement. Failure to raise such a point might amount to an estoppel or a want of bona fides such as to justify the court of enforcement in enforcing that award."

13. For all the above reasons, I find there to be no grounds upon which I should exercise my discretion not to enforce this award pursuant to section 44(3), Cap.341.

14. I see no reason why costs should not follow the event. The costs of the summons shall be to the plaintiff.