XCHRX SHANTOU ZHENG PING XU YUELI SHU KUAO TRADING CO. LTD. v. WESCO POLYMERS LTD.

HCCT107/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.107 OF 2000

------------------------

------------------------

--------------------

D E C I S I O N

--------------------

1. The parties to this application went through arbitration proceedings in the PRC during 1998 arising out of a contract for the supply of goods dated 4 March 1997. The plaintiff obtained an award in its favour. In 1999 the defendant applied, unsuccessfully, to the Second Intermediate People's Court in Beijing for revocation of the award. Thereafter the plaintiff attempted to enforce the award in the PRC. Due to a lack of assets in the PRC that was unsuccessful. The plaintiff has now commenced these court proceedings in Hong Kong for enforcement of the award as a debt. This is their application for summary judgment under Order 14. Both parties have had legal representation throughout. The award was for RMB176,189.85 plus RMB15,000 in fees.

2. The above is a bare outline of the history of this case. There were delays in the arbitration in the PRC to enable the defendant to argue many points of law. Now, in Hong Kong, submissions on PRC law have been revived and further submissions have been made. Experts on Chinese law have filed affirmations containing learned opinions, conflicting with each other, covering a total of about 50 pages. An application had been made to hear oral evidence from both experts on Chinese law in the Order 14 hearing. Although the application was granted the experts have not been called. The hearing has proceeded on affirmation evidence and legal argument from Mr Lee Tung Ming for the plaintiff and Mr Brian Wong for the defendant.

3. The usual procedure for the enforcement of mainland CIETAC awards in Hong Kong is under Part III A of the Arbitration Ordinance ("Cap.341"), namely by applying for leave to enforce the award ex parte whereupon the defendant may then apply to have the ex parte order set aside. Section 40E then applies which states that the enforcement shall not be refused unless the defendant can prove one or more specific reasons for not enforcing as set out in section 40E(2). Even when that is done the court retains a discretion to, nonetheless, enforce the award.

4. Section 40B of Cap.341 gives the plaintiff a choice of whether to enforce its award by this route or by a court action for the enforcement of a debt. In this case the plaintiff has proceeded by way of a court action.

5. The first question which arises therefore is whether there are any important differences between proceeding by Order 14 and by proceeding under section 2GG of Cap.341. Mr Wong submits that the plaintiff has a more onerous task under Order 14. For example he submits that the plaintiff must prove that the PRC award and the underlying arbitration agreement were both valid. If there are triable legal issues concerning their validity the matter should go to trial. Experts must be called to give evidence at trial and the court must decide what the PRC law is having heard the expert evidence.

6. Mr Lee on the other hand submits this need not happen. He accepts there is a conflict between the experts and that this court cannot resolve the conflict simply on affirmation evidence. However, he submits that as section 40E gives the court a residual discretion to enforce the award there would be no need to resolve the conflict between the experts if it is a proper case for the exercise of the discretion.

7. I agree with Mr Lee. Firstly the court must apply the Order 14 test. Are there triable issues? Put more fully, is there an issue to be tried arising out of the plaintiff's claim that their PRC award should be enforced in Hong Kong summarily? In answering that question this court must consider the Hong Kong law applicable to the enforcement of PRC awards, namely section 40E of Cap.341. In my judgment, no extra burden lies on the plaintiff which makes his task more difficult than it would otherwise have been. The plaintiff starts therefore with the advantage of the strong pro-enforcement bias afforded by the legislation.

8. The defence have raised three issues which they say fall within section 40E and are triable issues. I will deal with each of them briefly. I do so only briefly because as will be seen I have decided the outcome of this case as a result of exercising the court's discretion in the plaintiff's favour having considered each point raised both individually and in the overall context of the history and nature of the claim. The defendant's grounds for resisting the enforcement are :

1. Incapacity of the plaintiff

9. Section 40E(2)(a) states that an award may not be enforced if "a party to the arbitration agreement was (under the law applicable to him) under some incapacity". The defence rely on this section because it was a finding in the arbitration award that the plaintiff was not a party to the underlying contract for the supply of goods, and did not have the capacity, in PRC law, to enter into the contract in question. The plaintiff's answer is that section 40E(2)(a) refers to incapacity to enter into the arbitration agreement, not the underlying contract. There is much support for the contention that the arbitration agreement, even where it is contained in one clause of the underlying contract, is a separate agreement and that the plaintiff's incapacity to enter into the underlying contract does not affect its capacity to enter into the arbitration agreement. Each of the two experts on Chinese law have written many pages on this issue. It would be wrong for this court to make any finding of fact concerning foreign law on purely affidavit evidence. This court can however consider the weight of the plaintiff's arguments on the issue when deciding whether to exercise the discretion.

2. The award exceeded the scope of the arbitration

10. Section 40E(2)(d) states that an award may not be enforced if it "contains decisions on matters beyond the scope of the submission to arbitration". Mr Wong's submission, which he argues is a triable issue, is as follows. The award contained the following statement :

"The Arbitration Tribunal holds that it is on the basis of a valid contract that the claimant make the said arbitration request. As the contract in this case ... is not valid, no support shall be given to the claimant's application for arbitration. But for the reason of the cause stated in Part One of 'Opinions of the Arbitration Tribunal' the Respondent shall pay RMB176,189.85." (emphasis added by me)

11. The contract under the heading of "remarks" says :

"2. This contract is governed by the laws of Hong Kong PROVIDED THAT if the BUYER is a party situated in the PRC then all disputes in connection with the contract ... (shall go to arbitration in Beijing under PRC Arbitration Law)." (emphasis added)

12. Mr Wong submits that once the Tribunal found the contract to be invalid it was unable to make any award under it because their jurisdiction was limited to the contract and they determined that there was no valid contract in the first place. Any award therefore would be outside the scope of the arbitration.

13. In my judgment no triable issue arises out of this submission for two reasons. Firstly, the Tribunal merely made an award to the plaintiff on an alternative basis. In doing justice to the plaintiff they said they could not give the damages claimed for breach of contract but awarded a sum by way of restitution in order to meet the justice of the case. Secondly, the "remarks" say "all disputes in connection with the contract". The scope of such words is plainly wider than "all disputes under the contract". Mr Wong's submission would have been stronger had it said "under" but it did not. Even if this was a legal argument at trial rather than in Order 14 proceedings, the court would be in no better position to resolve it. It is purely a legal argument which can be determined now and does not give rise to a triable issue.

3. Public Policy

14. Section 40E(3) provides that an award may not be enforced if it would be contrary to public policy to do so. Mr Wong submits that the underlying contract was an illegal contract and it would be against public policy to enforce it in Hong Kong. The submission stems from Mr Wong's first ground of resistance because it is the plaintiff's lack of capacity to enter into the contract which, it is submitted, makes it an illegal contract. The alleged illegality is confined to the "incapacity" issue. Again the PRC legal experts have considered this issue at length. It is not for this court to determine whether or not it is an illegal contract.

15. On the assumption that it is an illegal contract Mr Lee makes the following points. Firstly, the nature of the illegality must be weighed in the balance. It is not illegal in the sense of a gaming contract or a contract to do an unlawful act. It merely concerns whether or not a party to a normal commercial contract was sufficiently qualified to enter into the contract in China. Secondly, to put it in context, there is no evidence or suggestion that such a contract would be illegal in Hong Kong.

16. Thirdly, both the arbitration Tribunal in the mainland and the Second Intermediate People's Court in Beijing were aware of this argument. Neither of them considered this to be a ground for not making an award to the plaintiff.

17. The public policy defence was considered in all the judgments in Hebei Import and Export Corporation v. Polytek Engineering Co. Ltd [1999] :

"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) 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. It would take a very strong case before such a conclusion can be properly reached, when the facts giving rise to the allegation have been made the subject of challenge in proceedings in the supervisory jurisdiction, and such challenge has failed."

(per Litton PJ)

"In my judgment, the position is as follows. Before a Convention jurisdiction can, in keeping with its being a party to the Convention, refuse enforcement of a Convention award on public policy grounds, the award must be so fundamentally offensive to that jurisdiction's notions of justice that, despite its being a party to the Convention, it cannot reasonably be expected to overlook the objection."

(per Bokhary PJ)

"However, the object of the Convention was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced. In order to ensure the attainment of that object without excessive intervention on the part of courts of enforcement, the provisions of art V, notably art V(2)(b) relating to public policy, have been given a narrow construction. It has been generally accepted that the expression 'contrary to the public policy of that country' in art V(2)(b) means 'contrary to the fundamental conceptions of morality and justice' of the forum."

(per Sir Anthony Mason)

Thus it can be seen there is a high threshold to meet before an enforcing court will intervene on this ground. I am satisfied that at trial this ground would certainly fail and therefore no leave should be granted to defend on this basis.

4. Discretion

18. Returning to Mr Wong's first ground for resisting enforcement he submits that the court cannot resolve the conflicts in expert opinion on foreign law on affidavit evidence only, with which I agree. He goes on to submit that therefore leave to defend must be granted so that the court can hear the evidence and then make a decision, with which I do not agree.

19. Even in an Order 14 application the defence are faced with the terms of section 40E which are discretionary. If it is plain and obvious that a court would have exercised its discretion (had it needed to do so) in the plaintiff's favour, when dealing with an enforcement application brought, not under Order 14, but under section 2GG, leave to defend should be refused in Order 14 proceedings.

20. In this case there are, in my judgment irresistible grounds for exercising the court's discretion in the plaintiff's favour and thus determine that there is no sustainable defence to an enforcement order. Those grounds are the combined effect of the following factors :

(a) The relative weakness of the defendant's grounds for resisting enforcement compared with the force of the plaintiff's answer thereto.

(b) The defendant has been legally represented throughout. In the arbitration itself and before the Second Intermediate People's Court in Beijing, the defendant argued that, on the question of the plaintiff's incapacity, PRC law and PRC arbitral procedures should apply. It is not open to the defendant to change his position now. It is not open to him to argue that the capacity of the plaintiff to conclude the arbitration agreement which gave rise to the award should be determined otherwise than in accordance with PRC law and procedure. Sir Anthony Mason in the Hebei case said as follows :

" Article 45 of the rules provides that a party who knows or should have known that a provision of the rules has not been complied with yet proceeds without raising his objection in a timely manner shall be deemed to have waived his right to object. Article 45 gives effect to an important principle, not confined to Chinese law, namely that a party to an arbitration who wishes to rely on a non-compliance with the rules governing an arbitration shall do so promptly and shall not proceed with the arbitration as if there had been no non-compliance, keeping the point up his sleeve for later use after an award is made, should that course prove to be expedient."

(c) At arbitration no challenge was made to the plaintiff's capacity to conclude the arbitration agreement. It does so for the first time in Hong Kong. The issues at arbitration centred around the merits of the case. The defendant took part in the arbitral process from the outset.

It made no preliminary challenge to the plaintiff's status as a valid party to the arbitration agreement and therefore also, the arbitration itself. The fact that it did not do so then, or at any time in the PRC, amounts to an estoppel preventing it from doing so now. Moreover, it was open to the defendant, under PRC Arbitral law, to seek a ruling from the People's Court in Beijing, as to the plaintiff's capacity or the validity of the arbitration agreement. This it did not do.

(d) There are a number of references in the Mainland Arbitration Law, the CIETAC Arbitration Rules and the PRC Civil Law and Civil Procedure Law which deal specifically the defendants obligation to raise points of jurisdiction timeously.

(e) The defendants' legal representatives in the PRC went to considerable lengths to defend the claim. The arbitral proceedings spanned 15 months. Two adjournments were sought by the defendant and granted. They were allowed to submit supplementary evidence and materials after the first oral hearing. Written legal advice was submitted followed by rebuttals, replies to rebuttals, further rebuttals and further replies. After the award a revocation was sought in Beijing. In all of this the capacity of the plaintiff to arbitrate was not raised. In all matters that were raised the defendant was unsuccessful in defending the claim.

(f) Finally, they would have known throughout (and the plaintiff did not know) that there were no assets in the mainland against which an award could be executed.

21. For all the above reasons I am satisfied that this is a proper case for me to enter judgment against the defendant for the Hong Kong dollars equivalent sum of RMB191,189.85. I make a costs order nisi for the costs of these proceedings and the proceedings and enforcement in the PRC to the plaintiff.

22. Mr Wong opposes any award of interest on the ground that, although it is sought in the prayer, it is not specifically pleaded in the statement of claim. In my judgment interest should be awarded on the basis that the defence have never been under any illusion that interest was not being sought by reason of the fact that both the prayer to claim and the Order 14 summons specifically refer to interest. On this basis any application for leave to amend to add the words "together with interest" to paragraph 8 of the Statement of Claim would have been favourably met. The amount of interest I award is at prime plus 1% from 2 May 2000.