SHANDONG HONGRI ACRON CHEMICAL JOINT STOCK CO LTD v. PETROCHINA INTERNATIONAL (HONG KONG) CORPORATION LTD

HCCT 45/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 45 OF 2009

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IN THE MATTER OF ENFORCEMENT OF ARBITRATION AWARD

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BETWEEN

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R U L I N G

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Background

1.  On 21 September 2009, the China International Economic and Trade Arbitration Commission (CIETAC) issued Arbitral award No. 0305 [2009] in respect of a dispute between the parties to this litigation. The award was in the following terms:

“1. (Shandong Hongri) shall return 3,810.578 tonnes of sulphur to (PetroChina).

2. (PetroChina) shall return to (Shandong Hongri) the sum of US$2,953,198, being the payment received for the goods.

3. (PetroChina) shall indemnify (Shandong Hongri) the sum of US$1624.26, equivalent to RMB11,126.18, being the insurance premium incurred.

4. (PetroChina) shall indemnify (Shandong Hongri) the sum of RMB350,002.58, being 14 items of fees, including “service fees”, incurred in relation to the goods under the Sale and Purchase Contract at the destination port (calculated up to December 2008).

5. (PetroChina) shall indemnify (Shandong Hongri) the sum of RMB65,400.00, being the authentication fee.

6. The arbitration fee of the case is RMB347,372, (PetroChina) is responsible for 70% of the arbitration fee, being RMB243,160.4; (Shandong Hongri) is responsible for 30% of the arbitration fee, being RMB104,211.60. (Shandong Hongri) has already paid in advance the said arbitration fee in full. Therefore, (PetroChina) shall pay to (Shandong Hongri) the sum of RMB243,160.40.

7. The other claims made by (Shandong Hongri) in the arbitration are dismissed.

The sums mentioned in (2), (3), (4), (5) and (6) above, which are payable to (Shandong Hongri), shall be paid by (PetroChina) to (Shandong Hongri) within 30 days from the date of this award. Should payment be made after the deadline, interest shall be added in accordance with the law.

This Award is a final award and is effective on the date when the award is made.” (sic)

2.  On 17 November 2009, Shandong Hongri, in reliance upon s 2GG and s 40B Arbitration Ordinance, Cap 341, made an ex parte application for an order granting leave to enforce items 2, 3, 4, 5 and 6 of the award, together with interest on the sum of US$2,953,198 at judgment rate from 22 October 2009 to the date of payment, and interest on the accumulated sum of RMB669,689.16 for the same period.  The ex parte order was made by me on 18 November 2009.

3.  It will be noted immediately that Shandong Hongri did not seek to enforce that part of the award contained in paragraph 1, whereby it was obliged to return 3,810.578 tonnes of sulphur to PetroChina.

4.  On 4 December 2009, PetroChina filed a summons to set aside the ex parte leave to enforce the award that had been granted.

5.  On 16 December 2009, I ordered that the sum of US$2,953,198 be paid into court and that there be a joint inspection of the sulphur.  That order had risen as it was revealed that there was a dispute between the parties as to the quality of the sulphur and precise terms of the award.  It was the case for PetroChina that by reason of what it described as a supplemental award, the return of the sulphur in good quality was a condition precedent to its obligation to pay the amount ordered under the award.

6.  The sequence of events that led to the documentation said to constitute the supplemental award was as follows.

(a) The award was issued on 21 September 2009.

(b) On 29 September 2009, Shandong Hongri made clear its position that it considered that the return of the sulphur in the same status as it had been delivered was a pre-condition of the repayment of the purchase price.

(c) On the same day PetroChina requested Shandong Hongri to attend a joint inspection on 30 September 2009, to ascertain whether the sulphur was the original sulphur.

(d) Shandong Hongri did not send representatives to attend the joint inspection. PetroChina says that Shandong Hongri refused to cooperate. Shandong Hongri did not suggest any other date for a joint inspection.

(e) On 9 October 2009, PetroChina applied to CIETAC for a supplemental award in order to clarify the sequence of performance by the parties under the award.

(f) On 15 October 2009, CIETAC replied to both parties informing them that it would entertain an application for a supplemental award under Article 48 of the CIETAC Arbitration Rules.

(g) By two letters dated 18 November 2009 and 20 November 2009, the CIETAC Arbitration Tribunal confirmed PetroChina’s view of the interpretation of the award, namely that Shandong Hongri must return the original goods to PetroChina, and that if it failed to return the goods in the same status as when the goods were originally received, Shandong Hongri did not have the right to demand the return of the payment for the goods from PetroChina. It will be noted that the ex parte application was made on 17 November 2009, and the order of 18 November 2009.

7.  On 16 March 2010, Shandong Hongri applied by summons pursuant to O 14A for the trial of preliminary issues. 

8.  On 17 May 2010, I gave leave to PetroChina to amend the summons for December 2009, seeking the setting aside of the ex parte order.  The purpose of the amendment was to seek leave to enforce the whole of the award, including paragraph 1.

9.  On 21 June 2010, I heard the parties, and on 6 August 2010, on the application of Shandong Hongri, made an order staying execution of the judgment on the award, and gave directions for the hearing of the summons issued on 16 March 2010, by Shandong Hongri pursuant to O 14A.  There are three issues, which may be shortly stated. 

10.  They are first whether the obligations arising from the award, on the part of Shandong Hongri to return 3,810.578 tonnes of sulphur to PetroChina, and on the part of PetroChina to pay to Shandong Hongri US$2,953,198 and other consequential payments are concurrent obligations, or whether the return of the sulphur is a condition precedent to payment. 

11.  Second is the question as to whether or not three letters dated 18 and 20 November 2009 and 30 March 2010, from CIETAC, purporting to explain or interpret the award are legally binding on the parties as a supplementary/additional award and form an integral part of the award at issue in these proceedings. 

12.  Third, by an amended summons, dated 18 May 2010, PetroChina applies to set aside the ex parte order giving leave to enforce the award on the ground of material nondisclosure. 

13.  On 21 January 2011, I heard argument on those issues and now give my ruling.

Are the obligations concurrent obligations

14.  The important terms of the award require Shandong Hongri 3,810.578 tonnes of sulphur to PetroChina, and for PetroChina to return to Shandong Hongri US$2,953,198, being the payment received from the goods.  The award is silent as to when the sulphur must be delivered to PetroChina, but provides that the payment of the money awarded shall be paid within 30 days of the date of the award.

15.  Ms Cheng SC for Shandong Hongri, relying upon Zhejiang Province Garment Import and Export Co v Siemssen & Co (HK) Trading Ltd, unreported, HCMP 144/1992, argues that the obligations are concurrent obligations. 

16.  Mr Ng SC for PetroChina says that the requirement that Shandong Hongri should return the sulphur is a condition precedent to payment.  Mr Ng draws my attention to the fact that no time is specified in the award for the return of the sulphur to PetroChina, but the requirement for payment of the various amounts awarded to be paid by PetroChina is specified as being within 30 days after the date of the award.

17.  Mr Ng relies upon Article 49(1) of the CIETAC Arbitration Rules which provides:

“The parties must automatically execute the arbitral award within the time period specified in the award. If no time limit is specified in the award, the parties shall execute the arbitral award immediately.”

Thus, Mr Ng says, it follows that the requirement of Shandong Hongri to return the sulphur arises immediately upon the making of the award, but the obligation for PetroChina to refund and pay the amounts awarded does not arise until 30 days after the date of the award. Consequently, he says, on its plain terms, the obligations are not concurrent, but that the obligation to return the sulphur in good condition is a condition precedent to the obligation to pay.

18.  Ms Cheng relies upon paragraph 40 of the judgment of Kaplan J in Zhejiang Province:

“I am quite satisfied that the award became binding on the parties when it was published. I reject the argument that the obligation to pay the sums awarded against the defendants was in any way conditional upon the defendants receiving back the goods. The obligation to pay and the obligation to return the goods were concurrent obligations.”

19.  In order to understand this passage properly it is necessary to read it in the context of the particular award that was under consideration by the learned judge.  He set out the relevant passage at paragraph 34 of the judgment:

“1. The claimant shall return all the quantity, according to the invoices and actual delivery of the printing materials of the six designs, 01, 02, 011, 017, 058 and 061, to the defendant. The defendant shall refund the payment of these six designs, a total of US$103,890.00, to the claimant and paid to the claimant the interest thereon for the period from 3^rd June 1989 until the date of actual payment and a monthly interest of 0.75; when it returns the goods, the claimant shall provide the necessary assistance, any expenses incurred for returning the goods shall be borne by the defendant;” (sic)

It is plain that the date from which interest ran is a date that is related to the payments made by the claimant for the designs, because the award was rendered on 12 July 1991.

20.  There is an important difference between the award considered by Kaplan J and the award now under consideration.  In the first the award was silent as to the time at which either delivery or payment should be made.  In the latter the award is specific as to the time of delivery, an immediate obligation arising on the date of the delivery of the award, by reason of Article 49(1) of the Arbitration Rules of CIETAC, and as to payment, in its terms, 30 days after the date of the award.

21.  While the decision of Kaplan J in Zhejiang Province would be highly persuasive to me were it not possible to discern times for the various steps to be taken under the present award, in my view it is clearly distinguishable from the present award.

22.  I proceed upon the assumption that the arbitral tribunal making the award knows the content of its own rules and in particular the consequences of Article 49(1).  It follows that by not specifying a time for the performance of the delivery of the sulphur the arbitral tribunal intended that obligation to arise immediately upon the making of the award, and the obligation on Shandong Hongri to refund money, to arise subsequently, 30 days after the delivery of the sulphur.

23.  That is entirely logical.  Ms Cheng was obliged to acknowledge that the consequence of her argument was that Shandong Hongri would be obliged to refund the money paid, and if the sulphur returned were either not the same sulphur or sulphur of a lesser value, Shandong Hongri must then proceed to bring a separate action against PetroChina for any loss that might have resulted.  In any terms that is an inherently unfair situation, and is plainly the situation the arbitral tribunal sought to avoid by specifying a time for repayment that was subsequent to the obligation to deliver the sulphur.

24.  I accordingly hold of that the obligation on PetroChina to make payment of the sums awarded to Shandong Hongri is not concurrent with the obligation of Shandong Hongri to return the sulphur, but subsequent to, and conditional upon, the due performance of the that obligation.

The effect of the three letters

25.  Strictly speaking, having so found, it is not necessary for me to consider the effect of the three letters.  I do so in case this matter should proceed further.

26.  The circumstances in which the arbitral tribunal came to issue the letters is set out in paragraph 15 of my earlier ruling. That deals with the first two letters dated 18 November 2009 and 20 November 2009. 

27.  There is an important supplementary fact in relation to the two letters.  Both letters were on the letterhead of CIETAC and were fixed with the seal of the Secretariat Department of CIETAC.  They were not signed by the members of the arbitral tribunal, as the award had been signed. The first, contains the following expression: “the arbitration tribunal holds that”, (Shandong Hongri’s translation), “the arbitral tribunal holds the view that”, (PetroChina’s translation).  The second contains the expression: “the arbitral tribunal is of the view that”, (both translations).

28.  On 16 March 2010, Shandong Hongri filed its summons pursuant to) 14A.  That summons raised the effect of the two letters. One of the issues raised in the affidavit of Mr Stanislav of Shandong Hongri, in support of the summons was the fact that neither of the two letters had been signed by any of the arbitrators.

29.  The summons was due to be heard by me on 31 March 2010.  On 24 March 2010 PetroChina’s PRC lawyers wrote to CIETAC drawing the attention of CIETAC to the fact that neither of the two letters had been signed, asserting that supplementary awards, as PetroChina considered the two letters to be, were not required under the Arbitration Rules to be signed, and requesting the Commission to confirm, pursuant to Article 70 of the Arbitration Rules, that the two letters constitute supplementary awards which are binding on the parties.  Article 70(2) provides that the Arbitration Rules “shall be interpreted by the CIETAC”.

30.  On 30 March 2010, on CIETAC letterhead, bearing the seal of the Secretariat of CIETAC, and signed by the two arbitrators, the following statement is made:

“The Arbitral Tribunal confirms that (the two letters) as mentioned above are supplementary explanations of the Arbitral Award of the arbitration proceedings no. G20080536 and form part of the said Arbitration Award.”

31.  Mr Ng relies upon the three letters and says that they constitute a proper supplementary award under Article 48 of the Arbitration Rules, making it clear that the obligations of the return of goods and payment of money are not concurrent obligations, but that the obligation on PetroChina to pay Shandong Hongri was dependent on the return of the original goods in the same status as when they were originally received.  Article 48 provides:

“Article 48 Additional Award

Within thirty (30) days from the date on which the arbitral award is received, either party may request the arbitral tribunal in writing for an additional award on any claim or counterclaim which was advanced in the arbitration proceedings but was omitted from the award. If such omission does exist, the arbitral tribunal shall make an additional award within thirty (30) days from the date of receipt of the written request. The arbitral tribunal may also make an additional award on its own initiative within a reasonable period of time after the arbitral award is issued. Such additional award shall form a part of the arbitral award previously rendered.”

32.  Ms Cheng says that the three letters cannot form part of the award.  She relies first upon fundamental principles of law, second upon non-compliance of the three documents with Article 48, and third argues that the circumstances in which the three letters came into existence are contrary to natural justice and consequently ought not to be received.

33.  The first argument depends upon the fundamental proposition that upon the delivery of the award on 21 September 2009, the arbitral tribunal became functus officio, and, in arbitral tribunals having no inherent jurisdiction to vary a final and binding award, the letters were of no effect.  The functus officio doctrine in relation to arbitral awards simply means that once an arbitrator has issued a final award he may not revised: see Gary B Born, International Commercial Arbitration, Volume II p 2513. In that publication Mr Born makes the following statements at p 2512:

“There are strong policies counseling against alteration of an award after it has been made. One of the most fundamental purposes of the arbitral process is to obtain a speedy, final resolution of the parties’ disputes, without the costs and delays of litigation. Further, most national legal systems provide that an arbitral tribunal is “functus officio” once it has made its award. This again reflects the powerful interest in the finality of awards, free from continuing dispute about their correctness, completeness, or meaning. A liberal approach to “corrections” or “interpretation” is in obvious tension with these policies.

Accordingly, many modern arbitration statutes provide mechanisms that allow parties to request (and arbitrators to make) “corrections” to, “interpretations” of, or “supplementations” to an arbitral award. In most jurisdictions, the circumstances in which these types of changes can be made are very narrowly circumscribed.”

34.  Ms Cheng is right.  Unless some appropriate provision can be found in the Arbitration Rules of CIETAC, then there is no basis upon which the arbitral tribunal may supplement its award in the manner it has purported to in this case. I accept the submission that by reason of the doctrine of functus officio, the three letters cannot form part of the award.

35.  The only provision that might be relied upon is Article 48.  In that respect Ms Cheng makes first, an argument upon interpretation, and second an argument based upon procedure.  Article 48 permits the arbitral tribunal, at the request of either party within 30 days of the award to issue an additional award “on any claim or counterclaim which was advanced in the arbitration proceedings but was omitted from the award.”

36.  There is a dispute between the parties as to the translation of the Chinese version of the CIETAC Arbitration Rules and the English version.  As both versions are published by CIETAC, it was no statement on the rules as to which version shall prevail I proceed on the basis that it is a view of CIETAC that both versions are identical.

37.  There is nothing in the evidence put before me by PetroChina to establish that the issue of which was dealt with by the three letters constitute a claim or counterclaim advanced in the arbitration proceedings but omitted from the award.  If the question of the timing of the payment on the return of the goods was an advanced in the arbitration proceedings, for the reasons set out in paragraphs 6-16 above, I am satisfied that it has been dealt with in the award, and there is no basis upon which clarification may be sought under Article 48.

38.  The provisions of Article 48 require that the request for an additional award must be made within 30 days of the date on which the arbitral award was received by the parties.  In the absence of evidence to the contrary I take that to be the date of the delivery of the award, namely 21 September 2009.  The request for clarification of the sequence of performance was made by PetroChina in a letter to CIETAC dated 9 October 2009.  Any additional award must, in terms of Article 48, therefore be issued no later than 9 November 2009.

39.  Shandong Hongri objected to the issue of an additional award by a letter to CIETAC dated 22 October 2009.  There being no response by 9 November 2009, on 17 November 2009, Shandong Hongri made ex parte application to this court for leave to enforce the award.

40.  The letter issued by the Secretariat on 18 November 2009, which, I accept, merely referred to the parties to Article 49(1), the effect of which was the requirement for immediate return of the goods, and the specific terms of the award, payment within 30 days, and does not constitute an additional award in terms of Article 48, first because it is out of time, and second because it does not purport to be an additional award but merely a reference to the parties to relevant provisions.

41.  The subsequent letters of 20 November 2009 and 30 March 2010, both fall foul of the time limit, both apparently being applications outside the 30 day period.

42.  The third argument made by Ms Cheng is that the letters of 20 November 2009 and 30 March 2009, were issued in breach of the rules of natural justice.

43.  It is apparently the practice of CIETAC, and the lawyers who practise before it, that when an application is made to CIETAC the application is not copied to the other side by the applicant, but it is left to CIETAC to forward a copy of the application to the other side.

44.  The CIETAC letter of 20 November 2009, was as a result of a letter by PetroChina’s PRC lawyers to CIETAC, on 19 November 2009. That letter was not copied to Shandong Hongri, and the response by CIETAC on 20 November 2009, was given without having given Shandong Hongri the opportunity to be heard on the point raised.

45.  The CIETAC letter of 30 March 2010, was a result of a letter by PetroChina’s PRC lawyers to CIETAC on 24 March 2010.  That letter was not copied to Shandong Hongri, and the response by CIETAC on 30 March 2010 was given without having given Shandong Hongri the opportunity to be heard on the point raised.

46.  It is a fundamental proposition of natural justice of the decision maker may not make a decision after hearing from one side only, without giving the other side the opportunity to be heard.  It is no answer to the proposition that the procedure it was adopted as a procedure that is permitted by the rules under which the decision was made.  In Paklito Investment Ltd v Klockner East Asia Ltd [1993] 2 HKLR 39 Kaplan J dealt with a situation where, in accordance with CIETAC rules, the arbitral tribunal, without informing the parties, had obtained its own expert report, and without informing the parties and, without disclosing that report to the parties, reached a conclusion.  Enforcement of the award in Hong Kong was refused.

47.  Mr Ng says that the decision is distinguishable on the basis that the error in that case was fundamental, and went to the heart of the decision.  I reject the submission.  It is equally fundamental that Shandong Hongri should have been given the right to comment on the applications were made by PetroChina.  In respect of the letters of 20 November 2009 and 30 March 2010 they were given no such right.  On that basis alone, I would refuse to consider those letters as part of the award.

48.  For the reasons contained in paragraphs 25-47 above, I conclude that the three letters do not form part of the arbitral award.

Material nondisclosure

49.  The affidavit in support of the ex parte application exhibited PetroChina’s purported application of 9 October 2009, and Article 48, CIETAC’s acknowledgement of receipt of that application on 15 October 2009, and Shandong Hongri’s PRC lawyers response by way of objection dated 22 October 2009. 

50.  The position adopted by Shandong Hongri was that there was simply no basis upon which it could be argued that any clarification was required of the award or that there was jurisdiction to make an additional award.

51.  In Wuzhou Port Foreign Trade Development Corp v New Chemic Ltd [2001] 3 HKC 395, Burrell J had to consider the issue of material nondisclosure.  It was argued that a particular fax from the party resisting enforcement ought to have been disclosed by the applicant for enforcement, but was not.

52.  In the present case Shandong Hongri were perfectly entitled to take the view, on 17 November 2010, that their view that the arbitral tribunal would not further involve itself in the matter was correct.  Shandong Hongri properly disclosed the exchange of correspondence but as at 17 November 2009, there was nothing more to disclose.  Thereafter as part of the summons on the part of PetroChina on 4 December 2009, to set aside the ex parte order the court was informed by PetroChina of the correspondence and the view taken by PetroChina of the interpretation of the award.

53.  In those circumstances, while there being a continuing duty of disclosure on Shandong Hongri, there was nothing it need disclose.

54.  I am satisfied that there has been no material nondisclosure of the application by PetroChina to set aside the ex parte order for the enforcement of the award on that basis must be refused.

The Orders

55.  The amended summons by PetroChina dated 18 May 2010, for variation of the ex parte order to include paragraph 1 of the award is granted, and there will accordingly be an order for the enforcement of the award.

56.  Ms Cheng correctly reminds me that at this stage of the proceedings I am dealing only with the first stage of the procedure whereby arbitration awards are enforced in Hong Kong, namely the stage where the award is converted into a court judgment following the procedure in O 73. 

57.  As the execution of any judgment so obtained is a separate matter it is not appropriate at this stage that there be a stay of execution. 

58.  It should not be necessary for me to remind the parties that should any application be made by Shandong Hongri to a Master for orders enabling execution of the judgment that has been entered in consequence of this ruling, the fact that I have found that the obligation on PetroChina to pay sums awarded are subsequent to, and conditional upon, the due performance by Shandong Hongri of the obligation to return the sulphur, is a matter that ought to be disclosed to the Master.

Costs

59.  I will hear the parties on costs if agreement cannot be reached.