SKY POWER CONSTRUCTION ENGINEERING LTD v. IRAERO AIRLINES JSC

HCCT 113/2022

[2023] HKCFI 1558

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 113 OF 2022

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D E C I S I O N

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Background

1.  On 13 December 2022, the Applicant in these proceedings applied for leave to enforce an arbitral award made in LCIA Arbitration No 204644 (“Arbitration”) on 5 September 2022 (“Award”) as a judgment of the Court. On 3 January 2023, this Court granted leave and an order was made (“Enforcement Order”), in the usual terms that the Respondent may apply to set aside the Enforcement Order within 14 days after service of the order on it, and that the Award shall not be enforced until after the expiration of that period.

2.  The Respondent is a company incorporated and existing under the laws of the Russian Federation. The Enforcement Order was served at its registered office on 13 February 2023. Under the terms of the Enforcement Order, the Respondent had up to 27 February 2023 to apply to set aside the said order.

3.  On 22 February 2023, a Notice to Act was filed in these proceedings by solicitors acting for the Respondent in Hong Kong. It was only on 7 March 2023 that these solicitors issued a summons on behalf of the Respondent (“Summons”), seeking (according its terms) leave to file the Respondent’s supporting affirmation to set aside the Enforcement Order, and alternatively, for execution of the Enforcement Order to be stayed.

4.  The Respondent’s supporting affirmation, for which leave to file was sought, was made by Mr Iurii Vladimirovich Lapin (“IVL”), the Director-General of the Respondent. In this affirmation, IVL stated that the Respondent’s delay in applying to set aside the Enforcement Order is a direct result of: (1) the “late service” of the Enforcement Order on 13 February 2023 (when it had been granted on 3 January 2023); (2) the unprecedented geopolitical situation in the Russian Republic; and (3) the difficulty for a Russian company with no Hong Kong branch of engaging local legal representation, consultation with legal representatives, consultation within the company and the filing of documents.

5.  IVL stated in his affirmation that the Enforcement Order should be set aside on the ground that the arbitral procedure was not in accordance with the parties’ agreement and with the tribunal’s Procedural Order Number 3 (“PO 3”). By PO 3 issued by the tribunal on 10 January 2022, the tribunal had directed that (inter alia) the parties’ factual witnesses and counsel were to convene at one location in Moscow, and that the witnesses of fact and expert witnesses were to participate in the hearing of the Arbitration remotely via video-conferencing. The arbitrator was to sit in London, and to hear the parties and their evidence remotely.

6.  According to IVL, the procedure stipulated in PO 3 was altered by the tribunal on the initiative of the Applicant, despite the objections from the Respondent. Instead of the parties all convening at one location in Moscow, the hearing of the Arbitration took place on 14 February 2022 and 15 February 2022, on “fully virtual basis”, with the parties and counsel and the tribunal engaging in the hearing from their respective locations, the Respondent, its witnesses and representatives attending in Moscow, the arbitrator sitting in London, and the Applicant’s witnesses and legal representatives attending in Irkutsk.

7.  According to the Respondent, it had been prejudiced by the fact that the Arbitration had so been conducted on a full virtual basis, with the Applicant’s factual witness Mr Blanusa (“Mr B”) attending remotely, which “hindered the Respondent from adequately viewing the demeanour of (Mr B)”, or to vet the witness’s genuineness and the authenticity of the oral testimony provided. By conducting the Arbitration via video-conference, the Respondent claims that it had been unable to present its case adequately, and that the procedure was contrary to what had been agreed between the Applicant and the Respondent (that the factual witnesses would be present and would actively participate in the Arbitration in person).

8.  In IVL’s affirmation, it was also claimed that taking into account his age, he preferred to be examined and/or cross-examined in person. IVL further claimed that the 8-hour time difference between Irkutsk and London was more disadvantageous to the Respondent, in comparison with a 3-hour time difference between Moscow and London as had been originally envisaged.

9.  The Respondent claims that the outcome of the Award would have been substantially different if the original terms of PO 3 had been complied with.

Nature of the application

10.  It is unfortunate that the nature of the application made by the Summons has to be considered, as that should have been made perfectly clear in the Summons itself.

11.  The Applicant’s objection is that the Summons did not specify that the Respondent is seeking an extension of time to apply to set aside the Enforcement Order. The Summons only sought leave to file the affirmation of IVL, without more. The alternative relief sought was for execution of the Enforcement Order to be stayed. If the Respondent is seeking leave to set aside the Enforcement Order out of time, the Applicant pointed out that the Summons does not set out the grounds relied upon for the setting aside.

12.  This Court held in KB v S HCCT 13/2015, 15 September 2015, that it is an abuse of process to issue a summons to set aside an order granting leave to enforce an arbitral award, if the summons does not set out or clearly disclose a ground for setting aside. It is likewise an abuse of process to issue a summons to set aside an order granting leave to enforce an arbitral award, without a proper supporting affidavit as required under Order 73 rule 10 (6A) RHC. This is all in line with and in recognition of the objective and aim of the speedy resolution of disputes by arbitration and the recognition and enforcement of arbitral awards. In no circumstance should the Court have to speculate and surmise the relief sought by a party in its application, or the grounds relied upon by it.

13.  The Summons seeks leave “to file the supporting affirmation of IVL to set aside the Enforcement Order”. The Summons was filed with the affirmation of the Respondent’s solicitor Karbhari Jal Nadirshaw (“KJN”), which was stated (in paragraph 4) to have been filed in support of the application to extend time to apply to set aside the Enforcement Order. The KJN affirmation stated reasons for the need for an extension of time. These were that the Respondent had no representation in Hong Kong, was not served with the Enforcement Order and had no knowledge of it until 13 February 2023. It was said that on receipt of the Enforcement Order, “the Respondent had to consult, take legal advice and find legal representation in Hong Kong, thereafter necessitating conferences and consultation”. The delay in service of the Enforcement Order, the unprecedented geopolitical situation in the Russian Federation, and the distance, travel and logistical complications involved were cited as reasons for seeking the extension of time.

14.  The KJN affirmation also set out, at paragraph 8, the matters relied upon by the Respondent if an extension of time is granted. These included the parties’ agreement to conduct the hearing of the Arbitration in person in Moscow, the amendment of the PO 3 by the tribunal, and the alleged inability of the Respondent to present its case adequately as a result of the arbitration being conducted by video-conference, citing the tribunal’s “serious procedural error”.

15.  Whilst the Summons did not specify that the Respondent was seeking an extension of time to apply to set aside the Enforcement Order, objectively reading the terms of the Summons and reviewing the contents of the KJN affirmation filed with the Summons, the Summons was in fact treated by the Court as an application for time to make the application to set aside the Enforcement Order after the period specified in paragraph 2 of the Enforcement Order itself. That was reflected in the directions issued by the Court on 14 April 2023, when the Court ordered “the application for extension of time to apply for setting aside Enforcement Order is to be processed on the papers”, and a timetable was set out for evidence to be filed by the Applicant in opposition, and by the Respondent in reply.

16.  The situation created by the Summons was undesirable, but despite the confusion, I will not treat it as an abuse of process when the application was explained in more detail in the KJN affirmation filed with the Summons, and in the IVL affirmation which was exhibited thereto.

Consideration of whether time extension should be granted

17.  In Astro Nusantara International BV v PT Ayunda Prima Mitra (2018) 21 HKCFAR 118, the Court of Final Appeal set out the approach and reiterated the appropriate test to apply, when the Court is asked to exercise its discretion to extend time under Order 3 rule 5 RHC. Astro likewise concerned an application for extension of time to set aside an enforcement order. The Court emphasized that the discretion is “broad and unrestricted”, designed to enable justice to be done between the parties, and that the discretion involves the intersection of two principles: that of promoting the enforcement of time limits for the expeditious dispatch of litigation in the public interest, and the recognition that a plaintiff should not ordinarily be denied adjudication of his claim on the merits because of a procedural default, unless the default causes prejudice to his opponent which cannot be compensated by costs. The applicable principle in deciding whether time should be extended is to look at all relevant matters and consider the overall justice of the case, avoiding a rigid mechanistic approach (as acknowledged by the Court of Appeal in The Decurion [2012] 1 HKLRD 1063).

18.  In Terna Bahrain Holding Co WLL v Al Shamsi [2013] 1 Lloyd’s Rep 86 the Court outlined some relevant factors to be considered, which include the length of the delay, whether the party who permitted the time limit to expire was acting reasonably in the circumstances, whether the respondent had contributed to the delay, whether the respondent would by reason of the delay suffer irremediable prejudice, the strength of the application, any impact on the progress of the arbitration, and whether “in the broadest sense it would be unfair to the applicant for him to be denied the opportunity of having the application determined”. The Court of Final Appeal in Astro highlighted the fact that it would be inappropriate to promote the importance of certain factors and according to others, including the merits of the case, a secondary status. All should be looked at in a broad, unrestricted approach.

19.  In this case, the Respondent highlighted the fact that there was only a delay of 8 days from the expiration of the period specified in paragraph 2 of the Enforcement Order. That has to be considered against the yardstick of the 14 days provided for in the Enforcement Order itself. In that light, the delay of 8 days cannot be said to be insignificant.

20.  As for the explanations given for the delay, there is no ground to claim that the delay (if any) in the service of the Enforcement Order had caused or contributed to the delay in the Respondent’s filing of the application for the setting aside of the Enforcement Order or its application for extension of time to do so. The time to apply for setting aside the Enforcement Order commences to run only upon service of the Enforcement Order, which was effected on 13 February 2023 (on which there is no dispute). If the Applicant had served it late, the period of 14 days commenced from the later date. The Respondent suffered no prejudice so far as the timing of the setting aside application is concerned.

21.  Despite the Respondent’s claims of the difficulties and complications of travel, consultation and finding legal representation, there is no dispute that IVL was able to locate and instruct solicitors in Hong Kong by the time the Notice to Act was filed on 22 February 2023 (before the expiration of 14 days on 27 February 2023). Even on the Respondent’s own case, its solicitors only wrote to the solicitors for the Applicant in Hong Kong on 3 March 2023 to seek an extension of time to make the application to set aside the Enforcement Order. The Summons was issued on 7 March 2023.

22.  The Applicant’s stance is that there was no satisfactory excuse proferred for the Respondent’s failure to seek extension of time or to make any application to the Court until 7 March 2023. The Applicant pointed out that despite the alleged difficulties complained of by the Respondent regarding the geopolitical situation in Russia, the Respondent admitted that it had been able to arrange for its general legal counsel to fly to Hong Kong and to liaise with the Respondent’s solicitors, upon receipt of the Enforcement Order.

23.  I can accept the Respondent’s explanation that there were difficulties in giving full instructions to its solicitors in Hong Kong with evidence to support its application to set aside the Enforcement Order, in the time between service of the Enforcement Order on it on 13 February 2023 and the expiration of the 14 days on 27 February 2023. This has to be considered in the context of the background of the dispute in the Arbitration, the need for the solicitors to review the Award and to advise the Respondent on the grounds available, together with the need to finalize an affirmation setting out the grounds which can be relied upon for the setting aside application. According to IVL, the Respondent has no branch office or business presence in Hong Kong, is unfamiliar with the business environment here, and requires more time to deliver the necessary documents to the solicitors in Hong Kong to confirm the Respondent’s instructions. Matters were complicated by the lack of direct flights between Russia and Hong Kong, and the delays caused by the geopolitical situation in Russia. IVL claimed that it took 6 weeks to deliver documents by courier from the Respondent’s office in Russia to the solicitors’ office in Hong Kong.

24.  I accept that documents can be dispatched by fax or email, and it is not necessary for the Respondent to be physically present in Hong Kong before instructions can be given to its solicitors in Hong Kong. However, given the time difference, the language issues, and the need to substantiate the grounds for the setting aside application before an application can be made, the Respondent’s or its solicitors’ inability to act immediately was not unreasonable.

25.  The prejudice to the Applicant, if extension of time was granted, is that it would be delayed in enforcement of a final award. The Respondent would argue that such delay could be compensated by costs and in monetary terms. There is no claim of any other prejudice.

26.  The merits of the setting aside application are indisputably relevant as one of the factors to be considered by the Court, when deciding whether extension of time should be granted to the Respondent to make the application in question. This is on the basis that the primary aim of the Court in exercising its powers is to secure the just resolution of disputes in accordance with the substantive rights of the parties (Order 1A rule 2(2) RHC), and an applicant should not be shut out from having its valid claims and rights determined by the Court.

27.  On the evidence produced for the Respondent, the only grounds relied upon for the intended setting aside application is that the hearing of the Arbitration was not in accordance with the agreement of the parties, and that the virtual hearing had resulted in the Respondent being unable to present its case “adequately”. The Respondent also claims that the tribunal had not given equal and fair treatment to it by acceding to the Applicant’s application for the virtual hearing.

28.  In my judgment, there are no merits in the Respondent’s setting aside application.

29.  The hearing of the Arbitration was initially fixed for December 2021, but rescheduled to February 2022 due to the arbitrator having been infected with Covid-19. In January 2022, the Applicant indicated that Mr B, its only witness on facts, was not available to travel to Moscow for the hearing as provided for in PO 3, due to the inconvenience and disruptions to his business, and the safety concerns of exposure to the risk of becoming infected with Covid as a result of his having to travel to Moscow for the hearing. A fully virtual hearing was accordingly proposed, for the parties to participate in the February hearing from their respective home jurisdictions. The Respondent objected to such a procedure, and this raised the issue of whether the hearing in February should be further postponed for Mr B to attend in person in Moscow at some future date, or for the hearing to proceed in February but on fully virtual basis.

30.  In her email of 22 January 2022, the arbitrator referred to the Applicant’s position concerning Mr B and his preference for a virtual hearing in February 2022, and the Respondent’s objection and insistence on the procedure set out in PO 3, as previously agreed. She pointed out the alternatives of either a further postponement of the February hearing to dates when Mr B can be available, or directing the hearing to proceed on a fully virtual basis. The arbitrator explained that determining which alternative to adopt required her “to balance both the need for the proceedings to be concluded expeditiously and for the conduct of the proceedings to be fair to the Parties”. The arbitrator referred expressly to Article 14 of the LCIA Rules (“Rules”), the contents of which are essentially the same as the provisions of section 33 of the 1996 Arbitration Act (“Act”). Article 14 and section 33 set out the duty of the tribunal, to act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and “to adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined”. Section 33(2) of the Act expressly states that the tribunal “shall comply with that general duty in conducting the arbitral proceedings, in its decisions on matters of procedure and evidence and in the exercise of all of the powers conferred on it”.

31.  The arbitrator explained in her email to the parties that it was with the above duties in mind, and taking into account the continued uncertainty as to the regulation of the pandemic in Russia and in Hong Kong over the course of the coming weeks, that it was in her judgment the appropriate course for the hearing to proceed on a fully virtual basis, with the witnesses giving their evidence and their legal representatives presenting their cases from their respective locations, rather than meeting in person in Moscow. She pointed out that it was a compromise relative to the position originally agreed by the parties, but that the continuing impact of the pandemic, as well as the nature of the case, led her to the conclusion that it was more appropriate in the circumstances for the hearing to proceed virtually than to have it further postponed, given the risk that public health measures might prevent personal attendance in Moscow from being possible for a period if the relevant regulations should change either in Russia or in Hong Kong.

32.  The Respondent argues that it was wrong for the arbitrator to rely on Article 14 of the Rules to decide the conduct of the hearing, since the Article is expressed to be “subject to the mandatory provisions of the applicable law”. For the Respondent, Counsel pointed out that section 34(1) of the Act provides that it shall be for the tribunal to decide “all procedural and evidential matters, subject to the rights of the parties to agree any matter”. The Respondent argued that although “procedural and evidential matters” include when and where any part of the proceedings is to be held, the parties’ agreement prevails over the Rules, and the Applicant and Respondent in this case had agreed to the hearing of the Arbitration being held on “semi-virtual” basis, with the parties, their witnesses, representatives and legal advisers attending and present in Moscow, to participate in the hearing - and as recorded in PO 3. The tribunal had no power to alter this procedure in view of the Respondent’s objections, and any hearing conducted in accordance with a procedure different to that agreed and set out in PO 3 was not a procedure conducted in accordance with the parties’ agreement.

33.  I cannot accept that the Respondent is correct in its submissions. Section 34(1) of the Act clearly states that it shall be for the tribunal to decide all procedural and evidential matters, only subject to “the right of the parties to agree any matter”. In this case, the parties had been in agreement on the semi-virtual procedure set out in PO 3. However, from January 2022, the parties were in dispute and did not agree on whether the hearing should proceed in February as scheduled, in the manner set out in PO 3, whether the hearing in February should be postponed, or whether the hearing should proceed on a full virtual basis with parties attending from their respective home jurisdiction. In the light of such dispute, it was then up to the arbitrator to decide on the procedure. It was in fact the arbitrator’s duty, under section 33(1) of the Act and Articles 14.1 and 14.2 of the Rules, so to decide and

“to adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined”.

34.  This was what the arbitrator did, after taking into consideration all the circumstances of the case to which she referred, and it is not for the Court to question or to interfere in the arbitrator’s exercise of her discretionary and case management powers with regard to the flexibility of the arbitral process.

35.  Article 14.2 of the Rules states that the tribunal “shall have the widest discretion to discharge the general duties set out in Article 14.1”, namely the duty set out in section 33(1)(a) of the Act, subject to the mandatory provisions of any applicable law. The tribunal may, under Article 19.1 of the Rules, decide that the hearing should be held at any stage, and by virtue of Article 19.2, the tribunal “has the fullest authority under the Arbitration Agreement to establish the conduct of a hearing, including (inter alia) its form, content, procedure, time limits and geographical place”. Article 19.2 expressly provides that “as to form, a hearing may take place in person, or virtually by conference call, videoconference or using other communications technology with participants in one or more geographical places (or in a combined form)”.

36.  There is clearly no basis for the Respondent to claim that the tribunal did not have power, in the absence of the Respondent’s agreement, to direct the hearing in February 2022 to take place in the form ordered, on virtual basis. The tribunal is given wide discretion and powers under the Act and the Rules in relation to the conduct of the Arbitration, and there is nothing in section 34 of the Act or the Rules which constrain the tribunal when the parties cannot agree on the procedure. Otherwise, an arbitration will be unnecessarily delayed and hampered whenever the parties cannot agree, when the whole purpose and objective of arbitration is for the tribunal to resolve disputes between parties.

37.  Nor is there any basis to claim that in reaching her decision on the form of the hearing, the arbitrator had failed to act fairly and impartially. If there was any inconvenience as a result of the virtual hearing being conducted in the way it was, such inconvenience was suffered by both parties, and each party was subjected to the same risks and difficulties.

38.  The Respondent sought to highlight the disadvantages of a virtual hearing and the undesirability of the evidence having been given and tested through video link only. The Respondent claims that it was not able effectively to cross-examine the critical factual evidence of Mr B and to test his credibility.

39.  Remote hearings are now commonplace in court proceedings as well as in arbitrations, even before but particularly more so after the pandemic, and the consequent difficulties created and impact on travelling and gathering. Whether it is appropriate in any particular case to permit the factual witnesses to give evidence at the hearing remotely, whether the effectiveness of cross-examination can be or was undermined, whether appropriate measures are required or were put in place to ensure the security of the process, are all matters for the consideration and final decision of the tribunal in the case. The arbitrator in this case had duly considered the difficulties and delay caused by the global pandemic, the need for a speedy resolution of the Arbitration without further postponements in the face of the changing situation and the evolving health regulations and travel restrictions, when she decided on the timing and format of the hearing. As reflected in the Award, the arbitrator was obviously satisfied with the manner in which the virtual hearing was conducted, and the parties were not seen to have voiced any concern in the course of the remote hearing with regard to any interference or difficulties encountered.

40.  In any event, as the Applicant highlighted, the arbitrator made the final Award on the basis of the contractual and contemporaneous documents, the construction of the documents, and the legal issues raised. The arbitrator pointed out that where the factual witnesses’ evidence was not consistent with the contemporaneous documents, she had preferred the evidence of the contemporaneous documents.

41.  On the materials available, I cannot see any real injustice or prejudice to the Respondent, in the sense that the outcome of the Arbitration could have been different, if the hearing had not been conducted on fully virtual basis. There is no permissible ground to set aside the Enforcement Order and refuse recognition of the Award.

Conclusion

42.  Having considered the matter as a whole, I decline to grant leave to the Respondent to file the affirmation of IVL or to apply to set aside the Enforcement Order out of time. The Summons is dismissed, and it follows that the costs of and occasioned by the Summons should be paid by the Respondent to the Applicant, with certificate for counsel, on indemnity basis.