L v. R

HCCT 87/2023

[2024] HKCFI 1611

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 87 OF 2023

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D E C I S I O N

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Background

1.  These proceedings were instituted in November 2023 by the Plaintiff (“L”)’s Originating Summons, whereby L seeks to set aside (1) a Settlement Agreement dated 12 August 2023 (“Settlement Agreement”) signed by L and the Defendant (“R”); and (2) a Procedural Order dated 28 August 2023 (“PO 7”) made by the tribunal in an arbitration which had been initiated by R against L in Hong Kong before the HKIAC (“Arbitration”). The stated grounds for the setting aside are that firstly, the terms of the Settlement Agreement were contrary to a Scheme of Arrangement which had been sanctioned by the Supreme Court of the Seychelles on 6 March 2023 (“Scheme”), and that the Settlement Agreement had been signed by a director of L without authority. The second ground for the setting aside is that PO 7 was a final decision of the tribunal in relation to the subject matter of the Arbitration, and was against public policy as it was based on the Settlement Agreement which was contrary to the Scheme and signed without authority, and further, that L was unable to present its case to the tribunal on the lack of authority of the director who had signed the Settlement Agreement for L.

2.  In December 2023, L applied ex parte and was granted leave to serve the Originating Summons out of the jurisdiction on R in St Kitts (“Service Out Order”). L also obtained leave to dispense with personal service (“Dispensation Order”), and to effect substituted service of documents in the proceedings on R (“Substituted Service Order”), by (inter alia) email, and to its legal representatives in Hong Kong.

3.  On 4 January 2024, R applied by his summons to set aside the Service Out Order, the Dispensation Order and the Substituted Service Order (“Summons”), on the grounds that: (1) leave should not be granted for service out under Order 73 rules 7 RHC, as no claims can be made by L under the Arbitration Ordinance, or there is no serious question to be tried on the merits of L’s Originating Summons; (2) that L had not been able to show in its ex parte application that it was impracticable to serve the Originating Summons and the documents relating thereto in the usual manner on R; and/or (3) there was material non-disclosure in L’s ex parte application.

4.  By the time of the hearing of R’s Summons, the setting aside of the Dispensation Order and the Substituted Service Order, and the grounds in support thereof, had been withdrawn.

5.  The remaining issue in dispute for determination on the Summons is whether the Service Out Order should be set aside, and the costs of the application for setting aside the Dispensation and Substituted Service Orders.

The Settlement Agreement and PO 7

6.  The Settlement Agreement was claimed to have been made between R and L, relating to the Arbitration which had been commenced by R. Under the Settlement Agreement, the parties agreed to a full and final settlement of the Arbitration on terms that each would withdraw and/or have dismissed all claims and/or counterclaims made in the Arbitration, thereby fully disposing of the Arbitration on the basis that neither party is liable to the other in any way, and each party will bear its own legal and other costs. The Settlement Agreement set out terms as to the implementation of the settlement, the release of various claims and liabilities, and provides that the Settlement Agreement is governed by Hong Kong law, and that the High Court of Hong Kong shall have exclusive jurisdiction to settle any disputes which may arise out of or in connection with the Settlement Agreement, with each party irrevocably submitting to the exclusive jurisdiction of the Hong Kong Court.

7.  Settlement of arbitration claims and settlement agreements are dealt with in section 66 of the Ordinance. This is set out below:

“66(1) Article 30 of the UNCITRAL Model Law, the text of which is set out below, has effect—

‘Article 30. Settlement

(1) If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and, if requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms.

(2) An award on agreed terms shall be made in accordance with the provisions of article 31 and shall state that it is an award. Such an award has the same status and effect as any other award on the merits of the case.’.

(2) If, in a case other than that referred to in article 30 of the UNCITRAL Model Law, given effect to by subsection (1), the parties to an arbitration agreement settle their dispute and enter into an agreement in writing containing the terms of settlement (settlement agreement), the settlement agreement is, for the purposes of its enforcement, to be treated as an arbitral award.”

8.  Pursuant to the Settlement Agreement, the parties made a joint application to the tribunal on 14 August 2023 to terminate the Arbitration. However, correspondence was submitted to the tribunal, in which it was purported that the legal representatives of L had changed, and issue was taken as to whether the Settlement Agreement had been signed with the authority of L. After a further exchange of correspondence and some delay, the tribunal finally decided to terminate the Arbitration pursuant to Article 37.2(a) of the HKIAC Rules, but instead of issuing an order for the parties’ respective claims and counterclaims to be withdrawn and the Arbitration to be terminated on the terms set out in the Settlement Agreement (as requested by L and R), the tribunal decided to terminate the proceedings in the form of a procedural order, because (in the tribunal’s opinion) there were no terms of the settlement to record. The tribunal stated, at paragraph 44 of PO 7:

“In reaching its present decision, the Tribunal notes as follows:

(a) The Tribunal does not make any determination as to the validity of the Settlement Agreement. Pursuant to Clause 7.2 of the Settlement Agreement ‘[t]he High Court of the Hong Kong SAR shall have exclusive jurisdiction to settle any dispute(s) which may arise out of or in connection with this Settlement Agreement and the Parties irrevocably submit to the exclusive jurisdiction of the High Court of the Hong Kong SAR.’

(b) The Tribunal does not make any determination as to the composition or authority of the Respondent’s Board or the Respondent’s rights under the scheme of arrangement approved by the Supreme Court of Seychelles on 6 March 2023.

(c) The Tribunal is satisfied, based on the powers of attorney or letters of engagement presented in the present arbitration by the Claimant and Respondent, respectively, that the Parties, duly represented by their respective counsel on record, jointly requested the termination thereof.

(d) The Tribunal does not rule on the merits of any claims or counterclaims presented in the present arbitration as the Parties have agreed that the Arbitration is to be terminated.”

9.  At paragraph 54 of the order made by the tribunal, it accordingly:

“(a) terminates the present arbitration;

(b) determines the costs of the arbitration pursuant to Article 34.1 of the HKIAC Rules at HK$2,193,990.82;

(c) decides that each Party is to bear 50% of the costs of the arbitration so determined; and

(d) makes no other orders as to costs in relation to these arbitral proceedings.”

Service Out Order

10.  The Originating Summons for setting aside the Settlement Agreement and PO 7 is of course made under the Arbitration Ordinance (“Ordinance”). It cites sections 66(2) and 81 of the Ordinance. Service out of any originating summons relating to applications made under the Ordinance is governed by Order 73 rule 7 RHC. This rule has effect in place of Order 11 rule 1.

11.  Under Order 73 rule 7, service out of any originating summons or summons, or of any order made on such originating summons or summons, is permissible with the leave of the court if the arbitration to which the originating summons, summons or order relates is governed by Hong Kong law or has been, is being, or is to be held within the jurisdiction of Hong Kong. There is no doubt that the Arbitration in question in which PO 7 was made was held in Hong Kong. L as Plaintiff is clearly entitled to apply and obtain leave of the Court for service of the Originating Summons out of the jurisdiction, and this was a proper case for service out of Hong Kong.

12.  On behalf of R, it was argued that L has no case against it in these proceedings for setting aside the Settlement Agreement and PO 7, since neither the Settlement Agreement nor PO 7 are “awards” within the meaning of the Ordinance. It has to be borne in mind that for service out of the jurisdiction, L as Plaintiff only has to show a serious question to be tried on the merits of its claims in the proceedings. This is not the hearing of the substantive application to set aside the Settlement Agreement or PO 7, and the threshold for “serious question to be tried” is not high.

13.  Dealing first with PO 7, R argued that it was merely a procedural order made by the tribunal, to terminate the Arbitration, and it was made clear by the tribunal in PO 7 that it was not making any determination or ruling on the merits of any claim or counterclaim presented in the Arbitration, nor on the validity of the Settlement Agreement, or the authority of the board of directors of L, since the parties before the tribunal had agreed that the Arbitration was to be terminated. Counsel for R pointed out that notwithstanding the parties’ joint request for their Settlement Agreement to be recorded in an arbitral award, the tribunal specifically declined to do so and instead chose to issue a procedural order.

14.  It was accordingly argued for R that PO 7 is not a final determination of a claim or a particular issue in the Arbitration, to amount to an “award” (citing G v N [2024] HKCFI 721, Born, International Commercial Arbitration, Vol III (3^rd edition) para 23.01, and Russell on Arbitration (24^th edition) para 6-002).

15.  As this Court explained in G v N and in W v Contractor [2024] HKCFI 1452, orders and directions of the arbitral tribunal are enforceable under section 61 of the Ordinance, in the same manner as an order or direction of the Court, with leave of the Court, but the grounds for setting aside an award under section 81 of the Ordinance do not apply to such orders or directions because section 61 sets out its own regime for enforcement of interim orders and directions of the tribunal.

16.  Applying the guidelines in ZCCM Investments Holdings v Kansanshi Holdings [2019] 1 CLC 770 for the classification of an order as either an award, or an interim order, and bearing in mind in particular the nature of the issues dealt with in PO 7, the tribunal’s description of its decision (a relevant but inconclusive factor), and the finality of the tribunal’s decision, I consider that L has shown at least that there is a serious question to be tried, that PO 7 is final in the termination of the Arbitration proceedings, and that it is a final and binding “award” in that sense. Although R argued that the Settlement Agreement did not terminate the Arbitration or render the tribunal functus officio, PO 7 did. It ruled on the termination of the Arbitration and on the parties’ costs entitlement/liability. Nothing remained for the tribunal’s decision.

17.  As for the Settlement Agreement, L argued that section 66(2) of the Ordinance applies to the Settlement Agreement and contends that by virtue of section 66(2), the Settlement Agreement is treated as an arbitral award for the purposes of its enforcement, and as such, questions of whether enforcement of the Settlement Agreement should be challenged, allowed or refused can arise under section 81 or 86 of the Ordinance.

18.  Article 30(1) of the Model Law (given effect by section 66(1) of the Ordinance) applies when the parties settle the dispute, and the tribunal (upon the parties’ request and without objection from the tribunal) records the settlement in the form of an arbitral award on the agreed terms. In such a case, Article 30(2) makes it clear that the award on the agreed terms has the same status and effect as any other award on the merits of the case, to render it enforceable and open to challenge in the same way as an award.

19.  Section 66(2) states that it applies in a case other than one referred to in Article 30 of the Model Law. Where the parties to an arbitration agreement settle the dispute and enter into an agreement in writing containing the terms of settlement, then that agreement is to be treated under section 66(2) as an arbitral award “for the purposes of its enforcement”.

20.  In the present case, since the tribunal did not accede to the parties’ request to record the settlement purported to have been made by the parties in the form of an arbitral award, Article 30 of the Model Law does not apply, and section 66(2) comes into play. The Settlement Agreement between L and R is to be treated as an arbitral award under section 66(2) for the purposes of its enforcement.

21.  If the Settlement Agreement is to be treated as an award for the purposes of its enforcement, there is in my judgment a serious question to be tried whether the grounds for challenging or resisting enforcement of an award, as provided for in the Ordinance, can apply to an application to set aside the Settlement Agreement.

22.  For the above reasons, there is in my judgment no ground for setting aside the Service Out Order on the basis that there is no serious question to be tried on the merits of L’s claim in the Originating Summons.

Material non-disclosure?

23.  According to R, L should have disclosed to the Court that there was no serious question to be tried on the merits of the Originating Summons because of the absence of any “awards” capable of being challenged, and that it was not a proper case for service out under Order 73 rules 7(5).

24.  On L’s part, it was argued that in its application for service out, it had already pointed to the fact that the Settlement Agreement was treated as an award under section 66(2), and that PO 7 was a final decision despite not being in the form of an award.

25.  The matters of alleged non-disclosure relied upon by R relate to the law, and I have ruled against R on these issues of law. There is accordingly no case of material non-disclosure to justify the setting aside of the Service Out Order.

Substituted Service Order

26.  On behalf of R, Counsel contended that after the issue of R’s Summons which pointed out the deficiencies of L’s failure to attempt personal service before seeking substituted service, R was personally served with the Originating Summons and the relevant documents, without any difficulties. Whilst maintaining that there was never any impracticability in effecting personal service on R, and that the Substituted Service Order ought not to have been sought in the first place, R submitted that he withdrew the application to set aside the Dispensation Order and the Substituted Service Order, in order to save costs and because the issue had been rendered academic by the personal service.

27.  Despite the withdrawal, R seeks costs of the application to set aside the Dispensation Order and the Setting Aside Order against L.

28.  Counsel for R accepts that the starting point is that the party seeking to withdraw an application should pay the associated costs, and the burden of persuading the Court to depart from such general rule rests on the party who seeks the withdrawal. Counsel argued that the Court should not adopt a mechanical approach but should be guided by principles of fairness and justice, and consider whether there is a good reason for withdrawal. On the facts of the case, it was contended that the Court should take account of whether the party seeking the withdrawal has achieved substantially what it had sought in the application, and whether such party was in effect the substantive winner of the case. According to R, the Substituted Service Order would have been set aside but for his withdrawal, because it had been wrongly sought and wrongly granted, when L had not established the impracticability of service and the necessity for substituted service. It was highlighted that the Originating Summons and the relevant documents were successfully served on R personally, 5 days after his Summons was issued, and that such personal service had rendered R’s original application academic, but has confirmed the lack of impracticality.

29.  Counsel for L referred to the evidence filed on the ex parte application, where explanation had been given as to why service was impracticable. This included the fact that the address given by R at the XXXXX Residences in St Kitts did not contain any specification of the particular apartment unit where R resided, R’s frequent and regular travels to multiple jurisdictions (including South Korea, Moscow, Tokyo, Malaysia and French Polynesia) in the period between June and November 2023, and the fact that the solicitors who were on the record as R’s solicitors in other Court proceedings in Hong Kong had refused to accept service of documents on his behalf in these proceedings. In particular, it was pointed out for L that the personal service on R which was effected on 4 January 2024, and which R has highlighted, was not the only and first step taken by L to attempt personal service. The first letter of service was in fact dated 20 December 2023, which had been sent to a process server in St Kitts.

30.  On the evidence, I am satisfied that the Substituted Service Order was not unjustified and was not improperly made. As Counsel for L emphasized, the fact that R’s solicitors had refused to accept service of the Originating Summons on behalf of R in these proceedings, whilst at the same time acting for R in other proceedings, gives rise to a strong inference of evading service, or game playing (in the words of Anthony Chan, J in Saif Partners II LP and ors v Joe Zhixiong Zhou [2020] HKCFI 987). This is not a practice to be encouraged when the underlying objectives of the RHC are to avoid unnecessary costs and delay, and to ensure the expeditious disposal of proceedings. Speedy progress of proceedings under the Ordinance is particularly important and is an essential feature of the Court’s policy of supporting arbitration.

31.  I decline to order costs in favor of R.

Disposition

32.  The Summons is dismissed. L is the obvious winner of this interlocutory skirmish, which I would add is a totally unnecessary distraction, and it follows that the order should be for R to pay to L the costs of and incidental to the Summons, on indemnity basis.