CANUDILO INTERNATIONAL COMPANY LTD v. WU CHI KEUNG AND OTHERS

HCCT 63/2021

[2023] HKCFI 700

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 63 OF 2021

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D E C I S I O N

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Background

1.  It is trite that when the Court is called upon to set aside or to refuse enforcement of an arbitral award, the fact that the tribunal had erred on facts or law is not a ground for the Court to interfere. The Court looks only at the structural integrity of the arbitral process, stepping in when there is an error which is so egregious that it would be shocking the conscience of the court to allow the award to stand and to permit its enforcement. The present case calls for consideration of whether errors made by the arbitrator on facts and law can be so egregious and cause an outcome which is so unfair and unjust, that the Court cannot ignore the errors as enforcement of the award made would be repugnant.

2.  On 6 August 2021, the Applicant (“CIC”) commenced proceedings to enforce a final arbitral award made on 7 June 2021 (“Final Award”) in an arbitration commenced in Hong Kong (“Arbitration”) between CIC as Claimant, Apennine Holdings Limited (“Company”) as 1^st Respondent, Wu Chi Keung (“CK Wu”) as 2^nd Respondent, Ji Guanhua (“Ji”) as 3^rd Respondent, Wu Chi Fong Thomas (“CF Wu”) as 4^th Respondent and Wang Liuxi (“Wang”) as 5^th Respondent.

3.  On 10 August 2021, this Court granted leave (“Enforcement Order”) for CIC to enforce the Final Award against CK Wu, Ji, CF Wu and Wang as a judgment of the Court, and in terms of the Final Award which were that: (1) CK Wu, Ji and CF Wu should jointly and severally pay to CIC €856,953 with interest; (2) CK Wu, Ji and Wang should jointly and severally pay to CIC €896,290.98 with interest; (3) CK Wu, Ji, CF Wu and Wang should jointly and severally pay to CIC HK$899,200, and arbitration fees.

4.  On 26 April 2022, CK Wu and CF Wu (referred to hereinafter jointly as “Wu”) applied, out of time, to set aside the Enforcement Order.  The grounds stated are that the Tribunal had (inter alia) exceeded its mandate and jurisdiction by failing to determine the issues in dispute, that the Arbitration was not conducted in accordance with the arbitration agreement and/or the agreed arbitration procedures, that Wu did not have a reasonable opportunity to present their case, and that enforcement of the Award would be contrary to the public policy of Hong Kong.

The Arbitration

5.  The Arbitration was commenced by CIC under two sales contracts (referred to in the Arbitration and in these proceedings as the “006 Contract” and the “007 Contract”) which were made between CIC as seller, and the Company as buyer. Wu and Ji were named in the 006 Contract as the 3 guarantors.  CK Wu and Ji were named as the 2 guarantors in the 007 Contract.  By virtue of a supplemental agreement to the 007 Contract (“Supplemental Agreement”), Wang also agreed to act as guarantor of the Company in respect of its obligations under the 007 Contract.

6.  Under the 006 and 007 Contracts and the Supplemental Agreement (referred to collectively hereafter as “Contracts”), CIC agreed to sell and the Company agreed to purchase certain commodities, and Wu, Ji and Wang provided guarantees for the obligations to be performed by the Company under the Contracts. CIC claimed in the Arbitration that the Company had defaulted in payment of the purchase price for the goods sold under the Contracts, that the Company was in breach of its payment obligations, and that Wu, Ji and Wang as the guarantors were liable for payment of the sums due under and in accordance with the terms of the Contracts.

7.  There is no dispute that the Company did not take part in the Arbitration. CF Wu is the sole director and one of the two shareholders of the Company, with Ji being the other shareholder.

8.  After commencement of the Arbitration on 10 September 2019, an arbitrator was appointed on 10 December 2019 (“Arbitrator 1”).  According to Wu, due to disagreements amongst the shareholders/controllers of the Company, it was not possible to engage legal representatives to represent the Company independently in the Arbitration, and to file a Defence on behalf of the Company. The original solicitors instructed for the Company ceased to act for it by 19 October 2019 (as recorded in the Interim Final Award of 26 June 2020, referred to and explained below). Hence, no step was taken by the Company in the Arbitration and it is not disputed, that the Company did not file any defence or evidence, and made no submissions in the Arbitration.

9.  On their part, Wu raised various issues and disputes in their Defence.  In summary, they claimed that:

(1)  The parties did not have intention to create legal relations under the sale and purchase contracts. They were informed by CIC’s parent company (“Listco”) that the Contracts were matters of form only, created for regulatory purposes (“No Intention Defence”).

(2)  CIC never sold any goods to the Company. The orders and sales documents were placed by the Company with foreign suppliers directly, and not with CIC (“No Sale Defence”).

(3)  The sum due under the 006 Contract was agreed to be set-off against a sum due from CIC to the Company under a separate contract (“Set-off Defence”).

(4)  The 007 Contract did not clearly specify the goods sold and purchased and CIC had not proved what it had sold to the Company (“No Schedule of Goods Defence”).

(5)  The Contracts were vitiated by CIC’s breaches of a Framework Agreement made between Wu and Listco under which Listco was to provide funding to the Company for the purchase of goods, and Listoco’s breaches of the Framework Agreement constituted misrepresentation and economic duress affecting/ relating to the Contracts (“Vitiating Factors Defence”).

10.  The particular features of the Arbitration and the awards made have to be explained.

11.  After Wu, Ji and Wang had filed their statements of defence, various applications were made to Arbitrator 1. By his Procedural Order No 8 dated 6 May 2020 (“PO 8”), Arbitrator 1 made various orders for (inter alia) Ji and Wang to file their amended Defence and evidence, for CIC to file its amended Reply, and issued a timetable for the exchange of witness statements (which timetable was annexed to PO 8 as “Attachment A”). On 21 May 2020, Arbitrator 1 also issued Procedural Order No 10 (“PO 10”), whereby Arbitrator 1 allowed CIC’s application for the question of the Company’s liability for payment under the 006 Contract and 007 Contract with CIC to be determined, by way of an interim award, and on the papers filed (ie without a hearing). Under PO 10, CIC and the Company were directed to submit their respective written submissions and legal authorities by 18 June 2020.  Arbitrator 1 expressly directed that upon receipt of the materials from CIC and the Company, he would declare the proceedings between CIC and the Company closed and make an interim final award.

12.  Pertinently, Arbitrator 1 directed at paragraph (5) of PO 10 that the further Arbitration proceedings between CIC on the one part, and Wu, Ji and Wang on the other part, would proceed in accordance with the timetable set out in Attachment A of PO 8. Attachment A referred to the exchange of witness statements by 3 June 2020, the submission of agreed and disputed issues within 5 weeks thereafter, the submission of written submissions after another 5 weeks, and a hearing of the Arbitration on a date to be fixed.

13.  Having made the decision to accede to CIC’s application to bifurcate the Arbitration into the determination of (1) CIC’s claims as to the Company’s liability for payment, and (2) CIC’s claims against the guarantors in respect of their liability, Arbitrator 1 then declared, on 19 June 2020, that the Arbitration proceedings between CIC and the Company were closed.  In a notice issued to the parties on 19 June 2020, he directed that an interim final award would be issued by him within 4 weeks. In the same notice, Arbitrator 1 stated: “For avoidance of doubt, it is hereby declared that the Arbitration proceedings between CIC and the other Respondents should continue to proceed.”

14.  Throughout this time, from 19 October 2019, the Company had no legal representation.  No documents were filed for the Company in the Arbitration.

The Interim Final Award

15.  On 26 June 2020, Arbitrator 1 issued an Interim Final Award (“2020 Award”). In the 2020 Award, Arbitrator 1 referred to PO 10, whereby he had permitted CIC’s application to determine on paper the claim relating to CIC’s payment liability under the 006 Contract and the 007 Contract.  It was pointed out (at paragraph 28 of the 2020 Award) that the Company had failed to respond to the direction contained in PO 10, as to the service of written submissions and other documents.

16.  In the 2020 Award, Arbitrator 1 stated, at paragraph 33, that the 2020 Award only involved the dispute between CIC and the Company.  It was further stated that the dispute between CIC and the other Respondents in the Arbitration would continue, and that having considered the submissions and materials of CIC, Arbitrator 1 did not consider that the disputed matters between CIC and the other Respondents in the Arbitration have to be determined in the 2020 Award.

17.  Arbitrator 1 found in the 2020 Award that CIC and the Company had performed their contractual obligations under the 007 Contract.  He construed the provisions of the Contracts, and concluded that (as can be seen from paragraph 79 of the 2020 Award) as between CIC and the Company, the Company should pay to CIC the sums due under Contract 006 and Contract 007, in the respective amounts of €856,953 and €896,290.98, and that the Company should pay to CIC the arbitration costs.

18.  The Arbitration took a change in course after the issue of the 2020 Award. Arbitrator 1 issued Procedural Order No 14 on 29 June 2020 (“PO 14”). He notified all parties that he had on 26 June 2020 received a letter from solicitors acting for the Company, whereby an extension of time was sought for making written submissions on behalf of the Company, notwithstanding that Arbitrator 1 had already declared the proceedings between CIC and the Company to be closed on 19 June 2020.  Arbitrator 1 stated that CIC and the Respondents should be given a reasonable opportunity to decide whether to nominate a new arbitrator to continue the Arbitration, and by PO 14, Arbitrator 1 stayed the proceedings for 8 weeks until 24 August 2020.

19.  CIC, Ji and Wang objected to the appointment of a new arbitrator. Wu objected to Arbitrator 1 remaining as arbitrator. On 20 July 2020, Arbitrator 1 resigned. In his notice issued to the parties on 20 July 2020, Arbitrator 1 stated that after having considered the matter and the respective stance of the parties, he was of the view that to continue to act in the Arbitration after the issue of the 2020 Award would give rise to reasonable suspicion or doubt as to his impartiality as arbitrator.

The New Arbitrator

20.  Accordingly, on 17 September 2020, HKIAC appointed a new arbitrator for the Arbitration (“Arbitrator 2”) and notified the parties of the same. In a letter dated 28 October 2020 sent to all parties, including the solicitors appointed by then for the Company, Arbitrator 2 pointed out that the 2020 Award had already been issued, and that the entire arbitral proceedings between CIC and the Company had concluded. Arbitrator 2 further pointed out that the Company had indicated to HKIAC that the 2020 Award should be set aside, and that the Company would be making the necessary application to the new tribunal. In his letter, Arbitrator 2 stated that after his appointment, he would only be dealing with the Arbitration proceedings between CIC, Wu, Ji and Wang. He referred to the timetable hitherto fixed for the parties to exchange witness statements, pointed out that witness statements had not yet been exchanged, and directed CIC, Wu, Ji and Wang to exchange their witness statements by 11 November 2020.

21.  After witness statements had been exchanged in November 2020, Arbitrator 2 notified the parties that having reviewed CIC’s application for paper disposal of its claims, Arbitrator 2 considered that it was necessary to have an oral hearing.

22.  Written submissions for the hearing of the Arbitration were thereafter served by CIC, Ji and Wang through their respective lawyers. On 20 February 2021, Arbitrator 2 was informed that the solicitors for Wu had ceased to act.  Opening submissions were served by CF Wu on 22 February 2021, and by CK Wu on 24 February 2021. Wu acted without lawyers in the Arbitration from 20 February 2021.

23.  The hearing of the Arbitration took place from 1 to 3 March 2021 and on 8 March 2021. Witnesses were called. Closing and reply submissions were served on 22 March 2021 and 12 April 2021 respectively.

The Final Award

24.  On 7 June 2021, the Final Award was issued by Arbitrator 2.  He found that:

(1)  He had jurisdiction in the Arbitration.

(2)  The Contracts (ie 006 Contract and 007 Contract including the Supplemental Agreement) were validly executed, and were binding on Wu, Ji and Wang.

(3)  He had no jurisdiction to rule on either the existence of the Framework Agreement and the Joint Venture Agreement referred to by Wu, or the set-off claimed by Wu by way of defence.

(4)  The Contracts were not induced by misrepresentation or fraud.

(5)  The Contracts were not affected by economic duress.

(6)  The Contracts did not violate their governing law.

(7)  The default payments (逾期付款違約金) under the Contracts were neither unreasonable nor excessive to render them unenforceable.

(8)  CIC was not in breach of its duties to perform under the Contracts. The goods purchased and the payments made by the Company to CIC were related to the Contracts.

(9)  Wu, Ji and Wang were liable under the Contracts.

25.  The Final Award therefore ordered Wu to pay the sums of €856,953, €896,290.98 and HK$899,200, with costs.

The grounds for resisting enforcement

26.  On behalf of Wu, Counsel pointed out by way of highlight that Arbitrator 2 made it clear in the Final Award that he was bound to follow the 2020 Award, which was binding not only on the Company, but also on Wu as well as Ji and Wang. Arbitrator 2 referred to the cases cited by the lawyers acting for Ji and Wang in arguing whether there was re-litigation of the matters decided in the 2020 Award (In Re Kitchin (1881) 17 Ch D 668 and Welltime Hong Kong Ltd v Cosmic Insurance Corporation Ltd [2004] 2 HKC 155), and sought to distinguish them on the basis that Wu, Ji and Wang were all parties in the same proceedings as CIC and the Company, that they could have made their submissions on any defence which they had, in relation to the Company’s primary liability for the debt due to CIC under the Contracts, and in relation to their own liability thereunder. Arbitrator 2 pointed out that Wu, Jin and Wang had not done this in the Arbitration before Arbitrator 1, and that they were seeking to have a “second bite of the cherry” which was impermissible. Although Arbitrator 2 appeared to deal with the No Intention Defence, No Sale Defence, and Vitiating Factors Defences in the Final Award, it was only on a peripheral basis, with the starting point that he was bound to follow the findings made by Arbitrator 1 in the 2020 Award.

27.  Accordingly, it was argued by Counsel that Arbitrator 2 had failed to decide the key issue of Wu’s Defence, that they as guarantors were not liable when there was no valid primary debt due from the Company, and that Arbitrator 2 had failed to apply an independent mind, and without being influenced by the 2020 Award made against the Company, when he made the Final Award.

28.  Having carefully reviewed the Final Award, I cannot accept the submissions made on behalf of CIC, that Arbitrator 2 did not consider and had not stated in the Final Award that he was bound by, and had to follow, the 2020 Award.  Arbitrator 2’s approach was obvious from the Final Award.  At paragraph 68, he first stated:

“With regard to the actual dispute between the parties, this tribunal should start with the (2020 Award) (“應從最終中間裁決後開始審理本案”).  According to the (2020 Award), the former tribunal’s decision is that all the contracts were valid as a whole, and this meant that the commercial terms, the arbitration clause and the terms relating to the (Respondents) as guarantors are valid.  If it can be said that only the provisions involving (the Company) are valid, but not the other provisions, that is unreasonable.” (Emphasis added)

29.  What is more obvious is that Arbitrator 2 went on to state, at paragraph 70 of the Final Award:

“As none of the parties have disputed the 2020 Award, I cannot decide afresh the matters determined in the 2020 Award, nor is there basis to decide those matters afresh.”

30.  In relation to the claims of fraudulent misrepresentation and economic duress made by the guarantors, Arbitrator 2 stated that all these disputed matters had been raised in the first part of the Arbitration before the 2020 Award, and that Arbitrator 1 had already decided in the 2020 Award the disputes relating to the validity and binding effect of the Contracts.  At paragraph 74, Arbitrator 2 concluded:

“The former tribunal has made an award on the validity of the Contracts, and the factual disputes which I am deciding are the same facts decided by the former tribunal in the same arbitration.  As the disputed matters have been decided in the award, and none of the parties have disputed the award, I have to abide by the said award/decision  (“本人須遵循該裁決”).”

31.  In dealing with the claims made by Wu as to the purpose of the Contracts being to avoid regulatory issues, Arbitrator 2 stated in his conclusion at paragraph 84 as follows:

“The former tribunal had in the (2020 Award) decided the nature of the Contracts as agreements for resale of the goods. I cannot overturn such decision  (“本人不能夠推翻該項決定”).”

32.  The same statement was made at paragraph 88 of the Final Award:

“As for the claim that (CIC) had failed to perform the relevant contracts, the former tribunal had actually decided that (CIC) and all the respondents had performed (the Contracts). I cannot overturn such finding of fact  (“本人不能推翻對此項事實的裁決”).”

33.  Finally, on CIC’s claim for default payment and interest, Arbitrator 2 found at paragraphs 100 and 103 of the Final Award:

“The former tribunal had decided that the default payment under the 006 Contract is enforceable, but that the default payment under the 007 Contract is unenforceable.

…

As for 007 Contract, CIC’s claim for default interest was already dismissed by the former tribunal.”

34.  In my view, and reading the Final Award as a whole, Arbitrator 2 decided the essential issue of whether there was a primary debt established to be due from the Company on the basis that this had already been decided in the 2020 Award, and he had to follow the findings because he and all the guarantors including Wu were bound by the 2020 Award. I accept that Arbitrator 2 had, at various parts of the Final Award, attempted to state the defences and claims made by Wu, for example in dealing with the No Intention Defence and the Vitiating Factors Defence (in paragraphs 72, 78 to 79 of the Final Award), and the No Sale Defence (at paragraph 89 of the Final Award), in rejecting them. Mr Lai for Wu contended that Arbitrator 2 had made no analysis of the evidence apart from following the 2020 Award, but as the Court pointed out at the hearing, a poorly reasoned award and a failure to give adequate reasons for the award are not grounds to set aside or refuse enforcement of an award.

35.  What is more convincing in this case is that on an objective reading of the Final Award, the Court has grave concerns that Arbitrator 2 had not applied his own independent mind pursuant to the mandate given to him under the arbitration agreement to decide the dispute between the parties.  For the second part of the Arbitration which was presided by Arbitrator 2, that dispute was whether, as against the guarantors, there was a valid debt due and payable under the Contracts and that the Contracts were not vitiated by any misrepresentation or economic duress. Wu and the guarantors were entitled in law to test and challenge the evidence on the Contracts, and on the alleged primary debt. It is not reasonably clear from the Final Award and the dismissive approach adopted by Arbitrator 2 to the Defence that he had independently considered the issues raised in Wu’s Defence and the evidence adduced in the second part of the Arbitration heard by him, when deciding the liability of the guarantors under the Contracts. What is material in this case is that at the first part of the Arbitration, Arbitrator 1 had expressly stated that it was not necessary for him to deal with and decide on the disputed issues raised in the Defences of Wu, Ji and Wang. As Arbitrator 1 had also pointed out in the 2020 Award, the Company itself had not adduced any evidence to refute CIC’s claims made against it.

36.  It has to be borne in mind that even if Arbitrator 1 had not resigned after hearing the first part of the bifurcated Arbitration, the arbitrator would still have to determine the issues raised, the defences pleaded and the evidence adduced by Wu, Ji and Wang in the second part of the Arbitration.  The effectiveness of bifurcating the Arbitration can be said to be dubious, but that was what CIC applied for, and was accepted by Arbitrator 1. Contrary to what Arbitrator 2 stated in the Final Award, the disputed issues between CIC and the guarantors had not been decided by Arbitrator 1, and the findings made as to the debt between CIC and the Company did not bind Wu, Ji and Wang who were entitled to dispute the primary debt of the Company under the Contracts. Also contrary to what Arbitrator 2 stated, PO 10 issued by Arbitrator 1 on 21 May 2020 only required CIC and the Company to submit written submissions, authorities, disputed issues and other documents for the trial or hearing of the first part of the Arbitration. There was the express direction in PO 10, that the Arbitration between CIC and the other Respondents would proceed in accordance with the timetable formerly set out in Attachment A to PO 8, which referred to a further hearing on the date to be fixed.

37.  It was incorrect for Arbitrator 2 to state in the Final Award and to proceed on the basis that Wu had failed to respond, but could (if they had wished) and should have responded, with evidence on questions such as the validity of the Contracts, prior to the issue of the 2020 Award. The reality was that the determination of the issues affecting the Company and Wu had been bifurcated on CIC’s application, and Wu had been directed to file their evidence and make their submissions at the second part of the hearing of the Arbitration. It was grossly unfair and unjust that Arbitrator 2 considered that Wu had already been given the opportunity to present their evidence and make their submissions before Arbitrator 1, had failed to do so, and should be bound, the arbitrator on his part seeking on that basis to distinguish the cases of In Re Kitchin (1881) 17 Ch D 668 and Welltime Hong Kong Ltd v Cosmic Insurance Corporation Ltd [2004] 2 HKC 155 (“Authorities”).

38.  Mr Wong for CIC submitted that even if the Court does not agree with Arbitrator 2’s analysis and views of the Authorities, the Final Award is still a valid and enforceable award, as the Court does not review the correctness of the decision of Arbitrator 2.  Counsel for Wu accepts that an error of law made by an arbitrator is not a ground to set aside or refuse enforcement of his award. As Reyes J said in A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389 at para 23, by choosing arbitration, the parties must be deemed to have undertaken the risk that an arbitrator might get matters wrong in his decision.

39.  It is not necessary to go further into In Re Kitchin and Welltime. However, what is distinguishing in this case is that although there was one Arbitration, there were two parts of the hearing against different parties, CIC against the Company in the first part, and CIC against Wu, Ji, and Wang in the second part. Contrary to what is stated at paragraph 75 of the Final Award, Wu (and the other guarantors) did not have the “equal opportunity” to appear and to present and argue their case in the first part of the hearing against the Company. The first part involved CIC proving its case of the Company’s liability, in circumstances when the Company had not filed a defence or put in any submissions or evidence, and in circumstances when Arbitrator 1 had made it clear that he would not deal with the issues and disputes raised by the other Respondents as guarantors in the first part of the Arbitration. Simply put, Wu were not seeking to have a second bite of the cherry, as Arbitrator 2 stated. They never had the first bite.

40.  What is more disturbing, which in my view lies at the heart of Wu’s case, is not whether Arbitrator 2 had erred in law, and on facts as to the matters put before and decided by Arbitrator 1, but that Wu had not been given notice nor the reasonable opportunity to meet the case made against them in the hearing of the Arbitration on their liability. The issues raised in the Defence filed by Wu were as summarized in paragraph 9 above. Counsel for Wu highlighted that the list of issues agreed and put before Arbitrator 2 reflect those issues, and were in fact set out at paragraph 62 of the Final Award. There was no issue as to whether there was already a binding 2020 Award against Wu and the other guarantor respondents, or whether Arbitrator 2 was bound to follow the 2020 Award made by Arbitrator 1, and if so, in what respects he was bound.

41.  Although Mr Wong for CIC had accepted, at the hearing on 23 February 2023, that the issue of the binding effect of the 2020 Award was not raised before or at the hearing by Arbitrator 2, he later retracted such admission, accepting only that the list of issues recorded at paragraph 61 of the Final Award did not include the question of the binding effect of the 2020 Award.

42.  It is not sufficient that Wu had, in their Defence, raised and put in issue the primary liability of the Company. The primary liability of the Company for the debt under the Contracts, and the guarantors’ liability for such primary debt if established, were indeed the very issues for determination by Arbitrator 2.  Whether there was a primary debt due from the Company to CIC was the case Wu had to meet and had been prepared to meet in the Arbitration.  However, in deciding this issue, Arbitrator 2 (rightly or wrongly) considered himself to be bound by the 2020 Award. As Mr Lai pointed out, Arbitrator 2 had entirely changed the landscape of the Arbitration by taking such a stance. As a result, the case against Wu was that there was already a binding 2020 Award made against them, they were bound by the findings as to the validity and enforceability of the Contracts and the lack of vitiating factors, and that they were therefore liable as guarantors. To put matters even worse, CIC sought to contend that Wu’s Defence in the Arbitration before Arbitrator 2 (and their present application to resist enforcement) constitute abuse of process, and that Arbitrator 2 was entitled and correct to consider himself bound by the 2020 Award, as a collateral attack against the 2020 Award would bring the proceedings into disrepute, following the line of authorities of Hunter v Chief Constable of the West Midlands Police [1982] AC 529, Ko Hon Yue v Chiu Pak Yuk (2012) 15 HKCFAR 72, and Ho Kin Man v Commissioner of Police [2014] 3 HKLRD 478.  Mr Wong further cited Johnson v Gore Wood & Co [2002] 2 AC 1 and Fortune Pharmacal Co Ltd v Falcon Insurance Co (Hong Kong) Ltd [2023] HKCA 66 in support, to argue that Wu should not be allowed to attack the 2020 Award as it would be abuse of process to do so.

43.  None of the authorities cited can apply to the facts of this case. I fail to see any collateral attack or abuse of process. In simple terms, there was no judgment or award decided against Wu on the issues they raised, as Arbitrator 1 had expressly made clear in the 2020 Award. I cannot agree that a decision against the Company on its debt under the Contracts can bind Wu even as shareholders of the Company in their capacity as guarantors. There can be no abuse of process in Wu seeking from Arbitrator 2 a determination of the issues which Arbitrator 1 had expressly stated would only be decided in the second part of the Arbitration.  

Conclusion on grounds relied upon

44.  On the evidence available to this Court, and as reflected in the Procedural Orders made in the Arbitration, Wu had been directed to present their evidence and to make their submissions on their Defences in the second part of the Arbitration, but in effect, Arbitrator 2 had failed to consider and failed to decide Wu’s Defences in an impartial and independent manner.  On the facts of this case, Arbitrator 2 had failed to give Wu a reasonable opportunity to present their case on the binding effect of the 2020 Award, by deciding the issues in the manner he had done and on the basis that he and all the parties were already bound by the 2020 Award.  For that reason, the Arbitration had not been conducted in accordance with the arbitration agreement and/or the agreed arbitration procedures. It would, in my judgment, be contrary to our basic notions of justice and requirements for a fair hearing to enforce the Final Award, when Arbitrator 2 had failed independently to determine the issues in dispute between CIC and Wu as guarantors, and had unfairly and unjustly deprived Wu of the reasonable opportunity to present their case as to whether they were bound by the 2020 Award and the findings made therein.

Substantial injustice and merits of defence

45.  On behalf of CIC, it was argued that Wu had failed to establish any good defence on the merits to the claims made against them in the Arbitration, such that irrespective of any errors made by Arbitrator 2, it was unlikely that the Final Award would have been different.

46.  With all due respect, the conduct of the Arbitration by Arbitrator 2 was seriously flawed or egregious, such that due process was denied.  Wu had been surprised by the case he had to meet - that there was already a binding 2020 Award on their liability, and that it would be an abuse of process for them to challenge that. If Arbitrator 2 had given prior notice to Wu, that in making the Final Award he would consider himself bound by the 2020 Award, Wu as laymen might have sought the opportunity to adjourn the Arbitration and to instruct lawyers to argue these legal points on their behalf, with the result that the Final Award might have been different on various aspects of their Defence. 

47.  As Counsel for Wu pointed out, it is obvious that Arbitrator 2 had failed to properly understand the facts and procedures which had taken place in the Arbitration, and had failed to carry out the very task he was appointed to carry out in the Arbitration after the resignation of Arbitrator 1, who had done so in order to avoid the appearance of bias after making the 2020 Award, and to ensure that there would be someone who could objectively and impartially render an award on the liability of the guarantors.

48.  As Tang VP (as His Lordship then was) pointed out in Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1 (at paragraph 105):

“I am of the view that only a sufficiently serious error could be regarded as a violation of art 18 or art 34 (2) (a) (ii). And that an error would only be sufficiently serious if it has undermined due process. A party who has had a reasonable opportunity to present its case would rarely be able to establish that he has been denied due process. Even so, the Court may refuse to set aside the award if the Court is satisfied that the arbitral tribunal could not have reached a different conclusion. How a court may exercise its discretion in any particular case will depend on the view it takes of the seriousness of the breach. Some breaches may be so egregious that an award should be set aside although the result could not be different.” (Emphasis added)

49.  Earlier at paragraph 101 of the judgment, Tang VP also expressed his agreement with the first instance judge, that the Court may refuse to set aside an award notwithstanding a violation of due process, if the Court was not satisfied that the outcome “could not have been different”.  His Lordship also referred to the judgments in Brunswick Bowling & Billiards Corp v Shanghai Zhonglu Industrial Co Ltd [2011] 1 HKLRD 707 and Paklito Investment Ltd v Klockner East Asia Ltd [1993] 2 HKLR 39, and the view of Professor Albert Jan Van Den Berg:

“Thus only if it is beyond any doubt that the decision would have been the same would a court be allowed to override the serious violation.”

50.  In all the circumstances of this case, I can only come to the conclusion that the violation of Wu’s rights in the Arbitration was sufficiently serious and egregious, for the Final Award to be set aside. It cannot be said that it was beyond doubt that the Final Award would have been the same if all the evidence had been properly and seriously considered, and Wu had been given the reasonable opportunity to properly present their case. The rationale must be that even if Wu’s Defences were considered to be unmeritorious, they were nevertheless entitled to the reasonable and fair opportunity to present their case to the fact finding tribunal and to have their Defence properly and fairly determined. This is fundamental to the process of fair trial, and the absence of such pre-requisites of due process cannot be condoned by the Court, by recognizing and permitting enforcement of an  award which has given rise to substantial injustice.

Extension of time

51.  Finally, there is the question of whether time should be granted to Wu to make the Setting Aside Application. The Enforcement Order made on 10 August 2021 provided for Wu to apply to set aside the order within 14 days after service. It was not until 26 April 2022 that the Setting Aside Application was made. On behalf of CIC, it was submitted that with this long delay, and the absence of any good explanation therefor, the Court should not extend time.

52.  Mr Wong’s reliance on the decision in AW v PY [2022] HKCFI 1397 is misplaced. That case dealt with the time stipulated under Article 34 (3) of the Model Law applied by section 81 of the Ordinance, and the Court held that there was no jurisdiction or power to extend the time stipulated in the Ordinance by invoking the subsidiary legislation of Order 3 RHC.

53.  In this case, the time of 14 days to make the Setting Aside Application was stipulated in the Enforcement Order of the Court. Order 3 rule 5 RHC is applicable, and confers the discretionary power on the Court to extend the time within which a party is required or authorized by the order of the Court to do any act.

54.  In seeking extension of time, Counsel for Wu placed reliance on the judgment of the Court of Final Appeal in Astro Nusantara International BV v PT Ayunda Prima Mitra [2018] HKCFA 12. There, the Court of Final Appeal set out the relevant principles which govern the exercise of the Court’s discretion to extend time to challenge an order for enforcement of an arbitral award. These principles are correctly summarized in Counsel’s skeleton submissions:

(1)  The discretion to extend time conferred by Order 3 rule 5 is “broad and unrestricted, designed to enable justice to be done between the parties” (paragraph 53 of the judgment). Such discretion “is as broad as it can come” and, in the exercise of that discretion, the Court would, generally speaking, have some regard to what might ultimately be in issue.

(2)  The discretion involves the intersection of 2 principles: the first promotes the enforcement of time limits for the expeditious dispatch of litigation in the public interest; and the second recognizes 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 for which an award of costs cannot compensate (paragraph 54).

(3)  The Court is to look at all relevant matters and consider the overall justice of the case. A rigid mechanistic approach is not appropriate (paragraph 55).

(4)  The Terna Bahrain approach of promoting the importance of certain factors (such as the length of delay, the explanation given for the delay, and intentional delay), and according to other factors including the merits a secondary status is inconsistent with (3) above (paragraphs 58-62).

(5)  It is important to bear in mind the underlying objectives of the procedural rules, as stated in Order 1A rule 2 (2) RHC, that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties (paragraph 71).

55.  The defect dealt with by the Court of Final Appeal in Astro was the lack of an arbitration agreement and hence the lack of jurisdiction to join the party against whom the award was ultimately made. That was a fundamental defect. However, there is equal force in the argument for an extension of time in a case where the defect complained of is sufficiently egregious to amount to a serious denial of due process.

56.  The underlying objective of Order 1A RHC necessitates the just resolution of Wu’s claims that there had been a denial of due process in the Arbitration. As explained in the preceding paragraphs, Wu have a good case for setting aside the Enforcement Order, notwithstanding the lapse of time from the service of the Enforcement Order to the issue of the summons on 26 April 2022. The fact that they had not applied to set aside the Final Award does not preclude Wu’s opposition to CIC’s enforcement of the Final Award (Paklito Investment Ltd v Klockner East Asia Ltd [1993] 2 HKLR 39). Wu’s reasons for not having acted earlier were that they had grave financial difficulties in the latter part of 2021, and were not able to make the Setting Aside Application in time.

57.  To refuse an extension of time would be to deny Wu a hearing where their application has decisively strong merits, and would involve penalizing them for a delay when there is no evidence of prejudice to CIC which is uncompensatable by costs.

58.  In my judgment, bearing in mind the merits of the belated application, and the seriousness of the errors undermining the structural integrity of the Final Award, it is appropriate to grant the extension of time sought.

Disposition

59.  Wu’s application for extension of time to make the setting aside application is granted. Wu should pay the costs of and occasioned by the application to extend time, as they seek the indulgence of the Court. I make the order nisi that they bear such costs, which include 10% of the costs of the hearing on 23 February 2023.

60.  The Enforcement Order is set aside for all the reasons set out above, and the costs order nisi is that the costs of and incidental to the setting aside application (including costs reserved) are to be paid by CIC to Wu on indemnity basis, with certificate for Counsel.

61.  The orders on costs will become absolute unless application for variation is made within 14 days.