GAO HAIYAN AND ANOTHER v. KEENEYE HOLDINGS LTD AND ANOTHER

HCCT 41/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 41 OF 2010

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BETWEEN

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D E C I S I O N

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1.  On 2 August 2010, pursuant to ss 2GG & 40B, Arbitration Ordinance, Cap 341, (the Ordinance) and consequent upon an ex parte Originating Summons, I granted leave to Applicants to enforce an Arbitral Award made by the Xian Arbitration Commission, (the Commission) No. 2232 of 2009, dated 3 June 2010, (the Award), against the Respondents in the same manner and to the same effect as a judgment of the High Court of the Hong Kong Special Administrative Region.

2.  By a summons dated 16 September 2010, in reliance upon s 40E of the Ordinance, the Respondents now apply to set aside that ex parte order. The only ground now relied upon by the Respondents is s 40E(3) which provides:

“Enforcement of a Mainland award may also be refused if.......it would be contrary to public policy to enforce the award.” (irrelevant words omitted)

3.  The arbitration involved a dispute as to the validity of a share transfer agreement, the background to which is conveniently stated in the reasons for judgment of Tang VP, delivered on 18 September 2009 in HCMP 1510/2009.  In simple terms the Applicants were vendors and the Respondents the purchasers, of some of the shares in a joint-venture coalmining project in the Mainland.

4.  The decision of the Tribunal was to revoke the share transfer agreement and a supplemental share transfer agreement made between the Applicants and Respondents.

5.  The factual allegations giving rise to the grounds upon which it is argued by the Respondents that enforcement of the Award would be contrary to public policy may be summarised in the following way:

(a)   The arbitration was initiated by the Respondents on 7 July 2009, and the commission established a Tribunal to determine the dispute. A substantive hearing took place on 21 December 2009.

(b)   On 23 March 2010, before the hearing of the arbitration was completed, and before the Award was delivered, one of the members of the Tribunal, Mr Zhou Jian, telephoned a Mainland lawyer representing the Respondents and asked him to find a Mr Zeng Wai, a “middleman”, also representing the Respondents, and to tell Mr Zeng that the General Secretary of the Commission, Mr Pan Junxin “has something for him”.

(c)   Having learned of this request, Mr Zeng flew to Xian on 27 March 2010, and on that evening met with Mr Zhou and Mr Pan at the Shangri-La Hotel.

(d)   Mr Zeng was told by Mr Zhou and Mr Pan that the Tribunal had considered the case and had determined that the share transfer agreements were valid, but that the Respondents must compensate “other parties” by a payment of RMB250 million.

(e)   Mr Zeng conveyed the message to the Respondents who, while apparently satisfied that the award would be in their favour, were not prepared to make a compensation payment of RMB250 million.

(f)   On 31 May 2010, a further hearing in respect of the arbitration took place, after which the Tribunal adjourned for deliberation.

(g)   On 3 June 2010, the Tribunal issued its award.

6.  On these facts the Respondents say that there has been a seriously improper interference by Mr Pan with the Tribunal, and unwarranted communications with the Tribunal by Mr Pan.

7.  It would also be open to the Respondents to say, (but they do not), that there had been improper ex parte communications between a member of the Tribunal and a party to the proceedings, but that argument is not advanced.  I assume that argument is not advanced because, despite now complaining about the communications with them, following those communications, at the resumed hearings of the Tribunal, the Respondents made no complaint at all to the Tribunal.

8.  Subsequent to the issue of the Award an application was made by the Respondents to the Xian Intermediate People’s Court, the supervisory courts in respect of the arbitration proceedings, complaining about the facts set out in paragraph 5 above and seeking to have the Award set aside.  That Court refused to set the Award aside.  The reasons for the decision of that Court are not part of the information before me.

9.  The leading authority in Hong Kong on the public policy ground as a basis for refusing enforcement of an award is the decision of the Court of Final Appeal in Hebei Import & Export Corp v Polytek Engineering Company Ltd (1999) 2 HKCFAR 111, [1999] 1 HKLRD 665.  The decision was one on s 44(3) of the Ordinance, which deals with the enforcement of Convention awards.  That subsection is identical to s 40(3).  In dealing with the concept of something being “contrary to the public policy of that country”, at p 139F-G, Sir Anthony Mason NPJ said:

“It has been generally accepted that the expression “contrary to the public policy of that country” in art. V2(b) means “contrary to the fundamental conceptions of morality and justice” of the forum.  (Parsons & Wittemore Overseas Co Inc v Societé Generale De L’Industrie Du Papier (RAKTA) (1974) 508 F 2d 969 at 974 (where the Convention expression was equated to “the forum’s most basic notions of morality and justice”); see AJ van den Berg, The New York Convention of 1958 (Kluwer 1981) at p 376; see also Renusagar Power Co Ltd v General Electric Co (Yearbook Commercial Arbitration XX (1995) 681 at pp 697‑702)).”

10.  The Judge said further, at 139H-140A:

“The question then is whether the two matters of which the respondent complains, namely the alleged refusal of a hearing and communications to the chief arbitrator were contrary to the fundamental conceptions of morality and justice of Hong Kong. In this respect, the opportunity of a party to present his case and a determination by an impartial and independent tribunal which is not influenced, or seen to be influenced, by private communications are basic to the notions of justice and morality in Hong Kong.

The critical question, however, is whether what happened in this case was contrary to these basic notions.  In approaching this question, it is relevant to take account of the fact that the parties agreed to an arbitration which was to be governed by the CIETAC Arbitration Rules and the PRC Arbitration Law.  The fact that the parties agreed to procedures which differ from those which would ordinarily apply in Hong Kong is a circumstance of which we must take account (see the Arbitration Ordinance (Cap 341) s 2AA(2)(a)).”

11.  So in determining the question as to whether or not the circumstances of the Award are contrary to public policy the court must have regard to the basic notions of morality and justice in Hong Kong, but also take into account the fact that different procedures apply at the seat of the arbitration.

12.  The facts set out in paragraph 5 above are not accepted by Mr Ng for the Applicants, although for the purpose of the argument before me his case was that even if those facts were proved, they would not justify a refusal to enforce the award on the ground of public policy.

13.  I am told from the bar, although there is no direct evidence of the fact, that the procedure that was adopted by Mr Zhou and Mr Pan constituted part of a mediation process that was part of the process of the Commission.

14.  At first sight it is an extraordinary proposition that a member of the Tribunal, in the course of hearing an arbitration, could be involved in a mediation process, but I do not know from the evidence what the rules of the Commission permit by way of mediation.

15.  It would not be an extraordinary proposition, but on the contrary quite ordinary, that the General Secretary of the Commission, not himself a member of the Tribunal, might be involved in a mediation process.  Ordinarily, one would expect mediation procedures to take place prior to the commencement of the hearing of an arbitration, perhaps even being stimulated in the course of procedural directions prior to the commencement of the substantive hearing. Equally, in Hong Kong terms, there would be nothing extraordinary about mediation procedures taking place during the course of the arbitration, even under the supervision of the Secretary of the Commission, so long as the Secretary kept those procedures apart from the members of the Tribunal.  Such mediation procedures could be likened to settlement discussions in the course of a trial, a perfectly normal procedure.

16.  But the basic notions of morality and justice in Hong Kong would not permit ex parte communication between a member of a tribunal and party once an arbitration process has commenced.  Even allowing for the fact that there may be different rules in the Mainland I cannot accept Mr Ng’s submission that the facts as disclosed could not offend against the basic notions of morality and justice in Hong Kong.  But that is so even having regard to Sir Anthony Mason’s acceptance of the particular facts that occurred in the Hebei Import case.  The argument that the facts in the present case are significantly more egregious than those in Hebei Import, must be open to the Respondents in the present case.

17.  For these reasons I reject the argument on the part of the Applicants that the Respondents’ summons must be dismissed forthwith.  Unless the parties are able to agree upon the facts of the events of which complaint is made, it will be necessary for those facts to be established in a trial.  If those facts can be agreed, it will be possible to expedite full argument on the question as to whether or not those facts offend against basic notions of morality and justice in Hong Kong, and that consequently it would be contrary to public policy to enforce the Award.

18.  The Respondent’s summons is adjourned to 9:30 a.m. on Wednesday, 17 November 2010, at which time I will fix a timetable for the filing of affidavits and any further steps required to put the matter in order for trial.

19.  The costs of the hearing will be in the cause.