Summary of facts giving rise to the dispute
The dispute arose out of an agreement between D1-D2 (as sellers) and P (as purchaser) in 2003 (the Agreement) for the sale and purchase of all issued shares (the D4 Shares) in D4, which indirectly owned the right to develop and use a piece of land in Xiamen (Lot 22) through a wholly-owned subsidiary, D5. Under the Agreement, Lot 22 was to be delivered to P within six months of the date of the Agreement.
Shortly after the Agreement was entered into, D1-D2 sought to repudiate the Agreement, alleging issues of illegality, and Lot 22 was not delivered to P. Later on, a corporate restructuring took place such that D1-D2 effectively divested themselves of ownership of the D4 Shares to D3 (the Restructuring), and D5 developed Lot 22 and sold most of the units developed on it. D1-D2 thus later argued that it would be impossible to perform the Agreement.
Arbitral awards and enforcement actions in Hong Kong
The Mainland arbitral awards
P commenced CIETAC arbitration in Beijing in 2005 against D1-D2 under the Agreement. In 2006, the tribunal awarded P damages for breach of contract (in respect of late delivery of Lot 22) and ordered that D1-D2 “shall continue to perform the Agreement” (the First Award). D1-D2 later sought a second ruling from the tribunal for a determination that the Agreement could no longer be performed and that the parties be discharged from the Agreement. This application was dismissed by the tribunal in 2009.
Enforcement actions in Hong Kong – statutory procedure vs. common law action
P initially applied ex parte to the Hong Kong court for leave to enforce the award, invoking the statutory procedure provided by section 2GG of the former Arbitration Ordinance (Cap 341). The statutory procedure was summary in nature and, in 2007, the court granted leave to enforce the award and entered judgment in its terms, ordering that D1-D2 “shall continue to perform the [Agreement]” (the Statutory Judgment). D1-D2 unsuccessfully sought to set aside the order and failed in its appeal to the Court of Appeal (the CA).
However, upon learning of the Restructuring, which frustrated the continued performance of the Agreement (requiring the transfer of the D4 Shares), P initiated a common law action to enforce the First Award. P sought declarations that the D4 Shares were held on constructive trust for P, and later amended its claim, seeking (amongst others) damages or equitable compensation.
The lower courts’ decisions
The Court of First Instance dismissed the action in its entirety. On appeal, the CA ordered that the Statutory Judgment be set aside (at P’s election between an order for “continued performance” and an order awarding damages) and awarded damages to P for D1-D2’s breach of the implied promise to honour the First Award. The rest of P’s claims were dismissed.
The appeal to the CFA comprised cross-appeals respectively brought by D1-D2 (FACV 3/2019) and P (FACV 5/2019) against different parts of the decision of the CA. This case summary focuses on a key issue arising from the appeal brought by D1-D2; namely, can the Hong Kong court grant relief wider than that contained in a Mainland arbitral award in a common law action to enforce the award?
The CFA decision
In essence, the CFA held that the scope of remedy which the court may grant in a common law action to enforce an award was broad. If the subject award were a monetary award for payment, the relief granted would simply be a judgment enforcing the award as a debt; however, if it were a non-monetary award, the court may fashion an apt remedy chosen from the full range of remedies available in an ordinary common law action. While the arbitrators determined the parties’ mutual rights and liabilities, the enforcement of the award was a matter for the court. Enforcement at the court may be pursued summarily (under section 2GG of Cap 341) or by a common law action (under section 40B(1) of Cap 341 in relation to Mainland awards). The implied promise to honour the award existed as a contractual obligation separate and distinct from the obligations created by the underlying contract. Therefore, the cause of action for breach of the implied promise was a fresh cause of action at common law within the jurisdiction of the court and not a matter for the arbitrators.
It is worth mentioning that D1-D2 also ran an additional argument that granting damages on the basis that the Agreement no longer subsisted was inconsistent with the existing award requiring the continued performance of the Agreement, relying upon the well-known decision of Johnson v. Agnew [1980] AC 367. On that basis, D1-D2 argued that P must first return to the tribunal and ask it to rescind its order for the continued performance of the Agreement before any damages could be granted. This argument was rejected by the CFA, as it failed to recognise that the relief fell within the enforcement jurisdiction of the court and was, therefore, “neither a matter for the tribunal nor relief which in some way require[d] adjustment to achieve consistency with the terms of the award”.
Comment
The CFA’s decision is welcomed as it confirms the broad scope of relief which the Hong Kong court may grant in a common law action to enforce an arbitral award. This will enable the Hong Kong court to grant relief that takes into account any post-award development and change of circumstances. The decision also reduces the risk of a winning party being left with an unenforceable award which the losing party refuses to honour, thereby facilitating the fair and just resolution of disputes by way of arbitration proceedings.
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Client Alert 2020-570
