Background facts
On 10 September 2019, Canudilo International Company Limited (CIC) commenced an arbitration in Hong Kong (Arbitration) under two sale contracts (Contracts) where CIC was the seller and Apennine Holdings Limited (Company) was the buyer. Wu Chi Keung, Wu Chi Fong (collectively, Wu), Ji Guanhua, and Wang Liuxi were guarantors of the Contracts (collectively, Guarantors). CIC claimed that the Company had defaulted in payment of the purchase price for the goods sold under the Contracts. The Company was in breach of its payment obligations and, thus, the Guarantors were liable for the payment of the sums under the Contracts.
An arbitrator was appointed on 10 December 2019 (Arbitrator 1). The Company did not put forward any defence, evidence or submissions in the Arbitration. Wu, on their part, raised a number of defences, including misrepresentation and economic duress affecting the Contracts.
Upon CIC’s application, Arbitrator 1 decided to bifurcate the Arbitration in the following manner:
- Arbitrator 1 would first determine the Company’s liability owed to CIC under the Contracts by way of an award on paper. When the award was made, the proceedings between CIC and the Company would be closed.
- The proceedings between CIC and the Guarantors would continue in accordance with a previous timetable for the exchange of witness statements, amongst others, with a hearing date to be fixed.
The 2020 Award made by Arbitrator 1
On 26 June 2020, Arbitrator 1 issued an interim final award (2020 Award), stating that:
- Under the Contracts, the Company was liable to pay the sums due.
- The 2020 Award only involved the dispute between CIC and the Company.
- The dispute between CIC and the Guarantors would continue.
- The disputed matters between CIC and the Guarantors did not have to be determined in the 2020 Award.
The resignation of Arbitrator 1 and appointment of Arbitrator 2
On 29 June 2020, Arbitrator 1 received a letter from solicitors acting for the Company, seeking an extension of time for making written submissions on behalf of the Company, despite the fact that the proceedings between CIC and the Company were closed. Arbitrator 1 invited CIC and the Guarantors to decide whether to nominate a new arbitrator to continue the Arbitration and stayed the Arbitration for eight weeks. The parties had different views on whether to appoint a new arbitrator. Eventually, on 20 July 2020, Arbitrator 1 resigned, stating his view that for him to continue acting after the 2020 Award would give rise to reasonable suspicion or doubt as to his impartiality as arbitrator. On 17 September 2020, the Hong Kong International Arbitration Centre appointed a new arbitrator (Arbitrator 2) to deal with the Arbitration between CIC and the Guarantors.
The final award made by Arbitrator 2 and Hong Kong court proceedings
On 7 June 2021, Arbitrator 2 issued a final award (Final Award) in favour of CIC and found that the Guarantors should be liable to pay CIC under the Contracts.
On 10 August 2021, CIC obtained ex parte leave from the Hong Kong court to enforce the Final Award in Hong Kong against the Guarantors (Enforcement Order).
On 26 April 2022, Wu applied to set aside the Enforcement Order out-of-time on the ground that Arbitrator 2 had failed to decide the key issue of their defence and failed to apply an independent mind, without being influenced by the 2020 Award. Wu therefore argued 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 Final Award would be contrary to the public policy of Hong Kong.
Decision of the Hong Kong court
The Judge allowed Wu’s application to set aside the enforcement order of the Final Award out-of-time on the following main grounds:
- As recorded in the Final Award, Arbitrator 2 considered that a primary debt established to be due from the Company was a fact and already determined in the 2020 Award. He considered himself and the Guarantors bound by the 2020 Award. Accordingly, he adjudged that the Guarantors were liable for the sum due under the Contract.
- On this basis, the Judge found that Arbitrator 2 had failed independently to determine the issues in dispute between CIC and the Guarantors (including Wu) 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.
- The second part of the bifurcated Arbitration was to determine whether, as against the Guarantors, there was a valid debt due and payable under the Contracts and that they were not vitiated by any misrepresentation or economic duress. The Guarantors (including Wu) were entitled in law to challenge the evidence on the Contracts and the alleged primary debt and Arbitrator 2 should have adequately considered the issues raised in Wu’s defence.
- It was also incorrect for Arbitrator 2 to state in the Final Award that Wu should have submitted evidence and a response in relation to the validity of the Contracts before the issuance of the 2020 Award, as the determination of the issues affecting the Guarantors had been bifurcated. Such statement in the Final Award was therefore grossly unfair and unjust.
- CIC submitted that the court should not review the correctness of the Final Award. It was also accepted by Wu that errors of law were not a ground to set aside or refuse enforcement of an award. However, the Judge ruled that in circumstances where Arbitrator 2 had failed to give Wu a reasonable opportunity to present their case on the binding effect of the 2020 Award and went on to make the Final Award on the basis that he and all the parties were bound by the 2020 Award, the arbitration was not conducted in accordance with the arbitration agreement or the agreed arbitration procedures. Further, as Arbitrator 2 had failed to independently determine the issues in dispute between CIC and Wu and deprived Wu of the reasonable opportunity to present their case, it would be contrary to Hong Kong’s basic notions of justice and requirements for a fair hearing to enforce the Final Award.
- It could not be said 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 a reasonable opportunity to properly present their case. The process of fair trial required that Wu be entitled to a reasonable and fair opportunity to present their case to the fact-finding tribunal and to have their defence properly and fairly determined.
- Finally, CIC submitted that Wu was very late in making the application to set aside the Enforcement Order on 26 April 2022, when the 14-day time limit had long expired on 24 August 2021. The Judge held that the Hong Kong court had jurisdiction to extend time under Order 3 rule 5 of the Rules of the High Court (Cap. 4A). By applying the principles laid down by the Court of Final Appeal in Astro Nusantara International BV v. PT Ayunda Prima Mitra [2018] HKCFA 12, the Judge held that it would be appropriate to allow the application to be made out-of-time given the merits of the belated application and the seriousness of the errors undermining the structural integrity of the Final Award.
Conclusion
The Hong Kong court adopt a pro-arbitration and pro-enforcement approach towards the enforcement of arbitral awards. A high threshold of irregularity has to be shown for an award to be set aside.
As the Judge emphasised in her judgment, the Hong Kong court would not intervene in cases where the arbitrators had merely erred on facts or law. However, the Hong Kong court would scrutinise the structural integrity of the process. In cases where errors made by the arbitrator are so egregious and give rise to a serious denial of due process, the Hong Kong court would not ignore the errors, as allowing the enforcement of the award in such circumstances would be contrary to Hong Kong’s basic notions of justice.
This case serves as a good reminder to practitioners and arbitrators that arbitration proceedings should be conducted in accordance with the agreed arbitration procedures. Reasonable opportunities should be given to parties to present their case so as to ensure a fair trial process.
Client Alert 2023-073
