Background facts
A debt claim was made by the applicant as lender (Applicant) against the respondent as borrower (Respondent) under a loan agreement (Loan Agreement) as supplemented by a supplemental agreement (Supplemental Agreement).
The Supplemental Agreement contained an optional arbitration clause (Arbitration Clause):
“Any dispute or difference arising out of or in connection with the Loan Agreement and this Supplemental Loan Agreement shall, at the option of the Claimant (or the Plaintiff, as may be applicable), be referred to and finally resolved by arbitration administrated by the Hong Kong Arbitration Society and in accordance with the HKAS Online Arbitration Rules for the time being in force or by court proceedings in Hong Kong courts.” (emphasis added)
The Supplemental Agreement provided for the Respondent’s email address to be “xyz@china.hk”.
On 2 December 2022, the Hong Kong court granted the Applicant an order (Enforcement Order) for leave to enforce against the Respondent an arbitral award made by the Hong Kong Arbitration Society on 28 November 2022 (Award).
The Respondent applied to set aside both the Enforcement Order and the Award.
Preliminary procedural issues
Two procedural issues arose from the Respondent’s application. First, the Respondent only stated the grounds for the application to set aside in the affirmation but not the summons. Although the Hong Kong court proceeded to consider the grounds raised in the affirmation, the court commented that it was an abuse of process to issue a summons to set aside without properly setting out the grounds in the summons, and that parties should not expect the court to be indulgent towards such failures.
Second, the application for setting aside the Award was made out of time. As held in previous decisions (see our previous alert) the court had no power to extend the three-month period for applying to set aside an award as provided under Article 34(3) of the Model Law. The court therefore only proceeded to consider the application to set aside the Enforcement Order but not the Award.
First ground of setting aside: absence of valid arbitration agreement
The Respondent argued that the Arbitration Clause was not a valid arbitration agreement, as there was no element of compulsion of the parties to arbitrate. The Hong Kong court held that the ultimate question was one of construction of the clause in question and to ascertain the objective intention of the parties at the time of entering into the contract. Each case would turn on the terminology used in the contract. On an objective reading of the Arbitration Clause, the court held that there was in fact no option conferred on the Respondent as to whether to arbitrate because the Respondent was contractually bound by the Applicant’s choice to arbitrate under the Arbitration Clause. The Hong Kong court therefore rejected this ground.
Second ground of setting aside: invalid service of notice of arbitration
The Respondent did not participate or file any defence in the arbitration. Although the Respondent did not expressly state that he had not received the Notice of Arbitration (Notice), he referred to a discrepancy between the email address stated in the Supplemental Agreement (“xyz@china.hk”) and the email address stated in the Award where the Notice was said to have been served (“xyz@chinat.hk”).
The court observed that a notice of arbitration was the equivalent of a writ of summons in court proceedings. The service of the Notice was an important step to bring notice of the claims made to the Respondent. The court noted that, the only evidence on service of the Notice was contained in the Award, which stated an email address that was different from the one stated in the Supplemental Agreement. In the absence of any other relevant evidence, the court placed reliance on the content of the Award in determining whether the Notice was, in fact, sent to the wrong address or that the discrepancy between the email addresses was merely a typographical error made in the Award. In this regard, the court observed that “the contents of the Award must be taken to be correct and accurate. If it had contained any typographical error, it would have been corrected by the tribunal, on its own accord or on the application of the Applicant, but there has been no amendment of the Award in this case.”
Accordingly, the court could only conclude that there was no valid service of the Notice on the Respondent and, as such, the Respondent would not have been given notice of the arbitration and, consequently, would not have been given the opportunity to present its case.
Her Ladyship therefore set aside the Enforcement Order on this ground.
Conclusion
This case highlights the importance of an arbitration claimant to ensure that a notice of arbitration is properly served on the respondent pursuant to the arbitration clause or any service provision contained in the contract. The failure to properly serve the notice of arbitration may put the award at risk of being set aside. Incidentally, this case also serves as a reminder to arbitration users that an arbitral award must be carefully reviewed on receipt. Any typographical errors must be corrected promptly in order to avoid any prejudice that such errors may cause to future enforcement proceedings. An arbitration claimant is also recommended to keep good records of service of documents so that such records may be produced as evidence of service as and when necessary. This is all the more important where the respondent does not participate in the arbitration, in which case the claimant may also consider exploring and attempting other means of service with a view to bringing the notice of arbitration to the respondent’s attention.
Client Alert 2023-197
