The only recourse for a party seeking to challenge a Hong Kong award is to apply to the Hong Kong Court of First Instance (“Court“) for the setting aside of the award. The grounds under Hong Kong law mirror the setting aside grounds under the UNCITRAL Model Law and the grounds for refusing enforcement under the New York Convention.[1]
In dealing with setting aside applications or applications to refuse enforcement, the Court is concerned with the structural integrity of the arbitration proceedings. The conduct complained of “must be serious, even egregious”, before the Court will find that there was an error sufficiently serious so as to have denied due process.[2] Even if sufficient grounds are made out either to set aside an award or refuse enforcement, the Court has a residual discretion to enforce the award despite the proven existence of a valid ground.[3]
In X v Jemmy Chien, the Court heard an application by the plaintiff (P) to set aside an award (“Award“) and a cross-application by the defendant (D) to enforce the Award. P asserted that there was no valid arbitration agreement and the Award was in conflict with public policy.[4] The case is yet another example of the robust position the Court takes when considering setting aside applications or applications to refuse enforcement.
This article discusses how The Honourable Madam Justice Mimmie Chan, the judge in charge of arbitration-related court proceedings, approached P’s challenge as well as an application by D for an order that P gives security pending the outcome of the challenge.
In April 2010, P and D entered into a service agreement (“SA“). D agreed to provide certain services against a commission of 5% on payment received from P’s customers. The SA was governed by PRC law and contained an arbitration clause providing for arbitration with a sole arbitrator in Hong Kong.
A dispute arose over payment of outstanding commission under the SA. D referred the dispute to arbitration, claiming around USD 1.7 million. P challenged the arbitrator’s jurisdiction, alleging that there was no valid arbitration agreement between the parties, as D had signed the SA as agent for one Mr. Chen (“C“), who was the true party to the SA. P alleged that D and C proceeded this way to conceal that C had an interest in the SA: P argued that on the one hand, C was the Vice President of a third-party company (“TP“), which acted as an intermediary that ordered products from P’s group and resold them to its customers; on the other hand, C was to perform the SA which was prejudicial to TP’s interests and in conflict with C’s duties to TP. D denied these allegations, stating that it had merely delegated the performance of the duties under the SA to C.
On 25 February 2019, the arbitrator issued his award on the merits, ruling in favour of D and ordering P to pay the commission. On jurisdiction, the arbitrator ruled that D was the true party to the SA, having considered PRC law as well as Hong Kong law (which governed the arbitration agreement).
P applied to the Court to set aside the Award on the grounds that (i) there was no valid arbitration agreement and (ii) the Award was in conflict with the public policy of Hong Kong.
In July 2019, D applied for leave to enforce the Award and an order requiring P to pay security as a condition for allowing P to pursue its setting aside application. Chan J heard the security application in August and dismissed it in September 2019.[5] On 4 March 2020, Chan J also dismissed the setting aside application.
In deciding the application, Chan J had to (i) review the arbitrator’s jurisdictional decision that D was the true party to the arbitration agreement and (ii) consider whether enforcing the arbitration agreement and Award would be in conflict with the public policy of Hong Kong.
There was a valid arbitration agreement between the parties
On reviewing the arbitrator’s jurisdictional decision,[6] Chan J noted that the standard of review was one of correctness (in the sense that the arbitrator was correct in finding that he had jurisdiction), limited to true questions of jurisdiction. Chan J was conscious that it was not the role of the courts to review the merits of the tribunal’s findings of credibility and fact.
Chan J concluded that the arbitrator did not make any mistake in finding that there was a valid agreement between P and D personally. The decision on whether, on construction of the SA as a whole, D was a party to the SA, was a finding of law made on the basis of the facts. The facts were in turn found by the arbitrator on the basis of the parties’ evidence. The arbitrator was the best person to decide on questions of the parties’ intention, on the basis of witnesses testimony and documentary evidence.
Enforcement of the arbitration agreement and Award not contrary to public policy
Chan J then went on to consider whether enforcing the arbitration agreement and allowing the Award to stand would be contrary to public policy.
At the hearing before Chan J, counsel for P argued that it was illegal under Taiwanese law for C and P to enter into a contract for the performance of the services by C, as it would put C in breach of his fiduciary duties to TP. The SA was a sham agreement because the parties’ real intention at the time of the contract was to hide the illegality of C contracting with P. When P was not intended to be the true party, he could not have been intended to have the benefit of the arbitration agreement either.
However, P’s supporting affidavit only asserted that if the Court allowed the Award to stand, it would give effect to a sham agreement, as D was never meant to be the true party to the SA. Similarly, a legal opinion submitted with the affidavit merely dealt with a breach of fiduciary duties.
Chan J concluded that the public policy ground was not made out:
D had applied for security as a condition for the further conduct of P’s setting aside application which Chan J dismissed. In reaching her decision, Chan J had to consider two important factors:[7]
Since the hearing of P’s setting aside application was only three weeks away and there was no evidence of any risk of dissipation or delaying tactics by P, Chan J concluded that there was no real risk that enforcement in Hong Kong would be more difficult as a result of the interim delay.
Award creditors, who are seeking enforcement of an award while defending a setting aside application, should carefully consider what assets the award debtor has in Hong Kong and assess whether there are grounds for applying for security if the Court is minded to await the outcome of the setting aside application rather than ordering immediate enforcement.