Enforcement and challenge of arbitral awards in Hong Kong in recent cases

As the grounds for setting aside an arbitral award under section 81 of the Arbitration Ordinance (AO) and the grounds for refusing to enforce an arbitral award under the AO are very similar, the case law related to the grounds for refusal of enforcement can be used as helpful guidance to interpret the grounds for setting aside an arbitral award, and vice versa, where appropriate. Nonetheless, when bringing an application, lawyers must of course still pay attention to the exact wording of the section on which an application is based and bear in mind that each case turns on its own facts.

Invalid arbitration agreement

Under Article 34(2)(a)(i) of the Model Law and section 86(1)(b)(i) of the AO, a common ground for setting aside an arbitral award and for refusing enforcement is that the arbitration agreement was not valid under the law to which the parties have subjected it.

For example, in AB v CD, an arbitral award was set aside as the respondent, AB Engineering, was not a party to the arbitral agreement and thus there was no arbitration agreement between the parties.

The agreement containing the arbitration clause was made between AB Bureau and CD. Although AB Engineering was a subsidiary of AB Bureau, the two companies are separate legal entities and AB Engineering was not a party to the arbitral agreement. This decision highlighted the importance to identify the proper respondent and to verify its name before initiating arbitral proceedings.

However, in X v Jemmy Chien, the court refused an application to set aside the arbitral award on this basis. X contended that Jemmy was not the true party to the agreement in question, which was merely a sham to conceal the identity of a third party, whom X had been dealing with. The arbitral tribunal concluded that Jemmy was the true party to the agreement. X applied to set aside the award, challenging the tribunal’s finding.

The judge held that the arbitrator was the best person to decide the parties’ intention, and thus whether Jemmy was a party to the agreement based on the testimony from the witnesses and the documentary evidence. The judge was unable to find any mistakes in the relevant finding in the arbitral award.

The case shows that the court will refrain from conducting an unwarranted and unlimited review of the merits of the findings made by the tribunal. The reviewing court has a limited and narrow role of confining the scope of the review to true questions of pure jurisdiction only.

No proper notice of the appointment of arbitrator or of the arbitral proceedings

Under Article 34(2)(a)(ii) of the Model Law and section 86(1)(c) of the AO, another common ground is that the other party was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present its case.

For example, in AB v CD, the court held that even if AB Engineering was a party to the arbitral agreement, it had in any case not been given proper notice of the arbitral proceedings or the appointment of the arbitrator.

While the notice of arbitration was not sent to the proper registered address of AB Bureau and AB Engineering, it was also not addressed to AB Engineering. It was held that service of the notice of arbitration, naming a totally different company, was not proper service sufficient to give adequate and proper notice of the arbitration to AB Engineering. 

The court commented that “even if AB Engineering and [AB] Bureau have offices in the same building, being separate legal entities, the court and tribunal cannot expect either of them to take action and enquire into or respond to any notice directed at another, even affiliated, company. It would be totally unreasonable, onerous and unfair so to do.”

Award deals with matters beyond the scope of the submission to arbitration

Under Article 34(2)(a)(iii) of the Model Law and section 86(1)(d) of the AO, a ground for setting aside an arbitral award or refusing enforcement is that the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration.

Only questions of jurisdiction can be reviewed by the court under this ground, but not admissibility issues. In the decision of T v B, the court confirmed the distinction between a jurisdictional challenge and questions about the admissibility of a claim. Matters in connection with the claim, such as whether pre-arbitral conditions such as those in multi-tiered dispute resolution clauses are fulfilled, are matters of admissibility, not jurisdiction.

In the recent decision of C v D, the Court of Appeal affirmed the distinction between jurisdiction and admissibility for the purpose of Article 34(2)(a)(iii) of the Model Law, after an extensive review of local cases including T v B, cases in other common law jurisdictions (including England & Wales, Singapore, Australia and the US) and academic writings. This distinction, in line with reducing the permissible scope of judicial interference in arbitral procedures and respecting arbitral autonomy, perfectly illustrates the pro-arbitration stance by Hong Kong SAR courts.

Another example of an award being set aside on this ground can be found in the recent case of Arjowiggins HKK2 Ltd v X Co. In this case, the arbitral award was set aside by the judge as the arbitral tribunal's order was outside the scope of the parties’ reference to arbitration.

Arjowiggins and X were shareholders in a joint venture company established in China. X applied for judicial dissolution of the JV company following disputes between the parties, and a court in China ordered the dissolution of the JV company and the formation of a liquidation committee.

X later commenced an arbitration in Hong Kong SAR, seeking the immediate return and examination of certain documents of the JV company allegedly in Arjowiggins’s possession. While the arbitration was underway, the court in China ordered the formation of a compulsory liquidation group. The arbitral tribunal held in its final award that X was entitled to the remedy of procuring the delivery up of the documents to the compulsory liquidation group, even though such a remedy had not been pleaded prior to the partial award.

The court held that, the issue of the parties’ duties to facilitate the liquidation of the JV company, which underpinned the remedy of delivery of the documents to the compulsory liquidation group in the final award, was not pleaded. The scope of the reference to arbitration was the dispute relating to X’s claim for delivery of the documents to itself, not the dispute over X’s claim of its right to the proper liquidation of the JV company. The arbitral tribunal’s order was thus outside the scope of the submission to the arbitration.

The judge cautioned that “a party cannot in its pleading simply recite all the rights and duties contained in an agreement, and pick and choose, or ask the tribunal to pick and choose, at the end of the hearing, which rights to enforce and to issue an award on that basis”.

Therefore, it is very important for parties to properly plead their cases by clearly setting out their claims and remedies sought. Even though procedures in arbitrations are less formal than those in litigations, surprise arguments and claims not pleaded by the parties at the outset should be avoided. As the judge noted, “trial by ambush” has no place in arbitration, as parties should be able to know in advance the claims and remedies sought by the other party, so as to consider all possible defences and evidence to adduce.

Public policy

Another common ground for setting aside or refusing enforcement of an award under Article 34(2)(b)(ii) of the Model Law and section 86(2)(b) of the AO is that it would be contrary to or in conflict with public policy.

In Hebei Import & Export Corp v Polytek Engineering Co Ltd, the Court of Final Appeal held that “contrary to public policy” means “contrary to the fundamental conceptions of morality of justice” of the forum.

As demonstrated in the case of Qinhuangdao Tongda Enterprise Development Co. & Another v Million Basic Co. Ltd., the public policy ground is to be narrowly construed, and “must not be seen as a catch-all provision to be used wherever convenient”. It is “limited in scope and is to be sparingly applied”. 

If the public policy ground is to be raised, there must be “a substantial injustice arising out of an award which is so shocking to the court’s conscience as to render enforcement repugnant”, for example in the case of A v R.

Where fraud was alleged to be the basis for resisting enforcement, the threshold test requires the applicant for setting aside to show that it has a “real prospect of success” in persuading the judge to find that the award had been obtained by fraud, for example in the case of Karaha Bodas Co LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara.

In T v C, C sought to set aside an order to enforce an arbitral award by claiming that, among other things, it would be contrary to public policy to enforce the award under the old Arbitration Ordinance, as the documents relied upon by the other party and tribunal as the basis of the valid contract and arbitration agreement between the parties were forged and created as a result of fraud.

The court dismissed the application to set aside the enforcement order, holding that the threshold to substantiate an allegation of fraud is high and C has failed to adduce any or sufficient evidence to show a case of fraud. C claimed, among other things, that the signatures on certain documents were forged, but it based this claim on bare assertions on affidavit.

Significantly, C’s claims of forgery were rejected by the arbitral tribunal and the Malaysian court, the supervisory court of the arbitration. The court held that the decision of the supervisory court of the arbitration on the existence and validity of the contract and the arbitration agreement between the parties, and its refusal to set aside the award, should be given “due weight” by an enforcement court.

This decision shows that it is not easy to set aside an enforcement order on the basis of conflict with public policy, and parties must consider carefully and seek advice before making an application on this ground.

Material non-disclosure in enforcement applications

It is also worth mentioning that an enforcement order granted on an ‘ex parte’ basis - involving one of the parties only - might be set aside if there is material non-disclosure by the applicant.

For example, in A Consortium comprising TPL and ICB v AE Limited, the applicant, at the time of its ex parte application for an enforcement order, failed to disclose to the court that the respondent had issued proceedings in Dubai to nullify and stay enforcement of the award and failed to explain the non-disclosure. The court set aside the enforcement order granted on an ex parte basis, although it then re-granted the enforcement order based on the court’s findings under other grounds. Proper disclosure should have been made as soon as the applicant realised the mistake which had been made.

The case highlights the importance for parties seeking to enforce an arbitral award to make full and frank disclosure of all facts which are relevant to the exercise of the court’s determination of the ex parte application. The flip side of the coin is that, when faced with material non-disclosure by the other party, a party may apply to set aside the enforcement order.

Co-written by Cynthia Chan and Chris Lau of Pinsent Masons.