The public policy ground for refusing to enforce an arbitral award continues to be a narrow one in Hong Kong. In determining whether an award should be enforced, the courts will not look to the merits of the case or at the underlying transaction. Their role is purely mechanistic. This is illustrated by the long-running Xiamen Xinjingdi v Eton case. In a recent Hong Kong Court of Appeal case, Xiamen Xinjingdi v Eton, it was held that impossibility of performance was not a ground to justify refusal of enforcement. The case is properly known as Xiamen Xinjingdi Group Ltd v Eton Properties Ltd & Eton Properties (Holdings) Ltd CACV 106/2008 & CACV 197/2008.

The facts

Eton Properties and Eton Properties Holdings (the Eton Group), a high end property developer in Hong Kong, signed an agreement (dated 4 July 2003) with Xiamen Xinjingdi), a Chinese company, in which they pledged to sell their shares in Legend Properties (Hong Kong) Co Ltd, a Hong Kong subsidiary, for RMB120 million (approximately US$17.5 million). A subsidiary of Legend Properties owned land in Xiamen. The intention of the parties was to progressively transfer the right to develop, operate and make earnings from this land.

The Eton Group did not deliver the land or the shares to Xiamen Xinjingdi. On 14 November 2003, they returned the deposit to Xiamen Xinjingdi on the basis that performance of the agreement would be impossible and contrary to PRC law.

On 8 August 2005, Xiamen Xinjingdi commenced arbitration proceedings in a CIETAC tribunal in Beijing and it was ordered that the agreement should be performed. The tribunal held that the parties should “exert reasonable efforts in good faith to perform the [a]greement completely and fully [rather than blame] external causes.” As the agreement was a framework agreement, the tribunal considered that there should be close cooperation between the parties and reasonable efforts should be made to seek alternative approaches in meeting the purpose of the agreement.

During this first arbitration, the Eton Group continued with their restructuring plans and established a parent company, Eton Properties Group Limited (EPGL). The restructuring effectively diluted and transferred the shares in Legend Properties from the Eton Group to EPGL.

On 18 August 2008, the Eton Group submitted the dispute to another CIETAC tribunal. This tribunal ruled against the Eton Group’s proposition that the conditions for termination of the agreement had been satisfied.  

Before the second arbitration, the Court of First Instance in Hong Kong – on 24 June 2008 – had refused the Eton Group’s application to set aside the order allowing the arbitral award to be enforced in Hong Kong. The Eton Group then appealed to the Court of Appeal and a decision was handed down on 11 June 2009.  

“the Court of First Instance ... had refused the Eton Group’s application to set aside the order” The Court of Appeal’s decision

In the appeal, the Eton Group argued that it had been impossible to perform the agreement, as the land had been developed and 99 per cent of the units which had been constructed on the land had been sold to third parties. Furthermore, shares could no longer be transferred as a result of the Group restructuring. The Eton Group also submitted that the impossibility of performance gave rise to a public policy exception under Hong Kong’s Arbitration Ordinance concerning enforcement.

The Court of Appeal held that there was no “insuperable impediment” to the transfer of shares to Xiamen Xinjingdi. The restructuring, in any case, could not be a valid reason for non-performance as the impossibility had been “self-inflicted”. The Eton Group had continued with the restructuring despite the fact that arbitration had commenced and it should bear the associated risks. The Eton Group had failed to demonstrate any impossibility of performance.

In addition

The Eton Group was criticised for failing to inform the first tribunal of its restructuring plans. Also, the Court noted that the Group had used “filibustering” techniques to procure an adjournment of the court proceedings in the Hong Kong Court of Appeal. The Group’s good faith was questioned, given that they had proposed submitting the dispute to a CIETAC tribunal for the third time in order to consider “alternative remedies” such as damages in lieu or an account of profits.

It was held that the Eton Group had had ample opportunity to obtain the necessary directions flowing from the award from the CIETAC tribunal. The Court also noted that it did not have the power to remit the dispute back to CIETAC so that directions could be obtained. A court may only enforce or refuse to enforce an award under the provisions of the Arbitration Ordinance.

“The Eton Group had failed to demonstrate any impossibility of performance”

In conclusion

Parties wishing to make use of the public policy exception are advised to make arguments which have been previously accepted by the courts and to cite relevant case law authorities when putting forward their case.