In U v A [2017] HKEC 468, the Hong Kong Court of First Instance dismissed an application to set aside an Order for enforcement of an ICC award rendered in Hong Kong. In her judgment, Mimmie Chan J reiterated that Hong Kong courts will refuse challenges to enforcement based on unmeritorious technical points or minor procedural complaints. An error will only be considered sufficiently serious if it undermines due process.

The arbitration

The dispute related to a Preliminary Assignment Contract (PAC) between the parties in which U, the applicant, agreed to purchase 51% of a JV company in the PRC. In addition to the purchase of shares, the contract also provided that U would control the majority of the board of the JV. Several months later, in order to finalise the deal, the parties signed a separate Share Transfer Agreement (STA). Only the STA, and not the PAC, was submitted to the relevant PRC authorities for approval. Thus, the PAC was considered a so-called "Black Contract", while the STA was considered a "White Contract". The issue in dispute concerned the fact that the provisions in the PAC regarding control of the JV board were not contained in the government-approved STA.

The Respondents asserted that under PRC law the PAC, as a contract for the transfer of shares of a foreign-invested enterprise, can be legally valid and effective only with the approval of the competent Chinese authorities. Without that approval, they claimed that the PAC was not valid and that they therefore were not bound by the obligations therein.

While the arbitration was already underway, the Respondents obtained a PRC judgment confirming that the PAC was indeed ineffective. However, the Arbitrator refused to accept the PRC judgment as evidence because the Respondent had submitted it out of time. She also considered the judgment irrelevant in the determination of the dispute submitted to arbitration, since the parties to the judgment were not identical to the parties to the arbitration. Moreover, the PRC proceedings were tortious in nature, in contrast to the contractual claims referred to arbitration.

In the award, the arbitrator held that the PAC should be regarded as a framework contract, which was given effect by the supplemental STA. Consequently, she held that the PAC was valid, despite the lack of governmental approval.

The set aside application

The Respondent applied to set aside the Order on the following grounds:

  1. the Respondents were unable to present their case (s 86(1)(c)(ii) of the Arbitration Ordinance (Cap 609));
  2. the Award deals with a difference 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 (s 86(1)(d));
  3. it would be contrary to public policy and unjust to enforce the Award (s 86(2)(b)&(c));

i. Refusal to allow belated evidence does not breach due process

The Respondents complained that the arbitrator had unjustifiably refused to admit the PRC Judgment as evidence in the arbitration, such that the Respondents were deprived of a full opportunity to present their case on the key issue of the invalidity of the PAC.

The Court rejected the Respondents' submissions on two grounds. First, an arbitrator is fully entitled to impose time limits for the filing of evidence in the proper exercise of her case management powers (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd, FAMV 18/2012). Second, the Respondents were able to present expert evidence on the interpretation of PRC law on the required government approvals for foreign-invested enterprises. Thus, due process was respected and the parties were given a fair hearing.

ii.Only clearly unrelated decisions fall beyond the scope of the submission to arbitration

The award included a decision on the procedure for the election of the JV's board Chairman. The Respondents argued that this decision was beyond the scope of the submissions since this relief was not explicitly sought in the Request for Arbitration. Only later, in the Statement of Claim, had U requested an order to confirm its right to elect the Chairman.

Only decisions which are clearly unrelated to, or not reasonably required for, the determination of the subject dispute, matters or issues submitted to arbitration fall beyond the scope of the submission to arbitration (Grant Thornton International Limited v JBPB & Co (A Partnership), HCCT 13/2002). The Court went on to examine (i) the contract language, which did not contain any special requirements as to the form of the claims brought; (ii) the ICC Arbitration Rules, which merely require the request for arbitration to contain "a description of the nature and circumstances of the dispute giving rise to the claims and of the basis upon which the claims are made", and a "statement of the relief sought"; (iii) s 51 of the Arbitration Ordinance, which states that the claimants must bring the relief sought in his Statement of Claim. None of these provisions limits the relief sought in the arbitration to the claims brought in the Request for Arbitration.

iii.Error in (PRC) law is not contrary to Hong Kong public policy, nor is it unjust

The arbitrator allegedly made an error in PRC law in holding that the PAC is effective and valid despite lacking governmental approval. However, in enforcement proceedings in Hong Kong, the public policy to be considered is that of Hong Kong, not that of the PRC (Hebei Import & Export Corp v Polytek Engineering Co Ltd, (1999) 2 HKCFAR 111). To justify refusing enforcement, the violation of public policy must be "contrary to the fundamental conceptions of morality and justice" of the forum – i.e. Hong Kong.

The Court held that Hong Kong is not the correct forum to decide whether the award would violate PRC public policy, nor can it review the decision of the arbitrator that the PAC did not require approval under PRC law. To the extent that enforcement of the award is sought in the PRC, the Respondents are free to resist enforcement there.

The Court rejected the application on each ground and ordered the Respondents to pay costs on the indemnity basis.

Comment

Chan J has again reinforced the long-standing position of the Hong Kong courts that they will reject challenges to enforcement of arbitral awards based on unmeritorious technical points or minor procedural complaints.