Obtaining a favorable arbitral award will be a hollow victory unless and until the award is successfully enforced against the losing party.
In a recent decision in Xiamen Xinjingdi Group Co Ltd v. Eton Properties Limited & Ors1, the Court of Final Appeal (the CFA) reaffirmed Hong Kong’s pro-arbitration credentials and standing as a premier international arbitration hub by holding that when a winning party seeks to enforce an arbitral award by a common law action, a Hong Kong court is not restricted to enforcing the award “mechanistically” by making an order in its terms. Instead, the court may grant appropriate remedies to give effect to the award, which extends beyond the remedies initially sought in the arbitration.
The dispute arose out of an agreement to acquire shares in a company to develop and use a plot of land in Xiamen (the Agreement), which the first and second defendants sought to repudiate. The plaintiff refused to accept termination and commenced a China International Economic and Trade Arbitration Commission (CIETAC) arbitration (the Arbitration) in Beijing against the first and second defendants. The tribunal awarded the plaintiff damages for breach of contract and ordered that the first and second defendants shall “continue to perform the [A]greement” (the Award).
Upon application by the plaintiff (the Plaintiff’s Application) under the summary procedure (the Summary Procedure) provided by section 2GG of the former Arbitration Ordinance (Cap. 341),2 the Court of First Instance (the CFI) granted leave to enforce the Award and entered judgment (the Statutory Judgment) in its terms, ordering that the first and second defendants “shall continue to perform the Agreement.”
In opposing the Plaintiff’s Application, the first and second defendants filed evidence to the effect that a restructuring (the Restructuring) had taken place prior to the Arbitration, which involved divestiture of interest by the first and second defendants and development of the land in question. Upon learning of the Restructuring, the plaintiff commenced a fresh common law action against the first and second respondents, as well as other related parties (the Action) to enforce the Award. As part of the Action, the plaintiff sought a declaration for constructive trust, together with damages or equitable compensation. The relief sought in the Action went beyond the terms of the Award.
The lower courts’ decisions
Whereas the CFI dismissed the Action in its entirety, the Court of Appeal (the CA) allowed the plaintiff’s appeal. The CA also set aside the Statutory Judgment and required the plaintiff to elect between an order for “continued performance” of the Agreement (as ordered by the CIETAC tribunal) and damages in favor of the plaintiff against the first and second defendants for breach of an implied promise to honor the Award. The plaintiff elected for damages, and the CA entered judgment (the CA Judgment) in favor of the plaintiff accordingly.
The appeal to the CFA comprised cross-appeals brought by the first and second defendants and the plaintiff against different parts of the CA Judgment. This case summary focuses on the first and second defendants’ appeal to set aside the CA Judgment and quash the enforcement of the Award.
The CFA decision
The first and second defendants raised the following arguments before the CFA.
The “mechanistic argument”
The first and second defendants contended that the procedure for enforcing an arbitration award under a common law action should mirror the Summary Procedure, under which the enforcing court can enter judgment “in terms of” an arbitral award only “mechanistically.” The CFA ruled that a common law action is different from the Summary Procedure as the plaintiff is required to prove its case in a common law action. A Hong Kong court is therefore not constrained by the requirement to enforce an arbitral award mechanistically in a common law action.
The “outflanking argument”
The first and second defendants contended that the CA should have stayed the Action in favor of arbitration because (a) the plaintiff’s claim for breach of an implied promise to perform the Award was in truth a claim to enforce the underlying agreement, and/or (b) the damages sought by the plaintiff were for loss of the profits of development of the land flowing from the breach of the Agreement. It followed that the Action fell within the scope of the arbitration clause. Further, the only issue referred to and decided by the tribunal in the Arbitration concerned the validity of the Agreement, and thus the Arbitration was incomplete and the Award was not ready for enforcement.
The CFA considered that the implied promise to honor the Award existed as a contractual obligation separate and distinct from the obligations created by the Agreement. Accordingly, at the enforcement stage, the enforcing court may grant such relief as appropriate to an award:
- If it is a monetary award for payment within the jurisdiction, it may simply be a judgment enforcing the award as a debt.
- If it is a nonmonetary award that has not been complied with, the court may fashion an apt remedy chosen from the full range of remedies available in an ordinary common law action.
The CFA distinguished between proceedings at the arbitration and the enforcement phase. Once the final award is made, the arbitrators’ mandate is exhausted and, if the award is not complied with, a fresh cause of action arises for breach of the implied promise to honor the award. The plaintiffs’ claim in the Action was therefore not caught by the arbitration clause.
The extant award argument
In reliance on Johnson v Agnew3, the first and second defendants contended that it was wrong for the CA to award the plaintiff damages because such relief was fundamentally inconsistent with, and barred by, the Award. To enable the enforcing court to grant it damages, the plaintiff must first ask the tribunal to rescind its order that the “[first and second defendants] shall continue to perform the [A]greement.”
The CFA found that Johnson v Agnew did not require consistency between relief granted in a common law enforcement action and the content of an arbitral award. Accordingly, the relief sought in the Action fell within the enforcement jurisdiction of the Hong Kong court, and Johnson v Agnew would not bar the enforcing court from granting remedies different from an arbitral award.
The decision is a welcome clarification on the scope of relief that a Hong Kong court may grant in a common law action to enforce an arbitral award. It illustrates the Hong Kong courts’ pro-enforcement approach when dealing with the enforcement of arbitral awards and flexibility in making orders to render an arbitral award effective so as to accommodate a change in circumstances and other post-award developments. The decision therefore affords greater protection to a winning party in an arbitration.
Nonetheless, a winning party should not assume that a different relief will always be granted in its favor in a common law action to accommodate a change in circumstances. The CFA has observed that there can be cases where a remedy sought in a common law action may be refused on the grounds that such remedy is unwarranted given the limited scope of the award.