In 廈門新景地集團有限公司 v Eton Properties Limited & Ors, FACV Nos. 3 and 5 of 2019, the Court of Final Appeal (CFA) considered the scope of relief that the Hong Kong court, enforcing a Mainland arbitral award at common law, may grant. In particular, whether the court can only make an order which mirrors and does not go beyond the award. The CFA held that at the enforcement stage, in a common law action based on the implied promise to honour the award, the enforcing court may grant relief appropriate to the 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 non-monetary award, the court may fashion a suitable remedy chosen from the full range of remedies available in an ordinary common law action.
A dispute arose from an Agreement between the Plaintiff (P) and 1st and 2nd Defendants (D1-D2) providing that P would acquire from D1-D2 the right to develop land in Xiamen (Lot 22) owned by the 5th Defendant (D5), a PRC-incorporated company. D1-D2 wholly and indirectly owned D5 through the 4th Defendant (D4), a Hong Kong-incorporated company. The Agreement required D1-D2 to transfer their shares in D4 (D4 Shares) to P’s nominee upon receiving the transfer price and deliver Lot 22 within 6 months of the Agreement. The 6th Defendant (D6), who controlled the group of companies, later procured D1-D2 to terminate the Agreement and develop Lot 22 themselves. In response, P commenced CIETAC arbitration proceedings against D1-D2 in Beijing in August 2005. Between November 2005 and March 2006, restructuring of the corporate shareholdings meant that all D4 Shares came to be held by the 3rd Defendant (D3) as legal and beneficial owner in place of D1-D2, which allowed D3, via D4, to hold D5, which owned the rights to develop Lot 22. This made it impossible for D1-D2 to transfer their D4 Shares to P’s nominee as agreed.
In October 2006, the arbitral tribunal made an award in P’s favour, requiring D1-D2 to continue to perform the Agreement (First Award) and awarded P damages for breach of contract of RMB1.275 million (being damages for delay in delivering the land).
P’s application to enforce the First Award in the Xiamen Municipal Intermediate Court in July 2007 was dismissed, principally because D1-D2 were Hong Kong companies whose assets were outside the jurisdiction. P then successfully applied to the Hong Kong High Court, Court of First Instance (CFI), in HCCT 54/2007, for an order (Order) to enforce the First Award, by invoking the statutory procedure under s.2GG of the Arbitration Ordinance (Ordinance). Under that procedure, an arbitral award is enforceable with the court’s leave in the same way as a judgment of the court, and if leave is given, the court enters judgment in terms of the award.
D1-D2 then applied to set aside the Order and judgment and it was only then that they disclosed the restructuring. This prompted P to start a fresh common law action in the CFI, in HCCL 13/2011, (the Action) to enforce the First Award against D1-D2, as an alternative to its statutory action under s.2GG. P also sought declarations that D3 and D2 each held the D4 Shares registered in their names on constructive trust for P.
Meanwhile, D1-D2’s application to set aside the Order and statutory judgment came before the CFI for hearing. The Court rejected D1-D2’s “impossibility argument” that performance of the Agreement was now impossible because 99% of the residential units built on Lot 22 had been sold and that neither D1-D2 nor D5 could deliver possession of the land to P and D1-D2 could no longer transfer the D4 Shares to P, since the structure of the shareholding had changed. The Court considered it arguable that execution of the Agreement and payment of the deposit may have given rise to an equitable interest in the shares in P’s favour, resulting in a constructive trust being imposed on the D4 shares in the hands of D3 and D2. D1-D2’s appeal to the Court of Appeal was also dismissed.
Having failed before the Court, D1-D2 returned to the tribunal, applying for a determination that the Agreement could no longer be performed and seeking a ruling that the parties be discharged from it. The tribunal dismissed the application and reiterated that it had made an order for continued performance of the Agreement (Second Award). It ruled that the change of shareholding was a breach of the Agreement and not a ground for lawful termination, the unilateral notice of termination was invalid and it was not satisfied that the objectives of the Agreement were incapable of being met.
CFI ruling on P’s common law action
In the Action, P amended its Statement of Claim to add claims for tort for inducing breach of contract and conspiracy against six additional individuals (D6-D11) associated with D1-D2 and to add an alternative claim for damages or equitable compensation in the event that the relief it had been pressing for (i.e. transfer of the D4 shares to them) should prove unachievable
In June 2012, the CFI dismissed all of P’s claims in the Action, holding that performance of the Agreement had been rendered physically incapable of continued performance because Lot 22 had by then been fully developed by D5.While the Court recognised that the Action was brought to enforce the implied promise to honour the award at common law, it regarded it as being “no different in specie” from, and permitting no greater latitude in terms of remedy, than the statutory procedure under s.2GG. It held that on either approach, the Court was limited to “mechanistically” converting the award into a judgment in terms of the award. The Court said that in bringing the Action, P was seeking to go beyond such mechanistic enforcement, as it sought to substitute for the “continuous performance” award of the CIETAC Tribunal, a new claim for damages or equitable compensation, which not only went beyond the scope of the award as it now existed, but was never contemplated by the tribunal, which had not even been asked to consider such remedy.
The CFI therefore held that, this was an attempt to “subvert the integrity of the arbitral process” and get the Hong Kong Court “to usurp the designated dispute resolution body and impose its own remedy under the purported guise of enforcement, by asking it to rule upon an issue relating to breach of Agreement which must lie solely within the jurisdiction of the Beijing arbitral tribunal (or, if ultimately it became necessary, in the Beijing court of supervisory jurisdiction)”. The enforcement claim against D1-D2 was accordingly held to be outside the Court’s jurisdiction and failed. The Court said that it was up to P to return to the Tribunal and, if necessary, the Beijing supervisory court, to try to obtain substitute orders providing for the relief sought in the Action. The Court also dismissed P’s claims against all other Defendants.
Court of Appeal ruling on P’s common law action
The Court of Appeal allowed P’s appeal against dismissal of the common law action on the award against D1-D2. It noted that an arbitration award may be enforced by invoking the statutory procedure under s.2GG of the Ordinance or by bringing a common law action. It pointed out that an action on an award could be bought at common law where there had been a valid submission of a dispute to arbitration, an award had been made in the plaintiff’s favour and the defendant had failed to honour the award. Hong Kong law implied a mutual promise to honour the award and failure to do so constituted a fresh cause of action separate and independent from an action based on breach of the underlying agreement (which contained the arbitration clause). The Court held that in entering judgment under the statutory procedure, P had not made an informed irrevocable election, since it had done so while material information concerning the restructuring had been withheld by D1-D2. The Court held that P had to make an election between an order for “continued performance” and an order awarding damages (or equitable compensation). P made its election and the Court ordered that the statutory judgment be set aside and judgment be entered in P’s favour for damages against D1-D2 for breach of implied promise to honour the award under HCCL 13/2011.
Appeal to Court of Final Appeal
P and D1-D2 brought cross appeals to the CFA. P appealed against dismissal of its non-contractual claims against D3-D6 for inducing D1-D2’s breach of contract and its claim against D3 based on constructive trust. D1-D2 appealed against the part of the Court of Appeal judgment which allowed the appeal in relation to the award for damages.
CFA ruling on D1-D2 Appeal
The CFA dismissed the appeal, holding:
- The s.2GG procedure is summary in nature, the object being for the enforcing court to endow the award with the status of a compulsorily executable judgment, without itself scrutinising the merits of the arbitrators’ award and only entertaining challenges within the limits laid down in the Ordinance. The enforcing court is enjoined by s.2GG to confine itself to entering judgment “in terms of the award”.
- Enforcing an award by common law court action is quite separate and procedurally very different to s.2GG. An action on an award does not involve the plaintiff obtaining a judgment after an ex parte application. The plaintiff must sue on the award and prove his case. The rationale for restricting the court to entering judgment mechanistically therefore does not apply to the common law action. The Court is not constrained by the requirement that the judgment must be “in terms of the award”.
- What the parties had agreed to refer to arbitration were “disputes arising from the performance of the Agreement”. An action to enforce the implied promise to honour the Award is not a “dispute arising from the performance of the Agreement” and is therefore not caught by the arbitration clause, meaning that the action does not have to be stayed to arbitration. The implied promise to honour the award exists as a contractual obligation separate and distinct from the obligations created by the underlying contract.
- At the enforcement stage, in an action on the implied promise, the enforcing court may grant relief appropriate to the 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 non-monetary award, the court may fashion an apt remedy chosen from the full range of remedies available in an ordinary common law action.
- While it is conceivable that cases could arise where a remedy sought in a common law action may be refused on the ground that such remedy is unwarranted given the limited scope of the award, the present appeal came nowhere near such a case.
- The fact that the First Award requiring continued performance was still in existence did not prevent the enforcement court from awarding damages on the basis that such relief was inconsistent with the award. The relief granted in the common law action fell within the jurisdiction of the Hong Kong Court and was neither a matter for the tribunal nor relief which in some way required adjustment to achieve consistency with the terms of the award.
The CFA dismissed P’s appeal holding:
- On the facts, D3 to D6 could not be said to have had the necessary intent to frustrate the share transfer envisaged in the Agreement in effecting the restructuring.
- The Agreement, which was expressly made subject to PRC law, did not have the characteristics of a contract which, if governed by Hong Kong law, would have been enforceable by an order of specific performance. The Agreement did not qualify for specific performance because the obligation to transfer the D4 Shares to P’s nominee was subject to conditions precedent and because the Agreement’s terms were such as to require close cooperation between the parties and D1-D2’s performance to be supervised by the court.
The CFA for the first time clarified the relationship between enforcing an arbitral award by common law and through the Arbitration Ordinance, although the need to resort to common law for enforcement of arbitral awards should only come up sparingly. As illustrated in this case, enforcement of the award at common law will be useful to the plaintiff if the remedies sought are non-monetary and need to bind parties outside the arbitration agreement.