On 16 April 2018, the Beijing Fourth Intermediate People’s Court (the “Court”) refused recognition and enforcement of an arbitral award (No. A13027) administered by the Hong Kong International Arbitration Center (the “HKIAC”). This is one of the rare cases that an arbitral award administered by an arbitration institution outside mainland China is rejected by a China’s mainland court. This article reviews the background of the case and further analyzes the legal issues involved in it.

I. Factual Background

On 30 June 2011, the Applicant, IP Cathay II, L.P., and the Respondents (including five natural persons and several companies– Jiting Zhou, Mengkui Zhou, Xianghong Zheng, Wenhe Chen, and Jingbiao Li, as well as Beijing Wanruisheng Technology Co. Ltd. (“Wanruisheng”), Beijing Wanrunpeng Technology Co. Ltd. (“Wanruipeng”), Beijing Wanruifa Technology Co. Ltd. (“Wanruifa”), Tianjin Wanruifeng Technology Co. Ltd. (“Wanruifeng”), Beijing Beike Haoyue Technology Co. Ltd. (“Haoyue”), University for Science and Technology in Beijing (the “University”), and Harbin Guangsha College (the “College”) ) reached an Agreement on the Sale of Type C Preferred Shares (the “Agreement”), under which the Applicant was to pay USD $10,000,000 as subscription fees to purchase 87,303 shares of the Type C Preferred Shares of the targeted company, China Professional Education Co. Ltd (the “Company”).

The Agreement also included provisions on the redemption, repurchase, and transfer of the shares and the relevant price. Under the Agreement, the Applicant had the right to issue a notice of sale to the five natural-person Respondents and/or Beijing Ruiming Co. Ltd. (“Ruiming”), requesting them to purchase the shares of the targeted company according to the price set forth in the Agreement if: (1) when the adjusted profits of the targeted company before tax were less than CNY 130,000,000, or (2) when the targeted company failed to complete an IPO before 31 December 2012, or (3) when other shareholders and their assignees or heirs issued a notice of redemption to the targeted company, or, issued a notice of purchase to the five natural persons and/or Wanruisheng, or requested the Company to liquidate, dissolute, bankrupt, or terminate.

After that, the abovementioned three circumstances occurred in turn. The Applicant therefore issued a notice of sale to the five natural persons and Ruiming. Nevertheless, none of them fulfilled their duty to purchase the shares accordingly. The Applicant therefore asked some of the Respondents, including Wanruisheng, Wanruipeng, Wanruifa, Wanruifeng, Haoyue, and the College, to undertake the due liability as guarantors.

On 8 June 2013, the Applicant commenced the arbitral proceeding in the HKIAC. After the hearing, the tribunal issued the arbitral award against the Respondents on 24 August 2015.

II. Key Issues

Whether the arbitral award fell into any circumstance stipulated under the Arrangements of the Supreme People’s Court on the Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (the “Arrangement”) and the Civil Procedure Law of People’s Republic of China, based on which the recognition and enforcement of the award may be refused.

The Respondents, against whom the enforcement is sought, argued that the arbitral award fell into circumstances under Article 7 of the Arrangement. According to Article 7, the party against whom an application is filed may, after receiving notice of an arbitral award, whether made in the Mainland or in the HKSAR, adduce evidence to show any of the situations set out below. Upon such evidence being examined and any of the said situations being found proved, the relevant court may refuse to enforce the arbitral award:

(1) A party to the arbitration agreement was, under the law applicable to him, under some incapacity, or the arbitration agreement was not valid under the law to which the parties subjected it, or, failing any indication thereon, under the law of the place in which the arbitral award was made; 

(2) The party against whom the application is filed was not given proper notice of the appointment of the arbitrator or was otherwise unable to present his case; 

(3) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or the award contains decisions on matters beyond the scope of the submission to arbitration. However, if the award contains decisions on matters submitted to arbitration that can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration shall be enforced; 

(4) The composition of the arbitral authority or the arbitral procedure was not in accordance with agreement of the parties or, failing such agreement, with the law of the place where the arbitration took place; 

(5) The award has not yet become binding on the parties or has been set aside or suspended by the court or in accordance with the law of the place where the arbitration took place.

If the relevant court finds that under the law of the place of enforcement, the dispute is incapable of being settled by arbitration, then the court may refuse to enforce the award.

The enforcement of the award may be refused if the court of the Mainland holds that the enforcement of the arbitral award in the Mainland would be contrary to the public interests of the Mainland, or if the court of the HKSAR decides that the enforcement of the arbitral award in Hong Kong would be contrary to the public policy of the HKSAR.

The Respondents contended that the award fell into items 1 and 3. Therefore, the Court should refuse to enforce the award.

III. The Judgment

Based on the findings of the relevant facts, the Court found that while the award ordered that 21 respondents in the arbitration should undertake liability, the Applicant only asked for 7 of them (i.e. the five natural persons, the Company, and Ruiming) to undertake the liability of redemption and repurchase of the share. As the award dealt with a difference not contemplated by or not falling within the terms of the Applicant’s submission to arbitration, the arbitral award fell into the condition as stipulated under Article 7(3). Hence, the arbitral award shall not be enforced. In addition, since the award did not separate the responsibility of the 21 Respondents proportionately, the decisions on matters submitted to arbitration cannot be separated from those not so submitted. Therefore, the whole arbitral award shall not be enforced

The Court also found that since the arbitral award had already fallen into a circumstance based on which the enforcement should be refused, there was no need to further consider the other arguments contended by the Respondents.

IV. Comments

This is the first case under which the enforcement of a HKIAC award is refused by the Chinese Mainland court. The reason for the refusal is that the tribunal exceeded its substantive jurisdiction in issuing the award. Such a ground for non- enforcement of an arbitral award is also one of the reasons for refusing recognition and enforcement of a foreign arbitral award under Article 5(1)(c) of the New York Convention. According to the Article, recognition and enforcement of the award may be refused, if the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration. However, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced.

One thing should be noted is that even though the enforcement of an arbitral award may be refused if the tribunal renders the award beyond its substantive jurisdiction, such negative outcome can be prevented by parties from the very beginning and in the process of the arbitral proceedings if parties pay special attention to the following aspects:

  1. Be precise about the submissions

In this case, the claim submissions served by the Applicant were not ambiguous whereas the problem was that the tribunal exceeded its jurisdiction. Nevertheless, from the perspective of the parties, an applicant should be cautious to make sure that its claim submissions are precise and unambiguous. The same methodology also applies to counterclaims brought up by a respondent. Since the jurisdiction of the tribunal stems from the authorization of the parties, if the submissions are ambiguous in the first place, there are at least two risks which may bring negative impact on parties:

Firstly, the arbitral award based on such ambiguous submissions would be unclear, which may cause the enforcement of the award be refused during the enforcement stage. For example, according to Article 463 of the Interpretations of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China, the binding legal instrument for which a party concerned applies to the competent people’s court for enforcement shall contain clear contents relating to performance therein. Also, according to Article 3 of the Provisions of the Supreme People's Court on Several Issues concerning the Handling of Cases of Arbitration Awards Enforcement by People’s Courts, where an arbitral award is unenforceable because of the ambiguity, the competent people’s court may render a ruling to dismiss the entire application for enforcement.

Secondly, even if the contents of the arbitral award are sufficiently specific, it is still possible that the application of enforcement is refused as the tribunal is lack of substantive jurisdiction (e.g. Article 237(2) of Civil Procedure Law of the People’s Republic of China stipulates that if the matters fall outside the scope of the arbitration agreement or that the arbitral organ has no jurisdiction, the enforcement of the arbitral award may be refused). Therefore, a party should make sure that its submissions are clear and precise enough.

  1. The tribunal has certain discretion regarding the monetary amount claimed by parties

It is quite common that a tribunal may exercise its discretion regarding adjusting the monetary amount sought by parties. There are two common situations. First, the tribunal may decide a specific amount when the parties fail to do so. Second, the tribunal awards an amount different from the amount sought by parties, such as exceeding the requested amount.

In the first situation, there is usually no dispute about whether the tribunal has exceeded its jurisdiction. Dispute regarding whether the tribunal goes beyond its substantive jurisdiction usually happens in the second situation, especially when the amount granted by the tribunal exceeded the amount sought by parties. Currently, a more popular view is that since the compensation for breach of contract is a general submission brought up by parties, even though the specific amount rendered by the tribunal and sought by the parties is not the same, such discretion exercised by the tribunal does not exceed its jurisdiction.

Therefore, on one hand, the parties should specify the amount sought for relief so as to avoid the unexpected situation that the granted amount is unsatisfied to both parties. On the other hand, parties should not only rely on just indicating the amount sought for relief, but also prepare relevant evidence and other materials in order to lead the tribunal to make a proper award regarding the monetary amount.

  1. How to prevent a tribunal from rendering an award beyond its substantive jurisdiction

Such preventive measures shall be taken by parties from the very beginning and during the whole process of an arbitral proceeding. Parties should be cautious and very careful about this. The methods that may help to prevent the tribunal goes beyond its jurisdiction include but not limit to: appointing experienced and diligent arbitrators; making clear and specific submissions; in case if a list of issues is used, be sure to make it clear and precise; reminding the tribunal in time when parties realize that the tribunal may go beyond its jurisdiction; after receiving the award, if parties believe that the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, parties may ask the tribunal to correct the award according to the arbitration rules or the law of the seat of the arbitration.

It should be noted that skillful counsels are always leading the tribunal instead of being led by the tribunal or the opponent party. In order to do this, counsels should get a good command of both procedural and substantive issues of a case.