In a recent case, the Hong Kong Court of Appeal laid down a strict test that must be satisfied by a party alleging fraud to resist enforcement of a foreign arbitration award. The robust approach adopted by the Court is in line with the pro-enforcement stance taken in Hong Kong towards the enforcement of foreign arbitral awards under the New York Convention.

Background

The case involved the long-running Karaha Bodas dispute over a geothermal power plant in Indonesia. The Hong Kong proceedings arose from the claimant’s attempt to enforce the UNCITRAL award in its favour. The claimant was granted leave to enforce the award in Hong Kong in 2002, and the defendant’s attempt to set aside that order was refused in 2003. The defendant appealed to the Court of Appeal on a number of grounds, but the focus of its appeal was its case that it would be contrary to public policy to enforce the award because there was fraud or bad faith on the part of Karaha Bodas.

Judgment

The Court of Appeal dismissed the appeal. It held that unless counsel can responsibly assert that a specific allegation of fraud can be demonstrated to have “a real prospect of success”, the allegation should not be raised before the Hong Kong courts in an effort to prevent enforcement of a Convention award. The Court of Appeal was unanimous in its view that establishing a prima facie allegation of fraud would be insufficient. The Court held that once the threshold is satisfied, the enforcing court would probably have to hear the evidence on the allegation of fraud and make findings on the same. Whether the award should be enforced will then depend on such findings.

On the facts, the court held that the defendant had not met the required standard of a “real prospect of success”.

Commentary

Any allegation of fraud that satisfies the test is now likely to result in a hearing of the evidence before the courts in Hong Kong. This hearing will have time and cost implications for the parties and may require the Hong Kong courts to revisit issues previously examined during the arbitration. Therefore, the relatively high threshold test imposed by the Court of Appeal would appear to be sensible.

The decision places a heavy burden on counsel to carry out a legal analysis of the merits of their client’s case before raising the allegation of fraud in court. They will need to be able to show cogent reasons and strong evidence in order to “responsibly assert” that the allegation has a real prospect of success.

Note: It is understood that an appeal has been filed for this case to be considered by the Court of Final Appeal.