The respondent applied on the grounds that the award had been suspended under the laws of the People's Republic of China, that the respondent was unable to present her case and/or that enforcement of the award would be contrary to public policy.
The court however refused the application, agreeing with the applicant that the award had not been suspended by the mainland court and describing the respondent's suggestion that the Hong Kong court should be bound by provisions of the Supreme People's Court relating to enforcement of arbitral awards on the mainland as "astounding".
Sale and purchase
The applicant and the respondent were siblings, and the shareholders of a Hong Kong incorporated company. The respondent and another individual were the company's two directors. The parties entered into a share transfer agreement in November 2017 under which the applicant agreed to purchase the respondent's ten per cent shareholding in the company. The sale and purchase was agreed at RMB10 million to be paid in three instalments.
The applicant paid its first instalment payment in accordance with the agreement. However, it only paid RMB3 million out of the RMB6 million second instalment payment due in February 2018. The remaining RMB3 million was paid on 8 April 2019, which was after the date specified in the transfer agreement. The applicant then claimed that the respondent had failed to fulfil her obligation to effect the transfer of the shares, which he contended was a precondition for the making of the second stage payment.
The very next day following the applicant's payment, on 9 April 2019, the applicant commenced arbitration proceedings before the Shanghai Arbitration Commission, claiming that that the respondent was in breach of the transfer agreement. The respondent in defence claimed she had no obligation to arrange for the share transfer since the applicant had failed to make the second stage payment in accordance with the transfer agreement.
The tribunal issued its award following a hearing on 16 December 2019, whereby the respondent was ordered to transfer the shares to the applicant, to handle the related procedures for the registration of the transfer of shares, and to pay the applicant's legal costs and fees.
The applicant made an application to the court for leave to enforce the award. In accordance with its practice, the court made an order for the enforcement of the award on an ex parte basis on the basis of an affirmation submitted by the applicant subject to the respondent having leave to apply to set aside the enforcement.
The respondent sought to set aside the enforcement order. The grounds relied upon were that (i) there had been material non-disclosure by the applicant, in failing to disclose to the court that the respondent had applied to the Shanghai court to set aside the award (the Shanghai set aside application); (ii) the award had already been suspended under mainland law; (iii) the respondent was unable to present her case; and / or (iv) that enforcement of the award would be contrary to public policy.
Material non-disclosure
The court noted the observation in G v X [2022] HKCFI 829, that just as important as the duty to make full and frank disclosure to the court in an ex parte application, is the need for a party seeking to discharge an order to state clearly in its application the ground of material non-disclosure and the matters relied upon for the discharge.
This was in view of the reminders issued by the courts that "applications to discharge for material non-disclosure should not be abused, to become a rambling and roving investigation of what should have been disclosed, but was not". Fairness and natural justice also required timely disclosure of the matters relied upon.
Regarding the application to enforce the award on the mainland, the court did not find that there was material non-disclosure as parties are no longer precluded from filing simultaneous applications for enforcement of arbitral awards with the courts of the mainland and of Hong Kong following the coming into force of the Supplemental Arrangement on 27 November 2020, with the only restriction being the prohibition as to double recovery.
What was material, however, was the applicant misleading the court in his affirmation as to whether the applicant had applied for enforcement of the award on the mainland. The applicant had stated that the applicant had not applied for enforcement which the court found to be "obviously a mis-statement of the facts". The court was not able to condone any party misleading the court on any fact, even if this fact was not material to the outcome of the application.
The court considered that there was also no reason for the applicant not to have made disclosure of the fact that the respondent had made the Shanghai set aside application, which fact was material as to whether the enforcement order would be granted by the Hong Kong court.
In the absence of any explanation given by the applicant and "to reflect the utmost importance of the duty of a party, firstly, to make full and frank disclosure on an ex parte application, and secondly, not to mislead the Court on any matter", the court discharged the ex parte enforcement order, whilst noting that the court had the discretion to re-grant the order, which was dependent on whether the respondent could satisfy the court there were grounds on which enforcement could be refused under section 95 of the Arbitration Ordinance.
Award not suspended
The court rejected the respondent's reliance on Article 7 of the Provisions of the Supreme People's Court on Several Issues concerning the Handling of Cases regarding Enforcement of Arbitral Awards by the People's Courts 最高人民法院關於人民法院辦理仲裁裁決執行案件若干問題的規定 (SPC Provisions) to argue that since the Shanghai court had already accepted jurisdiction over the Shanghai set aside application, the award had already been suspended at the time of the applicant's ex parte application.
The court found it "astounding" that counsel for the respondent had submitted that under Article 7, that where the second director had made an application for non-enforcement, the Hong Kong court should rule to suspend enforcement. The SPC Provisions applied only to the mainland courts and had no effect on the Hong Kong court as a court of enforcement.
Hence, there was no evidence to support the contention that enforcement should be refused, that the award had not become binding or had been set aside or suspended by the mainland court or in accordance with mainland law.
Opportunity to present case
Enforcement of a mainland award may be refused if the person against whom it is invoked proves that the person was unable to present their case. The onus of proof is on the party seeking the court's exercise of discretion to refuse enforcement.
It must be established that there was a serious, even egregious, error to have undermined due process. Even if that can be established, the court may still refuse to set aside the award if it is satisfied that the tribunal could not have reached a different conclusion.
The court considered section 46 of the Arbitration Ordinance, that in the context of whether a party is unable to present their case in arbitration, the tribunal is required to give equal treatment to the parties, and to give them a "reasonable opportunity" to present their case and to deal with the case of their opponents.
In this case:
- The tribunal ruled at the hearing on 16 December 2019 that supplemental evidence of the parties may be submitted within 3 weeks of the hearing, i.e. by 6 January 2020.
- The applicant did not adduce any supplemental evidence, and no further hearing was scheduled.
- The tribunal informed the respondent on 29 May 2020 that the applicant had adduced new evidence, including a legal opinion on Hong Kong law.
- The respondent filed submissions in reply on 10 June 2020.
The court rejected the claim that the tribunal had made any serious or egregious error by deciding to accept the applicant's evidence without a further hearing, or that the respondent had been deprived of the reasonable opportunity to present her case.
The issues were already raised in the arbitration and which were in place and argued at the hearing on 16 December 2019, and the respondent had made submissions on 10 June 2020 on the materials submitted by the Applicant on 29 May 2020. It was the respondent’s choice to deal with the applicant's submissions briefly, and the respondent had the opportunity to make submissions. Furthermore, the respondent neither requested the tribunal to hold a further hearing to be held by the tribunal, nor did the respondent seek further time to adduce any evidence in reply, or to make further, detailed submissions.
The court also pointed out that the respondent did not explain or adduce any evidence to show that if she had been given the opportunity by the tribunal, she would be able to establish a defence to the claims made against her in the arbitration, whether under Hong Kong law, or as to the points raised in the "new" evidence adduced by the applicant, and how the transfer agreement could be said to be invalid, or unenforceable, such that she was not in breach of contract.
The court noted that any complaint made by the respondent that the tribunal had wrongly decided on the validity of the transfer agreement, or had wrongly taken into consideration questions of Hong Kong law in reaching such a decision, was a claim that the tribunal had made an error in law or on the facts, or had acted beyond the scope of the submission to the arbitration. The court found the former was not a ground to set aside the enforcement order, whilst the latter was not the ground relied upon by the respondent in the application.
The respondent's claim made under section 95(3)(b) of the Arbitration Ordinance (contrary to public policy to enforce the award) was based on the same matters argued under section 95(2)(c)(ii) of the Ordinance (unable to present case). Given that the court found that the respondent had been given the reasonable opportunity to present her case, the court rejected the respondent’s argument that enforcement of the award would be contrary to the public policy of Hong Kong.
Since the court ruled that there were no grounds to refuse enforcement of the award, the court exercised its discretion to re-grant the enforcement order, for leave to enforce the award in Hong Kong.
Takeaways:
- The case is an illustration of the benefits of the Supplemental Arrangement allowing parallel enforcement on the mainland as well as in Hong Kong. Often debtors have assets in both jurisdictions.
- It is extremely difficult to challenge enforcement of the award based on the ground that a party was unable to present its case. Not only does a party have to demonstrate a serious, even egregious, error to have undermined due process so that they were unable to present their case, but had an opportunity been given by the tribunal, it would have made a difference to the tribunal's ruling.
- The distinction between a lack of opportunity to deal with the case and the failure to recognize or take such opportunity.
- PRC enforcement legislation has no relevance in an enforcement application before a Hong Kong court.
- In making an enforcement application, it is important to disclose all material facts.
Authored by Timothy Hill, James Kwan, Damon So, and Nigel Sharman.
