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14 Jan 2019

Hong Kong Court refuses to enforce a Chinese Arbitration Award on public policy grounds

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In the case of Z v Y [2018] HKCFI 2342, the Hong Kong Court of First Instance allowed an application resisting enforcement of an award made in China. A tribunal seated in China had made an award against the Respondent in respect of obligations under a guarantee. The award creditor applied to enforce the award in Hong Kong and obtained a grant of leave on 27 February 2017. The Respondent applied to set aside the grant of leave under s 95 of the Arbitration Ordinance. The Court allowed the Respondent's application on the basis that enforcement of the award would be contrary to public policy.

The dispute arose with respect to a written guarantee purported to have been signed by the Respondent. The guaranteed transactions were eight supply contracts whereby goods were sold to the Applicant by the Respondent’s husband’s company. An affiliated company of the buyer (also owned by the Respondent’s husband) entered into back-to-back contracts to supply the same goods to the Applicant. In fact no goods changed hands. It transpired that these were sham arrangements to disguise what were in fact loans. Under PRC law these fraudulent contracts constitute a criminal offence.

After the award was made against the Respondent, she applied to resist enforcement in Hong Kong on the following grounds: (1) the sale contracts giving rise to the guarantee were illegal; (2) when the Respondent signed the guarantee she was under a mental incapacity; (3) there was no valid arbitration agreement; (4) the guarantee was void and invalid under both PRC and Hong Kong law; and (5) proper notice of the appointment of arbitrators was not given. The Respondent did not succeed in relation to grounds (2), (3) and (5). However, the Hong Kong did refuse enforcement under section 95(3)(b) of the Arbitration Ordinance on the basis of grounds (1) and (4), stating that it would be contrary to public policy to enforce an Award where there are valid grounds to claim that the guarantee was to secure obligations that were “tainted by illegality” and the tribunal had not addressed them.

The court accepted that as an enforcement court it should not review the merits of the Award, and that any mistake in law or fact is insufficient to found an application to set aside or refuse enforcement. However, the court considered that the question of illegality, although presented to the tribunal had not in fact been addressed in the Award with adequate reasons. The court referred to A v B [2001] 3 HKC 521 in which it was held that “… an award should be reasoned to the extent of being reasonably sufficient and understandable by the parties … it is a serious irregularity and the denial of due process which causes substantial injustice and unfairness to the parties, if an important issue … is not in fact addressed.” The Court held that the tribunal failed to give any adequate reason as to why it had concluded that the Respondent’s claim of illegality of the underlying Debt had not been established by the Respondent. The question of the validity of the guarantee under PRC law was also not addressed in the award and no reason was given to support the tribunal’s finding that there was a valid guarantee under PRC law.

This decision reinforces the fact that enforcement of foreign arbitral awards in Hong Kong is not merely a rubber stamping exercise.  The court will take allegations of serious irregularity of the tribunal and public policy reasons seriously. A copy of the decision can be found here.

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