Construction Company v Guarantor [2021] HKCFI 2558

In the anonymized case of Construction Company v Guarantor [2021] HKCFI 2558, the Hong Kong Court of First Instance (CFI) dismissed an application to set aside an enforcement order for an US award. In doing so, it reinforced the principle in Gao Haiyan of giving due weight to any pre-existing decision of the supervisory court at the seat of arbitration.

The Law

China, of which Hong Kong is a special administrative region, is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”).  Consistent with the Convention, Hong Kong law sets out a narrow set of circumstances in which a court may refuse enforcement of a Convention award.

The exhaustive grounds are listed in Section 89 of the Arbitration Ordinance (Cap. 609).  Relevant to the current case, these include:

  • Invalidity of the arbitration agreement (Section 89(2)(b));
  • Lack of proper notice of the appointment of arbitrator, or a party having inability to present its case (Section 89(2)(c)(ii)); and
  • Enforcement of the award being contrary to public policy (Section 89(3)(b)).

The Hong Kong courts take a “pro-enforcement” approach to awards, whether they be rendered in Hong Kong SAR, Mainland China, or another Convention State.  Courts have held that enforcement of an arbitration award should be “almost a matter of administrative procedure” and “as mechanistic as possible” (Shandong Hongri Acron Chemical Joint Stock Company Limited v Petrochina International Hong Kong Corporation Limited [2011] 4 HKLRD 604; KB v S [2015] HKEC 2042).  

Consequently, a set aside application or challenge to enforcement must satisfy a high bar. An applicant relying on an alleged abuse of due process must show that it is “sufficiently serious”, even “egregious” (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1), and that it would be shocking to the conscience of the Court or “contrary to its fundamental conceptions of morality and justice” to enforce the award (Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111).

A relevant consideration will be whether the courts of the seat of arbitration itself have themselves refused to set aside an award on due process grounds. In the well-known case of Gao Haiyan & Anor v Keeneye Holdings Ltd & Anor [2012] 1 HKC 335, concerning an award resulting from a Chinese med-arb process, the Hong Kong Court of Appeal noted that the Xian Court with supervisory jurisdiction over the arbitration had already refused an application to set it aside. The Hong Kong court determined it should give due weight to the decision of the supervisory court, and allowed enforcement.  

Facts

In July 2016 the Plaintiff entered into a construction contract with another entity “LLC”, of which the Defendant was an indirect parent. The Defendant issued a Parent Company Guarantee in favour of the Plaintiff, by which the Defendant became primary obligor for certain of LLC’s payment obligations (the “Funding Schedule Payments”) (“Guarantee”).

The Guarantee, which was governed by California Law, contained a split arbitration clause. This distinguished between, on the one hand, disputes regarding non-payment of the Funding Schedule Payments, and on the other hand “all other disputes” outside that category.  The former were to be referred to a sole arbitrator who would have jurisdiction only to determine the issue of “whether payment of the Funding Schedule Payments was made in accordance with the Guarantee” (“Sole Issue”).

The Funding Schedule Payments were not paid and in October 2020, the Plaintiff commenced arbitration against the Defendant as guarantor.  For its part, the Defendant, as Respondent in the arbitration, advanced an “Illegality Defence” that the Guarantee should not be enforced because the underlying construction contract was unlawful. It was submitted that the Plaintiff held no valid construction licence during the contract period.  The arbitrator rejected this defence, determining it irrelevant since his jurisdiction was confined to the Sole Issue of payment under the Guarantee itself.  Finding this Sole Issue to be undisputed, the arbitrator issued an award in favour of the Plaintiff. 

Subsequently, the Plaintiff petitioned the US Federal District Court to confirm the award. The Defendant duly applied to vacate it, on grounds of illegality, violation of the US’s public policy in licensing law and arbitrator misconduct.  In June 2021, the US Court rejected the application, finding in favour of the Plaintiff that the award was indeed consistent with the terms of the Guarantee, the arbitrator had not exceeded his powers in determining that the Guarantee is valid and enforceable, and the decision was rational without manifest disregard of the law. 

The Plaintiff applied to the Hong Kong court for an enforcement order, which was granted. Subsequently, the Defendant applied to set it aside on the basis of the Sections of the Arbitration Ordinance mentioned above, namely Sections 89(2)(b), (2)(c)(ii) and (3)(b).

The Decision

The Hon Madam Judge Mimmie Chan noted that the arbitrator’s refusal to deal with the Defendant’s submission on the Illegality Defence was by reason and on the basis of his decision of the scope of his jurisdiction as being confined to the Sole Issue.

 On a review of the terms of the Guarantee, particularly the scope of the dispute resolution clause thereunder, the Judge failed to see how this finding was wrong.  The Illegality Defence did not fall within the confines of the reference to arbitration in respect of the Sole Issue. Had the Defendant wished to advance this defence in arbitration, it could have commenced separate proceedings.

Moreover, as Judge Chan noted at the outset, the parties to the Guarantee had agreed that the governing law shall be the laws of the State of California and that the arbitration was to be conducted in accordance with the relevant institutional rules.  By doing so, the parties had submitted to the supervisory jurisdiction of the US Court at the seat of the arbitration. The supervisory court had upheld the award. Accordingly, re-confirming the Gao Haiyan principle, the Court determined to “give due weight to the US Judgment and the US Court’s endorsement of the validity of the Guarantee as well as on the question of the arbitrator’s jurisdiction”.

Judge Chan dismissed the Defendant’s argument that the US court’s decision could be disregarded, because it had applied a different test from that applicable in Hong Kong.

In any event, the Judge found the Defendant had not advanced sufficient evidence to prove the underlying construction contract was illegal and/or that it would therefore be contrary to public policy to enforce the award on the Guarantee.

The application to set aside the enforcement order was dismissed, with indemnity costs awarded to the Plaintiff.

Conclusion

An award debtor which has tried and failed to have that award set aside at its seat, will face an uphill struggle challenging enforcement in Hong Kong.  This case illustrates how the Hong Kong court will, applying the Gao Haiyan principle, seek to give due weight and deference to the decision of the supervisory court applying the procedural law to which the parties have subjected themselves.

This case also demonstrates the real-world consequences of split arbitration clauses.  Such clauses should be drafted with care and attention to avoid procedural uncertainty and cost at the arbitration phase. Having said that, as this case illustrates, split clauses can provide a useful means of hiving off simple disputes in order to obtain a timely award in relation to a narrow scope of issue. Defences will be unavailing if they fall outside the jurisdiction of arbitrators as defined by the parties.

 

Jurisdictions

Professional Exchange Programme Participant, Fangda Partners

Jacqueline Cheung is on attachment to Fangda Partners from the Department of Justice of Hong Kong SAR Government under the Professional Exchange Programme from 4 October to 3 December 2021.

Counsel (International Arbitration), Fangda Partners

Matthew Townsend is an arbitration lawyer based in Hong Kong.  His practice is primarily focused on international arbitration and dispute resolution, often (but not always) involving Chinese parties.

Townsend has experience of arbitration in a number of jurisdictions under a number of different arbitration rules.  His practice focuses on the energy, infrastructure, construction, technology and international trade sectors.  He has experience acting as advocate at all stages of an arbitration hearing