A recent judgment from the Beijing Fourth Intermediate People's Court ("Beijing Court") refused to recognise and enforce a foreign arbitral award issued in Hong Kong on the basis that the award dealt with a difference not contemplated by, or falling within the terms of, the submission to arbitration. It is an interesting decision, albeit relatively unusual, as the courts in Mainland China generally adopt a pro-arbitration stance.
The facts and circumstances giving rise to the original arbitration proceedings are relatively complex and are only briefly addressed in the Beijing Court judgment. In 2011, a number of individual and corporate parties entered into an agreement whereby IP Cathay II, L.P, a Cayman Islands company ("Claimant"), paid $10 million as subscription fees to purchase shares in a Chinese target company ("Target").
Pursuant to the agreement, the Claimant had a number of rights which crystallised upon the occurrence of certain events, including the failure of the Target to achieve an IPO or to achieve a certain level of profit. These rights included, amongst others, the right to issue a Redemption Notice to the Target and to issue a Notice of Sale of the shares to five individual and one corporate party to the agreement.
As can often be the case with these types of transactions, the Target failed to achieve an IPO or achieve the minimum expected profit, leading to the Claimant's rights under the agreement becoming enforceable. The Claimant issued a Notice of Sale which was, in turn, ignored by the recipients. On the basis that the Notice of Sale had been ignored, the Claimant then sought to enforce its rights pursuant to a separate guarantee given by some of the corporate entities. Again, it was ignored.
The Claimant submitted a request for arbitration on 8 June 2013 to the Hong Kong International Arbitration Centre (HKIAC) to assert its rights pursuant to the agreements (No. A13027). This was commenced against a total of 21 Respondents, being the five individual founders, the Target, and the corporate guarantors. A second arbitration was commenced on 9 July 2013 (No. A13085) and the two cases were merged together on the basis that the same or related agreements were in dispute in both cases.
Arbitral Award - Enforcement
Three arbitrators were appointed in the proceedings, and the tribunal handed down a single arbitral award addressing both cases on 24 August 2015 ("Award"). The Award found in favour of the Claimant. However, most significantly, the Award found that all 21 respondents were liable for the redemption and repurchase of the shares pursuant to the agreement. The Claimant had, in its submission to arbitration, only sought the particular remedy of redemption and repurchase of the shares against 7 of the 21 Respondents, being the recipients of the Redemption Notice and the Notice of Sale. This was to be the crucial flaw in the Award.
When the Claimant took steps to require the Respondents to comply with the Award, the Respondents refused. The Claimant applied to the Beijing Fourth Intermediate People's Court to enforce the award pursuant to the Arrangements of the Supreme Court on the Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region ("Arrangement") and the Civil Procedure Law of People's Republic of China. For reasons which are unknown, the Claimant instigated the enforcement proceedings against only 12 of the 21 Respondents.
The Respondents objected, their primary argument being that the Award should not be enforced as it fell within Article 7(3) of the Arrangement;
Article 7(3) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration…
The Respondents made a number of further arguments, including that:
- the appointment of arbitrators was not in keeping with the arbitration agreement;
- the method of service of the Award did not comply with the arbitration rules;
- the guarantee was an invalid guarantee and, if the Award were to be enforced, it would for various reasons be contrary to the public interest and to China's foreign exchange control policy.
Beijing Court's Judgment
The Beijing Court found that the Award exceeded, or "dealt with a difference not contemplated by" the Claimant's submission to arbitration, on the basis that the Award found that all 21 Respondents were liable in respect of the redemption and repurchase of shares, whereas the Claimant only sought a finding of liability in respect of seven Respondents in its original submission to arbitration. The Beijing Court determined that the Award fell within the scope of Article 7(3) and would not, therefore, be recognised and/or enforced.
Moreover, the entire Award was captured by Article 7(3) on the basis that it did not particularise any proportion to be attributed to any Respondent. Had it done so, it is possible that some parts of the award could have been enforced against some or all of the relevant Respondent(s).
Finally, as a result of the above decision, the Beijing Court did not consider or determine the other points raised by the Respondents for setting aside the Award.
It is difficult to critique the Beijing Court's judgment without seeing the Claimant's submission to arbitration and the Award, which are, of course, confidential. It appears that the Award dealt with the issues in dispute; however, for reasons which we do not know, the tribunal went one step too far by holding all 21 Respondents liable, when this was not sought by the Claimant in its submission to arbitration.
It is arguable that the Award should have perhaps been enforced against those Respondents that were contemplated by the Claimant but, given that the Beijing Court judgment will have likely been endorsed by the Supreme People's Court, there will be little option for appeal. It is generally the case that where a lower court is minded to reject a foreign arbitral award, it is sent to higher court(s) and ultimately the Supreme People's Court for approval before being handed down.
To avoid circumstances such as this, parties should ensure that a request for arbitration and all submissions thereafter are precise, clear and linear at the outset, setting out the claim, the requested relief and, most importantly in this case, the relevant parties. The same applies to any counterclaim. If at any point it is suspected that the Tribunal has gone or may go beyond its jurisdiction, take steps to (politely) remind the Tribunal that it only need rule on the specific points in the claim.
英属盖曼群岛商智龙二基金公司（IP Cathay II，L.P.）申请周继庭等申请认可和执行香港特别行政区仲裁裁决一审民事裁定书
“Civil ruling on IP Cathay II. L.P.’s application for the recognition and enforcement of the HKSAR arbitration decision against Zhou Ji Ting and others”
Date of publication: 2018-04-23.