X v Y [2021] HKCFI 147

In a rare decision, the Hong Kong Court refused to enforce an arbitral award on the basis that, (a) the Tribunal had ruled on matters beyond the scope of the arbitration agreement, and (b) a party had been denied a fair opportunity to present its case during the arbitration.  The Court ultimately concluded that enforcement of the arbitral award would constitute a breach of the rules of natural justice and be contrary to the fundamental concepts of morality and justice.  

PROCEDURAL HISTORY

On 1 August 2016, the Claimant, X, a Taiwanese life insurance company, commenced arbitration against the Respondent, a bank.  The arbitration was seated in Taiwan.  On 4 January 2018, the Tribunal rendered an award in favour of the Claimant  (the “Award”).  On 9 October 2018, the Hong Kong Court granted X leave to enforce the Award.  On 24 October 2018, the Respondent applied to the Hong Kong Court to set aside that enforcement order.   The Respondent succeeded. 

The Respondent made two primary arguments under section 86 of the Arbitration Ordinance (Cap 609).  First, it argued that it had not been able to present its case during the arbitration.  Secondly, the Respondent contended that the Award contained rulings on issues that were beyond the scope of arbitration agreement.  Both arguments were accepted by the Court.

BACKGROUND OF THE DISPUTE

The Respondent had managed X’s assets in accordance with an investment management agreement (the “Mandate”), which was governed by Taiwanese law and contained an arbitration agreement.  As security for certain loans, the Trustee also executed in favour of the Respondent, a pledge for X’s assets that were maintained in a trust account with the Singapore branch of the Respondent (the “Pledge”).  The Pledge was governed by the laws of Singapore and provided that disputes were subject to the non-exclusive jurisdiction of the Singaporean Courts.

In 2014, X was placed into receivership.  Subsequently, the Taiwanese authorities investigated X and discovered that two senior officers of X had fraudulently procured loans that had been made by the Respondent to Y, a subsidiary of X.  The Respondent claimed that the loans, totalling US$ 240 million, were never repaid.  At X’s request, in 2015, the Respondent returned US$64 million, representing the remaining balance in the trust account excepting US$194 million that represented the outstanding sum owed by Y to the Respondent. 

The Claimant, X, claimed that the Respondent had failed to return the US$194 million under the terms of the Mandate and that the Pledge was void under Singaporean law, thus the Respondent was obliged to return the remainder in the trust account.  The Respondent claimed that it was not obliged to do so because the pledge was valid, and in any event, the validity of the Pledge (and whether or not the Respondent was entitled to rely on it) was a matter to be determined by the Singaporean Courts and not subject to the jurisdiction of the Tribunal.  The Tribunal found in favour of the Claimant.  In particular, the Tribunal found the Pledge to be void as it violated Article 146 of the Taiwanese Insurance Act (which governs the permissible range of foreign investments for Taiwanese insurance companies).  Accordingly, there was no trust, the assets belonged to X, and the Respondent was obliged to return them to X.

ISSUE 1 – THE TRIBUNAL’S FINDINGS ON THE VALIDITY OF THE PLEDGE WERE NOT WITHIN THE SCOPE OF THE ARBITRATION AGREEMENT

The Respondent’s case was that the Award was premised on findings by the Tribunal that the Pledge was not valid under Taiwanese law.  Such a finding, however, was outside the scope of the Mandate.  The Hong Kong Court agreed with the Respondent.  The Court held that the Tribunal was wrong to determine that the Pledge was invalid, let alone on the basis of Taiwanese law only. 

First, the Hong Kong Court found that the core issue in the arbitration had centred on the validity of the Pledge and whether the Respondent could rely on the Pledge to retain the assets in the trust account once the Mandate had been terminated.  In applying the “closest connection test”, the Court found that it was clear from the arbitration that the parties had always agreed that the Pledge should be governed by Singapore law.

Secondly, the Hong Kong Court accepted the Respondent’s evidence, that throughout the arbitration, counsel for the Respondent had made it consistently clear to the Tribunal that the enforceability of the Pledge was a matter reserved for the Singaporean Courts.  The Court further noted that the Respondent had, during the arbitration, applied for a stay so that validity issues surrounding the Pledge could be first decided by the Singapore Courts.  Although the stay was not granted by the Tribunal, the Court noted that this application amounted – under the Taiwanese Code of Civil Procedure – to an unequivocal objection to the Tribunal’s jurisdiction over the validity of the Pledge.  

Ultimately, the Court held that the Tribunal should have recognised and given effect to the parties’ choice of forum, being litigation in the Singaporean courts under Singapore law.  Accordingly, the Tribunal’s findings that the Respondent was liable to return the assets that were subject to the Pledge, which was critical, went beyond the scope of the arbitration agreement in the Mandate. 

ISSUE 2: THE RESPONDENT WAS UNABLE TO PRESENT ITS CASE

The Respondent argued that it had been unable to present its case on whether the Pledge could be rendered void as a consequence of the breach of Article 146 of the Taiwan Insurance Act.  The Respondent contended that this point had never been raised prior to X’s post-hearing submissions.   

First, the Court accepted this point.  It found that it had been common ground between the parties’ experts that Article 146 of the Taiwanese Insurance Act did not render the Pledge void.  This was because the experts agreed that Article 146 was not a ‘validity provision’, but an ‘enforcement provision’, contravention of which would result in a fine but not render the transaction invalid. Secondly, the Court found that X had always argued that the Pledge was void under Singapore law.  It had never argued, prior to its post-hearing submission, that contravention of Article 146 had the effect of rendering the Pledge void.  As the parties had exchanged post-hearing submissions simultaneously, the Respondent was afforded no opportunity to deal with this new issue raised by X.   

Thirdly, in its Award, the Tribunal decided to reject the experts’ common view and accepted the new argument made by X in its post-hearing submissions.  The Court concluded that the Tribunal’s ruling was a “significant departure from the case presented by the parties prior to the post-hearing submissions” and made in circumstances where the Respondent had never been given an opportunity to present its case on whether a breach of Article 146 could render the Pledge void.   The Court remarked that the Tribunal could have requested further submissions from the parties on whether Article 146 was also a validity provision.  But it did not.

As a matter of law, the Court held that it was not concerned with the correctness of the Tribunal’s reasoning.  Rather, it was concerned with due process and the structural integrity of the arbitral proceedings.  In this case, due process had not been met because the Respondent did not have a fair opportunity to deal with critical arguments raised by X.

The Claimant, X, subsequently sought leave to appeal against the decision of Mimmie Chan J dated 5 November 2020.   Leave to appeal was rejected on 21 January 2021.

PRACTICE NOTES

This decision highlights the impact of jurisdictional arguments in arbitral proceedings where multiple agreements are involved, but contain different dispute resolution mechanisms.  The decision also develops the principle of due process under Hong Kong law, as it remains a ground under the Arbitration Ordinance (Cap 609) to refuse enforcement of an award.  In instances where a party has raised a new argument (that may also prove to have a material impact on the Award), the Tribunal should – when in doubt – invite the parties to provide further submissions or clarificatory remarks.   

Note: The views and opinions expressed in this article are those of the author and do not reflect the views of Quinn Emanuel Urquhart & Sullivan or its clients.

Associate, Quinn Emanuel Urquhart & Sullivan, LLP