The Hong Kong court refused to enforce a mainland arbitral award and found that the parties had abused the arbitration procedure

Recently, the High Court of Hong Kong issued a judgment in case 1 between Guangdong Shunde Zhan Wei Trading Co., Ltd. (hereinafter referred to as "Zhan Wei Company") and Xinfeng Muhang Co., Ltd. (hereinafter referred to as "XinFeng Company"), pointing out that the parties involved in the case had attempted to abuse the arbitration procedure and fraudulently obtain the property of Xinfeng Company through an arbitral award in the course of the shareholder dispute between Xinfeng Company. The Hong Kong court ultimately refused to enforce an arbitral award rendered by the Zhanjiang Arbitration Commission in the Mainland on the grounds that the agreement in question was invalid, Xinfeng had not been properly notified of the arbitration proceedings, failed to lay out its arguments, and violated public policy.

Basic facts of the case

Sun Fung was established in Hong Kong in 1989 with st and NI shareholders holding 50% of its shares (NI's major shareholders and directors are DL). Xinfeng has two directors, ST and DL. In addition, ST's wife and DL's wife are sisters. It is not disputed that until the dispute between the two parties (around 2016/2017), the DL party trusted the ST party and entrusted the affairs of Xinfeng Company to the latter.

At the end of 2016, ST and DL had a disagreement on the management of Xinfeng Company, and during the dispute between the two companies, on April 14, 2017, ST signed a marble sales agreement (hereinafter referred to as the "Sales Agreement") with the applicant zhan wei company in this case in the name of Xinfeng Company, involving a total price of RMB 220 million. Subsequently, Zhan Wei Company initiated the arbitration procedure against Xinfeng Company at the Zhanjiang Arbitration Commission on the grounds of Xinfeng Company's breach of contract (hereinafter referred to as the "Arbitration Procedure in this Case"). On 19 May 2017, the Zhanjiang Arbitration Commission issued an arbitral award in the case, ruling that Xinfeng Company should pay RMB59 million and related arbitration costs to Zhan Wei Company (hereinafter referred to as the "Arbitral Award").

Following the award, Zhan Wei filed an application for enforcement in the Hong Kong courts and also filed a winding-up petition against Xinfeng Company. In the process, the DL party objected and applied to the Hong Kong court to refuse to enforce the arbitral award.

Core controversy

The core disputes in this case are as follows:

First, whether there was a valid sales agreement and based on this, Zhan Wei Company had the right to initiate arbitration proceedings in this case. The DL party considers the sales agreement to be invalid because it was signed unilaterally with Zhan Wei Company by ST, and ST does not have the authority to enter into the sales agreement on behalf of Xinfeng Company in this process. On the other hand, Zhan Wei Company argued that ST had the implied authority to sign contracts with It on behalf of Sun Fung Company and that under the relevant provisions of section 117 of the Companies Ordinance of Hong Kong, Zhan Wei Company believed that as a third party dealing with Sun Fung in good faith, it had the right to believe that the authority of the relevant directors to act was not restricted by any relevant documents of Sun Fung Company, and it was not obliged to investigate the power limitations of the directors of Sun Fung Company.

Second, whether Xinfeng Company had obtained proper notice of the relevant arbitral procedures and arbitral awards in this case. The DL party argued that ST had never been authorized by the board of directors of Xinfeng Company to accept notice of the arbitration proceedings on behalf of the Company, nor did ST have any authority to make any concession or settlement decision on behalf of Xinfeng in connection with the arbitration proceedings in this case. The DL side also stressed that Xinfeng Company had never received proper notice because the relevant notices were sent to a property address that had been sold by Xinfeng Company. Zhan Wei Company argued that as the de factomanaging director of Xinfeng Company, ST had the implied authority to make day-to-day business decisions on behalf of Xinfeng Company, and this authority included authorizing the commencement and defense of legal proceedings (including arbitration proceedings) on behalf of the Company.

Third, whether the application for enforcement of the arbitral award should be rejected by the court because it contravened the relevant provisions of section 95 of the Arbitration Ordinance of Hong Kong. In this regard, the two parties engaged in a fierce confrontation on whether there was a valid arbitration agreement, whether Xinfeng Company failed to lay out its arguments in the arbitration proceedings, whether the enforcement of the arbitral award violated public policy, and whether the claimant failed to fulfill its obligation to disclose truthfully.

Summary of the Trial

Based on the relevant facts of this case, The High Court of Hong Kong, Mr Mimmie Chan J, ultimately held that the Sales Agreement was invalid because ST was not entitled to sign on behalf of Sun Fung and that the agreement and the arbitration proceedings in the case initiated subsequently were in fact a scheme (Sham) orchestrated by Zhan Wei and ST to obtain the property of Sun Fung Company. Therefore, Xinfeng Company was not a party to the arbitration agreement and was not able to lay out its arguments in the relevant arbitration proceedings. After summarizing the various grounds, the Court held that the enforcement of the arbitral award was contrary to the public policy of Hong Kong and ultimately ruled to set aside the enforcement order in this case, requiring the claimant to pay the respondent's costs in accordance with the indemnity basis.

Specifically, the analysis and rationale given by Judge Chen Meilan are as follows:

First, on the question of whether the sales agreement was valid, Judge Chen pointed out that the mere fact that ST was a director of Xinfeng Company did not prove that it had any actual, implied or apparent authority to sign contracts on behalf of Xinfeng Company. On the question of whether ST has the implied authority to represent Xinfeng Company because it has the status of a de facto executive director, it must be judged from the business transactions between ST and Zhan Wei Company.

Judge Chen pointed out that the sales agreement involved Xinfeng's sale of marble trade worth about RMB220 million to Zhan Wei. Zhan Wei was only incorporated three months before the signing of the agreement, and the value of the contract was 62 times that of Xinfeng's total sales in 2015. The sales agreement also stipulates that Xinfeng Company shall deliver the relevant marble within 6 days after signing the contract, otherwise it will be obliged to pay compensation of RMB 2.2 million for each day of delay. In addition, Xinfeng's general business is mainly to deal in timber rather than marble, and Zhan Wei Company can only prove that it has only two transactions on marble trade, one in 2010 and the other in 2013, but the value of the related transactions is also below one million yuan. In view of the many special circumstances mentioned above, Judge Chan held that this did not enable the court to be convinced that there were a course of dealings between the parties involved in this case, and therefore did not indicate that ST had any implied authority to sign contracts on behalf of Xinfeng.

In addition, Judge Chan also pointed out that there was no factual basis in this case to show that Xinfeng Company had made any board resolution on the issue of ST's authority, or that any person with actual authority to represent Xinfeng Company had made a clear statement of authority for ST's authority. Therefore, ST does not have any apparent authority to sign a contract on behalf of Xinfeng Company.

Second, on the question of whether the sales agreement was a sham/collusion, Judge Chan pointed out that fraud or collusion was a fairly serious allegation and that its establishment must be based on solid evidence. In this case, the sales agreement was entered into during a dispute between the shareholders of Xinfeng Company, and the amount involved was 62 times that of Xinfeng Company's annual sales in 2015. Moreover, Xinfeng Company did not have sufficient funds to purchase the marble required for the sales agreement, which made it particularly important to ensure that Zhan Wei Company paid according to the contract. In this case, however, the sales agreement stipulated that Zhan Wei Company only needed to issue a cheque that did not need to be accepted, which could be considered to have provided sufficient payment guarantees, which was undoubtedly incredible. At the same time, as noted above, the sales agreement requires the delivery of the marble within 6 days and provides for a daily compensation for breach of contract.

Judge Chen pointed out that the facts such as the time of signing the sales agreement and the unusual terms of the agreement should also be viewed together with the relevant facts after the signing of the agreement, including the relevant facts up to the time leading to the arbitral award. According to the agreement, On April 20, 2017, Xinfeng Company shall deliver the relevant marble. On April 19, 2017, Zhan Wei claimed to have found cracks in the first batch of marbles received and rejected the relevant goods on this ground. Subsequently, on 15 May 2017, arbitration proceedings in this case were commenced. Four days after the commencement of the arbitral proceedings in this case, on 19 May 2017, the award was rendered. Indisputable, ST represented Xinfeng in the arbitration proceedings in this case. The arbitral award stated that the parties agreed that Xinfeng had not delivered the goods in accordance with the sales agreement and had breached the contract. According to the arbitral award, the parties mediated the dispute and agreed that Xinfeng would pay Zhan Wei RMB 59 million as compensation.

And although ST has admitted on behalf of Xinfeng Company that the Company violated the Sales Agreement and agreed to pay a hefty sum of RMB59 million in the arbitral award, DL, as a director of the Company, or NI as another shareholder of the Company, has never received any notice of information about the Sales Agreement, the arbitration proceedings in this case, and the arbitral award. It was not until January 2018 that the latter was informed of the relevant information through the relevant notification documents of the Director of Insolvency in connection with the bankruptcy liquidation proceedings of Xinfeng Company. Judge Chen pointed out that these facts are undoubtedly surprising.

All of this, combined with some of the other circumstances in the present case, the Court ultimately held that the sales agreement and the subsequent arbitration proceedings in the present case were in fact a scheme (Sham) orchestrated by Zhan Wei Company and ST Fang to enable them to obtain Xinfeng Company's property.

Third, in response to the question of whether Xinfeng Company is the subject of the relevant arbitration agreement, Judge Chen pointed out that an undisputed legal principle is that the arbitration agreement itself is relatively independent of its main contract and can be distinguished from it. However, the relevant sales agreement and arbitration agreement in this case are contained in the same document. On the premise that ST did not have the authority to sign the sales agreement on behalf of Sun Fung, the Court held that the relevant arbitration agreement was not made by Sun Fung, i.e. Sin Fung was not a signatory to the arbitration agreement.

Fourth, on the question of whether Xinfeng Company failed to lay out the facts of its case in the relevant arbitration proceedings, Judge Chen pointed out that the Court had found that ST did not act in good faith when it agreed to and facilitated the sales agreement, admitted xinfeng company's breach of contract and agreed to the arbitral award that Zhongxinfeng company would pay a large amount of compensation to Zhan Wei company, but on the contrary took relevant actions for its personal interests. Therefore, ST's conduct in the arbitration proceedings in this case cannot be considered to have any implied or general authority to represent Xinfeng Company, and it cannot be subject to corresponding constraints. At the same time, Judge Chan also pointed out that there was no evidence in the present case that the notice of arbitration had been served on Sun Fung. On this basis, the Court concluded on the basis of the other facts of the case that Sun Fung Company had not been reasonably notified or informed of the relevant arbitration proceedings and that it had not been able to present its case in the arbitration proceedings in this case.

Fifth, on the question of whether enforcement of the arbitral award would violate relevant public policy, Judge Chan meilan pointed out that in view of the specific facts and relevant evidence in this case, the enforcement of the arbitral award would indeed cause the court to "shocking to the conscience of the Court". ST, with the assistance of Zhan Wei, abused the arbitration procedure and the arbitral award in this case, and allowing such an award to be enforced would undoubtedly be contrary to hong Kong's public policy.

Sixth, in addition to the above analysis, Judge Chan also pointed out that in the course of the application for enforcement in this case, the statements made by the relevant parties to the court were misleading, and there were obviously significant problems of non-truthful disclosure, so the order for enforcement must be revoked.

Case Studies

The abuse of arbitral proceedings and related fraud in this case are indeed rare. However, it is obvious that in the process of handling applications for enforcement of arbitral awards, the judgment standards and adjudication methods of Hong Kong courts have not changed in essence depending on the circumstances of the case. The maintenance of procedural fairness and substantive justice is also the same as before. This is undoubtedly particularly important in cases such as those involving "fraud". The outcome of the judgment in this case also reminds all parties in the arbitration procedure or commercial activities that they should abide by the most basic principles of good faith and fairness, otherwise they may suffer their own consequences.

exegesis:

1 [2021] HKCFI 3823, HCCT 25/2019, 29 Dec 2021

disclaimer

All materials and information provided herein are for sharing with readers only and do not constitute any legal advice. The information and information provided herein are also subject to update and modification from time to time by relevant regulations, laws, precedents, etc. If you need to obtain relevant legal advice, you need to consult legal counsel.

About the Author

Guo Junye Barrister

Qualified as a lawyer in China, a barrister in Hong Kong

Postgraduate Certificate in Laws (PCLL), University of Hong Kong

Master of Laws, University of Hong Kong (J.D., Hong Kong Law, China)

Master of Laws, Peking University (J.M.Chinese mainland Law)

Bachelor of Economics, Sun Yat-sen University (B.Ec.)

With a background in legal education and professional qualifications in both Chinese mainland and Hong Kong, Mr. Kwok currently practises at Sir Oswald Cheung's Chambers in Hong Kong, where he handles cross-border litigation and arbitration matters involving Chinese mainland backgrounds. Mr. Guo's practice focuses on contract law, tort law, real estate and land law, corporate law, family law, and white-collar crime. He has also handled a number of cases involving securities law, trust law, inheritance law and other related legal matters.

Click on the link to follow the latest tweet from Barrister Guo Junye

Past Articles:

Case review | The Hong Kong courts reiterated their consistent position in favour of the enforcement of arbitral awards

Hong Kong Labor Law: A few issues that both bosses and employees are concerned about

Case review | "Friendly consultation" before litigation must also be carefully considered word for word

Case review | A "very unusual" case

Case review | The Hong Kong High Court upheld the enforcement of the two awards of the Guangzhou Arbitration Commission in H v L

Case review | The High Court of Hong Kong upheld enforcement of a Mainland arbitral award in G v S

Review | CLECSS Hong Kong Dispute Resolution Market Webinars

Recognition and Enforcement of Mainland Arbitral Awards in Hong Kong: Basic Procedural Matters

Recognition and Enforcement of Mainland Arbitral Awards in Hong Kong: Basic Legal Provisions

Sun Yang's 8-year ban ruling was revoked: how to judge the impartiality and independence of arbitrators?

The unique role that a Hong Kong court freezing order can play in Mainland arbitration proceedings

Injunctions in Civil and Commercial Cases of the Hong Kong Courts (3): Property Rights/Title Freezing Orders

Injunction in Civil and Commercial Cases of the Hong Kong Courts (2): Topic of the Mariwa Injunction

Injunction in Civil and Commercial Cases of the Hong Kong Courts (1): Introduction and Overview

Jurisdiction of the Hong Kong Courts (5): The Connotation and Application of the Principles of Jurisdictional Objection and Non-Facilitation of Public Court

Jurisdiction of the Hong Kong Courts (4): Voluntary submission to the connotation and relevant provisions of jurisdiction

Jurisdiction of Hong Kong Courts (III): How to establish extraterritorial jurisdiction in civil litigation cases of Hong Kong courts

Jurisdiction of the Courts of Hong Kong (II): Serving a summons of the Court in Hong Kong establishes the ex officio jurisdiction of the Court

Jurisdiction of the Hong Kong Courts (1): Three ways to establish the civil litigation jurisdiction of the Hong Kong courts

This article is edited by Han Zhao