THE COURT’S REFUSAL TO ENFORCE ARBITRAL AWARDS DUE TO PROCEDURAL IRREGULARITY

August 2024

On 1 April 2010, A and a Shenzhen company entered into an agreement with R1 and R2, under which Rs agreed to sell their shares in a company and land development rights in a plot of land. After payment of a 50% deposit, the parties entered into a settlement agreement on 15 December 2010. R1 agreed to refund the deposit to A by 31 March 2011, in return for A not claiming 10% liquidated damages under the agreement.

Eventually, R1 failed to fully refund the deposit. On 9 October 2011, A commenced arbitration proceedings (administered by the Shenzhen Court of International Arbitration (“SCIA”)) against Rs. The award was only issued seven years later on 7 January 2019 (“1st Award”), holding Rs jointly and severally liable for a total sum of around RMB 74.6 million (including the outstanding sum, liquidated damages, interest and costs). On 31 March 2020, A sought further arbitration against Rs to claim interest on the outstanding sum under the 1st Award. Another tribunal found R1 liable for the interest with costs and expenses incurred, with R2 again jointly and severally liable (|2nd Awards”).

As Rs had no assets in the Mainland, A then turned to enforce the 1st and 2nd Awards in Hong Kong and obtained an enforcement order on 20 March 2023. R2 applied to set aside the order pursuant to Section 95 of the Arbitration Ordinance (Cap. 609) (“the Ordinance”), leading to the present action.

The settled law is that in approaching a Section 95 application, the Court is concerned with the “structural integrity” of the arbitration proceedings, such that the conduct complained of must be serious, even egregious, before the Court would find that there was an error sufficiently serious so as to have undermined due process. The Court has full discretion to enforce the award.

As a result, the Court retrospectively extended time for R2 to apply to set aside the enforcement order and refused enforcement of both awards on the following grounds:

There was an inordinate delay of some 7 years in rendering the 1st Award in contravention of the applicable SCIA arbitration rules, which required the tribunal to deliver the award within 5 months from the date on which the tribunal was constituted.
In the 1st Award, SCIA had approved an extension until 8 January 2019 for the tribunal to render the award despite A’s failure to fully settle the arbitration fees, which was obtained based on ex-parte submissions made by A to the tribunal. R2 was deprived of the opportunity to present its arguments against the approval which was interwoven with the subsequent deferral agreement, where the time extension approval was apparently granted only due to A’s financial difficulty.

While a more informal procedure may be adopted for procedural matters in arbitral context, dealing with matters on an ex-parte basis without proper procedural basis was a step too far, violating the basic notion of justice. A party shall be entitled to the opportunity for presenting his case and a determination by an impartial and independent tribunal which is not influenced, or seen to be influenced, by private communications.

This case serves to remark that Hong Kong Courts are not only empowered but also prepared to refuse enforcement under the Ordinance in appropriate circumstances. The regularity in obtaining the arbitral award, be it procedural or otherwise, is of paramount important. The Court is concerned with the overall structural integrity of the arbitration proceedings and serious irregularities undermining due process may prompt the Court to refuse enforcement of an award.