Hong Kong - Court Dismisses Application To Set Aside Arbitral Award.

Legal News & Analysis - Asia Pacific - Hong Kong - Dispute Resolution

24 April 2020
 

Introduction

 

In X v Jemmy Chien, HCCT 31/2019 the Plaintiff applied to set aside an arbitration award on the ground that there was no valid arbitration agreement between the Plaintiff and Defendant. The Plaintiff’s case was that the Defendant was not the true party to the Service Agreement containing the arbitration agreement, as he had signed it as agent for another (Chen) who was the principal and true party to the Service Agreement. The Plaintiff argued that the agreement was in truth a sham to conceal Chen’s involvement and that enforcement of the award would be giving effect to a sham and therefore be contrary to Hong Kong public policy. The Honourable Madam Justice Mimmie Chan dismissed the Plaintiff’s application to set aside and allowed the Defendant’s application for leave to enforce the award, as on reading the award on merits, she could not conclude that the arbitrator had made any mistake in finding that there was a valid agreement between the Plaintiff and Defendant personally.

 

Was there an arbitration agreement?

 

The Court said that the standard of review by the Court of the arbitral tribunal’s ruling on jurisdiction is one of “correctness”. It emphasised, however, this does not mean an unwarranted and unlimited review of the merits of the tribunal’s findings of fact. The scope of its review must, it said, be limited to true questions of jurisdiction and it must be cautious not to stray into the merits of findings of fact and law made by the tribunal, on issues unrelated to or not necessary for the question of jurisdiction.

 

The Plaintiff relied on the fact that prior to execution of the Service Agreement, there had been no relationship between the Defendant and Plaintiff and the Group of which the Plaintiff formed part and that the Plaintiff had all along dealt with Chen in its sale of products. The Service Agreement was signed by the Defendant next to the words “Party B” and “Representative”, such that according to the Plaintiff, the Defendant was clearly described and had signed as a representative of a contracting party.

 

The Plaintiff further relied on evidence in the arbitration that the Defendant had not participated in the negotiation of the Service Agreement, had little knowledge of its terms, duties and obligations and never had any communication with the Group. It was common ground that it was Chen who had performed the services under the Service Agreement, and the Plaintiff relied on the Defendant’s evidence that there was no detailed agreement between the Defendant and Chen as to how profits under the Service Agreement would be shared between them.

 

The arbitrator had found that under PRC law, which governed the Service Agreement, the Defendant was the true party and that the Service Agreement had been signed by the Defendant without any qualification.

 

The  Plaintiff argued that the arbitrator had erred in applying the “literal approach” of contractual interpretation under PRC law, in determining whether the Defendant was contracting in his personal capacity as principal and should have given proper consideration to the factual matrix, including, amongst other things, the history of the prior dealings between the Plaintiff and Chen and, had he done so, would have concluded that the Defendant was not a party to the Service Agreement and the arbitration agreement.

 

The Court held that there was an arbitration agreement between the Plaintiff and Defendant. It said that it had to be borne in mind that the arbitrator had heard the Defendant’s evidence and Plaintiff’s witnesses on the negotiations for the Service Agreement, the signing of it by the Defendant, the services provided by Chen under it, and dealings between Chen and the Defendant. The credibility of the Defendant’s evidence was a question entirely for the arbitrator, who had made findings of fact on the basis of the evidence before him and submissions made by counsel.

 

The Court said that reading the Service Agreement as a whole, it was not ambiguous in its identification of the Defendant as “Party B” and as the party who bore the obligation of performing the services to be provided. On the Court’s reading of the execution clause and way the Service Agreement was signed by the Plaintiff and Defendant, it objectively showed that the person who had signed for Party A had signed as representative of the named company, whereas the Defendant himself had signed as “Party B.” There was no other reference in the Service Agreement to the Defendant entering into the agreement as agent, or in any capacity other than on his behalf.

 

The Court agreed with the arbitrator’s conclusion that the evidence of the Defendant’s unfamiliarity with the terms of the Service Agreement, the fact that the services were performed by and delegated to Chen and that Chen had at one stage wanted to replace the Defendant as a direct party to the Service Agreement, did not prove that the Defendant had never intended to enter into the Service Agreement as a party in his personal capacity. Nor did the fact that there had been a long history of dealings between the Plaintiff and Chen, that the Defendant was only told of the termination of the Service Agreement by Chen and that the Defendant had relied on Chen as a witness for the arbitration, either individually or in conjunction, render it improbable or unbelievable that the Defendant had contracted to the Service Agreement on his own behalf.

 

The Court said that the decision on whether the Defendant was a party, on the construction of the Service Agreement as a whole, was a finding of law made on the basis of the facts found by the arbitrator as to the negotiations, respective roles played by the parties, and manner of their performance of the agreement. The arbitrator was the best person to decide on questions of the parties’ intention, on the basis of the testimony from the witnesses he heard, and documentary evidence which the parties produced in the course of the arbitration.

 

The Court said that in deciding on the correctness of the arbitrator’s decision on the existence of the Service Agreement and arbitration agreement between the Plaintiff and Defendant, and his consequential conclusion on jurisdiction, it was not the Court’s role to review the merits or correctness of the arbitrator’s findings of credibility and of fact. On reading the award on merits, the Court could not conclude that the arbitrator had made any mistake in finding that there was a valid agreement between the Plaintiff and Defendant personally.

 

Would enforcement of the arbitration agreement and award be contrary to public policy?

 

The Court emphasised that the public policy ground has always been narrowly construed by the Courts and that non-enforcement of awards has to be balanced against other public policy interests of upholding parties’ agreement to arbitrate their dispute, facilitating enforcement of arbitral awards, and observing obligations assumed under the New York Convention for enforcement of arbitral awards.

 

The Court pointed out that Order 73, rule 5(4) of the Rules of High Court, requires the affidavit in support of the originating summons to set aside an arbitral award to frame the party’s case and it must precisely and with necessary particulars set out the facts and grounds relied upon. In this case, the affidavit merely stated that “if the Arbitration Agreement contained in the Service Agreement is enforceable, the Court would be enforcing a sham agreement whereby the Defendant was never meant to be the true party”, and allowing the award to stand would be to give effect to a sham agreement. Neither the originating summons nor affidavit mentioned the important fact of illegality of the Service Agreement and the fact that the object and intention of the said agreement necessitated the performance of an illegal act in Taiwan. Further, there was no clear expert opinion that the performance of the Service Agreement constituted the commission of a criminal offence.

 

The Court also pointed out that the arbitration agreement was separate from the underlying Service Agreement and that allegations of fraud or illegality affecting the underlying contract did not render an arbitration agreement null and void, or render the dispute unarbitrable. The real question was whether the arbitration clause in the agreement could be impeached by the existence of fraud or illegality. 

 

The Court said that even if the services set out in the Service Agreement were intended to be, and were carried out by Chen, that did not affect the existence, enforceability or validity of the arbitration agreement. It was open, the Court said, to the Plaintiff and Defendant to separately agree that any dispute as to the performance of the services and payment therefor under the Service Agreement was to be arbitrated between the Plaintiff and Defendant. The arbitration agreement in the Service Agreement could be objectively and commercially construed to mean an independent arbitration agreement between the Plaintiff and the Defendant that any dispute as to the capacity in which either of them acted should be arbitrated between them. Enforcement of such an arbitration agreement would not be enforcing a sham, nor against public policy.

 

Further the Court said that to accept the Plaintiff’s application of resisting enforcement of the award was tantamount to permitting the Plaintiff to rely on its own wrongdoing and to avoid payment for the services rendered to it under the Service Agreement and that public policy reasons would not justify the Court doing so.

 

Accordingly, the Court was not satisfied that the award should be set aside and, even if the ground of public policy had been made out, the Court would not exercise its residual discretion to set aside the award.

 

Comment

 

This judgment is a reminder that the originating summons and supporting affidavit for an application to set aside an arbitral award must “precisely and with necessary particulars” set out the grounds and facts relied on to set aside. It is also a reminder of the Court’s pro-enforcement stance in relation to arbitral awards and that the public policy ground will be narrowly construed. It also illustrates the importance of the principle that an arbitration agreement is separate from the underlying contract. The existence, enforceability or validity of the underlying contract and the arbitration agreement will be considered separately by the Court.

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For further information, please contact:

  

Joseph Chung, Partner, Deacons

joseph.chung@deacons.com.hk