DANA SHIPPING AND TRADING SA v. SINO CHANNEL ASIA LTD

HCCT 47/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 47 OF 2015

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AND

HCMP 1676/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1676 OF 2016

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(Heard Together)

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D E C I S I O N

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Background

1.  The facts of this case are rather unusual and unfortunate.  On 16 November 2015, I granted leave to Dana Shipping and Trading SA (“Dana”) to enforce as a judgment of this court an arbitral award dated 3 February 2015 (“Award”), whereby Sino Channel Asia Ltd (“Sino”) was ordered to pay to Dana the principal sum awarded of US$1.68 million, interest, and costs of the arbitration.  The Award was made in an arbitration in London (“Arbitration”) in respect of a dispute under a contract of affreightment between Dana and Sino as charterer.  The Order of 16 November 2015 (“Enforcement Order”) was, in the usual course, granted on Dana’s ex parte application, with the usual provision that Sino may apply to set aside the Enforcement Order within 14 days after service of the Enforcement Order upon it.

2.  On 27 November 2015, Sino applied to this court to set aside the Enforcement Order, on the ground that Sino had not been given proper notice of the appointment of the arbitrator or of the arbitral proceedings, and/or was unable to present its case. 

3.  On 8 January 2016, Dana applied for security to be furnished by Sino, pursuant to s 89 (5) of the Arbitration Ordinance Cap 609 (“Ordinance”) and Order 73 rule 10A RHC, as a condition of the further conduct of Sino’s setting aside application.  The hearing of the security application took place on 8 March 2016. 

4.  In the interim of Sino’s application to set aside the Enforcement Order, and the hearing of Dana’s application for security, Sino applied to the English court, being the supervisory court of the Arbitration proceedings, in January 2016 to appeal against and to set aside the Award, notwithstanding that the time period for such an application to be made had by then already expired and was approximately 6 months out of time.  At the time of the hearing of the security application in Hong Kong, no explanation had been furnished by Sino in respect of the 6 months’ delay, no date had been fixed for the hearing of Sino’s setting aside application in London, and it was unknown when an outcome of the setting aside application was expected.  Sino argued at the hearing of the security application in March 2016 that Dana’s security application and Sino’s application to set aside the Enforcement Order should simply be adjourned, pending the outcome of Sino’s setting aside proceedings in the supervisory court.

5.  In a Decision handed down on 14 March 2016, this court adjourned Sino’s application to set aside the Enforcement Order for a period of 3 months, on condition that security should be provided by Sino, by payment into court of 60% of the amount of the Award within 21 days of handing down the Decision.  This court further ordered that in the event that security was not duly provided within the period of 21 days, Sino’s application to set aside the Enforcement Order was to be dismissed, and Dana was given liberty to enter judgment in terms of the Award (“SecurityOrder”).  The Security Order was duly drawn up and was sealed on 20 April 2016.

6.  In short, Sino failed to make payment into court of the security ordered within the period of 21 days, which expired on 4 April 2016.  As a result, the sanction imposed by the Security Order took effect, and Sino’s application to set aside the Enforcement Order was dismissed.  By way of enforcement pursuant to the Enforcement Order, Dana obtained from the court, inter alia, a Mareva injunction against Sino on 8 April 2016 (“Mareva”).

7.  On 1 April 2016, Sino applied for an extension of 21 days to put up security. 

8.  The hearing of Sino’s application to set aside the Award took place in London on 20 April 2016.  Judgment was reserved by the English court.

9.  The application of Sino’s application for extension of time to provide security pursuant to the Security Order was heard on 28 April 2016 (by which time the period of 21 days within which Sino had been ordered to make payment into court of the security required had expired).  The order made by the court on Sino’s application was to stay enforcement of the Enforcement Order up to 26 May 2016, for Sino to provide security (“Stay Order”).

10.  On 13 May 2016, the English court handed down its decision (“English Judgment”), whereby the Award was set aside under s 72 (1) of the English Arbitration Act 1996 (“Act”) on the ground that the Award was made without jurisdiction and is of no effect.  The English court pointed out in the judgment that although Sino’s application was issued 11 months after the date of the Award, and was well beyond the statutory time limit of 28 days for any application under s 67 (to challenge the Award on substantive jurisdiction) and/or s 68 (to challenge the Award for serious irregularity) of the Act, no time limit is stipulated under the Act for an application under s 72 (1), by a person alleged to be a party to arbitral proceedings but who has taken no part in the proceedings. 

11.  In purported reliance on the English Judgment, Sino applied to this court on 24 May 2016 for the following relief:

(1)  to set aside the Enforcement Order;

(2)  to set aside the Mareva;

(3)  to set aside the Stay Order; and

(4)  to seek the withdrawal of other enforcement proceedings issued by Dana, including garnishee proceedings and a statutory demand issued on 4 May 2016.

12.  Dana opposes Sino’s application.  In gist, Dana’s case is that Sino’s application to set aside the Enforcement Order was already dismissed by this Court by the Security Order, and Sino is not entitled simply to make a second application to set aside the Award, when its application by Originating Summons issued on 27 November 2015 was already determined, and dismissed.  The Hong Kong court retains a discretion in any event to enforce the Award, notwithstanding that the English court has set it aside.  Dana claims that Sino is not acting in good faith and its application on 24 May 2016 is an abuse of process. 

No automatic right to refusal of enforcement

13.  Dana is correct, in its submission that Sino has no automatic right to resist enforcement of the Award, merely by virtue of the fact that the Award has, since the Enforcement Order, been set aside by the English Court.

14.  As counsel for Dana also highlighted, it is indisputable that even where a ground is made out within the terms of s 89 of the Ordinance (including the ground under s 89(2) (f) (ii), that the award has been set aside by a competent authority of the country in which it was made), enforcement of the Award may (and not shall) be refused by the Hong Kong Court.  The Hong Kong Court as the court of enforcement has a residual discretion to permit enforcement, although such discretion has to be exercised on recognized legal principles (Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111).  The enforcing court applies its own law in deciding whether or not to enforce the Award.

15.  Yukos Capiral Sarl v OJSC Oil Co Rosneft [2014] 2 CLC 162 is clear authority that there is no principle of ex nihilo nil fit under English law.  In Yukos, the awards made by arbitral tribunals with a Russian seat were annulled by the relevant supervisory court in Moscow.  The claimant under the awards sought to enforce them in England and in Holland, where the defendant had assets.  The defendant pleads that as a consequence of the set aside decisions made by the Russian supervisory court, the awards no longer exist in a legal sense (under the principle “nothing comes of nothing” or ex nihilo nil fit) and that the claimant is precluded from asserting that the awards are valid and binding on the parties.  The English court held that there is no ex nihilo nil fit principle which precludes the enforcement of the awards, and the court has power to enforce the awards at common law notwithstanding the decisions of the Russian courts to set aside the awards.

16.  As the English court pointed out in Yukos, the awards are prima facie enforceable at common law, and the defence is based on the fact that the awards are not enforceable as a result of the set aside decisions made by the Russian courts.  At paragraph 12 of his judgment, Simon J observed:

“However, it is open to the claimant to argue that no effect should be given to the decisions of the Russian courts, based on conventional English conflict of law principles, for example on the basis that the judgments were obtained by fraud, that it would be contrary to public policy to enforce the judgments, or that the judgments were obtained in breach of the rules of natural justice, see for example Dicey Rules 50-52. The editors of Dicey (at para 16-148) suggest that this is the right analysis, albeit in the context of the New York Convention.

‘In the absence of authority in England it is suggested that where [an award] has been set aside in the court of the seat, an arbitral award should be enforced only if recognition of the order setting aside the award would be impeachable for fraud or as being contrary to natural justice, or otherwise contrary to public policy, in accordance with Rules 50 to 52.’”

17.  Both Dana and Sino seek to rely on AstroNusantara International BV & Ors v PT Ayunda Prima Mitra & Ors HCCT 45/2010, 17 February 2015.  As I have indicated in the course of the hearing, that decision is distinguishable from the present case.  First, the arbitral awards in Astro were not set aside by the supervisory court in Singapore.  Rather, the Singapore court, as the enforcement court, refused enforcement of the awards on the ground that there was no valid arbitration agreement.  The arbitral awards were never set aside by the Singapore court as the supervisory court, and they remained valid and created legally binding obligations on the defendant debtor to satisfy the awards.  This distinction was highlighted in paragraph 129(3) of the decision of Chow J.

18.  Secondly, the defendant in Astro sought extension of time, after a delay of 14 months, to set aside the orders granted by the Hong Kong court to enforce the awards.  This application was heard for the first time by Chow J after the Singapore court refused enforcement.  Prior to the setting aside of the awards, the defendant in Astro had never made any application to the Hong Kong court to resist enforcement.  By contrast, Sino first applied to set aside the Enforcement Order in November 2015, which application was dismissed by the Security Order on 14 March 2016, before the second application to set aside the Enforcement Order was made in May 2016.

19.  In Yukos, the English court pointed out that the key question was whether a foreign decision setting aside an award should be recognized in accordance with ordinary principles applying to the recognition of foreign judgments (the principles as set out in Rules 42 to 45 of Dicey).  For example, a foreign judgment is impeachable on the ground that its recognition would be contrary to public policy, or if it is impeachable for fraud.

20.  The Yukos approach was followed in Malicorp Ltd v Government of the Arab Republic of Egypt [2015] EWHC 361 (Comm), where Walker J succinctly summarized (para 21 of his judgment): 

“For present purposes I proceed on two assumptions. They are:

(1)  that the word “may” in s 103(2) of the 1996 Act confers a discretion on this court to enforce an award even though the award has been set aside by a decision (“the set aside decision”) of a court constituting a competent authority within s 103(2)(f); and

(2)  it would not be right to exercise that discretion if, applying general principles of English private international law, the set aside decision was one which the court would give effect to.”

21.  Whereas most academic authorities agree with the general proposition that awards may be recognized outside the arbitral seat even if they have been annulled there, views differ as to the circumstances in which recognition of an annulled award is appropriate.  In Professor Gary Born’s International Commercial Arbitration (2^ndedition), the analytical approaches were summarized as follows (at p 3636):

“First, some commentators urge that an annulled award may, and should, be recognized if it was annulled based upon the arbitral seat’s local standards....

Second, some commentators have reasoned that an annulled award should be recognized based simply on the criteria of Article V (1)’s first four paragraphs, without regard to the award’s annulment in the arbitral seat....

Third, some commentators have suggested that the decisions of the courts of the arbitral seat should be treated like some other foreign judgments, given effect when they satisfy standards for recognition of foreign judgments. Under this analysis, an annulled award would be denied recognition if the annulment decision was itself entitled to recognition (or, alternatively, if the court in the enforcement forum independently found one of the Article V grounds satisfied).

Fourth, other commentators have suggested that annulled awards should be denied recognition except where the parties have agreed to waive any judicial review of the award (or, in some authorities’ view, where the judicial proceedings in the arbitral seat were procedurally flawed)....”

22.  At page 3638, Professor Born considered that the better view can be identified, “based on effectuating the parties’ agreement to arbitrate and the Convention’s requirement that such agreements be recognized”:

“Under this approach, Contracting States should deny effect to annulment decisions in the arbitral seat: (a) which are based on local public policies or non-arbitrability rules in the annulment forum, (b) which are based on judicial review of the merits of the arbitrators’ substantive decision or on other grounds not included in Articles V (1) (a) to (d) of the Convention, or (c) which failed to satisfy generally-applicable standards for recognition of foreign judgments (eg procedurally-fair, regular procedures before an impartial decision-maker). Where an annulment decision is not given effect, the recognition court should independently apply the first four subparagraphs of Article V (1) (eg Articles V (1) (a) to (d) to determine whether or not to recognize the underlying award.”

23.  In Dallah Co v Ministry of Religious Affairs of Pakistan [2011] 1 AC 763, Lord Mance made the following observation on Article V (1) of the Convention (at paragraph 67 of his judgment):

“In Dardana Ltd v Yukos Oil Co [2002] 1 All ER (Comm) 819 I suggested that the word “may” could not have a purely discretionary force and must in this context have been designed to enable the court to consider other circumstances, which might on some recognizable legal principle affect the prima facie right to have enforcement or recognition refused... I also suggested as possible examples of such circumstances another agreement or estoppel.”

24.  Lord Collins also made useful observations on the court’s discretion, and how it should be exercised, in paragraphs 126 to 128 of his judgment:

“The court before which recognition or enforcement is sought has a discretion to recognize or enforce even if the party resisting recognition or enforcement has proved that there was no valid arbitration agreement....  Article V (1) (a) of the New York Convention (and section 103 (2) (b) of the 1996 Act) provides: “Recognition and enforcement of the award may be refused...”...

Since section 103 (2) (b) gives effect to an international convention, the discretion should be applied in a way which gives effect to the principles behind the Convention.  One example suggested by van den Berg, op cit, p 265, is where the party resisting enforcement is estopped from challenge, which was adopted by Mance LJ in Dardona Ltd v Yukos Oil [2002] 2 Lloyd’s Rep 326, para 8.  But, as Mance LJ emphasized at para 18, there is no arbitrary discretion: the use of the word ‘may’ was designed to enable the court to consider other circumstances, which might on some recognizable legal principle affect the prima facie right to have an award set aside arising in the cases listed in section 103 (2).  See also Kanoria v Guinness [2006] 1 Lloyd’s Rep 701, para 25, per Lord Phillips CJ.  Another possible example would be where there has been no prejudice to the party resisting enforcement: China Agribusiness Development Corp v Balli Trading [1998] 2 Lloyd’s Rep 76.  But it is not easy to see how that could apply to a case where a party had not aceded to an arbitration agreement.

There may, of course, in theory be cases where the English court would refuse to apply a foreign law which makes the arbitration agreement invalid where the foreign law outrages its sense of justice or decency (Scarman J’s phrase in In the Estate of Fuld, decd (No 3) [1968] P 675, 698), for example where it is discriminatory or arbitrary.  The application of public policy in the New York Convention (article V (2) (b)) and the 1996 act (section 103 (3)) is limited to the non-recognition or enforcement of foreign awards.  But the combination of (a) the use of public policy to refuse to recognize the application of the foreign law and (b) the discretion to recognize or enforce an award even if the arbitration agreement is invalid under the applicable law could be used to avoid the application of a foreign law which is contrary to the court’ s sense of justice.”

25.  In China Nanhai Oil Joined Service Corporation Shenzhen Brunch v Gee Tai Holdings Co Ltd [1995] 2 HKLR 215, the Hong Kong court enforced an arbitral award notwithstanding the court’s finding that the tribunal did not have jurisdiction.  Referring to the enforcing court’s residual discretion, Kaplan J observed:

“I think there is much force in Dr van den Berg’s point that even if a ground of opposition is proved, there is still a residual discretion left in the enforcing court to enforce nonetheless. This shows that the grounds of opposition are not to be inflexibly applied. The residual discretion enables the enforcing court to achieve a just result in all the circumstances although I accept that in many cases where a ground of opposition is established, the discretion is unlikely to be exercised in favor of enforcement. If the enforcing court was obliged to refuse enforcement in the event of the establishing of a ground of opposition, I believe that it would be far harder to import the doctrine of estoppel.” (Emphasis added)

26.  In each of the cases of China Nanhai and Hebei Import & Export Corp v Polytech Engineering Co Ltd, the Hong Kong court exercised its discretion to enforce the arbitral awards, on the ground that the defendant had not acted in accordance with its obligation of good faith. 

27.  The English court set aside the Award under s 72 (1) of the Act, on the ground that the arbitral tribunal was not properly constituted and the Award was made without jurisdiction, as notice of arbitration had not been served on anyone who had the authority to receive the notice of arbitration on behalf of Sino.  This is, in essence, equivalent to the ground set out in Article V (1) (d) of the Convention (the composition of the arbitral authority not in accordance with the agreement of the parties or the law of the country where the arbitration took place).  There is no evidence or suggestion that the setting aside proceedings in the English court were in any way procedurally unfair, or irregular, or that the decision maker was not impartial, or that it would in any way be contrary to the court’s sense of justice or public policy to recognize the English Judgment, which should be given recognition.  The fact that Dana is seeking leave to appeal against the English Judgment does not render it ineffective. 

28.  Having considered the relevant authorities, I conclude that the English Judgment is a decision to which this court should give effect.

Can the court entertain a 2^nd application to set aside the Enforcement Order?

29.  The further ground raised by Dana in opposing Sino’s application to set aside the Enforcement Order is that this court had already determined, and dismissed, Sino’s application to set aside the Enforcement Order.  Counsel for Dana argued that there are no grounds established which would entitle Sino to reopen the issue of whether the Enforcement Order should be set aside, such that Sino’s application on 24 May 2016 is an abuse of process, and should be dismissed on that basis.

30.  Counsel for Dana referred to the decision of DHCJ Marlene Ng in Wong Pak Sum v Hong Kong Furniture & Decoration Trade Association Limited HCMP 2946/2013, on res judicata and issue estoppel raised in interlocutory decisions.  In that case, the learned judge referred to Chu Hung Ching v Chan Kam Ming & Ors [2001] HKC 396, and set out a summary of the Court of Appeal’s decision:

“In Chu Hung Ching v Chan Kam Ming & Ors, the Court of Appeal accepted that the rules relating to res judicata and issue estoppel in interlocutory matters are less stringent than those generally applicable in that when the same issue is raised in a subsequent interlocutory application in the same action, it will not be unjust and unreasonable to allow the second application to be heard, for what is involved is not re-litigation of an identical issue of law or fact:

(a)  if the ruling of the first application was not based on the merits of the issue but on a technical objection;

(b)  if upon the first application the applicant had failed to prove essential facts from mistake or inadvertence;

(c)  if there is new evidence that seriously justifies reconsideration of the issue;

(d)  if there is a material change of circumstances of a non-evidentiary nature.”

31.  It is also helpful to bear in mind the observations made by Kwan J (as Her Ladyship then was) in Re Chime Corp Ltd (No 2) [2003] 2 HKLRD 945, where she highlighted in paragraph 23 of the judgment:

“I do not find it particularly helpful to categorize the determination as interlocutory or procedural. Whether the determination on an interlocutory application is capable of giving rise to issue estoppel would depend on the nature and substance of the ruling.”

Earlier on in her judgment, Her Ladyship further pointed out (in paragraph 18) that:

“An issue estoppel arises in the situation where a party is precluded from contending the contrary of any precise point which, having once been distinctly put in issue, has been solemnly and with certainty determined against him. The other conditions are the same as in a cause of action estoppel, regarding the identity of parties and the finality of the judicial decision said to create the estoppel (see Halsbury’s Laws of England (4^th ed) Vol 16, para 977).” (Emphasis added)

32.  The Enforcement Order was first made ex parte, without the issue of the constitution of the tribunal or the alleged lack of notice on Sino, having been raised.  Sino’s application to set aside the Enforcement Order was dismissed, as a result of the sanction imposed in the Security Order.  The Security Order determined the merits of Dana’s application for security, as a condition for Sino’s further conduct of its application to set aside the Enforcement Order.  In ordering security to be furnished, the court determined, on a preliminary basis, the merits of Sino’s application to set aside the Enforcement Order.  It was not a final determination of the application to set aside the Enforcement Order.  I do not consider that issue estoppel or res judicata applies in relation to the dismissal of Sino’s application to set aside the Enforcement Order.

33.  In any event, I accept that the English Judgment constitutes a material change of circumstance and/or new evidence which seriously justifies reconsideration of the Enforcement Decision by the Hong Kong court. 

34.  On behalf of Dana, Mr Alder argued that Sino’s application to the English court to set aside the Award was nothing new, as it had been envisaged by the time of the hearing before this court, on 8 March 2016, of Dana’s application for security. 

35.  Sino’s application to the English court may not have been new evidence or any change of circumstance, but the making/handing down of the English Judgment in May 2016 was a new development and a material change of circumstance.  As DHCJ Marlene Ng pointed out in Wong Pak Sum v Hong Kong Furniture & Decoration Trade Association Limited, the touchstone for the application of the doctrine of res judicata or issue estoppel in the context of interlocutory applications is “what is just and reasonable”.  In my view, it is just and reasonable to reconsider the question of whether Sino should have leave to set aside the Enforcement Order, and whether the Award should be enforced, when the supervisory court in England has decided to set aside the Award on the ground that the Tribunal was not properly constituted and had no jurisdiction under English law, which is the law of the country where the arbitration took place.

Should the court enforce the Award?

36.  Having decided that this court has a discretion whether to enforce the Award, and that the court can reconsider the Enforcement Order notwithstanding its earlier Security Order which embodies the sanction to dismiss Sino’s application to set aside the Enforcement Order, the key question is whether this court should exercise its discretion to enforce the Award, or set the Enforcement Order aside, in the circumstances of this case. 

37.  For the reasons set out in paragraph 32 above, I do not consider that Sino’s application made in May 2016, to set aside the Enforcement Order, is an abuse of process by virtue of its being an application made after the Security Order and the sanction taking effect thereunder.  Sino’s said application also seeks to set aside the Security Order, and this is reasonably arguable and not without basis, if the Enforcement Order is to be set aside and enforcement of the Award refused. 

38.  It is true that the grounds for the setting aside application were not set out in Sino’s Summons issued on 24 May 2016.  This court held in KB v S HCCT 13/2015, 15 September 2015 that this constitutes an abuse of process.  The precise grounds have not been clearly identified by Sino in the course of the submissions made by counsel at the hearing.  The application was simply made on the basis that as the English Judgment was issued, the Enforcement Order and all subsequent orders should be set aside.  For the reasons referred to in the preceding paragraphs of this Decision, there is no automatic right, and no principle of ex nihilo nil fit.

39.  On behalf of Dana, Mr Alder argued that Sino had totally ignored the Security Order and the time imposed thereunder for Sino to provide security, and had failed to give any satisfactory explanation as to why it could not provide such security, whilst at the same time being able to fund the proceedings before the English court.  It was argued that this constitutes contempt of the orders made by this court, and that Sino was clearly not acting in good faith.  Dana claims that Sino’s application to extend time for providing security was continuation of the delaying tactics employed from its initial application to set aside the Enforcement Order.

40.  The only explanation offered by Sino was in the 12^th affidavit of Mr Jung made on 26 April 2016, and filed in support of Sino’s application for an extension of time to put up security.  Jung claimed that apart from trying to recover the amount due by Beijing XCty to Sino, he had contacted several business partners, trying to raise funds for the purposes of putting up security.  By then, the 21 days specified in the Security Order had expired, and the hearing had taken place before the English court. 

41.  Whilst I agree that Sino was in breach of the Security Order, in all the circumstances of this case, including the amount of the security ordered, the timing of the English proceedings, the grounds on which the English court set aside the Award (which affirmed that Sino did not have valid notice of the Arbitration), I am unable to say that Sino’s conduct in these proceedings is sufficiently egregious to demonstrate bad faith, to justify the court’s exercise of its discretion to enforce the Award notwithstanding the English Judgment (which I have concluded is one to which this court should give effect).

42.  I will however consider Sino’s conduct as relevant to the question of costs.  In the initial application to set aside the Enforcement Order, Sino never explained in detail the basis of its application to the English court or the precise grounds relied upon by it.  Nor did it ever address the question of its delay in its application to the English court, and the claim that such application was out of time.  This was notwithstanding the fact that the merits of its application to the supervisory court to set aside the Award was relevant to the Hong Kong court’s determination of Dana’s application for security, and Sino’s own application to set aside the Enforcement Order.  The matters set out in paragraph 38 are also taken into account.  In my view, Sino’s overall conduct justifies the exercise of my discretion to decline to award in its favor the costs of these proceedings to set aside the Enforcement Order, notwithstanding my decision to refuse enforcement of the Award. 

Orders made

43.  I accede to Sino’s application to set aside the Enforcement Order, and decline to enforce the Award.  Since the Award is not to be enforced, it follows that the Mareva and the Security Order will be set aside.  I also grant Sino’s application (paragraphs 5 and 6 of its summons of 24 May 2016), that the statutory demand and the garnishee proceedings be withdrawn. 

44.  The English Judgment stands as a binding decision unless and until it is set aside on appeal.  I decline to further adjourn the application to set aside the Enforcement Order pending the outcome of Dana’s application for leave to appeal against the English Judgment.  The status of an award should not be left uncertain indefinitely, pending challenges in the court. 

45.  I order that each party is to bear its own costs of Sino’s application by its summons of 24 May 2016 and by its summons of 25 May 2016 for stay of execution, and the costs of the entire proceedings, including the costs of the earlier summons of 27 November 2015 and the costs reserved at the hearing on 2 June 2016.  The earlier costs orders made are varied to such extent only.

46.  A separate decision will be handed down in relation to Dana’s application for a new Mareva injunction in aid of its intended arbitration to be commenced afresh.

HCCT 47/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO 47 OF 2015

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D E C I S I O N

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Background

1.  By order made on 16 November 2015 (“Order”), I granted leave to Dana Shipping And Trading SA (“Dana”), to enforce a final arbitration award dated 3 February 2015 (and corrected on 15 June 2015) (“Award”), made in arbitration proceedings commenced by Dana against Sino Channel Asia Ltd (“Sino”) in London (“Arbitration”) in around February 2014.  The claims made by Dana in the Arbitration were that Sino had failed to perform its obligations under a contract of affreightment (“Contract”) made between the parties, by failing to nominate shipments in accordance with the provisions of the Contract.  The Award was for Sino’s payment to Dana of a principal sum of US$1,680,404.15, with interest and costs (“Award Amount”), on the basis of its breach.

2.  On 27 November 2015, Sino applied to set aside the Order.  The grounds relied upon are that Sino was not given proper notice of the appointment of the arbitrator or of the Arbitration proceedings, and that Sino was unable to present its case in the Arbitration.  The application to set aside has been adjourned to be heard on 16 March 2016.

3.  On 8 January 2016, Dana applied for payment to be made by Sino of the Award Amount, as security, pursuant to s 89 (5) of the Arbitration Ordinance Cap 609 (“Ordinance”) and O73 r10A RHC.  The adjourned hearing of the security application took place on 8 March 2016.

4.  In the interim of Sino’s application to set aside the Order and the hearing of Dana’s application for security, Sino applied to the English court in January 2016 to set aside the Award, notwithstanding that the time period for such an application to be made has expired, and it is approximately 6 months out of time.  No explanation has been furnished by Sino in respect of this delay.  No date has yet been fixed for the hearing of Sino’s application in London, and it is unknown when an outcome of the application can be expected.

5.  Sino argued that Dana’s application for security and Sino’s application to set aside the Order should both be adjourned pending the outcome of Sino’s setting aside proceedings in London.

6.  Dana’s stance is that the Court should either immediately dismiss Sino’s application to set aside the Order and enforce the Award in Hong Kong, or should exercise its power to order security to be furnished by Sino for the further conduct of its application to set aside the Order in Hong Kong.

Applicable legal principles

7.  The applicable legal principles for determination of Dana’s application for security are set out in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993]  2 Lloyd’s Rep 208, applied in Guo Shun Kai v Wing Shing Chemical Co Ltd [2013] 3 HKLRD 484.  In Soleh Boneh, Staughton LJ stated (at p 212):

“In my judgment two important factors must be considered on such an application, although I do not mean to say that there may not be others. The first is the strength of the argument that the award is invalid, as perceived on a brief consideration by the Court which is asked to enforce the award while proceedings to set it aside are pending elsewhere. If the award is manifestly invalid, there should be an adjournment and no order for security; if it is manifestly valid, there should either be an order for immediate enforcement, or else an order for substantial security. In between there will be various degrees of plausibility in the argument for invalidity; and the Judge must be guided by his preliminary conclusion on the point.

The second point is that the Court must consider the ease or difficulty of enforcement of the award, and whether it will be rendered more difficult, for example, by movement of assets or by improvident trading, if enforcement is delayed. If that is likely to occur, the case for security is stronger; if, on the other hand there are and always will be (sufficient) assets within the jurisdiction, the ease for security must necessarily be weakened.” (Emphasis added)

8.  In my view, the mere existence of proceedings to challenge an award in another jurisdiction does not by itself require a court to refuse enforcement for the time being and to adjourn the proceedings.  Section 89(5) of the Ordinance only stipulates that the adjournment and the order for security may be made by the Court, and only if it thinks fit.  O 73 r 10A is in even wider terms, providing that the Court may, and if it thinks just to do so, having regard to all the circumstances of the case, “impose such terms as to giving security or otherwise as a condition of the further conduct of the application” (to set aside an order granting leave to enforce an award), as it thinks fit.

9.  In the overall context, it is relevant to bear in mind that the primary aim of the Court under the Ordinance is to facilitate the arbitral process, to assist with enforcement of arbitral awards, and to enforce arbitration agreements made by the parties, whereby they agreed to arbitrate their dispute and to treat the arbitral award as final. 

10.  The ground relied upon by Sino in this case, in resisting enforcement of the Award, is that it was not given notice of the arbitral proceedings or was unable to present its case.  The Court has to be satisfied that the conduct complained of was serious, even egregious, before the Court would find that there was an error sufficiently serious as to have undermined due process (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd [2012] 4 HKLRD 1 (CA)).  It is also important to bear in mind that any failure to make prompt objection to the Tribunal or the supervisory court may constitute estoppel or want of bona fide (Hebei Import & Export Corp v Polytech Engineering Co Ltd (1999) 2 HKCFAR 111), and that even if sufficient grounds are made out to refuse enforcement of an award, the Court has a residual discretion to enforce the Award (Hebei Import & Export Corp v Polytech Engineering Co Ltd (1999) 2 HKCFAR 111).

The strength of the argument that the Award was invalid

11.  It appears to be undisputed that notice of the Arbitration and the appointment of the arbitrator was served on one Mr Cai (“Cai”) of a company known as Beijing XCity (“BX”).  The real issue in dispute is whether Cai can be said to be Sino’s agent, and whether Cai had authority to accept notice of the Arbitration, such that the service of notice on Cai constitutes valid notice on Sino.

12.  Although there is evidence of the Tribunal’s receipt of a fax from Sino, which was signed by both Cai and Jung Byung Dug (“Jung”) (the director of Sino), on 19 February 2014, whereby an extension of time was sought for Sino to appoint its arbitrator, Jung claims that he had not in fact signed the fax, and that it was a cut and paste production.

13.  At this stage, the Court is not to make a determinative finding on the merits of the application to set aside the Order. However, in this case, all the necessary evidence to be relied upon in the determination of Sino’s application has already been filed, pursuant to directions made by the Court.  From such evidence, it is clear that at the very outset, Jung has admitted that he had “lent” Sino’s name to BX, for Sino’s name to be used by BX in the signing of purchase and sales contracts with third parties, and in making applications to the banks for the issue of letters of credit for such contract transactions. 

14.  Jung is the director and shareholder of Sino.  In Jung’s affidavit filed on behalf of Sino on 27 November 2015 (“Jung 1”), Jung claimed that this lending of name was agreed between himself and Mr Zhou Wen Li (“Zhou”), the director and shareholder of BX, in around 2009.  Under this arrangement, Sino agreed to act as buyer to enter into sales contracts with suppliers of raw materials (such as steel, iron ore or coal), to on-sell such raw materials by entering into contracts with buyers, and to apply for letters of credit to be issued by banks in respect of the purchase price to be payable to the supplier.  All the details after the execution of the contracts would be handled by Zhou and his staff at BX.  Zhou and his staff would not inform Jung of the details and performance of the transactions.  According to Jung, such business relationship and dealings carried on smoothly between 2009 to early 2014.

15.  Jung claims that pursuant to the arrangement with Zhou and BX, in early 2013, he agreed at Zhou’s request to sign a charterparty in the name of Sino, for several shipments of raw materials to be made under the supply and sale contracts.  The charterparty was entered into with Dana.  According to Jung, he had met Cai at the office of BX in Beijing, and he understood that Cai was assisting Zhou in handling the documentation of some of the sale and purchase transactions.  Between November 2012 and June 2014, Jung had communicated with Cai through Skype messages.  Jung appears to accept that Cai was at all material times employed by BX, until he left BX in late 2014/early 2015.

16.  On such evidence from Sino, and with the clear acknowledgment by Jung that he had lent Sino’s name to BX, and had agreed to BX using Sino’s name to enter into contracts with third parties for the sale and purchase of goods, with knowledge that BX would be taking steps to perform such contracts entered into in Sino’s name, Sino had clearly agreed to BX acting in its name and/or as its agent in respect of the contracts, and to BX taking steps exclusively (without prior approval from Sino/Jung) to carry out and perform the contracts.  Particularly, this extends to the use of Sino’s name in entering into the charterparty on which the Contract with Dana is based, and BX’s performance of the charterparty made in Sino’s name.

17.  Since Dana had been dealing with Cai and other representatives of BX throughout the performance of the Contract, there is no merit in the argument that Dana (and the arbitrator) should have made attempts to contact Sino’s shareholder and director, Jung, whom Dana’s representatives had never met or dealt with, and who had played no role in the Contract.

18.  I consider that Dana has a good case to argue that since BX was Sino’s agent, with actual authority to enter into contracts for, and to execute, the sale and purchase of raw materials and the shipment of such materials under the Contract, service and notification of the Arbitration on BX and Cai for BX is good service and notification on the principal, Sino (Articles 94 & 95, Bowstead & Reynolds on Agency).  The claims made by Dana in the Arbitration relate to the performance of the Contract for the carriage of the goods sold and purchased under the relevant contracts entered into in Sino’s name.

19.  Overall, I consider that Sino does not have a strong case to argue that the Award is invalid, on the basis that the notice of the arbitral proceedings had not been validly served on Sino.  It certainly cannot be said that the Award is “manifestly invalid”.

20.  Counsel for Dana argued that in any event, Sino had ratified BX or Cai’s acceptance of the notice of the Arbitration and/or Cai’s conduct of the Arbitration.

21.  According to Jung, he had met with Zhou in May or June 2013, and was told that there were “some problems” with the charterparty, but that Zhou was dealing with these.  After that, on about 30 June 2015, Sino received the Award for the first time.  According to Jung, he passed this to Zhou, and they met in Beijing.  Jung asked Zhou about the Award, and was told by Zhou to ignore it, and that it was not necessary for Jung to do anything.  Zhou assured Jung that he would settle the Award.  Jung claims that he heard nothing further from Zhou and that it was only on 29 October 2015 that he first took action, by writing to the Tribunal to say that Sino had not received any notice of the Arbitration.  On 2 November 2015, Jung received the order from the Singapore court, whereby leave was granted to Dana to enforce the Award in Singapore.  It was then that Jung asked for and obtained a written Confirmation from Zhou dated 3 November 2015, whereby BX and Zhou agreed to bear full responsibility for Dana’s claim, and to indemnify Sino from any damage.

22.  Since Sino had claimed to the Tribunal on 29 October 2015 that Sino had not received any notice of the Arbitration, and even after the receipt of the Confirmation on 3 November 2015, Sino has applied to the Court to set aside the Order, I cannot agree at this stage that there is clear evidence of Sino’s unequivocal adoption and recognition of the act, either of accepting notice of the Arbitration, or of the conduct of the Arbitration, by Cai and/or Sino.

23.  The Contract was entered into by Sino, admittedly in its name, under the agreed arrangement between Zhou of BX and Jung of Sino.  Even if it can be argued that BX and/or Cai did not have any actual, implied or usual authority to accept notice of the Arbitration and of the appointment of the arbitrator, Sino is bound by the Contract made in its name and with its consent.  There has been no evidence adduced (either in the application for setting aside the Order, or the application for security) as to what facts can be raised by way of defence, on the merits, to the claims made by Dana of Sino’s breach of the Contract.  Even if Jung’s 4^th affirmation were to be considered, any error of law made by the Tribunal (as Jung suggests), including any error as to the computation of damages payable in respect of the breach of Contract cannot be a ground for setting aside or resisting enforcement of the Award.  This is relevant to the exercise of the Court’s discretion as to whether the Award should be enforced, even if the grounds under s 89 of the Ordinance can be made out.

24.  As for Sino’s application to the English court to set aside the Award, this was made in January 2016, nearly 12 months after the making of the Award in February 2015.  No expert evidence has been adduced on the likelihood of Sino being given leave to apply for the setting aside of the Award out of time, and no explanation has been offered in any way by Sino as to its 6 months’ delay in making application to the supervisory court, despite receiving notice of the Award on 30 June 2015 (on its own case).  Assuming that English law is the same as Hong Kong law (in the absence of evidence to the contrary), it would appear that Dana has a good case of arguing that leave would not easily be granted by the English court for Sino to proceed with its setting aside application. 

The ease or difficulty of the enforcement of the Award

25.  There is no evidence put forward by Sino as to its financial worth, and whether it would be able to comply with the Award.  I agree that Counsel’s reliance on the fact that Sino has a paid-up capital of HK$12 million has little meaning, in the absence of any other evidence as to its available assets and indebtedness.  As Counsel for Dana rightly pointed out, the only evidence of Sino’s financial credibility or otherwise is from the Infospectrum credit rating reports obtained by Dana (“Reports”).  Their references to Sino’s turnover merely show the total transaction amount under Sino’s contracts, without any indication of its profits or losses and, in the light of Jung’s evidence as to Sino’s dealings, whether such volume represents the business of Sino itself, or whether such business was, again, conducted only in its name for and on behalf of third parties.  I also bear in mind the fact that Jung himself disputes the accuracy of the Reports, and their references to Bow Steel Ltd in Hong Kong, BX in Beijing and other companies being affiliated companies of Sino.

26.  According to the Reports, Sino is wholly owned by Jung and Zhou is the other principal of Sino, BX being an affiliated company and used for administrative purposes.  According to the Report dated 9 March 2015, a discreet interview or conversation had been conducted with Jung on 4 March 2015, when Jung had claimed that Sino had 4 affiliated companies including Bow and BX, which share a common ownership.  These are denied by Jung.

27.  The relevant consideration, as set out in Soleh Boneh, is the ease or difficulty of enforcement of the Award and whether it will be rendered more difficult if enforcement is delayed, for example by movement of assets, improvident trading, and whether it is likely that there would be dissipation in the interim of the delay in enforcement.

28.  Having regard to the circumstances of Sino’s conduct of business on its own case, and its readiness to lend its name to an unrelated company to enter into financial commitments with banks and to carry out contracts made in its name, without any regard to the third party’s performance of the contracts, it would appear that Sino has little or no concern that third parties might be misled by the identity and financial worth of its contracting party, and whether contracts and obligations entered into in its name would be properly and duly performed.  Coupled with Sino’s delay in taking reasonable and prudent steps (even after receiving notice of the Award) to ascertain the meaning and effect of the Award and whether the liability under the Award would be duly discharged, and its delay in applying to the English court to set aside the Award, I consider that Sino is employing delaying tactics and there are real risks that the Award against Sino will not be satisfied, and that if Sino considered that it was in its best interests to do so, it would not shrink from attempts to defeat the interests of Dana under the Award.  In my view, there is a real risk that Sino would remove or dissipate its assets to prejudice the enforcement of the Award should there be further delay.  At this stage, it is unknown when the London proceedings will have an outcome.  Enforcement of the Award should not be indefinitely postponed for no good reason.

Orders made

29.  In all the circumstances, I am only prepared to adjourn the application to set aside the Order for a period of 3 months from 8 March 2016, and on condition that security be provided by Sino, by payment into court (or by provision of such other security as is acceptable to Dana) of 60% of the Award Amount within 21 days of the date of handing down this Decision.  I further order that in the event that the security is not duly provided within the period of 21 days, the application to set aside the Order is to be dismissed and Dana is at liberty to enter judgment in terms of the Award.

30.  If security is provided within the period of 21 days, there be liberty to apply after 3 months from 8 March 2016, as to whether the application to set aside the Order should be restored.

31.  The hearing date fixed for 16 March 2016 is to be vacated. 

32.  The costs of the application for security and the application to set aside the Order (including any costs reserved) are to be paid by Sino to Dana on an indemnity basis, with certificate for counsel.