ARJOWIGGINS HKK2 LTD v. SHANDONG CHENMING PAPER HOLDINGS LTD

HCCT 53/2015

[2021] HKCFI 1877

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 53 OF 2015

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DECISION

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A.  Introduction

1.  On 7 August 2020, Master Hui made a Garnishee Order to Show Cause (“Nisi Order”) upon an ex parte application made by the Judgment Creditor (“HKK2”).  The Garnishee is Hong Kong International Arbitration Centre (“HKIAC”). 

2.  The hearing to determine whether the Nisi Order was to become absolute was to be heard on 21 September 2020.  The Judgement Debtor (“Chenming”) by its summons dated 14 September 2020 applies to strike out, set aside and/or discharge the Nisi Order on the grounds that all proceedings pursuant thereto constitute an abuse of process, disclose no reasonable cause of action and/or are frivolous and vexatious.  Chenming also says that the HKK2 failed to make full and frank disclosure in its ex parte application for the Nisi Order.  On 18 September 2020, Master Chow gave directions for the filing of evidence by HKK2 and Chenming, and directed both applications to be heard together.  These cross applications are the subject matters of the hearing before me. 

3.  At the hearing, HKK2 was represented by Mr Laurence Li SC and Mr Chow Ho Kiu and Chenming by Mr Victor Joffe and Mr Alexander Tang.  HKIAC adopted a neutral stance on the cross applications and was excused from attendance. 

4.  For the purpose of these cross applications, the lengthy history of the legal proceedings between HKK2 and Chenming may be shortly stated. 

5.  On 20 November 2015, HKK2 obtained a favourable arbitral award against Chenming, by which Chenming was ordered to pay, inter alia, RMB167,860,000 plus interest to HKK2 (“2015 Award”).^[1] By an order of Mimmie Chan J dated 7 December 2015, the 2015 Award became enforceable as a judgment of the Hong Kong Court (“2015 Order”).  Chenming’s subsequent application to set aside the 2015 Award was dismissed by Mimmie Chan J on 12 October 2016.  As is clear from the Nisi Order, these garnishee proceedings are based on the 2015 Order. 

6.  On 18 October 2016, HKK2 served a statutory demand (based on the 2015 Award) on Chenming.^[2] This prompted Chenming to commence HCMP 3060/2016 to dispute the jurisdiction of the Hong Kong Court (“Jurisdiction Challenge”) by seeking a declaration that the Hong Kong Court does not have jurisdiction to wind it up.  

7.  The Jurisdiction Challenge failed before Harris J,^[3] following which HKK2 presented a winding-up petition against Chenming.  At the hearing of the petition on 28 August 2017, the petition was adjourned pending Chenming’s appeal against Harris J’s decision, on the giving of an undertaking by Chenming to procure a payment into court by a third party of the sums of HK$355,141,100.06 (being the Hong Kong dollar equivalent of the amounts claimed in the statutory demand) plus HK$33,971,332.38 (being interest thereon from 19 October 2016 to 27 August 2018).  Those sums were subsequently paid into court by a third party (“Court Deposit”).  

8.  Chenming’s appeal against Harris J’s decision was dismissed by the Court of Appeal in CACV 158/2017^[4] on 5 August 2020.  Chenming is now seeking leave to appeal to the Court of Final Appeal. On 18 October 2020, Harris J adjourned HKK2’s applications to restore the winding-up proceedings and for payment out of the Court Deposit, pending the proposed appeal to the Court of Final Appeal. 

9.  In the midst of the foregoing, there were two notable developments. 

10.  First, on 8 August 2018, HKK2 commenced another set of garnishee proceedings to enforce the 2015 Award against sums held by Bank of Communications Trustee Limited (“BCTL”) for the purpose of Chenming’s dividend distribution.  As BCTL had already distributed the funds, HKK2 only sought an order absolute in respect of an insignificant sum of HK$1,340 (“BCTL Garnishee Proceedings”).  Chenming says that the BCTL Garnishee Proceedings were not fairly disclosed by HKK2 in obtaining the Nisi Order. 

11.  Secondly, on 9 October 2018 commenced another arbitration against HKK2 (“2^nd Arbitration”).  By a Final Award dated 5 August 2020 (which was not for monetary relief), the Tribunal ordered, inter alia, that the security for costs in the sum of HK$3,000,000 paid by Chenming and held by the HKIAC (“Sum”) be returned to Chenming (“2020 Award”).  The Nisi Order, which was made two days after the publication of the 2020 Award, is directed at the Sum.  The Sum currently remains with and is held by the HKIAC pending the determination of the present cross applications. 

B.   The issues in these cross applications

12.  Both parties have proceeded on the basis that the cross applications are, in Mr Li SC’s characterization, “mirror image” of each other.  In opposing, HKK2’s application for the Nisi Order to be made absolute, the grounds advanced by Chenming are broadly as follows. 

13.  First, Chenming says that the Sum held by the HKIAC is not a debt owed by the HKIAC to Chenming.  Chenming contends that it does not have an immediate and effective civil claim against the HKIAC to recover the Sum, which is a prerequisite for the court to exercise its jurisdiction under RHC Order 49, rule 1 (“Issue 1”). 

14.  Secondly, Chenming argues that HKK2’s pursuit of the Nisi Order against the background of the ongoing winding-up proceedings against Chenming is an abuse of process, in that HKK2 is approbating and reprobating as it has taken two irreconcilable positions against Chenming on the issue of its solvency, and is therefore seeking inconsistent remedies or relief.  It is said that HKK2’s abuse lies in embarking upon a collective enforcement path (in the winding-up proceedings) on the one hand and invoking on the other an individual enforcement action in the form of these garnishee proceedings (“Issue 2”). 

15.  Thirdly, Chenming complains that HKK2 did not make full and frank disclosure when obtaining the Nisi Order, both as to law and on facts (“Issue 3”).  As to law, Chenming postulates that Issues 1 and 2 ought to have been brought to the attention of Master Hui.  As regards facts, it is Chenming’s case that HKK2, as mentioned above, should have disclosed the BCTL Garnishee Proceedings. 

16.  HKK2 in its written material portrayed Chenming as a debt dodger (in that the 2015 Award has remained unsatisfied) and referred to a number of adverse comments made by Harris J and Mimmie Chan J against the conduct Chenming in previous decisions.  However, HKK2 fairly did not press these points at the hearing, as they are not germane to the resolution of the three issues raised by Chenming. 

C.  Issue 1: No attachable debt

17.  RHC Order 49, rule 1(1) provides as follows:

“Where a person (in this Order referred to as the judgment creditor) has obtained a judgment or order for the payment by some other person (in this Order referred to as the judgment debtor) of a sum of money amounting in value to at least $1,000, not being a judgment or order for the payment of money into court, and any other person within the jurisdiction (in this Order referred to as the garnishee) is indebted to the judgment debtor, the Court may, subject to the provisions of this Order and of any written law, order the garnishee to pay the judgment creditor the amount of any debt due or accruing due to the judgment debtor from the garnishee, or so much thereof as is sufficient to satisfy that judgment or order and the costs of the garnishee proceedings.” (emphasis added by Chenming)

18.  The disagreement between Chenming and HKK2 is on the issue of whether the Sum amounts to a debt due from the HKIAC to Chenming.

C1.    Chenming’s position

19.  Chenming’s position is succinctly encapsulated at its Skeleton Submissions §19.  It is said that the order by the Tribunal (ie the 2020 Award) to return the Sum to Chenming, rather than generating any legal responsibility on the part of the HKIAC, was an internal administrative direction by the Tribunal (acting in its judicial capacity) to HKIAC (also acting in its judicial capacity as repository of funds held to the order of the Tribunal).  Both The Tribunal and the HKIAC are immune from suit when so acting. 

20.  On the issue of what constitutes a debt for the purpose of garnishee proceedings, Chenming relies on Taurus Petroleum Ltd v State Oil Marketing Co of the Minstry of Oil, Republic of Iraq [2018] AC 690.  Lord Mance DPSC said at §§88, 90-91 as follows:

“The concept of a debt for the purposes of a third party debt order, or its predecessor the garnishee order, is particularly well-settled by authority. First, “The test of ‘debt due’ is whether it is one for which the creditor could immediately and effectually sue”… [§88]

Secondly, and as a concomitant of the first principle, a judgment creditor cannot stand in a better position than the judgment debtor did in relation to the third party against whom the third party debt order is sought… [§90]

Thirdly, and again as a further concomitant of the previous two principles, where a judgment debtor has precluded itself contractually from having any immediate right to recover what would otherwise be a third party debt, a third party debt order cannot be obtained. There is in this respect no difference in principle between a fetter which arises contractually and for proprietary reasons... [§91]”

21.  It is Chenming’s case that it does not have an immediate and effectual civil claim against the HKIAC to recover the Sum by reason of the “fetter” of arbitral immunity.  It is said that the immunity arises from section 105(1) of the Arbitration Ordinance Cap 609 (“AO”), which provides:

“A person—

(a) who appoints an arbitral tribunal or mediator; or

(b) who exercises or performs any other function of an administrative nature in connection with arbitral or mediation proceedings,

is liable in law for the consequences of doing or omitting to do an act in the exercise or performance, or the purported exercise or performance, of the function only if it is proved that the act was done or omitted to be done dishonestly.”

22.  Chenming argues that that the wording of section 105(1) of the AO makes it plain that arbitral immunity covers all administrative functions, and in the present case, it is clear that the HKIAC, in receiving and holding the Sum pursuant to an order of the Tribunal, must be regarded as a person performing an administrative function in connection of the 2^nd Arbitration.  The HKIAC is therefore immune from ordinary suit absent a showing of dishonesty, and as there is neither suggestion nor evidence that the HKIAC has acted dishonestly, Chenming does not have an immediate and effectual claim against the HKIAC for the return of the Sum. 

C2.    Analysis

23.  Despite the persuasion with which its counsel have put their submissions, I disagree with Chenming. 

24.  First, as pointed out by HKK2, Hong Kong Civil Procedure 2021 Note 49/1/9 states as follows:

“It is essential that the relationship of creditor and debtor should exist between the judgment debtor and the garnishee. If the judgment debtor could sue the garnishee for the amount and recover it, it is plain that there would be an attachable debt but this is not an infallible test.

There must be money due to the judgment debtor.  In the case, for example, of a building contract, where the builder is paid on the certificate of the architect, it is plain that money in the hands of the building owner cannot be attached until a certificate is issued, and then only for the amount mentioned in the certificate…”

25.  In my view, Chenming’s submission that the existence of an immediate and effectual civil claim as being the exclusive test for the existence of a debt for the purpose of garnishee proceedings is inappropriate in the present case where, as here, the HKIAC does not assert any arbitral immunity and it is and was at all material times ready and willing to honour its obligation to return the Sum to Chenming.  In these circumstances, a rigid adherence to Taurus would render a “fallible test”. 

26.  The relevant (and undisputed) factual background is as follows.  By the 2020 Award, the Tribunal ordered the Sum to be returned to Chenming.  On the following day (6 August 2020), HKK2 was told by the HKIAC that the Sum, in compliance with the 2020 Award, would be returned to Chenming on either 7 or 10 August 2020.  HKK2 obtained the Nisi Order on 7 August 2020. 

27.  As I understand from the HKIAC website, fund holding (including sums paid as security for costs) is a service provided by the HKIAC to all cases (such as the 2^nd Arbitration) administered by the HKIAC at no additional cost.  Where the purpose of the Sum (as security for costs) is rendered spent by the order made in the 2020 Award, it seems to me quite plain that there is in existence a relationship of creditor and debtor between Chenming (as the judgment debtor) and the HKIAC (as the garnishee) and the Sum is due to Chenming.  One does not need to resort to the test adumbrated in Taurus to ascertain the foregoing position.  Indeed, in the particular circumstances of the present case, a strict application of Taurus would defeat the purpose of RHC Order 49, rule 1.  The anomaly, if Chenming’s position were correct, is that HKK2 can only proceed with these garnishee proceedings if the HKIAC acted dishonestly by refusing to pay over the Sum to Chenming, but HKK2 cannot execute against the Sum if the HKIAC, in the ordinary course, honours its obligations. 

28.  Secondly, even on a strict application of Taurus, I do not believe Chenming can derive assistance, since the arbitral immunity under section 105(1) of the AO, on its proper construction, does not apply to the situation of the present case where the administrative task in question (paying over the Sum) does not and cannot have any impact on the “integrity” of the 2^nd Arbitration. 

29.  On the issue of statutory interpretation, both parties have lodged very helpful post hearing submissions. 

30.  Chenming’s primary submission is that one should adopt the plain meaning rule.  However, as submitted by HKK2, the modern approach to statutory interpretation is the purposive approach.  As set out at HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 §§12-15:

“12. The modern approach is to adopt a purposive interpretation. The statutory language is construed, having regard to its context and purpose. Words are given their natural and ordinary meaning unless the context or purpose points to a different meaning. Context and purpose are considered when interpreting the words used and not only when an ambiguity may be thought to arise.

… the mischief rule is an early example of the purposive approach. And the purposive approach (including the mischief rule) has been reflected in Hong Kong in s.19 of the Interpretation and General Clauses Ordinance, Cap.1[5].

13. The context of a statutory provision should be taken in its widest sense and certainly includes the other provisions of the statute and the existing state of the law…

14. The purpose of a statutory provision may be evident from the provision itself. Where the legislation in question implements the recommendations of a report, such as a Law Reform Commission report, the report may be referred to in order to identify the purpose of the legislation. The purpose of the statutory provision may be ascertained from the Explanatory Memorandum to the bill. Similarly, a statement made by the responsible official of the Government in relation to the bill in the Legislative Council may also be used to this end…

15. Whilst as noted above, statements made by officials of the Government in relation to the bill in the Legislative Council may be used to identify the purpose of the statutory provision, employing it in order to ascertain the meaning of the statutory words stands in a fundamentally different position.  In England, in Pepper v Hart [1993] AC 593, the House of Lords decided that such statements may be referred to as an aid to interpretation for the purpose of ascertaining the meaning of the statutory language, where the following three conditions are met : (a) The legislation is ambiguous or obscure or leads to an absurdity; (b) The material relied upon consists of one or more statements by a Minister or other promoter of the Bill together if necessary with such other Parliamentary material as is necessary to understand such statements and their effect; (c) The statements relied upon are clear.” 

31.  Further, as stated at Ho Choi Wan v HK Housing Authority (2005) 8 HKCRAR 628 §109:

“In considering the language of statute, it is the task of the court to ascertain and given effect to the intention of the legislature. But that does not mean that the court must give a literal construction to every word or phrase in the statute… Whenever the legislature enacts or amends an Ordinance, its purpose is to remedy a perceived mischief or defect in the pre-existing legislation. It is to be presumed that it did not intend the statute to go wider in its operation than is necessary to remedy the mischief or defect in question. If it has inadvertently employed general words which, if given their fullest effect, are wider than necessary, the court not only may but must restrict them by construing them in a narrower sense which, while still falling within the ordinary meaning of the words, gives effect to the legislative intent but does not go beyond it, still less frustrate it.”

32.  Chenming’s position is that the arbitral immunity extends to all administrative functions of the HKIAC.  Whilst that might be the literal meaning of section 105(1) of the AO, that is not a correct interpretation, in my view, as the literal meaning is far too wide given the context and purpose of arbitral immunity. 

33.  Chenming relies on Corey v New York Stock Exchange 691 F 2d 1205 to explain the rationale for extending arbitral immunity to arbitral organizations such as the HKIAC.  At page 7 (right column), it states:

“Extension of arbitral immunity to encompass boards which sponsor arbitration is a natural and necessary product of the policies underlying arbitral immunity; otherwise, the immunity extended to arbitrators is illusory. It would be of little value to the whole arbitral procedure to merely shift the liability to the sponsoring association.”

34.  However, it is also stated at page 7 of Corey (starting from the left column) that:

“A number of policy arguments support our decision… [I]t is clear that immunity does not depend on the source of the decision-making power but rather upon that nature of that power. Accordingly, the limits of immunity should be fixed in part by federal policy. The functional comparability of the arbitrators’ decision-making process and judgments to those of judges and agency hearing examiners generates the same need for independent judgment, free from threat of lawsuits. Immunity furthers this need. As with judicial and quasi-judicial immunity, arbitral immunity is essential to protect the decision-maker from undue influence and protect the decision-making process from reprisals by dissatisfied litigants…

By immunizing arbitrators and their decisions from collateral attacks, arbitration as a contractual choice of the parties is respected yet the arbitrators are protected… An aggrieved party alleging a due process violation in the conduct of the proceedings, fraud, misconduct, a violation of public policy, lack of jurisdiction, etc, by arbitrators should pursue remedies against the “real” adversary through the appeal process. To allow a collateral attach against arbitrators and their judgments would also emasculate the appeal provisions…”

35.  Both parties have referred to the 1996 Departmental Advisory Committee on Arbitration Law 1996 Report (“DAC Report”). In England, section 74 of the Arbitration Act 1996 introduced immunity for appointing bodies and persons as regards their appointing functions.  The DAC Report relevant states at §§300-301:

“300. The reason for this proposal is that without such an immunity [for arbitral institutions], there is in our view a real risk that attempts will be made to hold institutions or individuals responsible for the consequences of their exercise of the power they may be given to appoint or nominate arbitrators, or for what their appointed or nominated arbitrators then do or fail to do. This would provide a means of reopening matters that were referred to arbitrations, something that might be encouraged if arbitrators were given immunity (as we have proposed in clause 29) but nothing was said about such institutions or individuals.

301. There is an additional point of great importance.  Many organisations that provide arbitration services… could find it difficult if not impossible to finance the cost of defending legal proceedings or even the cost of insurance against such cost.  In our view the benefits which these organisations (and indeed individuals) have on arbitration generally fully justify giving them a measure of protection so that their good work can continue.”

36.  Chenming points out that section 105(1) of the AO is wider than section 74 of the Arbitration Act 1996 since the former extends not only to appointing functions, but to all acts of an administrative nature in connection with arbitral proceedings.  It contends that there is no difficulty in applying the same rationale.  It says that the purposes of section 105(1) of the AO are:

(1)  to promote and protect the idea of party autonomy and minimal intervention by the local court;

(2)  as a provision implementing arbitral immunity, to implement a policy choice to promote arbitration by (a) protecting the internal integrity of the arbitral process and collateral challenges against awards, (b) protecting those who are involved in the arbitral process from vexation by local court and (c) insulating the arbitral participants so as to ensure arbitral fees and costs are kept within a reasonable range. 

37.  For the following reasons, I respectfully disagree with Chenming’s submissions.  It seems to me that none of the above considerations warranting the protection of arbitral immunity applies in circumstances such as the present.  First, the act of releasing the Sum to Chenming pursuant to the 2020 Award is a ministerial act which does not involve any decision-making on the part of the HKIAC.  Secondly, I am unable to see, and Chenming has not explained, how even if there is a failure by the HKIAC to perform the ministerial and administrative task of releasing the Sum, and if sued upon by Chenming, such can have the effect of reopening matters that were referred to in the 2^nd Arbitration, amounts to a due process violation, represents an interference by the Hong Kong Court which might have an adverse effect on arbitral autonomy, or poses a risk of escalating insurance costs when the HKIAC does not dispute the claim (if made by Chenming or those in an analogous position of expecting a return of sums held by the HKIAC but ordered to be returned by the arbitral tribunal). 

38.  I therefore agree with the position advocated by HKK2.  The purpose of section 105(1) of the AO is to bar the kind of lawsuits where a party unhappy with an outcome or a state of affairs, finds an act or alleges an omission by the arbitral body, and seeks to claim against the body for that outcome or state of affairs as allegedly a consequence of that act or omission.  Conversely, its purpose is not to bar all claims against an arbitral body, in particular, as here, where the claim is one (undisputed by the arbitral body) for recovery of a debt or property held by it. 

39.  For the above reasons, I determine Issue 1 against Chenming. 

D.  Issue 2: Abuse of process

40.  As I understand Chenming’s position, its case on abuse is premised on HKK2’s approbation and reprobation in taking two irreconcilable positions against Chenming in different proceedings.  The positions relate to the factual position of Chenming’s solvency, and consequentially on the different relief sought by HKK2.  It is said that it is impermissible on the one hand for HKK2 to petition for the winding-up of Chenming on the basis of its insolvency (which is a collective enforcement path), and then seek individual enforcement against by way of garnishee proceedings.  As regards the latter, Chenming says that the impermissibility of the inconsistent relief is reflected in section 269(1) of the Companies (Winding Up and Miscellaneous Proceedings) Ordinance Cap 32 (“C(WUMP)O”), which provides:

“Where a creditor has issued execution against the goods or lands of a company or has attached any debt due to the company, and the company is subsequently wound up, he shall not be entitled to retain the benefit of the execution or attachment against the liquidator in the winding up of the company unless he has completed the execution or attachment before the commencement of the winding up…”

41.  I do not agree with Chenming.  First, on the position of solvency, as observed by Harris J at Re Yueshou Environmental Holdings Ltd, HCCW 142 of 2013, 16 July 2014 §14, the authorities suggest that the conventional view is that, where, as here, a creditor is relying on the deeming provision of insolvency by reason of non-satisfaction of a statutory demand, there is nothing objectionable in principle to a creditor owed a debt he believes cannot be disputed issuing a petition to wind up a company he knows is probably solvent, citing for example Cornhill Insurance plc v Improvement Services Limited [1986] 1 WLR 114.  

42.  Secondly, in terms of the relief, Chenming relies on McPherson & Keay on the Law of Company Liquidation, 4^th Ed which states at §7-086 as follows:

“Execution has been described as “the process for enforcing or giving effect to the judgement of the court”. It is a process which, in the interval between the presentation of a winding-up petition and either the appointment of a provisional liquidator, or the making of a winding-up order, a judgement creditor is at liberty to commence or continue until such proceedings are stayed restrained by the court in consequence of an application…”

43.  I also accept HKK2’s submission that I am entitled and should take into account the observations made by Harris J^[5] and the Court of Appeal^[6] that there is a real possibility that Chenming would not allow itself to be wound up, as on the basis of its latest financial statements, it would appear that Chenming is well able to satisfy the 2015 Award.  As such, there is a real question whether section 269(1) of the C(WUMP)O would be engaged at all.  Even if it is, it will only lead to the consequence that HKK2 is not able to retain the fruits of the present execution against the liquidator of Chenming. 

44.  For the above reasons, I determine Issue 2 against Chenming. 

E.   Issue 3: Full and frank disclosure

45.  Chenming argues that HKK2 was under a duty to disclose the arguments on law relating to Issue 1 and Issue 2 and the factual scenario relating to the BCTL Garnishee Proceedings. 

46.  As regards Issue 1 and Issue 2, the relevant facts, namely that the Sum is held by the HKIAC and that HKK2 had commenced winding-up proceedings against Chenming, were disclosed in HKK2’s evidence leading to the Nisi Order.  I agree with HKK2 that the legal arguments arising therefrom could not be reasonably anticipated. 

47.  Chenming submits that that BCTL Garnishee Proceedings ought to have been disclosed as it was a similar application, it was abortive and it resulted in a costs decision against HKK2.  I am unable to see how the lack of practical success in that application has any relevance to HKK2’s present application. 

48.  For the above reasons, I determine Issue 3 against Chenming. 

F.   Conclusion

49.  The parties’ submissions also mentioned various other points.  Where these have not been expressly set out or dealt with above, it does not mean they are thought to be irrelevant (or have been overlooked). To avoid doubt, those other points have also been considered and I believe they are either subsumed in the matters dealt with above or do not materially affect the analysis. 

50.  Chenming’s summons dated 14 September 2020 is dismissed and the Nisi Order is made absolute. 

51.  I understand that the HKIAC has not made any application for costs.  I make a costs order nisi that Chenming is to pay to HKK2 the costs of the garnishee proceedings and the costs of and occasioned by Chenming’s summons dated 14 September 2020, with a certificate for two counsel.  HKK2 is to lodge its skeleton bill of costs within 7 days and Chenming its list of objections within 3 days thereafter and I will deal with the assessment on paper. 

52.  I thank counsel for their helpful assistance. 

HCCT 53/2015
[2018] HKCFI 93

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 53 OF 2015

______________

______________

______________

__________________

D E C I S I O N

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Background

1.  The Claimant seeks an injunction against the Respondent, to restrain it from continuing the civil proceedings commenced in the Intermediate People’s Court of Weifang City in Shandong Province on the Mainland (“Weifang Court”) by the Respondent against the Claimant and Mr Tong Chong, an agent or representative of the Applicant. 

2.  The main facts of the dispute between the parties in this case have been set out in my Decision of 12 October 2016 (“October Decision”).  They will not be repeated, and this Decision will adopt the same nomenclature used in the October Decision.  In gist, there is an arbitral Award dated 20 November 2015 made against the Respondent for payment of a sum of RMB 167,860,000 to the Claimant, with interest and costs.  This Court granted leave to the Claimant to enforce the Award as a judgment in Hong Kong, and on 12 October 2016, dismissed the Respondent’s application to set aside the order granting leave for enforcement of the Award.

3.  The saga has continued since October 2016, with further proceedings instituted in Hong Kong and on the Mainland, including proceedings instituted by the Respondent in Hong Kong in November 2016, seeking to restrain the Claimant from petitioning for the winding up of the Respondent on the basis of a statutory demand served by the Claimant on the Respondent, for a total sum of RMB 310 million then due from the Respondent to the Claimant, under the Award and other judgments and orders made by the Mainland Courts.  Those proceedings instituted in Hong Kong in November 2016 are referred to, for convenience, simply as the Winding up Proceedings.  The Respondent did not dispute in the Winding up Proceedings that the amount of the Award is payable.  It asserted that it was profitable, and so, was in a position to pay the debt under the Award but, as Harris J highlighted in the Reasons for his Decision made in the Winding up Proceedings on 7 July 2017, the Respondent simply refused to make payment, claiming instead that as a foreign company, the Hong Kong Court has no jurisdiction to make a winding up order against it, since it cannot be shown that the Claimant would derive sufficient benefit from the making of the winding up order here. 

4.  For the reasons amply set out on 7 July 2017, Harris J dismissed the Respondent’s application for an injunction (to restrain the Claimant from filing a winding up petition), finding that a winding up order could be made by the Hong Kong Court.  In the scathing judgment of Harris J, the conduct of the Respondent was considered to be “unethical”, its refusal to honour the Award showing disregard for the integrity of the legal system of Hong Kong and contempt for the High Court of Hong Kong.  According to the learned companies judge, the obvious and appropriate step in all the circumstances of the case is the winding up of the Respondent in Hong Kong, and the delisting of its H shares which are listed on the Main Board of the Hong Kong Stock Exchange. 

5.  After the Court dismissed the Respondent’s application for the injunction, the petition for winding up the Respondent was filed by the Claimant on 15 June 2017.  On the very next day, a cash dividend totaling RMB 1.162 billion was distributed by the Respondent to its shareholders, on 16 June 2017.  On 12 July 2017, the Respondent filed notice of its appeal against the decision of Harris J.  At the hearing of the winding up petition, on 28 August 2017, the Respondent was required by the Court to make payment into Court of HK$390 million pending the appeal, the amount comprising HK$370 million of the outstanding debt, plus HK$20 million in interest.  The payment was made by the Respondent, as ordered, without any admission or concession that the payment should be made out to the Claimant in satisfaction of the Award, if the appeal is to be dismissed.

6.  On 5 July 2017, the Respondent filed proceedings before the Weifang Court (“2017 Proceedings”).  The Respondent is the plaintiff in the 2017 Proceedings, the Claimant is named as 1^st defendant, one Mr Tong Chong (a director of the JV Company nominated by the Claimant) (“Tong”) is named as 2^nd defendant, and the JV Company is named as 3^rd party in the 2017 Proceedings.  The claims made and the parties named in the 2017 Proceedings are in fact identical to those in the proceedings which had been instituted by the Respondent against the Claimant in October 2013, also in the Weifang Court (“2013 Proceedings”), ie against the Claimant and Tong as defendants, also with the JV Company as 3^rd party.  The 2013 Proceedings had been withdrawn by the Respondent in December 2016, at the request of the judge in the Weifang Court and with the Respondent’s agreement – at least according to the Respondent.

7.  On 10 October 2017, the Claimant issued its summons for an injunction under s 21L of the High Court Ordinance, to restrain the Respondent from proceeding with the 2017 Proceedings, the ground of its application being that the 2017 Proceedings were instituted in breach of the parties’ arbitration agreement, and that the Respondent’s conduct is vexatious and oppressive, since the claims in the 2017 Proceedings have been raised and decided in the Arbitration leading to the Award, and in the proceedings in Hong Kong whereby the Respondent had attempted unsuccessfully to set aside the Award, and the Respondent is attempting,  by the 2017 Proceedings, to re-litigate in the Weifang Court matters which have been decided by the Tribunal and the Hong Kong Court, and which have been raised in the 2013 Proceedings which were withdrawn by the Respondent.

8.  In resisting the Claimant’s application, the Respondent argued that the Respondent is not the real or actual plaintiff in the 2017 Proceedings, since the 2017 Proceedings were instituted by the Respondent in name, but in actual fact and substance on behalf of the JV Company, as in a derivative action.  The claims made by the JV Company in the derivative action have not been decided by the Tribunal.  The Respondent further argued that neither the JV Company nor Tong are parties to the arbitration agreement, which was made between the Claimant and the Respondent, and contained in the JV Contract.  The arbitration agreement and the Award do not bind the JV Company on whose behalf the 2017 Proceedings were brought.  The Tribunal has no jurisdiction over the JV Company, and any findings made by the Tribunal are not binding on either the JV Company, or Tong. 

9.  Finally, the Respondent argued that in respect of the JV Company and Tong, since there is no arbitration agreement, Hong Kong is not the forum conveniens for the underlying dispute as to whether the Claimant and Tong have breached provisions of the relevant PRC laws, as the Respondent claims in the 2017 Proceedings, and that these are matters best tried by the Weifang Court.

The claims made in the 2017 Proceedings

10.  In the 2017 Proceedings, the Respondent named as plaintiff seeks damages from the defendants, namely the Claimant and Tong, in the sum of RMB 39,590,000.  That is the request named in the initiating document (起訴狀) (“Claim Form”).

11.  The Claim Form refers to the JV Contract made between the Claimant and the Respondent, whereby they agreed to set up the JV Company named as 3^rd party in the Claim Form.  The Claimant is referred to as the holder of 70% of the shares in the 3^rd Party, with the Respondent holding 30%, the Claimant as the majority shareholder being responsible for the management and technical support of the JV Company.  The Claim Form further pleads the setting up of the JV Company in December 2005, and Tong being assigned by the Claimant to be a director and the authorized person or representative of the JV Company, with full responsibility for the management and operations of the JV Company.  According to the Claim Form, the Claimant as the majority shareholder, and Tong as the director of the JV Company, exploited their relationship to injure the lawful rights of the JV Company, and dealt with the property of the JV Company without the approval of the board of directors.  It is claimed that Tong is in breach of Articles 148 and 149 of the Company Law, had misappropriated all the assets of the JV Company, and had caused the JV Company to sustain loss of RMB 39,590,000.  The Claim Form pleads that the Claimant and Tong as defendants effectively control the JV Company and its financial information, and had refused to disclose or account for same to the Respondent.

12.  The above facts pleaded in the Claim Form are, in substance, the same as the facts pleaded and the claims made in the 2013 Proceedings.  This is not disputed by the Respondent, which claims that the 2017 Proceedings are not new proceedings, but only continuation of the 2013 Proceedings, and that it is common for proceedings on the Mainland to be withdrawn by a party to alleviate pressure on the courts, only to be resumed later.

13.  On the Respondent’s case, the issues in the 2017 Proceedings do not arise out of the JV Contract so as to come within the ambit of the arbitration clause.  According to the evidence of the PRC law expert filed on behalf of the Respondent, the 2017 Proceedings is a derivative action, a tortious claim in nature, which is in dispute between the JV Company on the one part, and the Claimant and Tong on the other part, as opposed to the contractual nature of the claims made under the JV Contract, and referred to arbitration between the Claimant and the Respondent.  I reject these claims made on behalf of the Respondent.

14.  The claims in the 2017 Proceedings were made by the Respondent as plaintiff, and were not expressly stated as being derivative or representative in nature, made on behalf of the JV Company, which has been in liquidation since about June 2010.  The Claim Form pleads and relies on Articles 148 and 149 of the Company Law for relief.  The Respondent itself claims that the 2017 Proceedings are mere continuation of the 2013 Proceedings, and according to the more detailed Claim Form filed in the 2013 Proceedings, the Respondent as plaintiff claimed that under Article 148 of the Company Law, controlling shareholders should not abuse their shareholders’ powers or relationship to injure the interests of the Company (paragraph 25 of the 2013 Proceedings Claim Form).  The Respondent further claimed in the 2013 Proceedings that directors owe duties of diligence and loyalty to the company, and should not use their relationship to injure the interests of the company.  The Respondent claimed that in breach of the provisions of the Company Law, the Claimant and Tong used their relationship to confer benefits on their related companies, and misappropriated the assets and property of the JV Company, leading to the inability of the JV Company to continue its operations.  Those were stated to be the grounds of the Respondent’s claims against the Claimant and Tong for compensation.  Paragraph 4 of the Claim Form in the 2013 Proceedings does state that the Respondent seeks an order that the Claimant and Tong as defendants should compensate the JV Company (the 3^rd party named) damages of RMB 39,590,000.

15.  Expert PRC law evidence has been filed on behalf of both parties as to the alleged nature of the claims made in the 2017 Proceedings, and there is dispute between the experts as to whether the 2017 Proceedings are derivative in nature, seeking remedy on behalf of the JV Company; whether such action can be brought by the Respondent, allegedly on behalf of the JV Company, after the JV Company has been dissolved and a liquidation committee has been formed; and whether procedural requirements such as the service of prior notice or request on the JV Company prior to the commencement of proceedings on its behalf have been complied with, or can be dispensed with.  In my judgment, these issues do not affect the Claimant’s right to the injunction sought.

16.  Even if I were to accept the Respondent’s case, that it had instituted the 2017 Proceedings as representative and on behalf of the JV Company, I consider that the claims made by the Respondent in the 2017 Proceedings, despite being made in such “representative” capacity, fall within the scope of the arbitration clause contained in the JV Contract made between the Claimant and the Respondent.  That clause is drafted in wide terms, as follows:

“Any dispute arising out of or in connection with this Contract, including any question regarding its existence, validity or termination or as to rights or obligations of the Parties hereunder which is not settled by friendly discussions pursuant to Article 24.1 shall be referred to and finally resolved by arbitration in Hong Kong in accordance with the Arbitration Rules of the Hong Kong International Arbitration Centre… the arbitral award shall be final and binding on the Parties.” (Emphases added)

17.  Irrespective of whether the claims made by the Respondent in the 2013 Proceedings and 2017 Proceedings are representative in nature, and whether such claims are tortious in nature as alleged by the Respondent, they relate to matters in dispute which arose as a result of the investments made by the Claimant and the Respondent, and the setting up and operation of the JV Company, pursuant to the JV Contract made between them.  The allegations as to the Claimant’s misuse of its powers and relationship as shareholder of the JV Company, in misappropriating assets of the JV Company or making improper payments to parties connected with the Respondent, all carried out through Tong, its director appointed to the JV Company pursuant to the JV Contract, and the claims of damage sustained by the Respondent as minority shareholder, and damage sustained by the JV Company, for whom the claims were allegedly made by the Respondent, are all connected with the JV Contract, and the parties’ operations thereunder.  Any claims made or asserted by the Respondent as shareholder of the JV Company, including any right to commence derivative actions on behalf of the JV Company to seek any remedy for the JV Company, arises by virtue of its acquiring shares and becoming a shareholder under the JV Contract.  The claims made by the Respondent in the 2017 Proceedings certainly cannot be said to be “entirely unrelated to” the JV Contract, and the rights assumed and obligations acquired by the parties thereunder (Getwick Engineers Ltd v Pilecon Engineering Ltd HCA 558/2002, 28 October 2002).

18.  The 2017 Proceedings fall within the scope of the arbitration clause in the JV Contract between the Claimant and the Respondent, such that the Claimant is contractually entitled to ask for the proceedings to be stayed.

19.  I further accept the submissions made by the Claimant, that all the claims made by the Respondent in the 2013 Proceedings and 2017 Proceedings, as to alleged misappropriation, breach of fiduciary duties, breach of the Company Law, have been raised and dealt with in the Arbitration, and determined by the Tribunal in the Award.  As a party in the Arbitration, the Respondent is bound by the findings made by the Tribunal, as to its alleged entitlement as shareholder of the JV Company.  The counterclaim made by the Respondent in the Arbitration was for the sum of RMB 39,590,000, claimed to have been improperly paid by the JV Company, and procured by the Claimant and Tong, to parties related to the Claimant, or were otherwise unauthorized.  This essentially encompassed the claims made in the 2013 Proceedings and the 2017 Proceedings (and referred to by Counsel for the Claimant as the TSA Claim, the Management Cost Claim, and the Excess Payment Claim).  The Respondent’s counterclaim was dismissed by the Tribunal, which found that the Respondent had been made aware of the payments, that no approval by the board of the JV Company was required, and further, that the Claimant was not in breach of the relevant provisions of the PRC Company Law, and not in breach of its fiduciary duties and obligations of good faith under the JV Contract.  The Respondent is clearly and unquestionably bound by these findings made by the Tribunal in the Award.

20.  Even if it should be true that there are new claims open to the Respondent to be pursued, as to the Claimant’s alleged misapplication of any assets of the JV Company, these claims should be pursued by arbitration in accordance with the arbitration clause in the JV Contract.

The order sought against Tong

21.  On behalf of the Respondent, it was argued that Tong is not a party to any arbitration agreement with the Respondent, nor was he a party in the Arbitration, to be bound by the Award.  The Respondent accordingly submits that the Claimant is not entitled to seek any injunction to restrain the Respondent from conducting the 2017 Proceedings against Tong.

22.  In the Arbitration, the Respondent advanced a counterclaim against the Claimant, in respect of its breach of obligations as controlling shareholder under the Company Law (paragraph 7 of the Respondent’s Supplemental Submissions on the Counterclaim), by failing through itself “and its representative directors, in particular, (Tong)” to ensure that the Respondent’s rights as a minority shareholder were respected.

23.  The Respondent also alleged in the Arbitration that Tong had failed to act in the best interests of the JV Company, and was in breach of his fiduciary duties owed to the JV Company, inter alia, by procuring or directing the JV Company to enter into agreements with third parties, or procuring unauthorized and improper payments to be made by the JV Company to parties associated with the Claimant/Tong.  The Respondent pleaded and relied on the fact that Tong was a director appointed by the Claimant to the JV Company, and that he was a “representative” of the Claimant as shareholder (see paragraphs 145 to 148 of the Rejoinder dated 14 August 2014, served by the Respondent in the Arbitration).  The Respondent claimed (in paragraph 150 of the Rejoinder) that the Claimant “was either behind (Tong’s) acts or in fact had no different personality from (Tong) and Mr Liu and, as a result, should be liable for all the losses arising from (Tong’s) actions and inactions”.  Tong had been cross-examined by the Respondent in the Arbitration as to all these matters.

24.  The Claimant emphasized, however, that the claims made by the Respondent in the Arbitration, in respect of Tong’s acts of breach of duty, were directed against the Claimant - as the only party in the Arbitration against which the counterclaim was made, and that this was on the basis (as the Respondent alleged) that Tong was acting for or as agent of the Claimant, which should be liable for the losses resulting from Tong’s actions and breach.

25.  The Award records the Respondent’s submission that the claim made by the Respondent of Tong’s breaches of the Company Law was not against Tong, but against the Claimant, on the premise that the Claimant was vicariously liable for the actions of Tong, particularly as he was acting as a director of the Claimant or as the Claimant’s representative director, such that Tong’s conduct is attributable to the Claimant (see paragraph 16.1 of the Award).  After hearing the evidence and the submissions made by the parties, the Tribunal found that since the payments and transactions of which the Respondent complained had been known to the Respondent and did not require authorisation by the board, the Claimant is not liable for the conduct of Tong complained of.

26.  The Respondent had already made claims against Tong in the Arbitration, as a representative and agent of the Claimant, in respect of his acts and alleged omissions as a director of the JV Company, and these are the very same claims which are now repeated in the 2017 Proceedings. The Tribunal has already found that the claims against the Claimant and its agent, Tong, have no basis.  I consider that it would be vexatious and oppressive for the Respondent to reopen the issues determined by the Tribunal, in the context of the claims made against Tong in his capacity as the director representative or agent of the Respondent, by pursuing the 2017 Proceedings.  I agree with the Claimant, that to permit the Respondent to continue the 2017 Proceedings against Tong would be to discredit the findings made in the Award against the Respondent.

27.  Tong, who has at all material times been claimed by the Respondent to be the representative and agent, for whom the Claimant should be vicariously liable, should be entitled to the benefit of the arbitration clause contained in the JV Contract between the Claimant and the Respondent.  Like the English Court in ICBCL Financial Leasing v CG Commercial Finance [2014] EWHC 3156 (Comm), I am prepared to extend the injunction sought by the Claimant to restrain the further conduct of the 2017 Proceedings against Tong.

Unconscionable conduct

28.  In the context of considering whether the Court should exercise its jurisdiction and discretion to grant an anti-suit injunction, the Respondent argued that the Court should consider whether the conduct of the Respondent, which is sought to be restrained, is in any way unconscionable.

29.  The grant of an injunction is an exercise of the Court’s discretionary powers.  As accepted by Counsel for the Respondent, the conduct of the parties is a relevant factor in the Court’s determination of whether its discretion should be exercised in favor of, or against a party which comes to it for aid.  In this case, the conduct of the Respondent has been described by Harris J in no uncertain terms to be unethical, reproachable and unacceptable, as showing disregard and contempt for the Hong Kong Court, and the integrity of our financial and legal system.  I would add that the Respondent has at the same time displayed complete disrespect for the arbitration agreement and the arbitral process to which it had voluntarily agreed under the JV Contract and submitted, by totally refusing to accept its liability under the Award when it is not in its favor.  I share all the sentiments expressed by Harris J in paragraph 31 of his Reasons for Decision dated 7 July 2017, and see no just or fair basis or cause for me to exercise my discretion in favor of the Respondent.  The Court’s authority must be maintained for the due administration of justice, and the Respondent’s intentional and deliberate disregard of the order of this Court and of the Award cannot be countenanced.

Conclusion and orders

30.  The injunction sought by the Claimant against the Respondent and Tong is granted in terms of its summons issued on 10 October 2017, which includes an order that the Respondent should pay the costs of the Applicant on an indemnity basis, with certificate for 2 counsel.

The Respondent’s application to file further expert evidence

31.  By the order of A Chan J made on 26 October 2017 (“Order”), directions were given for the filing of evidence in respect of the Claimant’s application by summons dated 10 October 2017 for the anti-suit injunction (“Summons”).  Under the Order, the Respondent was to file its evidence in opposition to the Summons by 9 November 2017, the Claimant was to file its evidence in reply by 23 November 2017, and the Summons was adjourned for argument (with a date later fixed for hearing on 3 January 2018).  The Order contained the express direction that no further affirmation should be filed without the leave of the Court.

32.  The Respondent served its expert evidence on PRC law on about 13 November 2017, and the Claimant served its expert evidence in response, on 24 November 2017.  It was only on 21 December 2017, that the Respondent applied for leave to produce and rely on its further expert evidence, said to be in answer to the expert evidence of the Claimant.  The application for leave was fixed for hearing on the day of the substantive hearing, on 3 January 2018.

33.  I reject the Respondent’s claim, that it has the right to reply to the expert evidence served by the Claimant in answer to the Respondent’s expert evidence.  The Order made no distinction between the service of factual, and expert, evidence, providing only that no further evidence should be filed without the leave of the Court.  At the time when the Order and the directions were made, the Respondent must have anticipated that it would be serving expert evidence on PRC law, in opposition to the Claimant’s application for stay of the 2017 Proceedings, and that if it did, it was highly likely that the Claimant would be serving its own evidence on PRC law.  The Respondent did not ask for time to put in expert evidence, in reply, if it considered that it had the right to do so.  It waited until 5 clear days before the hearing on 3 January 2018 to apply for leave to put in further expert evidence.  The application was made too late in time, and it affected the Claimant’s preparation for the hearing scheduled to take place on 3 January 2018.  Delay is a ground for refusing a late application such as this.

34.  If, as the Respondent submitted, there is any right on its part to serve expert evidence in reply, I consider that it is also incumbent on the Respondent, at the time when it sought directions for filing evidence for the Summons, not only to highlight to the Court and to the Claimant that it would be serving expert evidence, but also to confer with the Claimant and to agree on a timetable for the experts to discuss the expert evidence to be addressed, and to identify areas of agreement and disagreement in good time before the scheduled hearing of the Summons, to be of assistance to the Court.  Having failed so to do, it lies ill in its mouth to complain of not being given the opportunity to adduce further expert evidence.

35.  In any event, and as a matter of caution, I have considered the further expert evidence sought to be produced and relied upon by the Respondent.  Suffices it to say that it serves little purpose other than to confirm that the experts do not agree on the nature of and procedures for derivative actions under PRC law.  As indicated in the earlier part of this Decision, the different views of the experts on the issues they address under the relevant provisions of the PRC law have little impact on the outcome of the application for the injunction, which I have granted.

36.  Since the application for leave to adduce expert evidence is too late in time, it is dismissed, with costs to the Claimant.

HCCT 53/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 53 OF 2015

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D E C I S I O N

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Background

1.  This is an application made to set aside an award made in an arbitration which was conducted in Hong Kong (“Arbitration”), pursuant to a notice of arbitration (“Notice”) filed with the Hong Kong International Arbitration Centre (“HKIAC”) and served on 19 October 2012. The Arbitration was commenced by Arjowiggins HKK2 Limited (“Claimant”) against X Co (“Respondent”), under a joint venture contract dated 27 October 2005 (“JV Contract”) made between the Claimant and the Respondent. 

2.  Under the JV Contract, the Claimant and the Respondent agreed to establish a joint venture company on the Mainland in accordance with the relevant PRC laws and regulations.  As stated in Article 5.1 of the JV Contract, the purpose of the JV Company was to manufacture paper products “in order to achieve favorable economic results and a high rate of return for the parties”.  The JV Contract sets out the parties’ respective capital contributions.  Under Article 3.1(5), the Respondent warrants that it shall by itself enter into or procure its affiliated companies to enter into Related Contracts (as defined) with the JV Company, pursuant to which the Respondent and/or its concerned affiliated companies “shall ensure” that the JV Company “shall have a continuous and stable supply of power, water, steam and wastewater treatment facilities at affordable rates in accordance with the terms and conditions of each of the Related Contracts”.  The relevant Related Contracts are set out in Schedule 1 of the JV Contract, and these include a Steam Supply Contract made between the Respondent and the JV Company (represented by the Claimant under the said contract), which was signed on 9 September 2005 (“Steam Supply Contract”).

3.  The recitals of the Steam Supply Contract refer to the fact that the Respondent as the owner of steam generating facilities had undertaken under the JV Contract to provide the JV Company with a stable and economic supply of steam throughout the term of the Steam Supply Contract.  Under Article 1 of the Steam Supply Contract, the Respondent agreed and undertook to supply steam to the JV Company’s plant in such manner as is required by the JV Company to conduct its business.

4.  Under the JV Contract itself, the Claimant and the Respondent agreed (article 7.4.4) that each shall be responsible for “cooperating to achieve the practice and goals of the JV Company” as set forth in the JV Contract and the Related Contracts, by executing by itself and procuring its concerned affiliated companies to execute any and all documents, and taking all actions necessary or advisable to effect the foregoing.

5.  Article 23.1 of the JV Contract states that the formation of the JV Contract, “its validity, interpretation, execution and settlement of any disputes arising hereunder shall be governed by, and construed in accordance with, the laws of the PRC.”

6.  The arbitration clause of the JV Contract provides, under Article 24.2.1:

“Any dispute arising out of or in connection with this Contract, including any question regarding its existence, validity or termination or as to rights or obligations of the parties hereunder which is not settled by friendly discussions pursuant to Article 24.1 shall be referred to and finally resolved by arbitration in Hong Kong in accordance with the Arbitration Rules of the Hong Kong International Arbitration Centre (the “HKIAC Rules”) for the time being in force which rules are deemed to be incorporated by reference into this article save and except for any multiplication made hereunder or otherwise agreed by the Parties.  The arbitral award shall be final and binding on the parties.”

7.  Article 24.2.4 further provides as follows:

“To the extent this Article is deemed to be a separate agreement independent from this Contract, Article 23.1 concerning governing law and Article 26.3 concerning notices are incorporated herein by reference.”

8.  Disputes arose between the Claimant and the Respondent as to whether the Respondent was entitled to terminate the supply of steam to the JV Company under the Steam Supply Contract, as a result of which various proceedings were instituted on the Mainland.  These include proceedings commenced by the Respondent for the dissolution of the JV Company in June 2010, and the JV Company was ordered by the Weifeng Intermediate Court to be dissolved. 

9.  In October 2012, the Claimant commenced the Arbitration pursuant to the JV Contract, claiming that the Respondent was in breach of the provisions of the JV Contract, by seeking the dissolution of the JV Company without the necessary unanimous vote of all the directors of the JV Company pursuant to Article 10.14 of the JV Contract, and in failing to supply steam in accordance with the provisions of Articles 3.1 (5) and 12.3 of the JV Contract.  On its part, the Respondent counterclaimed for damages in respect of the Claimant’s breach of the JV Contract and/or its breach of PRC law.

10.  Following hearings in September 2014 and January 2015 which took place before the tribunal in the Arbitration (“Tribunal”), the Tribunal rendered the Award on 20 November 2015, whereby it found that the Respondent was in breach of Article 3.1 (5) of the JV Contract, by failing to supply steam to the JV Company, and was in further breach of its obligations under the JV Contract by seeking the judicial dissolution of the JV Company.  The Tribunal further found that the Respondent was in breach of its obligations of good faith and fair dealing, and dismissed the Respondent’s counterclaims in their entirety.  By a majority, damages in the sum of RMB 167,860,000 were awarded to the Claimant, with interest and costs.

11.  On 7 December 2015, the Applicant obtained leave of the Court to enforce the Award (“Order”) in Hong Kong.  On 17 and 19 February 2016 respectively, the Respondent applied to set aside the Order and the Award, on the ground that (under Article 34 (2) (a) (i)) the arbitration agreement between the parties was invalid under PRC law; that the Award deals with a dispute not contemplated by or falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission (under Article 34 (2) (a) (iii)); and that (under Article 34 (2) (a) (iv)) the composition of the Tribunal was not in accordance with the agreement of the parties.

12.  The parties do not dispute that PRC law is the governing law of the JV Contract and the law of the arbitration agreement (by virtue of the provisions of Articles 23.1 and 24.2.4 of the JV Contract).  It is also indisputable that the Arbitration which was held and seated in Hong Kong is governed by the Arbitration Ordinance Cap 609 (“Ordinance”) (s 5 of the Ordinance), and that Hong Kong law is the lex arbitri governing the conduct of the arbitral proceedings and the exercise of the Court’s supervisory jurisdiction over the Arbitration (PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, 314E-315).

13.  Having considered the submissions made by Counsel and the evidence adduced in this case, I find that there is no substance in the Respondent’s application to set aside the Order, or the Award. The following are my reasons.

The invalidity ground

14.  In support of its case that Article 24.2.1 of the JV Contract is invalid as an arbitration agreement, the Respondent relies on expert evidence on Article 16 of the PRC Arbitration Law.  This states:

“An arbitration agreement shall include the arbitration clauses stipulated in a contract and any other written agreement for arbitration concluded before or after a dispute occurs.

The following contents shall be included in an arbitration agreement:

(1) the expression of the parties’ wish to submit for arbitration;

(2) the matters to be arbitrated; and

(3) the Arbitration Commission selected by the parties.”

15.  It is not disputed by the Claimant that HKIAC is not expressly identified as the arbitration commission or institution in Article 24.2.1.

16.  The Respondent’s expert (“Wang”) has referred to Articles 3 and 6 of the Interpretation of the Supreme People’s Court (“SPC”) on the PRC Arbitration Law (“SPC Interpretation”).  Article 3 of the SPC Interpretation provides that if the name of the arbitration body stipulated in the arbitration agreement is incorrect but the specific arbitration body can be determined, the agreement may be found to have selected an arbitration body.  Article 6 of the SPC Interpretation states that if an arbitration agreement stipulates arbitration by an arbitration body in a certain location and the said location has only one arbitration body, this arbitration body shall be regarded as the agreed arbitration body.  If the location has multiple arbitration bodies, the parties may agree to select one of these arbitration bodies when applying for arbitration.  If the parties cannot reach a consensus concerning the selection of arbitration body, the arbitration agreement is invalid.

17.  In support of its claim that Article 24.2.1 is invalid as an arbitration agreement, the Respondent relies on Article 4 of the SPC Interpretation.  This states that if an arbitration agreement stipulates merely the arbitration rules that apply to the dispute, it shall be regarded as not stipulating the arbitration body, unless the parties reach a supplemental agreement or are able to determine an arbitration body based on the agreed arbitration rules.

18.  Wang’s opinion refers to the fact that the HKIAC Rules do not contain a deeming provision similar to Article 4 (3) of the CIETAC Arbitration Rules, to the effect that the parties’ agreement to undergo arbitration in accordance with the CIETAC Rules shall be regarded as agreeing to submit the dispute to the CIETAC Arbitration Commission for arbitration.  In Wang’s opinion, the absence of such a deeming provision in the HKIAC Rules, coupled with the fact that there are more than one arbitral institutions in Hong Kong, lead to the conclusion that Article 24.2.1 is invalid by operation of Article 16 of the PRC Arbitration Law, as interpreted by the SPC Interpretation.

19.  The absence of a deeming provision similar to Article 4 (3) of the CIETAC Arbitration Rules only means that the mere reference to the HKIAC Rules cannot automatically be taken to mean that the HKIAC will be the arbitral body administering the arbitration.  It cannot by itself lead to the conclusion that the clause is invalid under Article 16.

20.  Wang referred to various decisions of the SPC in his opinion, but these are on the basis that if the arbitration body cannot be determined from the arbitration rules, the arbitration clause is invalid under Article 16.  The test is whether the arbitration body can be determined - as recognized by Article 4 of the SPC Interpretation itself.

21.  As highlighted by Leading Counsel for the Claimant, and by the Claimant’s expert (“Fei”), HKIAC as the arbitration body can be ascertained and identified from the HKIAC Rules.  The role and powers of the HKIAC as the institution administering the Arbitration are provided in numerous parts of the HKIAC Rules themselves.  The Introduction to the HKIAC Rules states that the rules were adopted by the Council of the HKIAC for use by parties who seek the formality and convenience of an administered arbitration.  Article 4 of the HKIAC Rules requires the notice of arbitration to be filed with the HKIAC Secretariat.  The HKIAC Secretariat has the power to extend time limits provided for in the HKIAC Rules.  Article 5 requires the answer to the notice of arbitration to be submitted to the HKIAC Secretariat.  The HKIAC Secretariat has the power to require a notice of arbitration to be amended.  Section III of the HKIAC Rules states the administrative functions, powers and duties of the HKIAC Counsel in the management of the arbitration process and the appointment of arbitrators.

22.  On behalf of the Claimant, Mr Coleman SC argued that a reference to the HKIAC Rules in an arbitration clause is sufficient for the purpose of designating HKIAC as the arbitration commission, as supported by the fact that even the model arbitration clause suggested by the HKIAC Rules merely provides for settlement by arbitration in Hong Kong under the HKIAC Rules.  The model clause proposed by the HKIAC for adoption by parties who wish to have disputes referred to arbitration in accordance with the HKIAC Rules is as follows:

“Any dispute, controversy or claim arising out of or relating to this contract, including the validity, invalidity, breach or termination thereof, shall be settled by arbitration in Hong Kong under the Hong Kong International Arbitration Centre Administered Arbitration Rules in force when the Notice of Arbitration is submitted in accordance with these rules.” (Emphasis added)

23.  Considering the HKIAC Rules as a whole, I accept Fei’s evidence and agree with him that the arbitration body can be identified and determined from the HKIAC Rules themselves. 

24.  Even if the HKIAC Rules do not clearly identify HKIAC as the body to administer the Arbitration, Article 4 of the SPC Interpretation expressly provides for the ability of the parties to reach a “supplemental agreement” as to the stipulation of the arbitration party.  Article 4 states:

“If an arbitration agreement stipulates merely the arbitration rules that apply to a dispute, it shall be regarded as not stipulating the arbitration party, unless the parties reach a supplemental agreement or are able to determine an arbitration body based on the agreed arbitration rules.” (Emphasis added)

25.  The Claimant and the Respondent in this case had no difficulty in determining HKIAC as the arbitration body to administer the Arbitration, from the time when the Notice was served in October 2012.  By agreeing to the Amended Terms of Appointment of the arbitrators and participating in the Arbitration administered by the HKIAC, the Claimant and the Respondent had clearly agreed to HKIAC as the arbitration body to administer the Arbitration.  Other than objecting to the Tribunal’s rejection of the Respondent’s application for an extension of time to appoint its arbitrator and to the Tribunal’s appointment of Professor Lu Song as the Respondent’s arbitrator upon the Respondent’s default, the Respondent raised no objection to the appointment of the other arbitrators on the Tribunal, nor to the conduct of the Arbitration in accordance with the HKIAC Rules.

26.  In Fei’s opinion, which I accept, the parties’ adoption of the Amended Terms of Appointment in the Arbitration amounts to a valid supplementary agreement, which identified HKIAC as the arbitration institution, to constitute a valid arbitration agreement under the PRC Arbitration Law.  On the other hand, Wang has failed to address, or to address adequately, the issues of whether or not the parties had reached a supplemental agreement on the arbitration body, and whether HKIAC can be determined as the arbitration body from the agreed HKIAC Rules.  I agree that Wang has failed to give his opinion as an independent expert of the Court, and has simply reargued the case of the Respondent as advanced by the Respondent’s team, of which Wang formed a part, in the PRC proceedings and in the Arbitration.

27.  Significantly, it must be emphasized that the Respondent never raised issue with the Tribunal that HKIAC was not intended to be the arbitration institution to conduct the Arbitration under Article 24.2.1, or that there was no valid arbitration agreement for submission of their dispute to the Tribunal for arbitration.  The Respondent signed the Amended Terms of Appointment, in which the parties acknowledged and expressly agree that the Tribunal had been validly established in accordance with the JV Contract and Article 8 of the HKIAC Rules, and that HKIAC was to handle the security and payment for the Tribunal’s fees and disbursements.  The Respondent filed its Answer and counterclaim, and fully participated in the Arbitration.

28.  Article 4 of the Model Law, adopted by s 11 of the Ordinance, expressly states:

“A party who knows that any provision of this Law from which the parties may derogate or any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time limit is provided therefore, within such period of time, shall be deemed to have waived his right to object.”

29.  Article 28 of the HKIAC Rules, which the parties agreed under Article 24.2.1 of the JV Contract should apply to the Arbitration, also states:

“A party who knows or ought reasonably to know that any provision of, or requirement arising under, these Rules (including the agreement to arbitrate) has not been complied with and yet proceeds with the arbitration without promptly stating its objection to such non-compliance, shall be deemed to have waived its right to object.”

30.  As Mr Coleman was quick to point out, Wang was part of the legal team representing the Respondent in the Arbitration.  All the objections now raised by him under the PRC law governing the Arbitration were well known to him at the time of the Arbitration, but none of them were raised until now. 

31.  Article 20.3 of the HKIAC Rules further provides that:

“A plea that the arbitral tribunal does not have jurisdiction shall be raised if possible in the Answer to the Notice of Arbitration, but shall in no event be raised later than in the Statement of Defence referred to in Article 18, or, with respect to the counterclaim, in the reply to the counterclaim.”

32.  The Hong Kong courts have made it clear that a party to an arbitration who wishes to rely on any non-compliance with the rules governing the arbitration should do so promptly, and should not proceed with the arbitration as if there had been compliance, keeping the point up its sleeve for later use (Hebei Import & Export Corp v Polyteck Engineering Co Ltd (1999) 2 HKCFAR 111, China Nanhai Oil Joint Service Corp Shenzhen Branch v Gee Tai Holdings Co Ltd [1995] 2 HKLRD 215).  There is a duty of good faith which required the Respondent in this case to bring to the notice of the Tribunal any objections it may have to the validity of the arbitration agreement.  Not having done so, choosing instead not only to fully participate in the Arbitration, but also to make a counterclaim against the Claimant, to adduce factual and expert evidence and to make full submissions on the merits, the Respondent had deprived the Tribunal of the opportunity to rectify any alleged invalidity or defect in the arbitral process, and is estopped and precluded now from raising this complaint and objection as to alleged invalidity and lack of arbitration agreement.

33.  The case of Klockner Pentaplast GmbH & Co KG v Advance Technology (HK) Co Ltd [2011] 4 HKLRD 262 relied upon by the Respondent is distinguishable from the present case, since the party raising the invalidity of the arbitration agreement in Klockner was opposing the application for stay of the proceedings to arbitration, and had not participated in the arbitration itself.

34.  The question of whether the arbitration agreement is valid is governed by the law of the arbitration agreement, in this case PRC law.  However, whether or not the Award should be set aside, and whether enforcement of the Award should be allowed in Hong Kong is a question governed by Hong Kong law, under the Ordinance.

35.  There is no merit to the invalidity ground under PRC law, and no ground that the Award should be set aside and refused enforcement under the Ordinance.

The jurisdiction ground

36.  The Respondent seeks to rely on Wang’s evidence that the Tribunal had no jurisdiction to determine the claims submitted by the Claimant in the Arbitration, that the Respondent was in breach of the JV Contract by failing to supply steam to the JV Company, and by having commenced dissolution proceedings against the JV Company.  This is stated to be on the basis that the JV Company had submitted to the jurisdiction of the PRC courts, when the Respondent filed its claim against the JV Company in the Shouguang Court in December 2008 for fees due under the Steam Supply Contract, and when the Respondent initiated dissolution proceedings against the JV Company in the PRC Weifang Court in November 2010.  The Respondent further relies on the fact that the Weifang Court had refused to enforce a CEITAC award made in arbitration proceedings which the JV Company had commenced against the Respondent in Beijing under the Steam Supply Contract, and that the Shouguang Court had held that the Steam Supply Contract had been validly terminated by the Respondent.

37.  It is clear and beyond argument that the claims made in the Arbitration are made by the Claimant, a separate legal entity to the JV Company, and under the JV Contract, a separate agreement to the Steam Supply Contract made between the JV Company and the Respondent.  The Claimant has separate rights, and the Respondent has separate obligations, under the JV Contract for the Respondent’s supply of steam to the JV Company.  These rights and obligations are separate and distinct from the rights of and obligations owed to the JV Company under the Steam Supply Contract.  Any submission by the JV Company to the jurisdiction of the PRC courts, and any assumption of jurisdiction by the PRC courts over the JV Company in respect of the Steam Supply Contract, cannot affect the rights of the Claimant to pursue the Arbitration in Hong Kong in respect of the alleged breaches of the Respondent under the JV Contract.

38.  The dispute as to the Respondent’s alleged breach of its obligations owed to the Claimant under the JV Contract is clearly a dispute “arising out of or in connection with” the JV Contract, to fall squarely within the scope of the arbitration clause in Article 24.2.1.  The issues for determination, and decided by the Tribunal, in the Arbitration were whether the Respondent was in breach of Article 3.1 (5) of the JV Contract by failing to supply steam to the JV Company, and in breach of Article 10.14 of the JV Contract by seeking the dissolution of the JV Company without the unanimous vote of all directors at a meeting which is quorate.

39.  The position is clear, and supported by the opinion of Fei, that any adjudication by the PRC courts as to the rights and obligations of the parties to the Steam Supply Contract cannot give rise to any issue of res judicata between the Claimant and the Respondent, since the parties to the JV Contract and the Steam Supply Contract are different, and the agreements adjudicated upon are different. 

40.  In addition, the expert evidence of Fei is clear, that:

(1)   res judicata under PRC law is part of the PRC Civil Procedure Law, which has no application to proceedings outside the PRC;

(2)   the issue decided by the PRC court, as to whether a winding up order should be made by the PRC court under Article 182 of the PRC Company Laws, is totally different to the issue for determination in the Arbitration, as to whether Article 10.14 of the JV Contract has been complied with for a party to the JV Contract to seek the dissolution of the JV Company, and whether the Claimant’s contractual rights under the JV Contract should be enforced;

(3)   the subject matter, parties and remedies sought in the dissolution proceedings before the PRC court are all different to the subject matter, parties and remedies in the Arbitration of the JV Contract before the Tribunal.

41.  Again, no challenge was ever made by the Respondent in the Arbitration that the Tribunal had exceeded the scope of its authority in dealing with the issues raised in the Arbitration, which issues were known to and agreed by the Respondent, and in fact submitted by both parties to the Tribunal for determination.  The Tribunal was in fact made aware of the PRC proceedings, except for the judgment of the Shouguang court.

42.  There is accordingly no merit in the jurisdiction ground, or in the claim that the issues are not arbitrable under PRC law.  The Tribunal never purported to make any order to dissolve the JV Company, or to rule on the dissolution of the JV Company.  It only decided that the Respondent was in breach of the provisions of Article 10.14 of the JV Contract.  The points made by Wang and by Counsel for the Respondent, that only the PRC court has jurisdiction to order the judicial dissolution of the JV Company on the grounds set out in the PRC Company Law are totally irrelevant to the question of the jurisdiction of the Tribunal, or the arbitrability of the matters submitted to the Tribunal in the Arbitration. 

The composition ground

43.  Under Article 24.2.2 of the JV Contract, the Tribunal is to consist of 3 arbitrators for determination of disputes arising out of or in connection with the JV Contract.  Article 24.2.2 provides:

“The tribunal shall consist of 3 arbitrators. Party A and Party B shall each appoint one arbitrator within 30 days of the referral of the dispute to arbitration. The 2 arbitrators appointed by Party A and Party B shall appoint a third arbitrator. If any Party fails to appoint its arbitrator or such arbitrators are unable to agree upon the third arbitrator within 60 days of the referral of the dispute to arbitration, then the Party’s arbitrator or the third arbitrator, as the case may be, shall be appointed by the Chairman of the Hong Kong International Arbitration Centre.”

44.  The Respondent as Party B to the JV Contract failed to appoint its arbitrator within 60 days of the referral of the dispute to the Arbitration.  Its application for an extension of time to make the appointment was dismissed by the Secretariat of the HKIAC.  By letter dated 27 December 2012, HKIAC informed the parties that in accordance with Article 24.2.2 of the JV Contract, the HKIAC Council had appointed Professor Lu as the Respondent’s arbitrator.  By letter dated 11 January 2013, HKIAC informed the parties that Mr Christopher Lau SC was confirmed to be the 3^rd and presiding arbitrator as nominated by Dr Moser (the arbitrator appointed by the Claimant) and by Professor Lu.

45.  As indicated in the earlier parts of this Decision, the Respondent only objected to HKIAC’s refusal to grant a time extension.  The challenge to Professor Lu’s appointment was in limited terms only before the Tribunal.  The Respondent did not challenge the appointment of Mr Lau in the Arbitration. 

46.  The Respondent now contends before this Court that the appointment of Professor Lu and of Mr Lau was not in accordance with the parties’ agreement under Article 24.2.2, in that Professor Lu and Mr Lau were not, but should have been, appointed by the Chairman of the HKIAC, and not by the Council. 

47.  On a plain reading of Article 24.2.2, where the Respondent failed to appoint its arbitrator within the 60 days period specified in Article 24.2.2, the Respondent’s arbitrator was to be appointed by the Chairman of the HKIAC. 

48.  The part of Article 24.2.2 which reads “or the 3^rd arbitrator” (to be appointed by the Chairman) does not apply, when the 2 arbitrators can agree on the 3^rd arbitrator.

49.  The Chairman of the HKIAC is part of the Council which made the appointment of Professor Lu in this case.  I do not accept that the Respondent has furnished proof (as it is required under Article 34 (2) (a) to do) that the ground under Article 34 (2) (a) (iv) has been made out. 

50.  Opposition to enforcement and recognition of awards based on unmeritorious technical points or minor procedural complaints have always been viewed with disfavor by the Hong Kong courts.  In Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1, the Court of Appeal made it clear (in the context of inability to present a party’s case as a ground of opposition) that “the conduct complained of must be serious, even egregious”, before a court could find that a ground has been made out.  In his judgment (at paragraphs 94 and 105), Tang VP (as His Lordship then was) explained:

“... the conduct complained of must be sufficiently serious or egregious so that one could say a party has been denied due process...

...  an error would only be sufficiently serious if it has undermined due process.  ...  Even so, the Court may refuse to set aside the award if the Court is satisfied that the arbitral tribunal could not have reached a different conclusion.  How a court may exercise its discretion in any particular case will depend on the view it takes of the seriousness of the breach.  Some breaches may be so egregious that an award would be set aside although the result could not be different.”

51.  Even if a ground can be made out that Professor Lu was not appointed by the Chairman, but by the Council only, I fail to see how it can be said that the Respondent suffered any prejudice as a result of the appointment by the Council, and how due process can be said to have been undermined as a result.  I am not prepared to exercise my discretion to set aside the Award on the ground that there has been a serious or egregious error in the appointment of Professor Lu (or Mr Lau), to constitute a denial of due process.

52.  The points made in the earlier parts of this Decision, as to the Respondent’s failure to raise its objections to the Tribunal, apply to this ground of complaint.  The Respondent agreed to and confirmed the validity of the composition of the Tribunal by signing the Amended Terms of Appointment, and participated in the Arbitration notwithstanding the alleged irregularity in the appointment, without raising these objections and depriving the Tribunal of the opportunity to rectify any such defect.  The Court will not permit the Respondent to raise these alleged irregularities now (Hebei Import & Export Corp v Polyteck Engineering Co Ltd (1999) 2 HKCFAR 111, ChinaNanhai Oil Joint Service Corp Shenzhen Branch v Gee Tai Holdings Co Ltd [1995] 2 HKLRD 215).

Conclusion

53.  For all the above reasons, the Respondent’s applications to set aside the Order and the Award are dismissed as totally without merit, with costs to the Applicant on an indemnity basis, with certificate for 2 Counsel.