Enforcement order refused as no arbitration agreement or required notice

The case concerned an application to set aside an ex parte enforcement order granted by the Hong Kong SAR court to enforce an arbitral award made by the Zhanjiang Arbitration Commission for the payment of RMB59 million (US$9.3m) by a company, ‘the company’, to GD. The award was made in an arbitration initiated by GD against the company on the basis that the company had breached a contract it had signed for the sale of marble to GD, a company registered in mainland China.

The issues in the proceedings included whether there was a binding contract under which GD claimed the right to commence arbitration; whether the company had proper notice of the arbitration, the award and the commencement of enforcement proceedings, and accordingly whether enforcement of the award in GD's favour could be refused based on the grounds set out in section 95 of the Arbitration Ordinance (Cap 609)(AO). These grounds largely reflect those set out in the New York Convention.

In this case, the Hong Kong SAR court refused to enforce the award against the company due to fraudulent collusion between an agent of the company and GD. The court found that the contract was a sham entered into by the agent to further its own personal interests and deceive the company out of funds. The contract was therefore not binding as it was entered into without the authorisation of the company. As the contract was invalid, so too was the arbitration agreement that it contained.

At the same time, there was no evidence that anyone in the company had been notified of the commencement of arbitration or the claims from GD in arbitration, giving them sufficient opportunity to present their case.

Taking these facts into account, the court granted the application for setting aside. It held that the company was not a party to the arbitration agreement, had not been given proper notice of the arbitration, and the respondent had been unable to present its case. The court further concluded that enforcement of the arbitral award in such circumstances would be contrary to the public policy of Hong Kong SAR. Each of these grounds are independent grounds for refusal under AO s 95. It was also found that there was a material non-disclosure by GD in its application to obtain leave from the court to enforce the award in Hong Kong SAR.

Hong Kong SAR courts are generally supportive of arbitration, whether award is made inside or outside of Hong Kong SAR. However, the Hong Kong SAR court will not enforce judgments where party seeks to abuse arbitral process.

This decision reinforces the need for contracting parties to take prudent steps to establish authority of any counterparty’s agents before entering into contracts. Diligence is also required to ensure counterparties duly receive notice of arbitration and enforcement proceedings or that sufficient and objectively reasonable efforts have been made to ensure such notice.

The case

The Company was jointly owned 50/50 by Simon Tsang and a corporate shareholder NI. It was claimed that the company entered the subject contract with GD in relation to the sale of a large quantity of marble by the company to GD. GD later initiated an arbitration at Zhanjiang Arbitration Commission against the company for its breach of the contract. An award was made after negotiations between the company and GD requiring the company to pay compensation of RMB 59 million to GD.

GD applied to the Hong Kong SAR court on an ex parte basis and obtained an enforcement order from the court granting GD to enforce the award in Hong Kong SAR.

NI then applied to the court to set aside the enforcement based on that the contract was void and invalid, the company was not given proper notice of the arbitral proceedings and was unable to present its case, enforcement of the award would be contrary to public policy and GD was guilty of material non‑disclosure in its ex parte application.

The court held that the contract and award were made in collusion between Tsang and GD and that the company had not received proper notice of the arbitration, which was served on one of its former properties sold by Tsang in the company’s name. This meant that the company was also unable to present its case.

The court held that the company had not been given proper notice of arbitration and unable to present its case. Enforcement of the award in these circumstances would be contrary to public policy and abuse of the arbitration process. Material nondisclosure by GD also entitled the court to set aside the enforcement order. The failure to disclose the sale of the property, and the service of documents at that property, had been or was very likely to be disputed, serious, deliberate, intentional or material.