Hong Kong court backs belated serious errors application to set aside enforcement of arbitral award

Hong Kong SAR is a well-known pro-arbitration jurisdiction. The Hong Kong courts will only refuse to enforce an award or set aside the court’s leave to enforce an arbitral award in limited circumstances. Hong Kong courts are generally unwilling to intervene in tribunal’s decisions to prevent losing parties from re-opening matters that have already been decided in the parties’ agreed choice of platform.

However, the decision on the case between Canudilo International Company Limited (CIC) and Apennine Holdings Limited (Apennine) and others demonstrates that the Hong Kong courts will not ignore substantial injustice and egregious errors that undermine due process made by an arbitrator. The decision highlights the importance of the list of issues that parties seek for the tribunal to determine and the role to be played by the tribunal in addressing these issues and ensuring that all parties have had a reasonable opportunity to present their case. This is an example of the due process the court will seek to preserve and uphold.

Even when the time period for setting aside the enforcement order of an award as set out in that order has elapsed, a party can still make a set-aside application to the court and the court has discretionary power to extend the time period if it considers just to do so in the circumstances of the case. This principle was laid down by the Court of Final Appeal in 2018, in the Astro Nusantara International BV v PT Ayunda Prima Mitra case. When receiving an award in favour or not in favour, it is important for that party to understand its rights and potential next steps that can be taken.

The case

CIC agreed to sell certain goods to Apennine, signing two sales contracts and a supplemental agreement. CIC claimed in the arbitration that Apennine had breached its payment obligations by failing to pay for the goods sold under the contract and that its guarantors – the remaining four respondents including Wu Chi Keung (Wu), Ji Guanhua, Wu Chi Fong Thomas (Wu) and Wang Liuxi– were liable to pay the sums due.

An arbitrator was appointed after the arbitration started. The arbitrator granted CIC’s request to divide the arbitration into two phases including a first phase, based on documents only, to determine CIC’s claims as to Apennine’s liability for payment; and a second phase, to determine CIC's claims against the guarantors' liability.

On 26 June 2020, the arbitrator issued an interim award for the first phase, noting that Apennine did not file any defence or evidence and made no submissions in the arbitration and held that Apennine must pay to CIC the sums due under the two sales contracts and the arbitration costs. The arbitrator did not decide the dispute between CIC and the guarantors. On the same day, Apennine‘s lawyer requested an extension of time for Apennine to submit written materials. The arbitrator granted a stay of the proceedings and then resigned to avoid the appearance of bias.

In September 2020, a new arbitrator was appointed to conduct the arbitration. The new arbitrator stated that the interim award had already been issued and the entire arbitral proceedings between CIC and Apennine had concluded; and that he would only be dealing with the arbitration proceedings between CIC and the guarantors.

In June 2021, the new arbitrator issued a final award finding the guarantors liable. Two months later, CIC was granted leave to enforce the final award against the four guarantors. Although any application to set aside the arbitral award had to be made within 14 days, it was not until 26 April 2022 that two of the individual guarantors Wu and Wu made an application to set aside the enforcement order.

Judge Mimmie Chan held that, contrary to the second arbitrator’s observation, the guarantors did not seek a ’second bite of the cherry’. In fact, the guarantors never had a first ‘bite’. It was not put forward as to whether there was already a binding interim award against Wu and Wu and the other guarantor respondents, or whether the new arbitrator was bound to follow the interim award made by the previous arbitrator, and if so, in what respects he was bound. As such, the arbitration had not been conducted in accordance with the arbitration agreement or the agreed arbitration procedures. Wu and Wu were not given notice or a reasonable opportunity to address the case brought against them at the arbitration hearing on their liability.

The second arbitrator wrongly considered himself and the guarantors to be bound by the interim award. The second arbitrator failed to independently decide the dispute between CIC and Wu and Wu as guarantors, which violated the basic notions of justice and requirements for a fair hearing. The second arbitrator had also unfairly and unjustly deprived Wu and Wu of the reasonable opportunity to present their case. Regardless of whether or not Wu and Wu’s defences were meritorious, they were nevertheless entitled to the reasonable and fair opportunity to present their case to the fact-finding tribunal and to have their defence properly and fairly determined. This is fundamental to the process of fair trial, and the absence of such prerequisites of due process cannot be condoned by the court recognising and permitting enforcement of an award which has given rise to substantial injustice.

The second arbitrator failed to properly understand the facts and procedures that occurred in the arbitration and failed to carry out the tasks he was appointed to perform in the arbitration after the first arbitrator resigned.

Therefore, the court granted Wu and Wu’s application to set aside the enforcement order.

The judge noted that the enforcement order was made on 10 August 2021 and that Wu and Wu had to apply within 14 days after service to set aside the order. However, they did not submit their application for setting aside until 26 April 2022. She nonetheless allowed the time extension by taking into account the relevant principles set out by the Hong Kong Court of Final Appeal, which govern the exercise of the court's discretion to extend time to challenge an order for enforcement of an arbitral award.

Considering the merits of the belated application, the seriousness of the errors undermining the structural integrity of the final award, and the fact that Wu and Wu had grave financial difficulties which is why they were not able to make the setting aside application in time, the judge found it appropriate to grant the extension of time sought in this case.

Co-written by Dr Navin G. Ahuja of Pinsent Masons.

A version of this article was first published in the Hong Kong Lawyer Newsletter and website.