Out-Law / Your Daily Need-To-Know

Hub Street: would Hong Kong courts follow Australian enforcement decision?

Out-Law Analysis | 13 Sep 2021 | 2:29 am | 5 min. read

A recent Australian court decision on arbitral enforcement brings it more into line with the position in Hong Kong, which has over the years developed a line of authorities guiding the application and limits of the courts’ discretion.

Australia has long been recognized as a pro-arbitration and enforcement-friendly jurisdiction. Nonetheless, the Federal Court of Australian Full Court (FCAFC) has reached a decision in Hub Street Equipment Pty Ltd (Hub) v Energy City Qatar Holding Company (ECQ) [2021] FCAFC 110 (Hub v ECQ), in which enforcement of a foreign arbitral award was been successfully challenged because the arbitral tribunal was not constituted strictly in accordance with the parties' arbitration agreement.

The FCAFC’s ruling is particularly instructive on two areas of the Australian enforcement regime, which we have considered in detail in a previous article. It is also significant in that it is perhaps the first Australian authority providing some certainty and guidance regarding the court’s discretion to enforce an award even where a party establishes a ground for non-enforcement. In particular, where some irregularity in the arbitral process is established, the court may consider the materiality of the irregularity and whether it affects the structural integrity of the arbitration, to consider whether it would exercise its discretion to nonetheless enforce the award.

In doing so, Hub v ECQ brings Australia more in line with the position in Hong Kong. If, in the future, issues concerning irregularities of composition of arbitral tribunal arise before Hong Kong courts, Hub v ECQ will likely have considerable persuasiveness in supporting an argument that such irregularities are so fundamental in nature to justify the courts’ exercise of discretion to refuse to enforce a resulting arbitral award.

A comparison with the Hong Kong position

Hong Kong, also being a party to the New York Convention (“Convention”), has an enforcement regime that shares many similarities with its Australian counterpart. The Hong Kong courts also favour an approach of pro-enforcement of arbitral awards, recognising that the object of the Convention is to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standard by which agreements to arbitrate are observed and arbitral awards are enforced.

In an unreported early 1978 Hong Kong case under the former Arbitration Ordinance of Hong Kong, Werner A Bock v The B’s Co Ltd, the Hong Kong Court of Appeal, like the FCAFC in Hub v ECQ, considered the enforceability of a Convention award rendered by an arbitral tribunal composed irregularly in breach of the parties’ agreement.

However, unlike Hub v ECQ, the Hong Kong Court of Appeal exercised its discretion to enforce the award, despite of the irregularity, because it held that no possible prejudice was caused to the defendant. The Hub decision differed because the court in Hub concluded that the irregular composition of the arbitral tribunal is fundamental to the structural integrity of the arbitration, and did not go on to consider further whether prejudice was caused to a party.

More generally, in Hong Kong, the court’s discretion to enforce an arbitral award notwithstanding a vitiating irregularity has been widely acknowledged and considered in various cases. When deciding whether or not to exercise its discretion, factors considered by the Hong Kong courts include:

  • Whether there was actual bias against a party or that the result would have been the same but for the irregularity;
  • Whether a party’s behaviour is bad enough to prove bad faith;
  • Whether there was a clear lack of due process and the making of the award was contrary to fundamental principles of natural justice.

Actual bias

Hebei Import & Export Corporation v Polytek Engineering Company Limited  concerned an application by a buyer to enforce a CEITAC award in Hong Kong against the respondent supplier.

As is permitted under CEITAC procedural rules, during the arbitration, a tribunal member and the tribunal appointed experts inspected the defective goods without the parties being in attendance, to collect evidence as to whether they could be modified to comply with the contract. The tribunal ultimately found for the applicant buyer. The respondent’s application to the Beijing Court to set aside the award was refused, and the applicant sought to enforce in Hong Kong on public policy grounds, and raised for the first time the ground that the communications during the inspection amounted to apparent bias.

The Hong Kong Court of Final Appeal (CFA) reconfirmed that the opportunity of a party to present its case and a determination by an impartial and independent tribunal which was not influenced, or seen to be influenced, by private communications were basic to the notions of justice and morality in Hong Kong.

However, the CFA found that the facts did not support the respondent’s contentions of bias: the parties had agreed to the application of the CEITAC procedural rules and PRC Arbitration Law, the respondent had been given ample time present its case and deal with the expert report that followed the inspection, and proceeded throughout the proceedings as though nothing untoward had occurred. The CFA held that a party to an arbitration who wishes to rely on non-compliance with the rules governing the arbitration shall do so promptly and shall not proceed with the arbitration as if there had been compliance, keeping such non-compliance ‘up his sleeve’ for later use.  The CFA allowed the applicant’s appeal and enforced the award.

Bad faith

In Dana Shipping and Trading SA v Sino Channel Asia Ltd, the Hong Kong court considered whether to exercise its discretion to enforce an award that had been set aside by the English court. The Hong Kong court declined to enforce, holding that on the facts, the defendant's breach of a security order requiring the defendant to apply for an extension was not sufficiently egregious to justify the court exercising its discretion to enforce the said award.

Natural justice

In Sun Tian Gang v Hong Kong & China Gas (Jilin) Ltd, the Hong Kong court refused to enforce an arbitration award against the plaintiff who did not participate in the proceedings for three reasons: 

The defendant failed to validly serve the notice of arbitration, and therefore the plaintiff did not receive fair notice of the proceedings so as to give him fair opportunity to answer and defend the claims; even if the notice had been validly served, the plaintiff’s incarceration during the entire period of the arbitral process prevented him from presenting his case, and pertinently, the defendant was aware of this; enforcement of an award in such circumstances would be contrary to public policy of Hong Kong so as to make enforcement repugnant, and if the defendant had knowledge of the plaintiff’s incarceration and inability to attend the arbitration, it would only make enforcement more repugnant.

The position in Hong Kong is more developed than that of Australia in terms of how the courts’ discretion should be applied. However, the approaches in both jurisdictions are not dissimilar. The primary aim of both jurisdictions is to facilitate the arbitral process and assist with enforcement as mechanically as possible, whilst allowing enforcement of award to be refused upon specific irregularities being established. This provides for some flexibility and allows the courts to enforce an award if the nature of such irregularities is de minimis. This is a welcoming position for commercial parties seeking certainty and uniformity across different jurisdictions party to the Convention.

Hub v ECQ serves as a reminder that parties to an arbitration should take special care to ensure that the arbitration agreement and all applicable procedural rules are duly followed. Otherwise, any non-compliance or irregularities, although they may seem unimportant, could affect the structural integrity of an arbitration, and ultimately attract uncertainty in the enforcement of the arbitral award at substantially increased legal costs.

Co-written by Ka Wai Ng of Pinsent Masons.