Hong Kong court sets aside arbitral award against wrong company

The decision demonstrates the importance of both parties in dispute and their lawyers properly complying with procedural requirements, including the need to properly identify and verify the identity of the opposing party, according to arbitration expert Alvin Ho of Pinsent Masons, the law firm behind Out-Law.

The dispute arose between two businesses, referred to in the judgment as AB Bureau and CD, over a success fee of approximately US$11 million for services rendered under an agreement between the parties in November 2013. The agreement contained an arbitration clause and, in April 2019, CD commenced a Hong Kong International Arbitration Centre (HKIAC) arbitration against AB Bureau.

CD named AB Bureau as the respondent in its notice of arbitration (NOA), which it served on AB Bureau on April 2019. However, AB Bureau never responded to the NOA. In July 2019, CD received two emails from employees of AB stating that 'AB Bureau' had been renamed 'AB Engineering'. CD then applied to the arbitrator to change the name of the respondent from AB Bureau to AB Engineering, and AB Engineering then became the named respondent in the arbitration.

AB Engineering did not participate in the arbitration. The arbitrator issued his final award on 18 March 2020, in which AB Engineering was named as the sole respondent and was ordered to pay CD US$18 million, interest and costs. He noted in the award that AB Engineering had chosen not to participate in the arbitration. AB Engineering applied to the Hong Kong court to set aside the award on a number of grounds, including that there was no valid arbitration agreement between AB Engineering and CD.

The court found in favour of AB Engineering, setting aside the award. Pinsent Masons, the law firm behind Out-Law, acted for AB Engineering and did the advocacy at court in the case.

In its judgment, the court found that although AB Engineering was a subsidiary of AB Bureau, the two businesses are separate legal entities and AB Engineering was not a party to the original agreement.

Although the agreement defined "AB" to mean "AB Bureau and any other affiliated entity", AB Bureau had over 30 subsidiary companies at the time of the agreement. There was no evidence that AB Engineering had any role in relation to the performance under the agreement, the rights conferred by the agreement or the obligations imposed by it. Even if AB Engineering was a party to the arbitration agreement – which it was not – CD should have added AB Engineering as a party to the arbitration in its own right, rather than substitute it for the original respondent entirely, the court said.

"Significantly, even if AB Engineering can, by its status as a subsidiary of [AB Bureau], fall within the definition of 'AB' under the agreement to be a party thereto, the proper course would have been for CD to add AB Engineering as a party to the arbitration, and not to include AB Engineering as the same entity as [AB Bureau], the original respondent, by virtue of a change of name," the court said in its judgment.

CD sought to rely on the emails it received in July 2019. It argued that these "estopped and debarred" AB Engineering from applying to set aside the award, as its employees had misled CD and the tribunal into believing that AB Bureau and AB Engineering are the same entity. However, the court rejected this argument outright.

"[I[t is incumbent on a claimant and its legal advisers to identify the proper defendant/respondent and to verify its name, particularly after query has been raised," the court said in its judgment. "It is no excuse for CD and its legal advisers now to put the blame on employees of Bureau/AB Engineering for any misnomer in the name of the party CD seeks to bring proceedings against."

The court also agreed with AB Engineering that it had "no obligation to participate in an arbitration of which it disputes to be a party".

Alvin Ho of Pinsent Masons said: "Even though Hong Kong is well known for its pro-arbitration stance, its courts take very seriously the fundamentals of the arbitral process, including the validity of arbitration agreements and the jurisdiction of the arbitral tribunal. This case confirms the primacy of the 'Dallah principle': a party which disputed jurisdiction was entitled not to participate in arbitration proceedings if it took the view that the proceedings were not valid".

"This case also reinforces the trend our team has seen over the past few years that Chinese companies are increasingly engaging in international arbitration," he said.