A v R

HCCT 54/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION & ARBITRATION PROCEEDINGS

NO. 54 OF 2008

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J U D G M E N T

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I. INTRODUCTION

1. This case concerns a New York Convention award. The award was made following arbitration proceedings in Denmark before a Sole Arbitrator (a Danish Commercial Court judge). The Applicant wishes to enforce the award as an Order of this Court. The Respondent says that the enforcement of the award would be contrary to public policy.

II. BACKGROUND

2. The Applicant (a Danish company) and the Respondent (a Hong Kong company) entered into an Agreement in 2004.

3. By Clause 3 of the Agreement, the Respondent undertook to pay 12% commission on total sales by the Respondent to a Customer. The commission was to be paid in consideration of the Applicant referring the Customer (a Danish company) to the Respondent.

4. Clause 2 of the Agreement required the Respondent to provide the Applicant with copies of relevant sale contracts between the Respondent and Customer. The Agreement stipulated in Clause 7 that the Respondent should not contact the Customer "to circumvent the conditions set forth in this agreement". By Clause 16, the Respondent was not to disclose the terms of the Agreement to the Customer.

5. Clause 12 of the Agreement gave the Respondent the option of terminating the arrangement:-

“after a period of four (4) years upon paying [the Applicant] an amount equivalent to 12% of the 4 (four) years estimated sales to [the Customer]. Such estimated sales shall be based on previous sales and expected sale.”

6. Clause 18 of the Agreement provided:-

"In each and every event that [the Respondent] commits a substantial breach of the terms of this Agreement, [the Applicant] shall be entitled to receive the sum of US$1,000,000 as liquidated damages. Liquidated damages shall be in addition to any other remedies [the Applicant] may have."

7. Clause 20 made Danish law applicable to the Agreement. Clause 21 stipulated ICC arbitration in Copenhagen if any dispute between the parties could not be settled by negotiation.

8. The Applicant referred the Customer to the Respondent. The Respondent or its affiliates entered into sales contracts with the Customer. But the Respondent failed to pay any commission to the Applicant. The Respondent also refused to provide the Applicant with copies of relevant sales contracts with the Customer.

9. The Applicant consequently commenced arbitration proceedings in Denmark. Just before the substantive hearing of the dispute, the Respondent's Danish lawyers informed the Arbitrator that they were no longer acting for the Respondent.

10. On 3 June 2008 the Arbitrator heard the matter substantively in the absence of the Respondent. He considered witness statements and a transcript of live evidence from representatives of the Customer. That live evidence was taken before the Snderborg City Court for use in the arbitration.

11. On 12 September 2008 the Arbitrator published the award. The award ordered the Respondent to pay US$3 million (together with interest and costs) to the Respondent.

12. The Arbitrator found 3 breaches by the Respondent. Those were the non-provision of relevant sale contracts contrary to Clause 2, the non-payment of commission contrary to Clause 3, and the circumvention of the Agreement contrary to Clause 7. In relation to the latter, the Arbitrator found that the Respondent had circumvented the Agreement by secretly contracting with the Customer through a related company.

13. The Arbitrator then applied Clause 18 to the 3 breaches. Given "the Respondent's total neglect of its contractual obligations," the Arbitrator concluded that liquidated damages "should not be fixed to a sum below [the Applicant's] claim of US$3 million".

III. DISCUSSION

A. Court's approach

14. Under Arbitration Ordinance (Cap. 341) (AO) s. 44 enforcement of a Convention award "shall not be refused except in the cases mentioned in this section". The grounds on which the Court can refuse to enforce a Convention award are therefore circumscribed by AO s. 44. If none of the grounds listed in AO s. 44 apply, the Court must enforce the Convention award.

15. The only ground for non-enforcement that might conceivably be relevant here is found in AO s. 44(3). That provides that enforcement "may ... be refused ... if it would be contrary to public policy to enforce the award".

16. That is a narrow ground. According to Hebei Import & Export Corp. v. Polytek Engineering Co. Ltd. (1999) 2 HKCFAR 111, the public policy objection only applies where the consequence of enforcing an award would be to "violate the most basic notions of morality and justice" of the Hong Kong Court (Litton PJ at 118D-E).

17. This stance is consonant with case law elsewhere.

18. In Profilati Italia SrL v. PaineWebber Inc. and another [2001] 1 Lloyds Rep 715 Moore-Bick J was considering whether an award might be set aside under s. 68 of the English Arbitration Act 1996 because it was "procured ... contrary to public policy".

19. He stated (at §17):-

".... I think that where the successful party is said to have procured the award in a way which is contrary to public policy it will normally be necessary to satisfy the Court that some form of reprehensible or unconscionable conduct on his part has contributed in a substantial way to obtaining an award in his favour. Moreover, I do not think that the Court should be quick to interfere under this section. In those cases in which s. 68 has so far been considered the Court has emphasized that it is intended to operate only in extreme cases. Lord Goldsmith, QC on behalf of PaineWebber drew my attention to the now familiar passage in par.280 of the Report of the Departmental Advisory Committee on Arbitration Law on what was then the Arbitration Bill where the Committee said in relation to cl. (now s.) 68:-

'Having chosen arbitration, the parties cannot validly complain of substantial injustice unless what has occurred simply cannot on any view be defended as an acceptable consequence of that choice. In short, clause 68 is really designed as a long stop only available in extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected.'

This passage has since been adopted and applied in a number of cases to which I was referred... None of these decisions concerned an application under s. 68(2)(g), but each in its own way emphasizes the fact that the expressions 'serious irregularity' and 'substantial injustice' are intended to be reserved for only the most serious cases."

20. In Soh Beng Tee & Company Pte Ltd. v. Fairmount Development Pte Ltd. [2007] SGCA 28, V. K. Rajah JA (delivering the decision of the Court) observed:-

"59. These cases [challenging the enforcement of arbitration awards] must be read in the context of the current judicial climate which dictates that courts should not without good reason interfere with the arbitral process, whether domestic or international. It is incontrovertible that international practice has now radically shifted in favour of respecting and preserving the autonomy of the arbitral process in contrast to the earlier practice of enthusiastic curial intervention:....

....

62. .... Aggressive judicial intervention can only result in the prolonging of the arbitral process and encourage myriad unmeritorious challenges to arbitral awards by dissatisfied parties. Left unchecked, an interventionist approach can lead to indeterminate challenges, cause indeterminate costs to be incurred and lead to indeterminate delays...."

21. In similar vein, in Asuransi Jasa Indonesia (Persero) v. Dexia Bank [2006] SGCA 41, Chan Sek Keong CJ stated (at §59) that the public policy ground only militates against enforcement:-

"where the upholding of an arbitral award would 'shock the conscience' ... or is 'clearly injurious to the public good or ... wholly offensive to the ordinary reasonable and fully informed member of the public' ... or where it violates the forum's most basic notion of morality and justice..."

22. All this is unsurprising. Public policy itself leans towards the enforcement of foreign arbitral awards as a matter of comity. The parties agreed to resolve their disputes by arbitration, rather than through the Court. They should be held to what they have agreed and be obliged to comply with an arbitration award.

23. By choosing arbitration, the parties must be deemed to have undertaken the risk that an arbitrator might get matters wrong in his decision. An error (whether of law or fact does not matter here) by an arbitrator in an award cannot by itself counterbalance the public policy bias towards enforcement. If the public policy ground is to be raised, there must be something more, that is, a substantial injustice arising out of an award which is so shocking to the Court's conscience as to render enforcement repugnant.

24. Public policy is often invoked by a losing party in an attempt to manipulate an enforcing Court into re-opening matters which have been (or ought to have been) determined in an arbitration. The public policy ground is thereby raised to frustrate or delay the winning party from...