A v B

HCCT 40/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 40 OF 2014

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D E C I S I O N

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1. This is an application made by A (“A”) to set aside an arbitral award issued by the arbitrator in June 2014 (“Award”), in an arbitration commenced on 18 February 2011 (“Arbitration”) by B (“B”) as claimant.

2. B is a company organized under the laws of Grand Cayman, and A is a company organized under the laws of the Republic of China. The parties entered into a Development and Sales Agreement dated 13 May 2008 (“Agreement”), for the joint development, manufacture, distribution and marketing of security and integrated circuit solution for designated goods (“Products”). Disputes arose under the Agreement in relation to the Products and A’s performance, and the Arbitration was commenced with B complaining that A was in breach of the Agreement. In the Arbitration, B sought a declaration that the Agreement had been rescinded, damages representing repayment of the development fees paid to A under the Agreement, the price of the Products paid by B in respect of the deliveries made under the Agreement, loss of profits, and a declaration that A is liable to indemnify B under its contracts with its sub-purchasers. On its part, A counterclaimed for the balance of the development fees and the outstanding price of the Products claimed to be payable under the Agreement.

3. In June 2014, the Arbitrator issued the Award, whereby B’s claims against A were allowed, and A’s counterclaim was dismissed. The Arbitrator found that A had failed to deliver the Products with the contractual features in compliance with the relevant standards stipulated under the Agreement.

4. In September 2014, A applied to set aside the Award, on the basis that it would be contrary to public policy to enforce the Award. The grounds relied upon by A are that the Arbitrator had failed to deal with a defence relied upon by A in the Arbitration, that the claims made by B were time-barred under the express provisions of the Agreement (“Limitation Defence”), and had failed to give any reasons for its rejection of the Limitation Defence.

Matters not in dispute

5. It is not disputed that the old Arbitration Ordinance, Cap 341 (“Cap 341”) applies to the Arbitration, since it was commenced before the operative date of the new Arbitration Ordinance, Cap 609 (“Cap 609”). The parties do not take issue that the relevant clause relied upon in the Limitation Defence (paragraph 7.5 of the standard terms and conditions of sale (“Paragraph 7.5”)) was incorporated into and formed part of the Agreement. Nor is it disputed that the Limitation Defence was pleaded in the Statement of Defence in the Arbitration, put in issue by B, and argued by the parties before the Arbitrator. It was referred to in the Award as one of the issues framed by B.

6. At the hearing before me, counsel for B also confirmed his acceptance that the Arbitrator had not expressly dealt with the Limitation Defence in the Award. B only contends that the Limitation Defence had been implicitly dealt with, and that the reasons for its dismissal can be inferred or understood from the Award when it is read in its context, and as a whole.

The applicable legal principles

7. The applicable legal principles are clear from the authorities. Article 34 of the Model Law (which applies to the Arbitration as an international arbitration under Cap 341) sets out the exclusive recourse against an arbitral award, and under Article 34 (2) (b), an arbitral award may be set aside by the court if the award is “in conflict with the public policy” of the forum of the court. “Contrary to public policy” has been held by the Court of Final Appeal in Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, 139 to mean “contrary to the fundamental conceptions of morality and justice” of the forum. Before a Convention jurisdiction can refuse enforcement of a Convention award on public policy grounds, “the award must be so fundamentally offensive to that jurisdiction’s notions of justice that, despite its being a party to the convention, it cannot reasonably be expected to overlook the objection” (p 123H-I of the judgment in Hebei).

8. The public policy ground is to be narrowly construed, and “must not be seen as a catch-all provision to be used wherever convenient”. It is “limited in scope and is to be sparingly applied” (Qinhuangdao Tongda Enterprise Development [1993] 1 HKLRD 173, 178). In A v R (Arbitration : Enforcement) [2009] 3 HKLRD 389, the court held that if the public policy ground is to be raised, there must be “a substantial injustice arising out of an award which is so shocking to the court’s conscience as to render enforcement repugnant”.

9. In considering whether or not to refuse enforcement of an award, it is clear that the court does not look into the merits of the case, nor at the underlying transaction. Error of law is not a ground for the setting aside of an award under Article 34. The court’s role is confined to determining whether or not grounds exist for refusing to enforce the award because it would be contrary to public policy (Xiamen v Eton Properties Limited & Anr [2009] HKLRD 353). Enforcement should be “as mechanistic as possible” (Xiamen Xinjingdi Group Ltd v Eton Properties Limited & Anr [2009] 4 HKLRD 353(CA); Re PetroChina International (Hong Kong) Corp Ltd [2011] 4 HKLRD 604).

10. In Grand Pacific Holdings Ltd v Pacific China Holdings Limited (in liq) (No1) [2012] 4 HKLRD 1, the Court of Appeal made it clear that in an application for setting aside an arbitral award under Article 34 of the Model Law, the court is only concerned with the structural integrity of the arbitration proceedings, since the remedy of setting aside is not an appeal as to the substantive merits of the dispute or the correctness or otherwise of the award.

11. It is also clear that even if the grounds for setting aside are sufficiently made out, the court may nonetheless enforce the award as a matter of discretion. The grounds set out in Article 34 are only grounds on which an award “may” be set aside (Hebei Import & Export Corp v Polytek Engineering Co Ltd in the context of refusal of enforcement of an award). In Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No1) [2012] 4 HKLRD 1, in the context of an application to set aside an award on the ground of a party’s inability to present his case, the Court of Appeal emphasized that:

“An error would only be sufficiently serious if it has undermined due process... Even so, the Court may refuse to set aside the award if the court is satisfied that the arbitral tribunal could not have reached a different conclusion. How a court may exercise its discretion in any particular case will depend on the view it takes of the seriousness of the breach. Some breaches may be so egregious that an award would be set aside although the result could not be different.”

12. It is also to be borne in mind, that it is in the interests of public policy to uphold an agreement made between parties to submit their dispute to arbitration, and as a matter of comity, to enforce an arbitral award which is binding on the parties and enforceable under and in accordance with the international Convention (as recognized by the Court in A v R (Arbitration : Enforcement) [2009] 3 HKLRD 389).

The Limitation Defence

13. In this case, it cannot be disputed that the issues identified by the parties and in the pleadings used in the Arbitration include a defence relied upon by A, that the claims made by B are time-barred under and by operation of Paragraph 7.5. This provides:

“Any action by (B) hereunder must be commenced within one (1) year of the date of delivery of the Product giving rise to the claim or the date the cause of action arose, whichever is earlier.”

14. On its face, there are 2 elements to Paragraph 7.5 which affect the relevant time limitation of one year. The first is the date of delivery of the Product giving rise to the claim. The second is the date the cause of action arose. Paragraph 7.5 provides that the earlier of these 2 dates is the relevant date for computation of the time limitation.

15. According to B, A were in breach of the Agreement in failing to develop and deliver Products which complied with the technical standards specified under the Agreement, and that the Products were not compatible with other software and components for integration into the applications of the...