A v B And Others

HCCT 26/2023

[2024] HKCFI 751

[redacted copy]

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 26 OF 2023

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REASONS FOR DECISION

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Background

1. On 12 May 2023, this Court granted leave to the Applicant (“A”) to enforce an award dated 25 August 2022 (“Award”) made by the sole arbitrator in an arbitration commenced by A against the Respondents at the International Center for Dispute Resolution, under the Rules for International Commercial Arbitration of the American Arbitration Association (“Arbitration”). Under the Award, the Respondents were, firstly, held to be jointly and severally liable to pay to A royalty fees and other charges under the Licence Agreements made between A and the 1^st Respondent (“Licensee”). Further, the Licensee, the 2^nd and 3^rd Respondents were prohibited from engaging in any educational business (as specified in the Award) (“Injuncted Activities”) at any location in Hong Kong.

2. On 23 June 2023, the Respondents applied to set aside the leave granted by the Court (“Enforcement Order”), on the stated grounds that the arbitral procedure was not in accordance with the parties’ agreement, it would be contrary to the public policy of Hong Kong to enforce the Award, and that there was material non-disclosure on A’s part in obtaining the Enforcement Order.

3. At the conclusion of the hearing on 22 December 2023, this Court set aside the Enforcement Order, and the following sets out my reasons.

4. The Arbitration related to 3 licence agreements (“Agreements”) executed between A and the Licensee for the Licensee’s operation of learning centers which adopted and used the "XXXXXX System” (“Centers”). A is a Maryland corporation with its principal place of business in Maryland USA, and is the franchisor of “supplemental education businesses” providing courses outside the school environment. It has established hundreds of centers and satellite locations, with licensees throughout the USA and other countries.

5. The Licensee is a Hong Kong company, and was the corporate licensee of A for many years. The 2^nd Respondent (“C”) and 3^rd Respondent (“D”) are the shareholders of the Licensee and the operators of the Centers under licence from A. In dispute are the 3 Agreements dated 31 August 1994 and 29 October 1999 for operation of the Centers in different locations in Hong Kong. The Agreements were signed by C on behalf of the Licensee as its Managing Director.

6. It is not disputed that on 1 February 2020, the Licensee closed all the Centers in Hong Kong, and C and D commenced operation of another education centre (“X Centers”) through a separate company (“XL”). The X Centers were operated out of the same locations as the Centers operated by the Licensee.

7. A relies on a notice dated 25 February 2022 from the Licensee (“Termination Notice”), which terminated the Agreements. In the Arbitration, A sought: payment of royalty fees due under the Agreements for the period of 1 February 2020 (when the Centers were closed) to 31 March 2022 (which A claims to be the effective date of termination of the Agreements under the Termination Notice), in the total sum of US $251,050.38. A also sought an injunction against the Respondents to restrain them from operating learning centers for a period of 2 years in Hong Kong from 31 March 2022, and arbitration costs and expenses of US $380,496.61.

8. A’s claims against C and D in the Arbitration were on the basis of their being guarantors of the liabilities of the Licensee under the Agreements.

9. In the proceedings before this Court, it was not disputed that the issues raised for determination in the Arbitration were:

(1) whether C and D had personally guaranteed the liabilities of the Licensee under the Agreements (“Guarantee Issue”);

(2) the applicability and enforceability of the restrictive covenant under the Agreements (“Non-Compete Covenant Issue”) and

(3) the liability and quantification of the damages payable by the Respondents (“Breach Issue”).

10. The Award was in favor of A on all the issues, but the Respondents claim that the arbitrator had failed to give any reasons for her decisions. The Award simply made findings and conclusions, without any analysis of the Guarantee, Non-Compete Covenant, and Breach Issues at all.

Failure to give reasons

11. The principles applicable to the Court’s consideration of a challenge against enforcement of an award on the ground of the tribunal’s failure to give adequate reasons have all been set out in R v F [2012] 5 HKLRD 278, Z v Y [2019] 1 HKC 244, and LY v HW [2022] HKCFI 2267, and need not be repeated here. Awards are to be read generously, in a reasonable and commercial way expecting, as is usually the case, that there will be no substantial fault that can be found with it, and always bearing in mind the policy of minimal curial intervention as highlighted in AI & ors v LG II [2023] 4 HKC 135. Any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable.

12. However generously the Award in this case is read, I have to agree with the Respondents, that objectively read and in the context of the issues raised and submissions and arguments made before the tribunal, the arbitrator failed to adequately explain in the Award the reasons for her conclusions made on the key issues raised in the Arbitration, of the applicable governing law of the Agreements, on the effective date of termination of the Agreements, and on the enforceability or the reasonableness of the Non‑Compete Covenant, all of which were disputed by the parties.

Non-Compete Covenant Issue: governing law

13. As pointed out by Counsel for the Respondents, the enforceability of the Non-Compete Covenant was a key and central issue in dispute between the parties in the Arbitration. Clause 28 of the Agreements is a governing law clause, which provides that the Agreements are governed by the US Federal Arbitration Act and the laws of the State of Maryland.

14. It appears that it was common ground in the Arbitration that under Maryland law, a contractual choice of law provision is not conclusive, and that the choice of law clause will not be enforced if:

(1) the chosen state has no substantial relationship to the parties or the transaction, or

(2) the law of another state would apply in the absence of the particular choice of law provision; and

(3) the application of the law of the chosen state would be contrary to a strong fundamental public policy interest of the other state which has a materially greater interest in the determination of the particular issue.

15. The above was reflected in the Post-hearing Brief of A, where it was accepted that the above instances are exceptions to the honoring and enforcement of a choice of law provision, and also stated in the Post-hearing Brief of the Respondents, where it was contended that “Hong Kong has a materially different interest than Maryland because the business which is the subject of the restrictive covenant is located in Hong Kong”.

16. On A’s case, the last act necessary to make the Agreements binding on the parties was A’s execution of the Agreements in Maryland, and Maryland law would apply even in the absence of the choice of law provision, and there is no need to weigh the laws of any other state.

17. There were accordingly extensive arguments made before the tribunal as to whether Hong Kong law, or the law of Maryland, should govern the enforceability of the Non-compete Covenant. This turns (inter alia) on where the last act making the Agreements binding occurred. Both parties submitted that under Maryland’s lex loci contractus rule, a contract is governed by the law of the place where the contract was made, and this depends on where the last act necessary to make the contract binding occurs. The Respondents argued that the last act was the signing and delivery of the Agreements by mail in Hong...