HONG KONG COURT OF APPEAL: COMMON LAW ACTIONS AVAILABLE TO ENFORCE ARBITRAL AWARDS

Two key developments emerge from the long-running proceedings in Xiamen Xinjingdi Group Co Ltd v Eton Properties Ltd [2016] 2 HKLRD 1106 and Xiamen Xinjingdi Group Co Ltd v Eton Properties [2018] HKCFI 910. The Hong Kong Court of Appeal (CA) has held that, when parties enter into an arbitration agreement, they make an implied promise that they will honour the terms of any subsequent arbitral award. If one party fails to honour the award, this may give rise to a separate cause of action at common law, for which the Hong Kong courts have jurisdiction to grant a full range of remedies, including damages. These proceedings also confirm that the Hong Kong Court of First Instance (CFI) has statutory powers to stay proceedings before it, pending the determination of an application for leave to appeal to the higher courts.

 

Background

In 2003 Xiamen Xinjingdi Group Co Ltd entered into an agreement with Eton Properties Ltd to develop a piece of land in Xiamen, China. This land was owned by Xiamen Legend, which was held by Hong Kong Legend, whose shares were held by Eton.

Under the agreement, Xiamen was to pay Eton RMB120 million for possession of the land, on which Xiamen would build and then sell apartment blocks. Eton was then to transfer its shares in Hong Kong Legend to Xiamen.

However, before the shares of Hong Kong Legend were transferred to Xiamen, Eton purported to terminate the agreement. Xiamen Legend subsequently developed the land itself, building and selling the apartment blocks.

The agreement contained a CIETAC arbitration clause, which provided for Chinese governing law and a Beijing seat.

 

CIETAC arbitration

In 2006, a CIETAC arbitral tribunal issued an award in favour of Xiamen. The award ordered Eton to pay damages of RMB1,275,000 in respect of its late delivery of the land, and to “perform its obligations” under the agreement by completing the transfer of shares from Hong Kong Legend to Xiamen. However, Xiamen and the Tribunal were unaware that, during the arbitration, Eton had commenced a restructuring process, in which its holdings were diluted. This made any prospect of the share transfer pursuant to the agreement impossible, thus rendering the Tribunal’s order for continued performance nugatory.

Xiamen subsequently applied to the Xiamen courts to enforce the award, but the Xiamen Municipal Intermediate Court dismissed the application, on grounds that included the fact that Hong Kong Legend’s assets were outside the Chinese court’s jurisdiction. Xiamen therefore sought to enforce the award in Hong Kong.

 

Hong Kong proceedings

Hong Kong Court of First Instance

Statutory enforcement

The CFI recognised the award under Hong Kong’s old Arbitration Ordinance (Cap. 341) and issued an enforcement order. However, the order lacked practical effect due to Eton’s restructuring. Consequently, Xiamen commenced further proceedings in the Hong Kong courts against Eton and nine other defendants who were companies or individuals associated with Eton.

Common law action

Xiamen brought a common law action on the award, which consisted of two sub-actions. First, Xiamen used the CFI’s enforcement order to seek damages from Eton in lieu of the continued performance ordered in the award. Second, Xiamen brought original actions against all the defendants on the grounds that they had conspired to restructure Eton in order to avoid carrying out the agreement. The CFI dismissed Xiamen’s application and Xiamen appealed.

Hong Kong Court of Appeal

The CA held that when parties enter into an arbitration agreement, they make an implied promise that they will honour any subsequent arbitral award. Eton’s failure to honour the award constituted a breach of the implied promise which had, in turn, led to Xiamen suffering loss. This gave rise to a separate cause of action, for which the appropriate remedy could include damages.

The CA outlined three criteria that a plaintiff must meet in order to rely on this cause of action. First, the plaintiff must demonstrate that there has been a valid submission of the dispute to arbitration. Second, there must be an award rendered in favour of the plaintiff. Third, the defendant must have failed to honour the award. Here, the CA found that Xiamen met all three criteria.

The CA also held that it had power at common law to order Eton to pay damages. In contrast to the statutory enforcement process, the common law permits a court to grant an order from a range of remedies – including damages – even when the arbitral tribunal has not done so.

The party seeking enforcement must elect one of the two remedies.

 

Hong Kong Court of First Instance: application to stay proceedings

In May 2016, both parties applied for leave to appeal to the Hong Kong Court of Final Appeal (CFA). In November 2017, Xiamen applied for directions regarding further conduct of the proceedings. In December 2017, Eton applied to the CFI for the proceedings to be stayed until the parties’ application for leave to appeal to the CFA was determined.

Xiamen argued that it was inappropriate for the CFI to stay the proceedings and that only the CA or the CFA were permitted to stay execution of the CA judgment and the order. Xiamen argued that, in cases where a judgment does not require the payment of money or performance of a duty (per Section 26 of the CFA Ordinance), only the CA and CFA have implied powers to grant an interim stay of execution pending the determination of an application for leave to appeal to the CFA, as well as having inherent jurisdiction to grant a stay of execution pending appeal. Xiamen argued that the application to stay proceedings in this circumstance was an application for stay of execution.

The CFI found that, in the present circumstances, there was indeed no order for payment of any amount by Eton to Xiamen, only an order for damages to be assessed. However, there was found to be no “execution” of a judgment pending appeal which Eton sought to stay. Accordingly, the CFI did not accept Xiamen’s argument that the CA and CFA were the only courts permitted to stay the proceedings. The CFI was itself permitted to grant an interim stay of the proceedings.

In elucidating the CFI’s position, Chan J noted that, while the CA and CFA have independent powers to stay execution of a judgment pending appeal, neither court has limited the power of the CFI to stay proceedings which take place before it. Section 16(3) of the High Court Ordinance and Order 1B, Rule 1(2)(e) of the Rules of the High Court in fact provide the CFI with statutory powers to stay proceedings until a later time, where it thinks fit to do so. As to when these powers should be invoked, Chan J noted the CFI must consider what is fair and just towards the parties in the circumstances.

Chan J found that any delay caused by an interim stay pending determination of the application for leave to the CFA would not cause substantial prejudice to Xiamen, given Xiamen had already waited ten years after becoming aware of Eton’s restructure to pursue its claim for damages. Accordingly, the CFI granted the stay.

 

Comment

If parties fail to honour the terms of an arbitral award, they may breach their implied promise at common law. This breach constitutes a cause of action for which the Hong Kong courts may grant a range of remedies, even though these remedies may differ from those provided in the original arbitral award. This common law action therefore provides aggrieved parties with an alternative avenue, when enforcement of the original award (through the traditional statutory process) becomes impossible. These proceedings also confirm the CFI’s statutory power to stay proceedings before it, provided the stay is fair and just in all the circumstances.

 

Kathryn Sanger
Kathryn Sanger
Partner
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Briana Young
Briana Young
Professional Support Consultant/Foreign Legal Consultant
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