HONG KONG COURT REFUSES SET ASIDE, REJECTS PUBLIC POLICY CHALLENGE

In Paloma Co. Ltd. v. Capxon Electronic Industrial Co. Ltd [[2018] HKCFI 1147], the Hong Kong Court of First Instance rejected a public policy challenge to a New York Convention Award rendered by a tribunal in Japan. The Respondent applied to set aside leave to enforce the Award, alleging that the tribunal’s conduct was biased, and violated basic concepts of morality, justice and public policy.

Deputy Judge Keith Yeung found that there was no evidence of bias on the part of the tribunal, nor any error or matter which would warrant setting aside the award. Yeung DJ relied on Hebei Import & Export Corp. v Polytek Engineering Co. Ltd. [(1999) 2 HKCFAR 111] to reiterate that, in order to refuse enforcement of an award under the New York Convention, the award must be so fundamentally offensive to the jurisdiction’s notions of morality and justice that this could not reasonably be overlooked. In the absence of such conflict, the Court would not look into the merits, nor review any alleged errors or reasoning of the tribunal.

Background

The Respondent, Capxon Electronic Industrial Co. Ltd. (Capxon), a subsidiary of Hong Kong-listed Capxon International Electronic Co. Ltd., has engaged in the sale and purchase of electrolytic capacitors with the Applicant, Paloma Co. Ltd. (Paloma), whose business address is in Japan. Disputes arose, on account of defective electrolytic capacitors supplied by Capxon. A three-member arbitral tribunal under the aegis of the Japan Commercial Arbitration Centre rendered the award in favour of Paloma, in the sum of JPY 2,427,186,647 (approximately USD 21,558,271.80) plus interest and costs.

The Respondent unsuccessfully attempted to set aside the award in the Tokyo District Court, Tokyo High Court, the Japan Supreme Court and the Taiwan Shilin District Court. The Applicant obtained leave to enforce the award in Hong Kong, and the Court granted a charging order nisi over 85,137,200 shares in Lancom Ltd. held by the Respondent (Lancom Shares).

The Respondent filed two applications seeking:

(i) that the charging order nisi not be made absolute, or in the alternative that its proceedings be adjourned, on the following grounds:

  • ineffective and illegal service of the order; and
  • dissolution of the Respondent was underway and the charging order would render it incapable of satisfying outstanding liabilities;

(ii) that the enforcement order be set aside, as the award was contrary to public policy on the following grounds:

  • the tribunal had presumed that certain defects in the electrolytic capacitors were attributable to the Respondent, based solely on its admissions in reports prepared in response to the Applicant’s queries. The tribunal failed to accept any evidence illustrating the contrary position; and
  • this presumption reversed the burden of proof, to the prejudice of the Respondent.

Decision

  • The charging order nisi

Though the Respondent’s initial argument for adjournment was based upon ineffective service of the charging order nisi, Capxon’s Chairman subsequently filed an affirmation, submitting that he had been appointed as the Respondent’s liquidator pursuant to an extraordinary general meeting of shareholders that resolved that Capxon be dissolved. In this scenario, if the Lancom Shares were to be charged, Capxon’s assets would be insufficient to satisfy its outstanding liabilities. Capxon’s Chairman also submitted that preparation of Capxon’s balance sheet and inventory was underway. In the alternative, if Capxon’s liquidation was insufficient to satisfy the Court that the charging order nisi should not be made absolute, the Respondent invited the Court not to proceed with the hearing of the charging order before it had determined the setting aside summons. While the Court took note of the peculiar timing of this submission, it found that the legal principles to be applied to the matter would be affected by the Respondent’s state of solvency. Such a decision would have an impact upon third party rights. The Court therefore directed that the charging order hearings be adjourned until further evidence had been filed.

  • The setting aside summons on public policy grounds

Yeung DJ reiterated the approach of the Hong Kong Courts towards enforcement of arbitration awards, as summarised by Mimmie Chan J. in KB v S [HCCT 13/2015]: The primary aim of the court is to facilitate the arbitral process and to assist with enforcement of arbitral awards.” Relying on the legal principles elucidated in Hebei Import & Export Corp. v Polytek Engineering Co. Ltd. [(1999) 2 HKCFAR 111]; Yeung DJ held that the validity of decisions of foreign arbitral tribunals should be recognised and given effect to, as a matter of comity, unless to do so would violate the most basic notions of morality and justice.

Applying these principles, he found that there had been no impermissible reversal of burden of proof by the tribunal, and that there was no evidence of tribunal bias against the Respondent. Yeung DJ held that he could not, and ought not to, look into the merits of the award or the tribunal’s reasoning. In the absence of any error or matter which would justify setting aside the enforcement order on the grounds of public policy, the Court dismissed the application

Discussion

The Court’s rejection of the public policy argument reminds us that egregious conditions must exist for such a challenge to succeed. Yeung DJ’s dismissal of the setting aside application is the latest in a long line, each reiterating Hong Kong’s continuing commitment to the New York Convention.

At the same time, the decision is a reminder that public interest and public policy may still have a role to play in insolvency situations and the court may not permit arbitration awards to trump third party creditors’ rights in these circumstances. Watch this space for further developments.

Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
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May Tai
May Tai
Managing Partner, Greater China
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Simon Chapman
Simon Chapman
Partner, Hong Kong
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+852 2101 4217
Briana Young
Briana Young
Foreign Legal Consultant, Hong Kong
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+852 2101 4214

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