In a rare move, the Hong Kong Court of First Instance has refused to enforce an arbitral award, rejecting an appeal from its earlier decision to set aside the enforcement order.

X v Y  [2020] HKCFI 2782

Background

The dispute arose between X, a Taiwanese life insurance company as investor and pledger, and the Bank as investment manager and the pledgee. The parties’ dealings involved a three-tier investment structure, encompassing X’s subscription of the “AB Trust”, the Bank’s management of assets deposited in a trust account, and X’s pledge of the managed assets as security for loans by the Bank.

The Bank’s management of assets was governed by an investment management mandate (Mandate) entered into by X and the Bank in April 2008. The Mandate provided for Taiwanese governing law and for arbitration as the dispute resolution mechanism. On the security side, in March 2008 the trustee of AB Trust executed, in favour of the Bank, a Pledge for Assets (Pledge) over the trust assets as continuing security for current or future obligations due to the Bank. The Pledge was governed by the laws of Singapore and submitted disputes to the non-exclusive jurisdiction of the Singapore courts.

The dispute arose when X was put into receivership in 2014, which prompted the receiver to demand the Bank to return the balance held in the trust account. The Bank relied on the Pledge to retain the balance, which represented the outstanding loans due to the Bank. In July 2016, the Bank instigated court proceedings in Singapore against X and other parties pursuant to the jurisdiction clause of the Pledge. In August 2016, X commenced arbitration against the Bank under the arbitration clause of the Mandate.

In the Request for Arbitration, X claimed that the Pledge was void under the laws of Singapore for lack of consideration, and as such that the Bank was liable to return the balance in the trust account. The Tribunal rendered an award in favour of X on 4 January 2018, ordering the Bank to return the balance of the trust account to X. X obtained an order to enforce the award in Hong Kong. On 24 October 2018, the Bank applied to set aside the enforcement order and  the Court granted the application in a decision dated 5 November 2020 (Decision).

The Decision

At first instance, the CFI was invited to rule on two issues:

  1. Whether the award dealt with matters falling outside the terms of the submission to arbitration; and
  2. Whether the Bank had been unable to present its case in the arbitration.

The Tribunal’s jurisdiction

The parties’ dispute revolved around whether the Tribunal had jurisdiction to find that the Pledge was invalid, so as to deprive the Bank of its property interests. X argued that, after the Tribunal had found X’s subscription of trust and deployment of assets invalid under Taiwanese insurance law, the validity and enforceability of the Pledge did not arise. The Bank argued that the real dispute between the parties had always been the validity of the Pledge, particularly whether the Bank could rely on the Pledge to retain the assets.

Applying the English Court of Appeal’s decision in Trust Risk Group SpA v AmTrust Europe Ltd [2017] 1 CLC 456 (see our previous post), the Hong Kong Court held that, where the parties have entered into multiple interlinked commercial contracts to deal with different aspects of their relationship, “the proper test in ascertaining the parties’ intention on how their disputes should be dealt with is to identify the nature of the claim, and the agreement which has the closest connection with such dispute and claim”. In this respect, the Court highlighted that the one-stop-shop presumption in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40 has limited application where the parties’ agreements contain competing jurisdiction clauses.

Applying the “closest connection” test, the Court agreed with the Bank that the Pledge was undisputedly the “centre of gravity of the dispute”. The Tribunal’s finding that the Pledge was illegal under Taiwanese law did not by itself invalidate the Pledge and the security interests under the Pledge. Since the parties’ dispute brought into question the validity of the Pledge, the question must be referred to the Singapore Court.

The Bank’s opportunity to present its case

Two issues were material to the Bank’s argument that it had been unable to present its case in the arbitration.

First, prior to the post-hearing submissions, X’s pleaded case had always been that the Pledge was invalid under Singapore law for lack of consideration. It was only in its post-hearing submissions that X argued, for the first time, that contravention of the relevant Taiwanese law provision (i.e. Article 146 of Taiwan Insurance Act) would render the Pledge void under Taiwanese law. This timing gave the Bank no opportunity to deal with X’s change of position.

Second, it was common ground between the parties’ experts that Article 146 did not have the effect of invalidating X’s transactions. Given that such evidence was unchallenged, the Bank did not further its case regarding Article 146. Contrary to the experts’ shared view, however, the Tribunal accepted X’s position that the pledge of X’s assets was void.

As a matter of law, the Court emphasised that the conduct complained of must be “serious or even egregious” before the Court can take a view that a party had been denied due process. Here, the Court sided with the Bank in finding that the Tribunal’s decision on Taiwanese law constituted a departure from the cases presented by the parties, and that the Bank had not been given a reasonable opportunity to present its case and to meet the case of X. The Court specifically cautioned that “in respect of matters which have never been in issue between the parties, and which do feature significantly in the arbitrators’ decision, great care should be taken to ensure that the parties are given a fair and ample opportunity to comment and deal with such matters.”

In light of the Tribunal’s jurisdictional overreach and the “substantial injustice” suffered by the Bank, the Court concluded that it would be a breach of rules of natural justice to enforce the award.

Leave to Appeal

Following the Decision, X sought leave to appeal on three grounds:

  1. the Court had misconstrued the nature of X’s claim in the arbitration;
  2. the Court had erred in finding that the legality of the Pledge was an issue that fell to be determined; and
  3. the Bank had been given a fair opportunity to present its case.

Applying the “reasonable prospect of success” threshold, Mimmie Chan J found that, in relation to the first two grounds, “[t]here are arguably some merits in the intended appeal which ought to be heard”.

However, the third ground was deemed to have no reasonable prospects of success. Chan J considered that the Court of Appeal would be unlikely to interfere with the first instance judge’s assessment of procedural fairness, which is a broad and multi-factorial exercise dependent on the Court’s analysis of the documentary evidence.

As such, even if the appeal were to succeed on the first and second grounds, the Court’s finding that the Bank had been denied due process would render the Award unenforceable. For this reason, the Court concluded that to allow the appeal would be against the object of the Arbitration Ordinance to facilitate the fair and speedy resolution of disputes without unnecessary expense.

Comments

This is a rare example of a Hong Kong court refusing to enforce an arbitral award, in spite of its long-established pro-arbitration and pro-enforcement reputation. The Decision highlights that the courts may be slow to apply the “one-stop-shop” presumption in commercial dealings involving different – and potentially competing – jurisdiction clauses. In such situations, the courts may revert to the “closest connection” test, out of respect for commercial realities and party autonomy. As a result, careful drafting is essential if parties intend to apply different dispute resolution mechanisms to different aspects of their relationships .

The Decision also reminds parties and arbitrators alike of the importance of due process. The Court reiterated that, in deciding whether to exercise its discretion not to enforce an award, it must consider standards of due process under Hong Kong law. Interference with due process, if sufficiently serious or egregious, may render an arbitral award unenforceable.

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