The long-running case of Xiamen Xinjingdi Group Co Ltd v Eton Properties Limited and Others  HKCFA 32 finally came to an end when the Court of Final Appeal (the CFA) handed down its decision on 9 Oct 2020. In the judgment, the CFA clarifies that in a common law enforcement action on an arbitral award, the enforcing court has the power to grant relief that is wider than that in the award.
In our previous blog posts, we have covered the factual and procedural history of this case, including the Court of Appeal’s judgment and its decision not to grant leave to appeal. In gist, Xiamen Xinjingdi Group Co Ltd (XJ) entered into an agreement with Eton Properties Limited and Eton Properties (Holdings) Limited (together, EP). Under the agreement, EP were required to sell to XJ all the shares in their wholly owned subsidiary, Legend Properties (Xiamen) Company Limited (Legend Properties), which indirectly had the right to develop and use a piece of land in Xiamen.
EP failed to perform the agreement. Instead of transferring the shares to XJ, they transferred their entire beneficial ownership in the subsidiary to a related party. XJ therefore commenced arbitration proceedings against EP before a CIETAC tribunal, which ordered EP to continue to perform the agreement and granted damages of RMB 1,275,000 (representing damages for delay in delivering the land).
However, XJ was unable to enforce the award. Given that EP had already transferred their entire beneficial ownership to a third party, the order for continued performance had limited practical effect. XJ’s application to enforce before a Xiamen court failed because EP were Hong Kong companies whose assets were outside the jurisdiction. Under a statutory enforcement procedure set out in section 2GG of the old Arbitration Ordinance (Cap. 609) (explained below), XJ had also obtained an enforcement order from the Court of First Instance (the CFI) in Hong Kong, which required EP to continue to perform. However, the enforcement order was similarly ineffective due to EP’s restructuring.
This prompted XJ to start a common law action against EP (together with other claims against other defendants related to EP) on the award before the Hong Kong court. In its amended pleadings, XJ claimed damages and equitable compensation in the event that the relief it had been pressing for, namely, specific performance, should prove unachievable. The CFI disallowed the claim for damages, holding that at common law the court is limited to “mechanistically converting the award into a judgment in terms of the award”. The Court of Appeal allowed XJ’s appeal against the CFI’s decision on this point, ruling that in a common law action the court is not limited to granting relief which simply mirrors the terms of the award.
Issue before the CFA
One of the major issues before the CFA was, among other things, whether the court had the power to grant relief beyond the terms of the award or whether the court was limited to mechanistically converting the award.
EP argued that the court had no power to grant relief beyond the terms of the award. They relied upon three arguments and the CFA dealt with them one by one.
First argument – mechanistic argument
The mechanistic argument was advanced as one of statutory construction. Section 2GG of the old Arbitration Ordinance, which was a statutory enforcement procedure and an alternative to the common law action, provided for mechanistic enforcement only. As a matter of statutory interpretation and having regard to the public interest in giving effect to the parties’ arbitration agreement, the argument ran, the same approach must apply to common law actions.
The court rejected the argument. While it accepted that the statutory procedure was mechanistic, it disagreed that the statutory framework circumscribed the remedies available in a common law action. It reasoned that the statutory intent behind the section 2GG summary procedure was to allow the enforcing court to speedily enforce the award without itself scrutinising the merits. In contrast, a common law action is different in the sense that the plaintiff must prove his case. This includes proving that (1) there was a submission; (2) that the arbitration was conducted in pursuance of the submission; and (3) that the award is a valid award, made pursuant to the provisions of the submission, and valid according to the lex fori. The rationale for mechanistic enforcement therefore did not apply to common law actions.
The court also pointed out that EP had failed to put forward any authorities supporting their proposition. In contrast, the court found that there was case law pointing in the opposite direction. It therefore rejected the mechanistic argument.
Second argument – outflanking argument
(i) Court should have stayed enforcement to arbitration
EP’s second argument was the outflanking argument, which had two versions. The first version was that the court should have stayed the enforcement action to arbitration because the claim was in truth a claim to enforce the underlying agreement and was subject to the arbitration clause. EP gave two reasons in support of their argument.
First, they said that suing for breach of an implied promise to perform the award was an action based on and arising out of the underlying agreement and so was subject to by the arbitration clause. The CFA disagreed. The arbitration clause provided that the parties agree to refer to arbitration any “disputes arising from the performance of the agreement”. The court held that the dispute in the present case stemmed from a breach of the implied promise to comply with the award. The court went on to say that as a matter of law, an implied promise to honour the award exists as a contractual obligation separate and distinct from the obligations created by the underlying contract. It is a separate and distinct cause of action. Accordingly, the present dispute arose from breach of the implied promise but not from the “performance of the underlying agreement”.
Second, EP said that the damages in the action were damages for loss of the profits of development of the land flowing from breach of the agreement. It followed that the action fell within the arbitration clause. Again, the court drew a line between proceedings at the arbitration and the enforcement phase. It held that at the enforcement stage, in an action on the implied promise, the enforcing court is granting relief for the breach of the implied promise and hence may grant relief appropriate to the award. The court accordingly rejected the second reason raised by EP.
(ii) Enforcement action bounded by the scope of the award
The second version of the outflanking argument was that the arbitration was incomplete and the court therefore could not legitimately start the enforcement phase. In this regard, counsel for EP submitted that the only issue referred to and decided by the tribunal concerned the validity of the underlying agreement only. They contended that the award merely confirmed that the underlying agreement was binding and nothing else. The court therefore had no jurisdiction to enforce the incomplete award.
Taking the view that the tribunal went much further than deciding that the underlying agreement was valid, the court rejected this argument. It noted that as a matter of fact, the tribunal had also held that EP were in breach of the underlying agreement and awarded relief accordingly. The arbitration was therefore not incomplete. It followed that this version of the outflanking argument also failed.
Third argument – extant award argument
The final argument EP raised was that the relief granted by the enforcing court was fundamentally inconsistent with, and barred by, the extant arbitration award. EP relied on the case of Johnson v Agnew to support its argument that, where a losing party fails to comply with a specific performance order, the innocent party must apply to the court to put an end to the contract before the court can property award damages. Since XJ never applied to the tribunal for a discharge of the underlying agreement, they could not now ask for damages.
The court did not accept the argument, holding that EP failed to recognise the distinction between the arbitration proceedings and the enforcement phase. It held that Johnson v Agnew was solely concerned with the consistency of remedies in the same action. In the present case, however, the relief granted in the common law action fell within the enforcement jurisdiction of the Hong Kong court. Accordingly, Johnson v Agnew was not a bar to enforcement.
It is clear from the CFA judgment that there is a distinction between the statutory procedure for enforcement under section 2GG of the old Arbitration Ordinance (which is substantially the same as section 84 of the current Arbitration Ordinance (Cap. 609)) and a common law action on an award. The statutory enforcement procedure is mechanistic in the sense that the enforcing court cannot go beyond the terms of the award. In contrast, in a common law action, the court has power to grant any relief it considers appropriate. This perhaps once again demonstrates the Hong Kong courts’ willingness to give effect to the parties’ arbitration agreement.
While Hong Kong courts will likely deal with most enforcement applications by way of the statutory procedure, it is worth remembering that a party wishing to enforce a Convention or Mainland award may opt for the alternative common law action, which allows broader forms of relief. This will be particularly important where, as in this case, a mechanistic conversion of the award is practically meaningless.
For more information, please feel free to get in touch with any of the contacts below, or your usual Herbert Smith Freehills contact.