The Hong Kong Court of First Instance has refused to set aside an enforcement order for a US award on the basis that the arbitration agreement was invalid, the defendant was unable to present its case, or it would be contrary to Hong Kong public policy to enforce the award (Construction Company v Guarantor [2021] HKCFI 2558). The Court's judgment not only demonstrates the pro-arbitration stance that Hong Kong judges take toward enforcing arbitral awards, it also serves as a timely reminder of the importance of the supervisory court's ruling in determining whether an application to set-aside an enforcement order will succeed in the place of enforcement.
Background
In July 2016, the Plaintiff and LLC entered into a contract for the construction of a project in Los Angeles, California. In March 2020, the Defendant (an indirect parent of LLC) issued a Parent Company Guarantee to the Plaintiff, guaranteeing LLC's obligations under the underlying construction contract to pay to the Plaintiff the sums of US$10 million, US$20 million and US$24.44 million (Funding Schedule Payments). Pursuant to the Guarantee, the Defendant had a primary obligation to pay when each of the tranches fell due.
The dispute resolution clause in the Guarantee expressly provided for two types of disputes to be dealt with and resolved differently: (i) those relating to "claims and disputes related to non-payment of the Funding Schedule Payments", and (ii) "all other claims and disputes". Relevantly, for the first type of dispute, the Guarantee limited the arbitrator's jurisdiction by providing that: "the sole issue to be decided by the arbitrator [is] whether payment of the Funding Schedule Payments was made in accordance with the Guarantee" (Sole Issue).
On 13 October 2020, the Plaintiff initiated arbitration proceedings against the Defendant for failing to make the Funding Schedule Payments. The Defendant mounted a defence of illegality, on grounds that the Plaintiff had not obtained the necessary license to conduct the work under the construction contract and thus its claim for non-payment under the Guarantee was tainted by illegality.
The Plaintiff denied any illegality, and sought a ruling that the arbitrator's jurisdiction was limited to the Sole Issue, so he was not competent to hear the illegality defence.
On 30 October 2020, the sole arbitrator made a decision on jurisdiction, and decided that his jurisdiction was confined to the Sole Issue, namely, whether the Guarantor made the Funding Schedule Payments in accordance with the Guarantee. The Guarantee was not a construction contract (being independent of it) and did not raise issues as to the laws concerning licensing.
On 24 November 2020, the arbitrator issued the award and allowed the Plaintiff's claims on the Defendant's non-payment. The arbitrator also noted in passing that the Plaintiff had demonstrated, on a prima facie basis, that it had obtained the necessary license.
On the same day, the Plaintiff petitioned the US Court to confirm the award. The Defendant sought to vacate the award on the basis of illegality and misconduct of the arbitrator. The US Court dismissed the Defendant's application, and found the award to be consistent with the terms of the Guarantee. It also concluded that the arbitrator had not exceeded his powers in determining that the Guarantee was valid and enforceable.
On 18 February 2021, on the Plaintiff's application, the Hong Kong Court granted leave to enforce the award in Hong Kong. The Defendant applied to set aside the enforcement order on grounds that (i) the arbitration agreement was invalid; (ii) it would be contrary to Hong Kong public policy to enforce such an award; and (iii) the Defendant had been denied the opportunity to present its case.
Decision
Mimmie Chan J dismissed the Defendant's set aside application under s.89 of the Arbitration Ordinance (Cap 609) (which deals with grounds to refuse enforcement of New York Convention awards).
The court noted that the parties (i) had agreed that the governing law of the Guarantee would be the laws of the State of California; (ii) had submitted to arbitration of their disputes in accordance with the rules of the relevant institution; and (iii) by so doing, had submitted to the supervisory jurisdiction of the US Court at the seat of the arbitration. In reaching this decision, the court gave due weight to the US Court's endorsement of the arbitrator's decision, including on the validity of the Guarantee as well as the question of jurisdiction.
In any event, the court was not satisfied that the Defendant had made out its case. The judge agreed with the findings of the arbitrator and the US Court. There was, therefore, no ground to refuse enforcement on the basis of Hong Kong public policy; as there was nothing contrary to the Court's conscience or its fundamental conception of morality or justice to prevent enforcing the award.
Comment
In considering the rulings of the US Court, the Hong Kong Court re-affirmed the principles set out in Gao Haiyan v Keeneye Holdings Limited [2012] 1 HKLRD 627. In that case, the Hong Kong Court of Appeal made clear that enforcing courts must give due weight to the decisions of the supervisory courts when applying the governing law of the underlying contract and arbitration agreement, and when deciding on issues of validity or procedure.
The court's decision should deter disgruntled parties from engaging in forum-shopping, and from litigating issues already decided in arbitration and by the supervisory court. The Hong Kong courts will look unfavourably on any attempt at a "second bite of the cherry".
For more information, please contact Kathryn Sanger, Partner, Briana Young, Professional Support Consultant, Charlotte Wong, Associate, or your usual Herbert Smith Freehills contact.
