China Property Development (Holdings) Ltd v. Mandecly Ltd and Others
Read the full judgment text of CACV 92/2015 on BabelCite. This Court of Appeal judgment was delivered on 24 May 2016 before Hon Cheung JA, Hon Kwan JA, Hon Poon JA.
Arbitration — Setting aside arbitral award — Irregularity under Article 34(2)(a)(ii) and (iii) and public policy under Article 34(2)(b)(ii) of the Arbitration Ordinance (Cap. 341) — Whether party was denied due process by award deciding a dispute not submitted — Share purchase and sum of RMB 10 million deducted under 20% Agreement clauses — Dispute over entitlement and liability to pay that sum — Tribunal ordered CPDH liable despite respondents disclaiming claim against it on that issue — Tribunal exceeded jurisdiction and denied CPDH opportunity to present case — Tribunal's post-award letter justifying order was beyond jurisdiction and to be disregarded — Serious irregularity found — Court's discretion to set aside award properly exercised — Appeal dismissed — Orders setting aside parts of Award directing payment by CPDH and declaration of subrogation allowed — Costs awarded to CPDH with certificate for two counsel.
Legal issues: Setting aside arbitral award for irregularity
Outcome: Appeal dismissed; part of the arbitral Award set aside for irregularity
Cites 4 cases
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CACV 92 & 93/2015 (Heard together) IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NOS. 92 AND 93 OF 2015 (ON APPEAL FROM HCCT NO. 53 OF 2010) ________________________
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________________________ J U D G M E N T ________________________ Hon Cheung JA : I. The appeal 1.The parties to the two appeals which are heard together, namely, the plaintiff (‘CPDH’), 1st defendant (‘Mandecly’),2nd defendant(‘Tsoi’),3rd defendant(‘Chan’), 4th defendant (‘Minghuaxuan’) and the 5th defendant (‘BPP’) were parties to an arbitration proceedings. The plaintiff was the first claimant and the 5th defendant the second claimant. After the arbitral award (‘the Award’) had been made on 25 May 2010, the plaintiff applied and succeeded before Deputy High Court Judge Simon Leung to set aside part of the Award. The 1st to 3rd defendants now appeal. II. Background 2.1The background of the case is set out in the judgment below which I will gladly adopt. 2.2BPP was set up for the purpose of a real estate development project in the Mainland. It used to be the wholly owned subsidiary of World Lexus Pacific Limited (‘World Lexus’). World Lexus was owned by Mandecly and Tsoi. Mandecly in turn was owned and controlled by Chan. 2.3In 2004, CPDH, through its subsidiaries, acquired 80% of the shareholdings in World Lexus and thus BPP. By an agreement dated 9 August 2004, CPDH acquired the remaining 20% of the shareholdings in BPP (‘the 20% Agreement’). 2.4By then, BPP had been involved in litigation in the Mainland in which BPP sought to recover from another company 北京華正時房地産開發有限公司 (‘Huazhengshi’) certain deposit paid in respect of the real estate development in 2001-2002. The parties agreed to cater for the situation and to provide for their rights and obligations arising out of, among others, the following terms of the 20% Agreement: Clause 3.6.2(5) ‘出讓方及陳先生同意在2005年3月31日前太平洋城公司如未能收回華正時有關協議下轉付將台鄉政府的人民幣1000萬元，受讓方可在2.4.2.2項下應支付轉讓代價餘額人民幣2000萬元中扣除人民幣1000萬元，如在2008年6月30日前太平洋城公司收回全部或部分華正時有關協議下之所付訂金/合同款，太平洋城公司將把所得款項不超于人民幣1000萬元轉付給出讓方及/或陳先生.’ Clause 3.6.2(6)(b) ‘出讓方及受讓方同意以下幾種方式可視為款項已收回……(b)將台鄉政府提供付款人為太平洋公司的發票、收據或公函，確認已收到人民幣1000萬元款，並表明此1000萬元款項權益歸太平洋城公司，可用作抵扣太平洋城公司應付將台鄉政府的各種款項包括土地補償款在內.’ 2.5The effect of Clause 3.6.2(5) was that: (i) CPDH would be entitled to deduct RMB 10 million from the consideration payable to the vendors under the 20% Agreement, if BPP failed to recover from Huazhengshi by 31 March 2005 the sum of RMB 10 million, which had been forwarded to the Jiangtai party; and (ii) if BPP recovered any part of the sum from Huazhengshi by 30 June 2008, such amount up to RMB 10 million would be payable to the vendors and/or Chan. 2.6Clause 3.6.2(6) set out the parties’ agreement on the situations where the sum of RMB 10 million under the Huazhengshi Judgment would be deemed to have been recovered by BPP. One of such situations was provided in sub-clause (b) above, namely, the Jiangtai party provided documentary proof of receipt of the sum from Huazhengshi, and confirmed the sum to be held for the benefit of BPP, which could be utilised to set off any amount payable by BPP to the Jiangtai party (‘the Deeming Provision’). 2.7BPP eventually succeeded on appeal and was given judgment against Huazhengshi in the sum of RMB 14 million plus interest (‘the Huazhengshi Judgment’). But recovery of the judgment debt was still pending. 2.8Dispute arose between CPDH and its counterpart in the deal pursuant to the 20% Agreement. Amongst other disputes, CPDH claimed to be entitled to invoke Clause 3.6.2(5) for the deduction of RMB 10 million from the consideration payable to the vendors under the 20% Agreement. 2.9In April 2005, CPDH and BPP commenced the arbitration. 2.10While the arbitration was pending, by an agreement dated 16 November 2007, World Lexus (then controlled by CPDH) sold the entire shareholdings in BPP to Best China Holdings Limited (‘Best China’), which was in turn owned by北京北大青鳥有限責任公司(‘Jade Bird’). The following terms of the agreement between CPDH and Best China (‘the Jade Bird Agreement’) are relevant for the present purpose:
2.11Essentially, credit was given to the RMB 10 million to be recovered by BPP pursuant to the Huazhengshi Judgment in the consideration payable by Best China. In return, World Lexus retained the benefit of the Huazhengshi Judgment after completion of the sale and purchase, so that the same, when recovered, would be payable by Best China to World Lexus. III. The relevant dispute in the arbitration 3.1The dispute in the arbitration relevant to the proceedings below is as follow. 3.2In the arbitration, CPDH (and BPP) claimed that pursuant to Clause 3.6.2(5), it was entitled to deduct RMB 10 million from the consideration payable under the 20% Agreement. The respondents disagreed and contended, among other things, that CPDH and BPP were in breach of the contractual term implied to Clause 3.6.2(5) that they should take reasonable steps and exercise due diligence to recover the RMB 10 million under the Huazhengshi Judgment by the contractual deadline 31 March 2005. They had failed to do so and CPDH was therefore not entitled to make the deduction. 3.3The respondents further contended that the Deeming Provision was invoked upon the letter from the Jiangtai party dated 6 March 2008 (‘the 6/3/2008 Letter’). The letter reads:
3.4Essentially, the Jiangtai party acknowledged by this letter the receipt of the sum of RMB 10 million from Huazhengshi, and the sum was held for the benefit of BPP and, subject to conditions, could be applied to set off the amount payable by BPP to the Jiangtai party. On this basis, the respondents claimed to be entitled to the payment of RMB 10 million pursuant to Clause 3.6.2(5). 3.5Alternatively, if CPDH’s deduction of the price was upheld, the respondents sought to subrogate to the rights of BPP in the interest of the Huazhengshi Judgment. This alternative claim was based on the concept of unjust enrichment: if CPDH had the benefit of the RMB 10 million deducted while BPP managed to recover any part of the Huazhengshi Judgment. IV. The Award 4.1Issue was taken by CPDH to the following parts of the Award:
4.2CPDH questioned the correctness of paragraphs 342 and 477(7) of the Award ordering it to pay RMB 10 million to the respondents. CPDH believed it was a typographical error and asked the Tribunal to clarify if it was a clerical mistake to order it, instead of BPP, to pay this sum pursuant to Clause 3.6.2(5). 4.3On 7 June 2010, the Tribunal answered and confirmed this part of the Award with reasons (‘the Tribunal’s Letter’). V. Application to set aside 5.1CPDH then commenced the proceedings below and sought to set aside paragraphs 342 and 477(7) of the Award, which directed it to make the payment of RMB 10 million on the ground that there was irregularity in the arbitration proceedings in that the claim against it for RMB 10 million under the Deeming Provision was not pursued by the respondents. 5.2The main contest was between CPDH on the one hand and Mandecly, Tsoi and Chan on the other hand. Minghuaxuan was in liquidation and did not enter appearance. VI. The Decision 6.The Judge acceded to CPDH’s application. He set aside paragraphs 342 and 447(7) of the Award. By so doing, the effect is that there is no longer any order directing CPDH to pay RMB 10 million to the respondents. The only relief that they have against CPDH is a declaration that they are entitled to be subrogated to the rights of BPP under the Huazhengshi Judgment to the extent of RMB 10 million. CPDH is content to have this relief made against it. VII. Basis of the setting aside application 1) Section 34C Arbitration Ordinance (Cap. 341) 7.1It is common ground that the arbitration below was an international arbitration and was subject to the UNCITRAL Model Law (section 34C of the now repealed Arbitration Ordinance (‘the old Ordinance’), Cap. 341). This Ordinance was repealed since 1 June 2011 but applies to the arbitration in question (which was commended in 2005) by virtue of section 111 of the new Arbitration Ordinance, Cap. 609 (and section 1(1) of the 3rd Schedule). 7.2The UNCITRAL Model Law is set out in the 5th Schedule to the old Ordinance. Article 34(1) provides that recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article. The relevant parts of Article 34(2) are:
2) CPDH’s grounds 7.3CPDH relied on Article 34(2)(a)(ii) and (iii), namely, it was unable to present its case and the Award did not fall within the terms of the submission to arbitration. It also relied on the public policy ground under Article 34(2)(b)(ii). As the Judge had observed, these grounds overlap one another. 3) Principles 7.4A number of authorities on the setting aside of an arbitral award has been cited to us: Brunswick Bowling & Billiards Corp v Shanghai Zhonglu Industrial Co Ltd [2011] 1 HKLRD 707, Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1 and Pang Wai Hak v. Hua Yunjian [2012] 4 HKLRD 113. Guidance on the correct approach discussed in Brunswick Bowling was adopted by this Court in Grand Pacific Holdings. Instead of reproducing again the guidelines again which contain discussion of the authorities, I will respectfully adopt a summary of these guidance by Recorder Anderson Chow SC (now Chow J) in Pang Wai Hak at paragraphs 29 and 30: 1) In determining whether to set aside an arbitral award on the ground that a party was unable to present his case under Article 34(2)(a)(ii) of the UNCITRAL Model Law, the Court is not concerned with the substantive merits of the dispute, or the correctness or otherwise of the award. This is because the Court is not hearing an appeal from the decision of the arbitral tribunal. 2) To justify setting aside an arbitral award on this ground, the Court has to be satisfied that a party has been denied due process. 3) For this purpose, the conduct complained of must be serious or even egregious. 4) It is not possible to set out exhaustively all possible situations of denial of due process. Whether there has been a denial of due process must depend on the Court’s evaluation of the relevant facts and circumstances of each individual case. 5) One particular instance in which a party can justifiably complain that he was unable to present his case and thus denied due process is where the tribunal carried out its own investigation or inquiry on primary facts, or decided a case based on a wholly new point of law or fact without giving the parties a fair opportunity to consider and respond to such point. 6) The Court has a discretion not to set aside an arbitral award even if a violation of Article 34(2)(a)(ii) of the Model Law has been established, but this discretion should only be exercised where the Court is satisfied that the outcome could not have been any different. Put in another way, the party seeking to set aside the arbitral award does not have to show that the outcome would have been different had there been no violation of that article; it suffices for that party to show that the outcome could or might have been different. 7) Ultimately, in considering whether a party was ‘unable to present his case’, the question is one of fairness in the arbitral process. 8) It is not necessary for a party seeking to rely upon the ‘unable to present his case’ limb in Article 34(2)(a)(ii) of the UNCITRAL Model Law to show any form of dishonesty or reprehensible conduct by the arbitral tribunal or of the other side. 9) The ‘unable to present his case’ ground is not limited to situations where a party is prevented from presenting legal arguments or deal with evidence on an issue going to the substantive merits of a case, but may extend to a situation where a party is prevented from presenting his case on a procedural issue which is taken by the arbitral tribunal against him of the tribunal’s own volition. 7.5In applying these principles, it is important to bear in mind the principle of finality and comity in a consensual arbitration like the present case: Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111. VIII. Has CPDH made out its case for setting aside? 1) The letter of 7 June 2010 from the Tribunal 8.1In reply to CPDH’s inquiry whether there was a typographical error, the Tribunal invited further submission from the parties. By its letter of 7 June 2010, it gave further reasons for making the award of RMB 10 million against CPDH instead of BPP. The relevant part of the letter reads:
8.2There are authorities which point to the arbitrator becoming functus officio as respects all the issues between the parties once the final award is made and the parties cannot re-open the same matters again before him: Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 Q.B. 630 per Diplock LJ at p.644B and Opotiki Packing v Opotiki Fruitgrowers [2003] 1 NZLR 205, per Fisher J at [24] & [25] adopting Fidelitas (affirmed on appeal). 8.3CPDH was only concerned with a possible typographical error in directing the award of RMB 10 million against it instead of BPP. The Tribunal clearly had exceeded its jurisdiction in attempting to explain why it was still justified in making this award notwithstanding clause 3.6.2(5) which expressly stated that it was for BPP to reimburse this sum. This being the case, the further explanation of the Tribunal should be ignored and instead, one should look at the state of pleadings, submissions of the parties and the Award itself to decide whether CPDH had made out a case on irregularity. But I will return to the letter again later to address a point made by Mr Bernard Mak (together with Mr Dixon Co) for the respondents. 2) State of pleadings 8.4CPDH had expressly pleaded and sought a declaration that it was entitled to deduct the RMB 10 million. Tsoi had raised no counterclaim against CPDH. Mandecly and Chan did not specifically plead a claim against CPDH for this sum. Instead their pleaded case (which, as the Judge stated, was adopted by Minghuaxuan) was that CPDH was required, among other things, to pay RMB 20 million under clause 2.4.2.2 of the 20% Agreement and it had wrongly deducted RMB 10 million. They pleaded that CPDH was liable to pay the RMB 20 million together with other sums. 8.5As can be seen from the pleadings of the respondents, their contention that CPDH was not entitled to deduct the RMB 10 million was because they alleged there was an implied term that CPDH must take all reasonable steps to recover the RMB 10 million from Huazhengshi and CPDH had been in breach of the implied term (‘the implied term issue’). Further as against CPDH there is an alternative claim for a declaration that the respondents were entitled to be subrogated to the rights of BPP under the Huazhengshi Judgment (‘the subrogation issue’) by virtue of clause 3.6.2(6)(b) of the 20% Agreement if BPP was deemed to have recovered the RMB 10 million (‘the deeming provision issue’). 8.6Whilst there was no express claim for RMB 10 million against CPDH, the respondents expressly sought against BPP for, among other things, an order for payment by BPP of the RMB 10 million. 3) Submissions of the parties 8.7Mandecly and Chan’s written submissions were all along the same lines. Their supplemental written opening submission before the Tribunal was that:
8.8In their closing written submission, they contended that:
They elaborated:
8.9In respect of the deeming provision issue, they submitted in their written closing submission:
8.10Then in respect of subrogation issue, the respondents submitted:
8.11CPDH in its written closing submission had referred to the respondents’ claim against it for RMB 10 million. But as apparent from the transcript of the arbitration proceedings, the claim for RMB 10 million which was directed to both CPDH and BPP was in respect of the implied term issue only. In the words of the respondents’ counsel, ‘if they breached the implied term, the consequence must be that they have to repay to us what they had deducted’. When the issue came up on who is to be responsible to pay for the RMB 10 million under the deeming provision issue, the respondents’ counsel expressly informed the Tribunal, that the deeming provision issue and hence the payment of RMB 10 million was only directed against BPP. 3) The Tribunal’s decision 8.12The Tribunal first addressed the issue of implied term and found against the respondents on this issue. The result is that CPDH is not required to repay RMB 10 million under this ground. The Tribunal then dealt with the deeming provision issue. Although it had repeated the respondents’ written submission that the liability to pay rested with BPP, at the end it held CPDH was liable for this sum. This can be seen from paragraph 342 of the Award. 8.13The Tribunal also granted the relief for subrogation. This is based on the unjust enrichment argument advanced by the respondents. As indicated in paragraph 354 of the Award, the Tribunal said that this is an alternative relief in the event ‘if (it) is wrong in the finding of the Deeming Provision and in awarding the respondents RMB 10 million’. 4) Irregularity established 8.14In the light of the express and clear indication from the respondents’ counsel that the deeming provision issue was directed towards BPP only, an irregularity had clearly occurred when the Tribunal actually ordered CPDH to pay RMB 10 million pursuant to the deeming provision. That was the only ground that CPDH was held liable. In so doing, not only was CPDH prevented from presenting its case on this issue under Article 34(2)(a)(ii), more importantly, the Tribunal had actually fallen into the Article 34(2)(a)(iii) error, namely, the award dealt with a dispute not contemplated by or not falling within the terms of the submission to arbitration; or contains decisions on matters beyond the scope of the submission to arbitration. 8.15In my view this point is unanswerable. In attempting to answer this, Mr Mak sought assistance from the letter of 20 June 2014 where the Tribunal said that the Award against CPDH was made on the basis of unjust enrichment. I had earlier held that it was not permissible to look at that letter. But just for the sake of argument, if the award of RMB 10 million against CPDH was on the basis of unjust enrichment, this was certainly not apparent from the Award itself. Unjust enrichment became an issue only under the subrogation issue and not under the deeming provision issue. This is clearly the position when the Tribunal expressly stated that the subrogation award is an alternative award if it was wrong to order CPDH to pay under the deeming provision. This award was made beyond the scope of the arbitration. Further the Tribunal had certainly not invited CPDH to make submission at the arbitration if its intention was to rely on the unjust enrichment ground. CPDH was indeed prevented from presenting its case. 8.16Mr Mak submitted that the attack was in substance a criticism of the adequacy of the reasons rather than an assertion of irregularity by reference to the judgment of Tomlinson J in ABB AG v Hochtief Airport GmbH [2006] 2 Lloyd’s Rep 1 at paragraph 80. He also relied on the following part of the judgment.
8.17In considering the English authorities, it is important to bear in mind the caution mentioned by Johnson Lam J (as he then was) in Brunswick Bowling:
8.18In my view this is a clear case of irregularity when the respondents’ counsel expressly disavowed a claim against CPDH on the deeming provision issue and yet the Tribunal had taken upon itself to make a finding against CPDH contrary to the respondents’ stand. Whilst this is an international arbitration, the arbitrators are all Hong Kong based with two of them being barristers. Hence there is no issue of language or different legal background and for which a margin of appreciation should be accorded to the Tribunal. This is clearly not an attack simply on the reasoning of the Tribunal. The reference to the pleadings, submission of the parties and the Award is solely for the purpose of establishing the irregularity. 5) Residual discretion 8.19The Court has a discretion not to set aside an award even when irregularity has been established. 8.20Mr Mak criticized the Judge for not exercising the discretion properly or at all. This is what the Judge said:
8.21The irregularity must in the first place satisfy the serious and egregious requirement. But on that basis, the nature of irregularity must be different in each case and in my view, in exercising the discretion, the Court must consider the nature of the irregularity. In respect of some irregularities, the Court having considered the circumstances of the case will have no difficulty in refusing to set aside the award. On the other hand, some irregularities may be so fundamental and the structural integrity of the arbitration proceeding is so seriously damaged that the Court will have no hesitation in setting aside the award. In between these two extremes there is a range of irregularities, the consequence of which really depends on the circumstances of the case. In this case, the irregularity clearly falls under the serious end of the two extremes when the issue decided by the Tribunal was not even part of the issues submitted for arbitration and when the respondents themselves had not even relied on unjust enrichment against CPDH under the deeming provision issue. The Judge was clearly correct in the circumstances to exercise the discretion in favour of CPDH by setting aside part of the Award. IX. Conclusion 9.Accordingly this appeal is dismissed. X. Costs 10.There will be an order nisi that CPDH is entitled to the costs of the appeal with certificate for two counsel. Hon Kwan JA : 11.I agree with the judgment of Cheung JA. Hon Poon JA : 12.I agree with the judgment of Cheung JA.
Mr Horace Wong SC and Mr Paul Mak, instructed by Reed Smith Richards Butler, for the plaintiff Mr Bernard Mak and Mr Dixon Co, instructed by Anthony Siu & Co., for the 1st and 3rd defendants (appellants in CACV 93/2015) Mr Bernard Mak and Mr Dixon Co, instructed by W.K. To & Co., for the 2nd defendant (appellant in CACV 92/2015) Attendance of King & Wood Mallesons, for the 5th defendant, was excused
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Cases cited in this judgment