Hz Capital International Ltd v. China Vocational Education Co., Ltd and Others

HCCT 48/2016

[2019] HKCFI 2705

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 48 OF 2016

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DECISION

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1.By a Summons dated on 10 April 2017 (the “Summons”), the 5^th to 8^th Respondents seek to set aside an Order made by Mr Justice Chow herein on 24 February 2017 (the “Order”) granting leave for the Applicant to enforce as a judgment an arbitration award made on 29 July 2016 (the “Award”).

PROCEDURAL MATTERS

2.On the face of it, the Summons was issued more than 14 days from the date of service of the Order as prescribed by Order 73, rule 10(6) of the Rules of the High Court.

3.Further, the Summons was only filed together with a two‑page affirmation of the handling solicitor of Messrs Fan Wong & Tso representing the 5^th to 8^th Respondents explaining that instructions were only received on 9 April 2017.  This is hardly sufficient as an affirmation in support of the application pursuant to the Summons as required by Order 73, rule 10(6A).

4.Subsequently, a detailed Affirmation of Zhou Ji-ting (“Zhou”), the 17^th Respondent, was filed on 23 May 2017.  The Summons was listed before Mr Justice Chow on 25 May 2017, which was however vacated upon the Applicant and the 5^th to 8^th Respondents agreeing on the directions for filing of evidence.  Thereafter, the Applicant filed its affirmation in opposition from Mr Zhao Wen-yao (“Zhao”) on 21 September 2017 and,in reply thereto, the 5^th to 8^th Respondents filed the 2^nd Affirmation of Zhou on 29 January 2018.

5.In due course, the Summons was listed for substantive argument before Mr Justice Chow on 30 April 2018 with very detailed written submissions having been served by both the Applicant (represented by Mr Raymond Fong of Counsel) and the Respondents (represented by Mr Ernest Ng together with Mr Mike Yeung of Counsel).  The hearing was however adjourned with direction given for cross-examination of Zhou and Zhao as deponents of the respective affirmations in order to resolve the factual disputes.

6.At the present hearing on 12 June 2019, Mr Lawrence Cheung of Counsel appeared for the Applicant (instead of Mr Fong) with limited instructions only to inform the Court that the Applicant would no longer advance any argument to oppose the Summons.  However, Mr Cheung made clear that he had no instructions to consent to an order in terms of the Summons.  This is a rather anomalous situation.  It is therefore necessary for the Respondents to satisfy the Court that the Order ought to be set aside.

7.In the absence of any opposition, I accept the 5^th to 8^th Respondents’ explanation that the Order was only sent by post on or about 24 March 2017 and was not received by them until 27 March 2017 [1].  Hence, the Summons was within time.

8.Further, I accept the 5^th to 8^th Respondents’ explanation that due to problems with translation and the time needed to seek legal advice from a firm of solicitors in Hong Kong, a substantive affirmation in support of the Summons could not be filed until 23 May 2017.

FACTUAL BACKGROUND

9.Zhou was an experienced educationalist.  He, together with the 18^th to 21^st Respondents, were the founders of the 13^th Respondent (a limited company incorporated in the Peoples’ Republic of China), which in turn established educational institutions in the PRC including the 14^th to 16^th Respondents.  In so far as may be appropriate, Zhou and the 18^th to 21^st Respondents are collectively referred to as the “Principals” hereinafter.

10.Since about 2008, various investors have expressed interests to participate in the business opportunity afforded by the proposed expansion of the said educational institutions operated through a web of overseas companies organized in the form of Variable Interest Entities (“VIE”).

11.There was also a plan to have the 1^st Respondent (China Vocational Education Co Ltd (“CVE”),a Cayman Island company) listed in the United States Stock Market through a process of Initial Public Offering (“IPO”). 

12.The 5^th to 8^th Respondents were companies incorporated in Hong Kong, which were wholly owned by the 2^nd Respondent (Beijing Runchang Co Ltd, a BVI company).  In turn, the 2^nd Respondent was wholly owned by CVE, which was wholly owned by the 4^th Respondent (Beijing Ruiming Co Ltd (“Ruiming”), another BVI Company). 

13.Hence, the beneficial ownership of the 5^th to 8^th Respondents could be traced back to the 4^th Respondent of which the Principals were the only shareholders.

14.For the sake of completeness, the 3^rd Respondent (Beijing Rui He Limited) was a Hong Kong company, which was also wholly owned by the 2^nd Respondent. As said, the 2^nd Respondent was wholly owned by CVE, which was in turn wholly owned by Ruiming.

15.On 30 May 2008 and 3 September 2008, two fund investors (ie Carlyle and Pinebridge) entered into separate agreements with, amongst others, CVE to subscribe for and purchase certain newly issued shares of CVE (known as “Series A Shares” and “Series B Shares” respectively).

16.Likewise, on 22 April 2011, Fresh Gain Limited (新博有限公司) contracted with, amongst others, CVE to subscribe for and purchase 273,261 newly issued shares in CVE at a price of US$33,800,000, which is known as “Series C Shares”. Fresh Gain Limited was owned by and/or related to a consortium in Hong Kong known as “New World” (新世界). Hence, Fresh Gain Limited was treated as being synonymous with New World in the dealings between the parties herein.     

17.Thereafter, an agreement dated 30 June 2011 (the “C2 Agreement”) was entered into between the Applicant (acting in concert with another investor, IP Cathay II, LP (hereinafter “Cathay”)) and the 1^st to 21^st Respondents herein (including, in particular, CVE, 5^th to 8^th Respondents and the Principals) along with other earlier investors (including Carlyle, Pinebridge and Fresh Gain Limited (see Annex 1 to the C2 Agreement [2]) whereby the Applicant agreed to:

(a)  subscribe to 47,144 newly issued shares of CVE at a price of US$5,400,000;

(b)  accept transfer from Ruiming, 5,238 shares of CVE at a price of US$600,000.

18.Likewise, pursuant to the C2 Agreement, Cathay agreed to:

(a)  subscribe to 78,573 newly issued shares of CVE at a price of US$9,000,000;

(b)  accept transfer from Ruiming, 8,730 shares of CVE at a price of US$1,000,000.

19.All the shares referred to in paragraphs 17 and 18 hereinabove under the C2 Agreement are collectively referred to as “Series C2 Shares”. 

20.For various reasons, progress for the intended IPO, which was supposed to take place no later than 31 December 2012 [3], had come to a halt in about October 2011 since there had been a reported or suspected shortage of fund in the various companies (ie the 1^st to 16^th Respondents) leading to disputes between the relevant parties in respect whereof various arbitration and legal proceedings were commenced:

(a)  On 7 October 2011, Fresh Gain Limited at the instigation of New World obtained an injunction[4] in Hong Kong to prohibit disposal of the assets belonging to CVE and the 2^nd to 3^rd Respondents to the extent of US$33,800,000 [5].

(b)  On 10 October 2011, Fresh Gain Limited commenced arbitration proceeding in Hong Kong (HKIAC/A11141) against, inter alia, CVE for return of the investment sum of US$33,800,000 [6].

(c)  On 18 February 2013 [7], Cathay commenced arbitration proceeding in Hong Kong (HKIAC/A13027) under the C2 Agreement against all Company Warrantors [8] for the return of the investment sum of US$10,000,000.

(d)  On or about 5 June 2013, the Applicant served the Notice of Arbitration (subsequently HKIAC/A13079) on the all the Respondents herein [9]. 

(e)  On 10 June 2013, Pinebridge commenced arbitration proceeding in Hong Kong (HKIAC/A13085) against the said Company Warrantors under the C2 Agreement for return of the investment sum of US$50,000,000 [10].

21.No issue was taken by the 5^th to 8^th Respondents as to the appointment of the tribunal made on 26 August 2013 (the “Tribunal”), which comprised of Mr Cao Lijun, Miss Elaine Liu and Miss Priscilla Leung (HKIAC/A13079).  Thereafter, the Tribunal dealt with procedural issues by correspondence:

(a)  By a letter dated 11 December 2013 [11], the Tribunal decided that (1) the two points raised by the Respondents in the Answer to Notice of Arbitration[12]concerning jurisdiction would be decided as part of the final award; (2) notwithstanding the appointment of provisional liquidator in respect of Ruiming by the Hong Kong Court on or about 15 October 2012, the address for service on Ruiming continued to be that stated in the C2 Agreement.[13]

(b)  The First Procedural Order was made on 27 January 2014 [14] and the Second Procedure Order was made on 2 October 2014 [15].

(c)  A written ruling on direction for supplemental documentary evidence was made on 27 December 2014 [16].

22.Thereafter, the evidential hearing of the arbitration took place between 5 and 9 January 2015 before the Tribunal. Closing submissions were lodged on 14 February 2015 and 16 February 2015 by the Respondents and the Applicant respectively.

23.In due course, an Award was handed down on 29 July 2016 [17]wherein the Tribunal held that (a) the investment sum of US$6,000,000 was not held on trust by the Respondents as claimed by the Applicant; (b) the Respondents do repay to the Applicant the sum of RMB 49,976,214.37 (ie the equivalent of US$6,000,000 together with interests thereon totalling US$7,719,288) upon lawful rescission[18] of the C2 Agreement occasioned by various breaches thereof by the Respondents; and (c) the Respondents do pay the Applicant’s costs of the arbitration proceedings in the sum of RMB 1,808,708.96 (ie the equivalent of HK$2,165,133.18).

APPLICATION UNDER THE SUMMONS

24.None of the Respondents took any step to apply to set aside the Award.  On 24 February 2017, upon application of the Applicant, Mr Justice Chow granted leave under the Order for the Applicant to enforce the Award as a judgment.

25.By the Summons, the 5^th to 8^th Respondents seek to set aside the Order.  On behalf of the 5^th to 8^th Respondents, Mr Ng (along with Mr Yeung) advanced the following two grounds for the application thereunder:

(a)  Pursuant to sections 86(1)(b) and/or 86(2)(c) of the Arbitration Ordinance, Cap 609 (the “Ordinance”) in that the Tribunal had no jurisdiction to hear the dispute as the condition precedent with respect to mandatory negotiation prescribed by Clause 13.1.1 of the C2 Agreement had not been fulfilled (the “Jurisdiction Issue”).

(b)  Pursuant to sections 86(2)(b), 86(2)(c) and/or section 4(2) of Schedule 2 of the Ordinance in that by the refusal of the Tribunal to admit evidence (particularly two electronic mails) with respect to the Jurisdiction Issue, there were serious irregularities causing substantial prejudice to the Respondents.

Jurisdiction Issue — non-fulfillment of condition precedent

26.On the strength of the authorities submitted by Mr Ng, I accept that there is a “choice of remedies” in that the 5^th to 8^th Respondents are not precluded from applying to set aside the Order by the mere fact that they have not taken out any application to set aside the Award in the first place (see Astro Nusantara International BV v PT Ayunda Prima Mitra (2018) 21 HKCFA 118; [2018] HKCFA 12 (at paragraphs 72 – 84) and PT First Media TBK (formerly known as PT Broadband Multimedia TBK) v Astro Nusantara International BV & Ors [2014] 1 SLR 372 at paragraphs 39 – 40,65 – 68, 71 and 143(c)).

27.In this connection, I observe that for all purposes and intent section 44(2) of the “old” Arbitration Ordinance, Cap 341 is identical to section 86(1)(b) of the Ordinance, wherein it is provided that the Court may refuse to enforce an award where “the arbitration agreement was not valid”.  Hence, the principle enunciated by the Court of Final Appeal in Astro Nusantara International BV & Ors (supra), referring to section 44(2) of Cap 341, is equally applicable to the present application under the Summons.  

28.Further, in PT First Media TBK (supra), the Singaporean Court of Appeal explained (at paragraph 43) that “the invalidity of the award encompassed cases where the award was made without jurisdiction”.  Logically, the lack of jurisdiction may arise from invalidity of the arbitration agreement within the meaning of section 86(1)(b) of the Ordinance.

29.Further, I accept the submission of Mr Ng that the determination by the Court as to jurisdiction of the Tribunal is a decision de novo (see Carrier Hong Kong Ltd v Dickson Construction Co Ltd [2005] 4 HKC 142 (at paragraph 3) and S Co v B Co [2014] 6 HKC 421 (at paragraphs 18 – 38); and PT Tugu Pratama Indonesia v Magma Nusantara Ltd [2014] 4 SLR (R) 257 (at paragraph 18)).

30.Primarily, Mr Ng argued that a condition precedent pertinent to a mandatory alternative dispute resolution procedure by way of “negotiation” (the “Mandatory Negotiation Tier”), as prescribed by Clause 13.1.1 of the C2 Agreement, has not been fulfilled and hence the Tribunal lacked jurisdiction.

31.The C2 Agreement is in Chinese.  Clause 13.1.1 thereof reads as follows:

「 13  争议的解决

13.1.1  因本协议或其解释、违约、终止或效力而引发的或与本协议或其解释、违约、终止或效力有关的任何争议、争端或索赔 (每一，称作一项“争议”)都应当根据本款进行解决。一旦发生某一争议，各方应当首先通过各方间的协商解决该争议。该种协商应当自本协议一方向对方提交书面要求进行该种协商之日后7天内开始。如果争议在该种书面要求作出日之后的30天内未能得以解决，一方在向对方发出书面通知后可以将该争议提交仲裁。」

32.No English translation of the C2 Agreement has been provided by the parties.  An identical clause can be found in Clause 13.1.1 of the relevant contract (in Chinese) with Pinebridge in respect of the Series B Shares.[19]  An equivalent provision can also be found in Clause 12.1 of the relevant contract (in English) in respect of the Series A Shares purchased by Carlyle [20]. It would therefore appear that the Mandatory Negotiation Tier provision was meant to apply to investors across-the-board.

33.In the premises, it is instructive to take reference from the authentic English text afforded by Clause 12.1 of the Carlyle contract[21] in respect of the Series A Shares, which reads as follows:

“ 12.  Dispute Resolution

12.1  Any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation,breach, termination or validity hereof (each a ‘Dispute’),shall be resolved in accordance with this Section. Should a Dispute arise, the Parties shall first attempt to resolve the Dispute by consultation among the Parties. Such consultation shall begin within 7 days after one Party hereto has delivered to the other Party hereto a written request for such consultation. If within 30 days following the date of which such written request is given the Dispute cannot be resolved, the Dispute shall be submitted to arbitration upon the request of a Party with written notice to the other Parties.”

(emphasis added)

34.Mr Ng placed emphasis on the word “shall” and prayed in aid the approach of Chan J of the High Court of Singapore in International Research v Lufthansa [2013] 1 Lloyd’s Rep 24 (at paragraph 100) to the effect that a mandatory tier of dispute resolution may be regarded as a “condition precedent” to arbitration, if the term is sufficiently definitive and certain, notwithstanding that it is not explicitly described as a “condition precedent”.

35.However, International Research v Lufthansa (supra) is of limited assistance since both parties proceeded on the basis that the various tiers of alternative dispute resolution mechanisms gave rise to a “condition precedent”.  Accordingly, Chan J approached the case on that basis and proceeded to consider whether the “condition precedent” had been fulfilled.

36.In Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd [2015] 1 WLR 1145, Mr Justice Teare was considering a challenge to jurisdiction of arbitrators arising from a contractual provision for dispute resolution and arbitration, which reads as follows:

“ ... parties shall first seek to resolve the dispute or claim by friendly discussion ... If no solution can be arrived at between the parties for a continuous period of four weeks then the non-defaulting party can involve the arbitration clause and refer the dispute to arbitration.”

(emphasis added)

37.Having taken into account the jurisprudence afforded, inter alia, by International Research v Lufthansa (supra), United Group Rail Services Ltd v Rail Corp New South Wales (2009) 127 Con LR 202 (Court of Appeal of New South Wales) and HSBC Institutional Trust Services Ltd v Toshin Development Singapore Pte Ltd [2012] 4 SLR 378, Mr Justice Teare concluded that the contractual term gave rise to a “condition precedent” in the form of mandatory “friendly discussion” (see David Joseph QC, Jurisdiction and Arbitration Agreements and their Enforcement (3^rd ed), Sweet & Maxwell, at paragraph 18.07).

38.The decision of Mr Justice Teare in Emirates Trading (supra)has however attracted much criticism.  David Joseph QC (at paragraph 18.10) propounded the following guidance:

“... 2.  The question in each ought to be whether or not there is a sufficiently clearly identified process by reference to objective criteria which the parties are required to engage in, prior to litigation or arbitration, and which would therefore enable the court or tribunal to determine at any stage whether or not a party is in breach.

... 4.  In marginal cases it is suggested that public policy should lean towards enforcement of ADR provisions.  The courts should not be astute to find uncertainty.  There are strong policy grounds to encourage parties to attempt to resolve disputers prior to litigation.”

39.On the foregoing analysis, I am satisfied that although the “consultation” prescribed by Clause 13.1.1 of the C2 Agreement is not described as a “condition precedent”, it is couched in sufficiently certain and objective terms to be enforced as such.

40.I shall now proceed to decide “de novo” as to whether the condition precedent was fulfilled before the Applicant served its Notice of Arbitration on 5 June 2013.

41.It is remarkable that in the First Answer to the Notice of Arbitration dated 5 July 2013, the Respondents raised two other grounds to challenge jurisdiction[22], namely:

(a)  the C2 Agreement was not signed by the Respondents;

(b)  the C2 Agreement involved investment by way of VIE, which contravened the relevant laws and regulations governing operation of business concerning the provision of education in PRC thereby rendering the arbitration clause unenforceable.

42.Suffice it to say that these two grounds were thoroughly dealt with and dismissed by the Tribunal in respect of which no issue has been raised by the Respondent.[23]

43.Pausing there, it has to be borne in mind that when the Respondents received the Notice of Arbitration on or about 5 June 2013 [24],they must also have been in receipt of similar arbitration notice issued by Fresh Gain Limited (or New World) on 10 October 2011 and Cathay on 18 February 2013 [25]. 

44.In the circumstances, it is remarkable that the 5^th to 8^th Respondents did not raise issue as to the “condition precedent” prescribed by Clause 13.1.1 of the C2 Agreement until the service of the Defence (dated 1 April 2014).

45.Further, even where the issue was raised by virtue of the facts and matters pleaded (in Chinese) under paragraph 9.5 of the Defence[26], it was asserted that:

“9.5.2  Prior to receiving the Notice of Arbitration, the Respondents have not received any Request Letter for Negotiation [as required by Clause 13.1.1 of the Contract.]”

9.5.3  On 10 June 2013, the Respondents notified [27] HKIAC of the commencement of the arbitration.” 

(emphasis added)

46.The purport of the plea under paragraph 9.5.2 of the Defence is certainly not the same as the argument now urged upon the Court by Mr Ng on behalf of the 5^th to 8^th Respondents that (a) Zhou did not receive the “Request Letter” (dated 3 May 2013)until 31 May 2013 [28]and (b) Zhou was deceived into signing on 31 May 2013 the “Refusal Letter” [29], which was backdated to 4 May 2013. 

47.It is inexplicable that notwithstanding the plea under paragraph 9.5.2 of the Defence, the Respondents have singularly failed to include in the witness statements of Zhou or Zheng Xianghong (“Zheng”,the 19^th Respondent) or LIU Fung[30] adduced before the Tribunal any facts or matters pertinent to the provenance of the Request Letter and Refusal Letter disclosed and relied upon by the Applicant in the arbitration. 

48.Neither was the series of contemporaneous emails[31] exchanged between HE Wuping of the Applicant (“He”) and Zheng between 28 and 31 May 2013 included in the Respondents’ List of Documents before the Tribunal.

49.In the circumstances, Mr Ng sought to advance an argument that there had been retrospective signing of the Request Letter and Refusal Letter as evidenced by the said series of contemporaneous emails.  

50.In fact, one important email in the series (sent by Zheng to He on 29 May 2013) was missing.  It can now be found in Exhibit ZWY-11 to the Affirmation of Zhao for the Applicant (dated 5 September 2017) [32].  In this regard, no explanation was proffered by Zhou in his Second Affirmation (dated 29 January 2018) [33].

51.A close examination of the series of emails referred to in paragraphs 48 – 50 hereinabove reveals the following (the English translation being prepared only for the purpose of the Decision herein):

28 May 2013	Email from He to Zheng (and one recipient with surname “Wang” of the Respondents) enclosing a request letter and refusal letter (in draft) for confirmation.
29 May 2013	Email from Zheng to He, which reads: “ [Chief] He, Our lawyer has revised [the draft] and opined that it would satisfy your requirement. If you agree, please sign, seal and return the same. My side will also sign and seal before issuing. Thank you!”
30 May 2013	Email from He to Zheng, which reads: “ Principal Zheng, We would sufficiently respect the view of the Secretary and your goodself. There is no issue of any ‘deceit’ or ‘misleading’ [on your part]. We have discussed with our lawyer and come up with some further change to the Request Letter and the Refusal Letter. We now send you the same for consideration. The Request Letter and Refusal Letter were for abridging time. We hope both the Secretary and your goodself would not misunderstand the content. There were three disputes identified in the Request Letter, which would afford sufficient grounds for your side to refuse to negotiate so as to avoid any unnecessary objection before the meeting of the Board of Directors. Besides, since our side would issue arbitration proceedings at the next stage, some grounds would be required. On the one hand,these grounds needed to be agreed to and confirmed by your side. On the other hand, they ought to afford protection to our interest when it comes to dealing with ‘New World’ and other co-investors in the future. We would beseech the understanding of the Secretary and your goodself. Thank you.”
	(emphasis added)
31 May 2013	Email from He to Zheng (and “Wang” of the Respondents): “ Principal Zheng, [Chief] Wang, In accordance with the amendments as confirmed this morning,enclosed please find the revised draft.  I would deliver the sealed version [of the Request Letter] to your school in the afternoon and collect the reply letter [Refusal Letter]. Thank you.”
	(emphasis added)

52.There may well be other emails in the series exchanged between the parties, which have not been put before the Court.  For instance, there is only one email (dated 31 May 2013), which suggests that there might have been other communication between the parties prior to transmission of the email on that day.

53.Be that as it may, it is clear from the string of emails that the Applicant (represented by He) and the Respondents (represented by Zheng)were bargaining at arm’s length with the assistance of their respective lawyers in settling the terms of the Request Letter and Refusal Letter, which were intended to be backdated in order to “abridge time” for commencement of arbitration.

54.Looking at the evidence in the round, I find that the Respondents (including the 5^th to 8^th Respondents) have unequivocally waived the right to insist upon strict compliance with the condition precedent pertinent to the Mandatory Negotiation Tier.

55.Alternatively, the series of the emails affords compelling evidence in writing as to an variation of the arbitration provision under Clause 13.1.1 as between the Applicant and the Respondents (including the 5^th to 8^th Respondents). 

56.In this connection, Clauses 14.6 and 14.7 of the C2 Agreement in Chinese (ie the equivalent of Clauses 13.6 and 13.7 of the Series A Share agreement in English, which are recited hereinafter for comparison)provide as follows:

「14.6 修改和弃权

本协议的任何条款均可进行修改，并可放弃对本协议任何条款的遵守 (一般性地或在某一个别情况下，并且具有追溯力或前瞻性地) ，但需经 (i) 公司、(ii) 各C2投资人、(iii) 新世界、(iv) 凯雷、(v) PineBridge以及 (vi)创始人正式书面授权同意。尽管有上述规定，就各C2投资人或任何创始人而言，未经各C2投资人或该创始人的书面同意，本协议不可被修正，且对本协议任何条款的遵守不得被免除，除非该种修正或免除以相同方式适用于各C2投资人或所有创始人(视情况而定) 。即使所有各方及所有他们允许的受让方未签署作出对按照本协议作出的任何修正或免除的同意，按照本协议作出的任何修正或免除应当对他们具有约束力。」

“13.6 Amendment and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the duly authorized written consent of: (i) the Company; (ii) each C2 Investors; (iii) New World; (iv) Carlyle; and (v) the Principals. Notwithstanding the foregoing, this Agreement may not be amended and the observance of any term of this Agreement may not be waived with respect to any Investor or the Principals without the written consent of such Investor or the Principals unless such amendment or waiver applies to all Investors or the Principals, as the case may be, in the same fashion. Any amendment or waiver effected in accordance herewith shall be binding on all Parties, including all their permitted assigns and transferees, even if they do not execute such consent.”

「14.7 可分割性

本协议的条款应当被视为可分割的，任何条款的无效或不可执行应当不影响本协议其他条款的效力和可执行性。如果本协议的任何条款，或其对于任何人士或者任何情况的适用，是无效的或不可执行的，那么：(1) 应当有一合适的和合理的且有效和可以执行的条款对其进行替代，以便该无效和不可执行的条款的目的得到实现：并且 (2)本协议的其余部分和该条款对于其他人士或者情况的适用应当不受到该无效或不可执行的影响，且，该无效或不可执行也不影响该条款在任何其他管辖范围内的有效和可执行性或在任何其他管辖范围内的适用。」

“13.7 Severability. The provision of this Agreement shall be deemed to be severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstances, is invalid or unenforceable: (i) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provisions, and (ii) the remainder of this Agreement and the application of such provision to other Person or circumstances shall not be affected by such invalidity and unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction.”

57.The arbitration provision evidenced in Clause 13.1.1 of the C2 Agreement is to be considered as a separate agreement.  Notably, by the time the Applicant took out arbitration proceedings on 5 June 2013, Fresh Gain Limited (New World) had already commenced arbitration as early as 10 October 2011.  Thereafter, Cathay (the other C2 Investor) also commenced arbitration proceedings on 18 February 2013.

58.Further, shortly after the Applicant’s, Pinebridge also took out arbitration proceeding on 8 June 2013.  It is unknown whether the Respondents have required strict compliance of and whether Pinebridge have strictly complied with the Mandatory Negotiation Tier.

59.In any event, the circumstances as of June 2013 (referred to in paragraphs 57 and 58 hereinabove) dictated that it would be rather meaningless or unnecessary for a variation to Clause 13.1.1 by way of an exemption or waiver of the condition precedent or the strict compliance with Mandatory Negotiation Tier to be agreed upon by all parties to the C2 Agreement. 

60.By virtue of the severability of the C2 Agreement as provided in Clause 14.7 thereof, the variation of Clause 13.1.1 as between the Applicant and the Respondents, which is evidenced in the series of emails, is binding on the 5^th to 8^th Respondents.  It follows that the 5^th to 8^th Respondents cannot be heard to insist upon the condition precedent or the Mandatory Negotiation Tier.

61.In so deciding, I have not lost sight of the assertion of the 5^th to 8^th Respondents[34] that Zhou agreed to backdate the Refusal Letter as a result of a deceit perpetrated by the Applicant in representing that signing of the same would facilitate the Applicant in dealing with or negotiating with New World for the benefit of the intended but dwindling IPO, which was supposed to have taken place no later than 31 December 2012 [35].

62.However, particulars of the alleged deceit perpetrated by the Applicant are glaringly lacking in both affirmations of Zhou.  When asked in Court, Mr Ng was quite unable to elaborate on how the signing and backdating of the Refusal Letter was supposed to facilitate the negotiation between the Applicant and New World. 

63.In fact, if the allegation of the deceit or fraud on the part of the Applicant is truthful and it was the Respondents’ intention to argue that the agreement of Zhou to backdate the Refusal Letter was vitiated by reason therefor, one would expect a positive case to be pleaded and proved before the Tribunal.  However, that did not happen.  In all circumstances, I am of the view that no weight should be given to such assertion made by Zhou at this late stage.

64.For the sake of completeness, in light of the said series of emails exchanged between 28 and 31 May 2013, Zhao now admitted on affirmation[36] that he might have made a mistake when he gave evidence before the Tribunal saying that he saw the Request Letter and Refusal Letter on or about 5 or 6 May 2013 [37].  He explained that he must have seen some drafts very similar to the two letters around that time.

65.That notwithstanding, it does not detract from the fact that Zhou knowingly signed the Refusal Letter on or about 31 May 2013, which were self-evidently backdated.  No issue was taken by Zhou at the material time[38].  

66.Importantly, the Applicant denied that the backdating had anything to do with any strategic plan in negotiating with New World. Zhao explained that the backdating was only to reflect the reality that negotiation between the Applicant and Respondents had been ongoing since April 2013.  It culminated in two guarantees being signed by Zhou on behalf of CVE and Ruiming respectively and provided to the Applicant on or about 6 May 2013[39].

67.Since the Applicant has not maintained its opposition to the application herein of the 5^th to 8^th Respondents and Zhao is not coming forward to give oral evidence, there is some strength in Mr Ng’s submission that I should prefer the evidence of Zhou to that of the Applicant.

68.However, it does not detract from the fact that the two guarantees[40] are contemporaneous documents whereby CVE and Ruiming (acting through Zhou) undertook to preserve assets equivalent to the investment sums of US$5,400,000 and US$600,000 respectively received from the Applicant under the C2 Agreement, pending the outcome of the intended arbitration.

69.Further, Recital (3) in each of the two guarantees specifically referred to negotiation between the parties having taken place, which however did not result in resolution of the disputes.  In the premises, I am of the view that due weight should be given to such contemporaneous documentary evidence.

70.In summary, the findings in paragraphs 51 – 60 hereinabove dictate that the 5^th to 8^th Respondents cannot be heard to challenge jurisdiction of the Tribunal on the ground of the condition precedent under Clause 13.1.1.  This should be sufficient to dispose of the application herein.  In deference to the industry of Mr Ng, I will proceed to consider the other ground of the application.

Serious irregularities causing substantial prejudice

71.This second ground of the 5^th to 8^th Respondents’ application is advanced pursuant to section 86(2)(b) and/or section 86(2)(c) as read with section 4(2) of Schedule 2 to the Ordinance.

72.Recently, the approach of the Court in light of an application so grounded has been admirably summarized by Madam Justice Mimmie Chan in Maeda Kensetsu Kogyo Kabushiki Kaisha & Anor v Bauer Hong Kong Ltd[2019] HKCFI 1006 wherein the learned judge explained:

“ Claims of serious irregularity, setting aside and legal principles

4. As the decisions in Grindrod Shipping Pte Ltd v Hyundai Merchant Marine Co Ltd [2018] EWHC 1284 (Comm), Terna Bahrain Holding Co WLL v Bin Kamil Al Shamsi [2013] 1 Lloyd’s Rep 86, Reliance Industries Ltd v The Union of India [2018] EWHC 822 (Comm), and P v M [2018] HKCFI 2280, 9 October 2018 illustrate, the test of a serious irregularity giving rise to substantial injustice (the language used in section 4(2) of the Schedule) involves a high threshold. In Reliance Industries Ltd v The Union of India, the English Court stated that only an extreme case justified the court’s intervention under section 68 of the Arbitration Act 1996, which adopts the same wording of ‘serious irregularity’ giving rise to ‘substantial injustice’ as in our section 4(2). As this Court recognized in P v M, a balance is to be drawn between the need for finality of an arbitral award and the need to protect parties against the unfair conduct of the arbitration. The threshold for setting aside must be high, in line with the objectives of the Ordinance to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense, and upholding the parties’ choice to resolve their dispute by arbitration (section 3 of the Ordinance), which must require minimal intervention by the courts in the arbitral process.

5. ‘Serious irregularity’ is set out in in section 4(2) of the Schedule. These include failure by the arbitral tribunal to comply with its duties of independence, impartiality and the use of appropriate procedures, as provided for in section 46 of the Ordinance; the tribunal exceeding its powers; failure to conduct the proceedings in accordance with the procedure agreed by the parties; and failure to deal with all the issues that were put to it.

6. Setting aside of arbitral awards under Article 34 of the Model Law includes the ground of a party being unable to present his case; the award dealing with a dispute not contemplated by or not falling within the terms of the submission to arbitration or containing decisions on matters beyond the scope of the submission; and the arbitral procedure not being in accordance with the agreement of the parties.

7. It has to be borne in mind, as the courts have emphasized in many cases, that the setting aside remedy and any intervention by the Court under the Ordinance (other than a permitted appeal on a question of law under section 5 of the Schedule) is not an appeal against the arbitral award, on facts or on law. In Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1, which concerned an application under Article 34 of the Model Law to set aside an award on the ground of inability to present one’s case, and the arbitral procedure not being in accordance with the agreement of the parties, the Court of Appeal highlighted the fact that the Court is concerned with the structural integrity of the arbitration proceedings, and will not address itself to the substantive merits of the dispute, or to the correctness or otherwise of the award, whether concerning errors of fact or law. I cannot see any rationale for adopting a different approach in a case where an award is challenged on the ground of serious irregularity under section 4 of the Schedule, based on the same cause of the tribunal’s failure to conduct the proceedings in accordance with the procedure agreed by the parties, or its failure to deal with all the issues that were put to it, or its having failed to treat the parties fairly and impartially and giving them a reasonable opportunity to present their cases and to deal with the cases of their opponents (as required under section 46(3)(b)) of the Ordinance). The Court should not be concerned with whether the arbitrator made errors of fact or law,but should only be concerned with the process of the arbitration,and whether it is fair.

8. When considering whether the applicants in question had been denied equality of treatment and the opportunity to present their case, Tang VP (as His Lordship then was) observed in Grand Pacific Holdings (at paragraph 94 of his judgment):

‘... I gather that the conduct complained of must be serious, even egregious, before a court could find that a party ‘was otherwise unable to present his case’. It is unnecessary for me to decide, and I do not decide, how serious or egregious the conduct must be before a violation could be established. Nor, do I decide whether ‘the conduct‌...must be sufficiently serious to offend...basic notions of morality and justice’. I am inclined to the view that the conduct complained of must be sufficiently serious or egregious so that one could say a party had been denied due process.’

9. It must also be emphasized that under section 4(2) of the Schedule, the serious irregularity alleged must have caused or will cause ‘substantial injustice’ to the applicant. Section 68 of the Arbitration Act 1996 has the same wording. In Terna Bahrain Holding Company WLL v Al Shamsi, Popplewell J set out the applicable principles on the court’s intervention for serious irregularity (paragraph 85 of the judgment), and in the context of substantial injustice, stated:

‘... (vi) The requirement of substantial injustice is additional to that of a serious irregularity, and the applicant must establish both.

(vii) In determining whether there has been substantial injustice, the court is not required to decide for itself what would have happened in the arbitration had there been no irregularity. The applicant does not need to show that the result would necessarily or even probably have been different. What the applicant is required to show is that had he had an opportunity to address the point, the tribunal might well have reached a different view and produced a significantly different outcome.’” (emphasis added)

73.In the instant case, this second ground is premised upon the ruling of the Tribunal disallowing the Respondents to rely on the series of emails[41] in the cross-examination of Zhao[42].  Primarily, the ruling of the Tribunal was made on the ground that (a) the emails were not disclosed notwithstanding that leave had been granted for the parties to supplement documentary evidence up to 30 December 2014 [43]; (b) the non-disclosure appeared to be a tactical decision on the part of the Respondents[44].  As a matter of fact, no valid explanation was proffered by the Respondents before the Tribunal for the non-disclosure and/or late introduction of the emails.  In light of the procedural history, I am of the view that the ruling cannot be faulted. 

74.In the absence of the evidence afforded by the series of emails, the cross-examination by the Respondents’ counsel of Zhao[45] and He[46] of the Applicant did not result in the revelation of the backdating of the Request Letter and Refusal Letter.  In the circumstances, the Tribunal rejected the assertion of the backdating and held that the Request Letter and Refusal Letter came into being on 3 and 4 May 2013 respectively as appear on the face of the two documents[47].

75.In the circumstances, the Tribunal did not rule on the issue as to whether Clause 13.1.1 of the C2 Agreement gave rise to a condition precedent.  That said, it is implicit in the finding of the Tribunal that the requirement of the Mandatory Negotiation Tier thereunder had been fulfilled.

76.As matters now stand before the Court, in light of the admission[48] of the mistake on the part of Zhao that he saw the Refusal Letter (as signed) on 5 or 6 May 2013, it must be taken to mean that the Applicant now accepts the signed Refusal Letter did not come into existence until 31 May 2013 as evidenced in the series of emails.

77.That said, there is no formal requirement for the Refusal Letter under Clause 13.1.1.  The only relevance of the Refusal Letter is to explain why no negotiation took place after the purported issuing of the Request Letter on 3 May 2013.

78.On a proper analysis, the entirety of this ground of the application boils down to whether the Tribunal was correct in finding that (a) the Request Letter was issued by the Applicant on 3 May 2013; and (b) since the Respondents refused to negotiate, there was no breach of Clause 13.1.1. 

79.It is not possible, nor is it necessary, for the Court to second- guess what findings the Tribunal would have made if it had the benefit of the series of emails (see Maeda Kensetsu Kogyo Kabushiki Kaisha & Anor (supra) at paragraph 9). 

80.However, on the face of the evidence before the Tribunal,the findings do not amount to “serious irregularities causing substantial prejudice”.  The Respondents only have themselves to blame for not making disclosure of the series of emails in good time despite the ample opportunities afforded by the Tribunal.  In so far as the non-disclosure is caused by inexperience of the Respondents’ counsel[49], the remedy lies elsewhere.

DISPOSAL

81.For the reasons set out hereinabove, the Summons is dismissed.

82.Since the Applicant does not maintain its opposition, this hearing is akin to an ex parte application.  I make an order nisi that there be no order as to costs of and occasioned by the Summons.  The costs order will apply to all costs reserved, if any.

Mr Lawrence Cheung, instructed by Kelvin Cheung & Co, for the applicant

Mr Ernest Ng and Mr Mike Yeung, instructed by Fan, Wong & Tso, for the 5^th to 8^th respondents