G v. X and Others

HCCT 58/2021

[2022] HKCFI 1864

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 58 OF 2021

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Before:  Hon Mimmie Chan J in Chambers

Date of Hearing:  1 June 2022

Date of Decision:  21 June 2022

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D E C I S I O N

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Background

1.On 22 March 2022, this Court handed down its Decision on the Applicant (“G”)’s application for continuation of a Mareva Injunction, and on the 1^st Respondent (“X”)’s application for payment out of the money he had paid into court for the discharge or in lieu of the Mareva Injunction, and for fortification from G. The Decision sets out the background of the parties’ dispute, and the Award made on 20 April 2021 in a CIETAC arbitration commenced by G, which will not be repeated here.

2.The abbreviations used in the Decision are adopted below.

3.The applications before the Court on 1 June 2022 were G’s application for enforcement of the Award in Hong Kong, X’s opposition thereto and X’s application for a stay of the enforcement proceedings in Hong Kong pending the determination of the Setting Aside Application by the Beijing Court, which application was made by X on 20 May 2021 and is still awaiting judgment.

4.To recap, the grounds of X’s opposition to G’s application for enforcement of the Award are that he was unable to present his case on G’s additional or revised relief sought by way of amendment of his claim, and on the formula which the tribunal had come up on its own for the calculation of the damages payable; that the Award had dealt with a difference or disputes which did not fall within the terms of the submission to arbitration, and/or contained decisions on matters beyond the scope of the submission, by allowing the consolidation of the disputes under 8 agreements into a consolidated arbitration and dealing with the disputes arising out of the 8 agreements. On that basis, the procedure was not in accordance with the parties’ agreement, and further, enforcement of the Award would be contrary to public policy.

5.In the Decision, I had considered the merits of X’s Setting Aside Application on the Mainland, in the context of deciding whether G had a good arguable case for the Mareva Injunction and also in the context of whether fortification should be ordered against G (see paragraph 53 of the Decision). This was on a brief consideration of the grounds of the Setting Aside Application, and I was not satisfied that the merits of the Setting Aside Application could show that G had no good arguable case to seek enforcement of the Award as a judgment in Hong Kong.

6.On the applications now before me, I have to decide whether X has proved that there are grounds under section 95 (2) of the Ordinance, by virtue of which the Court may refuse enforcement of the Award. If the grounds can be established, the Court still has a residual discretion to enforce the Award nevertheless.

7.X’s case is that enforcement should be refused, but alternatively, enforcement should be stayed pending the Mainland Court’s decision on the Setting Aside Application. Whilst I have expressed views in the Decision on whether G had a good arguable case for enforcement of the Award, to support the continuation of the Mareva Injunction, X is not precluded from making further submissions for the purpose of discharging his burden under section 95 (2) to prove that there are grounds for refusing G’s application for leave to enforce the Award in Hong Kong.

Opportunity to present case

8.I am not satisfied that X has shown that he was unable to present his case in the Arbitration on G’s amended claim for revised damages. As Counsel for G pointed out, and I accept, X had made submissions and filed evidence on G’s application to amend, and X had been given time on 11 August 2020 to submit his defence and related materials in support, but he failed to make further submissions and did not seek any extension of time to put in further materials.

9.Even on the case presented by X’s Counsel, his alleged inability to present his case was due to his reading and unreasonable interpretation of the August Notice issued by the tribunal, informing G that no additional arbitration fees were required, as meaning that the tribunal had decided not to accept G’s revised claim, and further due to X’s reliance and fanciful expectation that G would not be financially able to pay the additional fees specified in the March Payment Notice. It was on the basis of X’s own belief, that the tribunal had not accepted G’s revised claim, and that G would not be able to pay the additional fees, that X did not make any further submissions and made no further answer to the amended claim and the revised damages.

10.X claimed that he was only required by the March Final Notice (dated 30 March 2021) to make further submissions within 5 working days, and that he was not able to comply with such a deadline. I fail to see why X could not, in 5 working days, even make simple submissions that the amended claim was made too late, and/or that the revised damages should not be allowed. Even at the time of the hearing before this Court in June 2022, X has not put forward any complex or detailed evidence or submissions to explain why the amended claim should not have been allowed in the Arbitration, which matters he could and would have produced to the tribunal, if he had been given more time.

11.As for the alleged lack of opportunity to make submissions on the formula employed by the tribunal in the calculation of the damages payable to G, X had the full opportunity in the Arbitration to present his case on the claims made and the relief sought by G, which had throughout been for rescission of the relevant agreements, for the return of the 4% TME shares (representing the 40% equity interest sold by G to X which was induced by X’s fraud), and/or damages. Damages had throughout been one of the key issues of dispute in the Arbitration. As reflected in the Award, G’s claims were that X had fraudulently concealed information from G, to induce G to sign the relevant agreements and to sell his interests in the relevant companies, and that by virtue of X’s alleged fraud and coercion, G was entitled to rescind the 8 agreements and restore the validity of a series of contracts. G’s claim in the Arbitration was that X (and the other respondents) should restore everything after rescission of the 8 agreements, such that, inter alia, X should return to G the 40% equity interest represented by the 4% TME shares then held by X. G’s alternative claim was that if rescission and return of the shares were impossible, then X should compensate G for his economic losses by paying damages representing the difference between the market value of the 4% TME shares on the date of the Award, and the consideration X had received (page 14 of the Award).

12.It is therefore clear that the underlying claim of G was X’s fraudulent concealment of relevant information, and that the 8 agreements should be rescinded, the shares sold by G should be returned to him, and alternatively, he should be paid damages represented by the market value of the shares of which he had been deprived as a result of the fraud, and which he would have retained but for the fraud to realise profits for which he should be compensated.

13.X did have the reasonable opportunity to present his case, and he did make submissions on the claims made and relief sought by G. His defence, as argued before the tribunal, was that (inter alia) G had no right to rescind the agreements, that there were no elements of fraud or coercion, that the claim for rescission had exceeded the scheduled time limitation, that G was not a party to all of the 8 agreements in respect of which rescission was sought, and that G’s claims for rescission and for the return of the shares had no factual, contractual or legal basis, such that all of G’s claims including the claims for financial loss and costs should be dismissed by the tribunal. Those were the submissions made for X, by those representing him in the Arbitration, after having taken instructions from X and with X’s consent and approval.

14.The tribunal was entitled to reject X’s defence and submissions on relief, and to award damages to G on the basis of X’s breach of contract, which the tribunal found to have been established. The tribunal found that X’s conduct constituted fraud against G, and although G’s claim for rescission of the agreements on the basis of fraud was not allowed due to time limitation reasons, the tribunal held that X was liable to pay damages to G under the Contract Law of PRC. The tribunal found that X’s conduct constituted fraud against G, in that he had failed to truthfully state and disclose relevant information to G, had provided untrue information about the business of the company, had intentionally concealed important facts concerning the target company and had deliberately and seriously devalued G’s equity. According to the tribunal, this constituted breach and fault under Article 42 of the Contract Law, as malicious concealment and violation of the principle of good faith, and that G was entitled to compensation.

15.The tribunal’s award for damages was not for the full amount claimed by G: on the basis of the market value of the 4% TME shares on the date of the Award less the consideration paid to G in 2013. Instead, the tribunal’s award of damages for the 4% TME shares was based on the closing price of the shares on a date of 30 October 2020, at US$14.88, multiplied by the number of shares of the common stock of TME traded in the market in 2019, but at a discount of 95%, ie by awarding 5% only of the figure calculated. The tribunal reasoned that it could not award the full amount claimed by G, as the increase in the market value of the TME shares in the later period was attributable to the operations of the company with the existing investors and the respondents, as well as the performance of the US securities market. The tribunal recognized, however, the huge investments contributed by G at the early stage, and that such early investments had played a decisive role in the startup and subsequent development of TME.

16.X pointed out that the formula adopted by the tribunal in calculating the damages payable to G had been applied by the tribunal on its own accord, without having given any notice to the parties. It was highlighted that the tribunal made a material error in using US$14.88, on the wrong assumption that this was the price of one ordinary share of TME, when in fact, it was the price of an ADR unit of TME, equivalent to two ordinary TME shares. In so doing, the tribunal had awarded 2 times the amount it had intended to award to G.

17.X sought to highlight the fact that he is not seeking to set aside the Award on the basis that there was an error of law or fact made by the tribunal. His complaint is that he had not been given the opportunity to address the tribunal and to make submissions on the tribunal’s proposed manner of calculating damages, nor on the formula the tribunal chose to adopt without first informing the parties, which had created a huge difference in the amount of the award, and consequently grave prejudice to X.

18.On behalf of G, Counsel contended that X had already made full submissions on the claims made by G in the Arbitration, including G’s claim for damages, and X had already and fully responded to the submissions made by G as to how damages should be calculated: as the market value of the shares at the date of the Award. According to G, the challenge made as to the wrong formula or wrong data used by the tribunal is only an impermissible attack on the tribunal’s finding of fact and on the outcome of the Arbitration. The correctness of the tribunal’s findings and determination on liability and quantum are not to be reviewed by the Court of enforcement.

19.I am not persuaded that having received and heard detailed submissions made by the parties as to the relief claimed including the damages to be awarded, X having chosen to confine his submissions to the fact that G had no viable claim for any relief, and that effectively 0 damages should be awarded, the tribunal is required, after finding that liability was established, to invite further submissions from the parties again on the calculation of damages on the data available to the public and the tribunal. The point in play and the issue in the arena had throughout been G’s entitlement to rescind the agreements and to seek the return of the shares to him, or the value of the shares which he should have held but for X’s fraud, which was said by G to be reflected in the market value of the shares as at the date of the Award or enforcement of the Award. Both liability and quantum were in issue in the Arbitration, for determination by the tribunal. X chose to make no submissions on the claim of quantum. Viewed in another way, he did make submissions, but to the extent only that the quantum should be nil.

20.As pointed out by the Court in Reliance Industries Ltd v Union of India [2018] EWHC 822, whether there has been a reasonable opportunity to present or meet a case is one of fairness and will always be one of fact and decree which is sensitive to the specific circumstances of each individual case. On the facts of this case and as a matter of degree, I am not satisfied that X had been deprived of a reasonable opportunity to address G’s case.

21.As Popplewell J pointed out in Terna Bahrain Holding Company WLL v Bin Kamil Shamsi and Others [2012] EWHC 3283 (Comm):

“... whilst s 33 requires a party to be given a reasonable opportunity of addressing his opponent’s case, that does not mean that the tribunal is acting unfairly in deciding the case on the point to which the party raising it does not give any great emphasis, or which is not the subject matter of any great exposition. If the point is raised only briefly, that is in accordance with the ideal of speedy resolution which is an objective of the arbitral procedure (whether or not in a given case the objective is achieved). It is nonetheless so if a host of what turned out to be bad points are also raised and it is on those other points that the party raising the issues concentrates his exposition. Provided that the issue is raised, however briefly, the opposing party has an opportunity to address it at whatever length and in whatever detail he chooses.”

The present case appears to me to fall within the categories identified by the Court above, as NOT constituting the inability of a party to address a case.

22.Counsel for G further pointed out that if there was any alleged error in the tribunal’s calculation of damages, X could have invoked the remedy under Article 53 of the CIETAC Arbitration Rules, to request a correction of any calculation error in the Award. He did not do so, and has clearly waived his right, and is estopped from relying on the complaint now.

23.Article 53 of the CIETAC Arbitration Rules provides that within 30 days from its receipt of the arbitral award, either party may request the tribunal in writing for a correction of “any clerical, typographical or calculation errors, or any errors of a similar nature” contained in the award. On its face, Article 53 is sufficiently broad to include the correction of mistakes of calculations made in the Award, and I agree that it would have been open for X to apply to the tribunal, to point out the error, and to give the tribunal the opportunity to correct any error it had made in the calculation of the damages to be paid to G, rather than to raise it for the first time in its application to the Mainland Court to set aside the Award in respect of the error. Applying Hong Kong law in the enforcement proceedings, X was in breach of its duty of good faith in the Arbitration (Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, Gao Haiyan v Keeneye Holdings Ltd [2012] 1 HKLRD 627) by failing to alert the tribunal of the error X claims it had made, depriving it of the opportunity to clarify the calculation in the Award and to correct any error therein, and X should be held to have waived any irregularity.

The scope of the submission to arbitration

24.In pursuing X’s argument that the tribunal had dealt with a difference not contemplated by or not falling within the terms of the submission to arbitration, and contained decisions on matters beyond the scope of the submission to arbitration, Counsel pointed out that although X did not make any challenge to the tribunal’s jurisdiction in the Arbitration, he did claim and it was argued before the tribunal that the consolidation of the disputes under the 8 different agreements was contrary to Article 14 of the Arbitration Rules, since the Framework Agreement and the other agreements were not master and ancillary contracts, and the nature of the parties’ relationship under the agreements were different. X’s stance and arguments are reflected at page 51 of the Award. Hence, Counsel pointed out that it cannot be said that X had waived any right to complain of the tribunal having acted or making decisions on matters beyond the scope of the submission.

25.Whether disputes arising out of the 8 agreements can be dealt with in a single arbitration depends on whether it can be said that the Framework Agreement signed by G, X and others is the principal contract and the other 7 agreements can be said to be ancillary to and dependent on the Framework Agreement; or whether the 8 agreements can be said to involve the same parties and that the legal relationship arising between the parties under the different agreements can be said to be of the same nature. The tribunal found that both these conditions have been satisfied, to warrant a consolidation of the disputes under the 8 agreements. Although X was not a party to 3 of the 8 agreements, the tribunal found that he controlled and beneficially owned the companies which were parties, such that G could properly commence the Arbitration and seek relief against X under all the 8 agreements.

26.X’s complaint is that the question of X’s control and beneficial ownership of the companies which were parties to 3 agreements was not a matter submitted to the tribunal in the Arbitration, and further, that only the Framework Agreement and the Supplemental Framework Agreement were in the nature of “principal/ancillary contracts”, and the other 6 agreements were all independent of the Framework Agreement, dealing with different subject matters and legal relationships, and that the tribunal was not entitled to deal with the disputes under the different agreements in the one Arbitration.

27.Having considered the further detailed submissions and the expert evidence on PRC law, I cannot say that there are no reasonably arguable grounds to be made in the Setting Aside Application (Hebei Import & Export Corporation v Polytek Engineering Co Ltd [1996] 3 HKC 725) as to the scope of the submission to arbitration. This does not mean, of course, that G did not have a good arguable case for enforcement of the Award, to support its application for the Mareva Injunction. However, the Mainland Court, as the supervisory court of the Arbitration, is obviously in the best position to decide on the scope and operation of Article 14 of the CIETAC Arbitration Rules and on Mainland law. Its judgment on the question of the agreements and whether the disputes can be consolidated into one arbitration will obviously be given due heed by the Hong Kong Court, when deciding whether it should exercise its discretion to enforce the Award, or refuse enforcement here. It will be prudent to stay enforcement of the Award until the decision of the supervisory Court is known.

28.On behalf of G, it was submitted that there has been substantial delay in the Setting Aside Application, and that there is prejudice to G if enforcement of the Award should be further delayed. Counsel pointed to the fact that the payment into Court only covers the principal debt, and interest accrued up to 21 December 2021. There is additional, double interest accrued under the Award between 20 December 2021 and now, calculated to be RMB 29,637,333.5 up to 1 September 2022. Double interest is accruing at the daily rate of 0.0175%, namely RMB 116,682,417 per day.

29.G highlighted the fact that the Award was made in April 2021, G’s application for enforcement in Hong Kong was made in July 2021, but X only applied to stay the enforcement in Hong Kong in March 2022, 8 months after having been given notice of G’s enforcement proceedings. X’s Setting Aside Application in Beijing was made in May 2021. The delay in making the stay application was unjustifiable, and according to G, X had also been delaying and evading service of G’s Hong Kong enforcement proceedings.

30.When the Mareva Injunction continuation and fortification applications were heard in Hong Kong in December 2021, all the hearings in the Setting Aside Application had already been concluded in September 2021. Both parties had anticipated that the Setting Aside Application would be determined within 6 months of its filing, by December 2021. However, judgment in the Setting Aside Application is currently still pending, and there is uncertainty as to when the Setting Aside Application will be resolved.

31.By reason of the substantial delay, coupled with X’s evasion of service of these proceedings on the Mainland, G submitted that these proceedings and the Mainland Setting Aside Application are simply delaying tactics of X, and that leave to enforce the Award should immediately be granted without any adjournment (Hebei Import & Export Corporation v Ploytek Engineering Lo Ltd [1996] 3 HKC 725). If there should be any adjournment, G claimed that further security should be provided by X as it is uncertain when judgment would be available in the Setting Aside Application, and that G is being deprived of significant sums which continue to fall due under the Award.

32.X sought to highlight the fact that it has been over a year from the hearing of the Setting Aside Application, and that such delay meant that the Mainland Court is likely to set aside the Award. X relies on the fact that if a decision is made to set aside an arbitral award, this has to be made subject to a further reporting and approval process on the Mainland, which takes longer than the usual time to hand down a decision to uphold an award (the latter taking approximately 3 months).

33.There can be many reasons why the judgment in the Setting Aside Application has been delayed. The Mainland Court taking steps to inform parties not privy to the Arbitration of the Setting Aside Application having been made by X (“Notification”) and seeking their opinion, may be one of the reasons for the delay. However, I am not persuaded that either the Notification or the delay in the handing down of a judgment in this case necessarily means that the Award is likely to be set aside.

Disposition

34.The objective of the Ordinance, of facilitating the speedy resolution of disputes by arbitration, and the recognition of arbitral awards as being final and binding, must be borne in mind. It is naturally undesirable that enforcement of the Award should be indefinitely postponed and delayed, and that the status of the Award should be left in a state of uncertainty, because an application has been made to set aside the Award, and the prospects of success of the application are debated and uncertain.

35.An adjournment of an application for enforcement may be granted, but subject to terms and conditions as may appear to the Court to be just and necessary in the circumstances of the case. G asked for further security as a condition for adjournment, but I bear in mind the fact that there is already X’s payment into the Hong Kong Court, amounting to the equivalent of RMB 722,544,072, and that X’s assets on the Mainland have been frozen by the Mainland Court, for an additional value of RMB 60,867,678. Under the Award, X is to pay to G RMB 660,752,667 as damages, double interest, and arbitration fees of RMB 60,004,000. According to X, the payment in court and the assets frozen on the Mainland, totaling RMB 739,411,750, exceed the amount awarded, such that G is adequately secured. On G’s case, however, there is still interest accrued from 21 December 2021, and G’s legal costs, which remain uncovered by any security.

36.Even if security is to be ordered as a condition for the adjournment granted, G is not necessarily entitled to seek payment of the full amount of the Award. In this case, I will not make an order yet for additional security, but the adjournment will only be granted for a short period of time of 3 months from the handing down of this Decision. I grant liberty to G to apply for a hearing to take place 3 months after the handing down of this Decision, to seek an order for immediate enforcement of the Award, and for X to show cause why further security should not be ordered if further adjournment is sought. Parties may further apply for a hearing in the event that the Mainland Court should hand down its decision on the Setting Aside Application in the interim of the adjournment for 3 months.

37.Since X seeks the adjournment which is granted, X must pay the costs of and incidental to the Summons of 11 March 2022, with certificate for two Counsel, and an order nisi is made to such effect. Such order will be made absolute unless application for variation is made within 14 days.

Mr Douglas Lam SC and Ms Jacqueline Law, instructed by Reed Smith Richards Butler LLP, for the applicant

Mr Paul Shieh SC and Ms Astina Au, instructed by King & Wood Mallesons, for the 1^st respondent