Brunswick Bowling & Billiards Corporation v. Shanghai Zhonglu Industrial Co Ltd and Another

HCCT 66/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 66 OF 2007

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Before:  Hon Lam J in Court

Dates of Hearing:  13 to 15 January 2009

Date of Judgment:  10 February 2009

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J U D G M E N T

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1.This case concerns an arbitration that took place in Hong Kong in 2005.  The hearing lasted for 34 days between 7 March and 10 August 2005.  The arbitrators gave their award on 31 July 2007.  It is a complicated award which deals with various commercial disputes between the Claimant and the Respondents.  The net effect of the Award was that the Respondents were required to pay to the Claimant US$89,106.10 with interest and return 2,000 bowling balls to the Claimant.  In respect of some of the counterclaims raised by the Respondents, the Tribunal held that no award would be made because those claims were not within the jurisdiction of the Tribunal.  I was told that the parties had each spent more than US$10 million on legal costs incurred for the arbitration.

2.The Respondents applied to set aside the award in November 2007.  Large volume of evidence was filed by the parties.  The application was heard by this court in January 2009.

3.It is not disputed that this is an international arbitration governed by the UNCITRAL Model Law.  The background to the disputes is set out in Paras.1.1 to 1.17 of the Appendix to Interim Award.  The Appendix was the Tribunal’s reasons for the Award.  In this judgment I shall refer to it as “the Appendix”.  Instead of repeating what had been said, I attach those paragraphs as an Annex I to this judgment for the benefit of the readers who wish to know the background.

4.It is also common ground that under the Model Law, an award may only be set aside on the grounds stated under Article 34(2).  In the present proceedings, the Respondent relied on grounds under Article 34(2)(a)(ii),(iii) and (iv),

“(ii)    the party making the application  … was otherwise unable to present his case;

(iii) the award deals 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 …;

(iv)    … the arbitral procedure was not in accordance with the agreement of the parties … or, failing such agreement, was not in accordance with this Law.”

5.Parties addressed this court by reference to the different heads of claims and counterclaims.  I shall adopt the same course.

The OIS claim

6.On 12 January 2001, the Claimant and the Respondents entered into a Supply and Worldwide Distribution Contract [“SWDC”].  Under that contract, the Claimant became the exclusive worldwide distributor of bowling products manufactured by the Respondents for a term of 18 months.  In consideration of that, the Claimant was required to satisfy a minimum purchase requirement defined in monetary terms.  That requirement was qualified by an agreed arrangement in respect of Orders In System [“OIS”].  That arrangement was explained at Para.6.2 of the Appendix,

“… Since the SWDC came into effect immediately on signature it was plain that for the first period of six months the Minimum Purchase Requirement had to be relatively modest.  Great importance was therefore attached to the so-called ‘Orders in System’, defined by the SWDC as all of the Respondents’ unexpired and unfulfilled sales contracts and outstanding orders at the date of the SWDC with third parties … It was agreed in advance that the Orders in System should be divided between the parties, one set being allocated in the SWDC to the Claimant … and one to the Respondents … By the time the SWDC was concluded there were lists … identifying the specific Orders in System attributable to each side, the allocation having been made by the Respondents, who alone had access to the information prior to signature of the SWDC.  Sales under the Orders in System attributable to the Claimant were to be credited to the Claimant’s obligations under the Minimum Purchase Requirement …”  

7.The Respondents gave a warranty in the SWDC as regards the validity of the OIS attributable to the Claimant under Clause 10.2.  There was also an undertaking by the Respondents to procure the completion of such OIS in Clause 6.1.  Given the way in which the Tribunal dealt with this claim and the arguments of the Respondents challenging the Award in this respect, it is necessary to set out Clause 6.1,

“6.1   Zhonglu and Mr Chen shall procure and guarantee that, as of the date of this Contract, all Orders in System Attributable to Purchaser Group, as listed in Appendix 5.2, shall be completed by Zhonglu or the relevant Supplier Group Members and all sales pursuant to all Orders in System Attributable to Purchaser Group shall be credited to the Purchaser Group Members for the purpose of fulfilling the Minimum Purchase Requirement.”

8.The relevant factual backgrounds leading to such provisions are set out in paras.9.1 to 9.7 of the Appendix.  They are attached to this judgment as Annex II.

9.The Claimant said there was a breach of that warranty in that many OIS attributable to the Claimant were not true and valid.  In the Claimant’s post-hearing submissions placed before the Tribunal, at p.58 to 70, validity of the OIS was challenged because it is said that such OIS included,

(a) ongoing negotiations which constituted neither offers nor acceptances;

(b)    orders for products bearing trademark that the Respondents had no legal right to manufacture or sell;

(c) orders of substantially less value than represented by the Respondents;

(d)    orders for used AMF pinsetters, old Zhonglu equipment lines, and other lane packages not falling within the definition of “products” in the SWDC;

(e) contracts that were already in customer default;

(f) an order made in February 1999 with respect to which the prospective purchaser sought to lower the price in 2001;

(g) a proposed exchange of real estate for bowling equipment. 

10.The Claimant also said the Respondents had repudiated their obligation to complete those OIS under Clause 6.1.  Its case in this respect can be found at p.72 to 74 of the Claimant’s post-hearing submissions.  In essence, the Claimant said Zhonglu had to fulfill the relevant OIS.  Thus, at p.73 of those submissions, it was said,

“However, the foregoing provisions were deleted in favour of contract language that clearly imposed upon Zhonglu, and not Brunswick, the obligation of, and responsibility for, completing (i.e. fulfilling) the Orders in System.”

11.The Respondents’ case on OIS can be found at paras.375 to 390 of their Closing Submissions placed before the Tribunal.  Apart from dealing with the question whether the OIS attributable to the Claimant existed as a matter of fact both in terms of such orders being placed and the existence of the customers, at para.381 of the Closing Submissions, the Respondents said,

“… Brunswick persists with its claim that the orders were not ‘true and valid’ because (1) many OIS were not written, and (2) many OIS did not result in sales.”

Pausing here, in the light of the Claimant’s post-hearing submissions, I think this is an over-simplification of the claims of the Claimant.

12.The Respondents then proceeded to deal with point (1) at paras.382 to 388.  Given the complaint now advanced on behalf of the Respondents under this head, it is useful to set out para.382 to show the position taken by them before the Tribunal,

“Whilst the SWDC is governed by Illinois law, the pre-existing OIS were contracts in the PRC, subject to the laws of the PRC.  Under PRC law, ‘parties may conclude contracts in writing, orally, or in another form’.  Therefore, all OIS, whether oral or written, are valid under PRC law.”

13.There was a reference under footnote 501 in that paragraph to the relevant PRC statutory provisions to support the submission on the requirements under PRC law.

14.There was no reference in the parties’ respective submissions as regards any requirement for signature or sealing of contract under PRC law.  But there was a reference to the lack of signature in evidence as a ground for attacking whether the orders were actually orders, see the reference to the evidence of John Ng at para.9.32 of the Appendix.

15.Neither was there any contention before the Tribunal that completion of the OIS under Clause 6.1 refers to anything other than the fulfillment of the orders, viz. performing the obligations under the orders.

16.However, the Tribunal construed Clause 6.1 in a different way.  At para.9.17 of the Appendix, it was said,

“… However, this obligation was strictly limited in time by the words ‘as of the date of this Contract’, which clearly required the Respondents to have the Orders in System attributed to the Claimant completed on or before 12 January 2001.  This can only reasonably mean that the Orders in System had to be complete as contracts by that date, in the sense that all the terms of each order had to be agreed in written form, properly authenticated by each side, so that each order had become a fully formed and legally binding contract under Chinese law.  It was clear that the performance of each of these contracts by delivery of lane packages, and the payment of the purchaser price by the buyer, was to take place after 12 January 2001.”

The Tribunal further elaborated on the rationale for this interpretation at para.9.18 and 9.26 of the Appendix.

17.This court is not concerned with the correctness of this interpretation of Clause 6.1.  But one can note from the words in italics in the above quotation that by adopting that construction, the Tribunal construed Clause 6.1 in a manner that had not been considered by the parties.  This seems to be acknowledged by the Tribunal at paras.9.20 and 9.21 of the Appendix though I believe the reference to Clause 6.2 at para.9.20 should be a reference to Clause 6.1 instead.

18.The main argument of Miss Cheng SC before this court on this aspect of the case is that the Tribunal put aside the contentions of the parties and embarked on its own assessment of the requirements on validity of contracts under PRC law without regard to the evidence adduced by the parties on foreign law (including PRC law).  Counsel also said the Tribunal then decided the OIS claim in favour of the Claimant simply on the basis of its own secret view that orders not in writing and unauthenticated by signatures and seals were not valid under PRC law.  She said since the Claimant contended that validity of the orders should be determined with reference to Illinois law, it was not open to the Tribunal to refer to PRC law for that purpose.

19.Further, counsel submitted that the Claimant was deprived of any opportunity to deal with the Tribunal’s undisclosed view on the requirements of contract under PRC law.  The Tribunal had not identified the chapter and verse of the relevant PRC law that it relied upon.  The only evidence on PRC law on contract before the Tribunal was that adduced by the Respondents and such evidence was against the view of the Tribunal.

20.My attention was also drawn to paras.9.47 and 9.48 of the Appendix which adverted to the lack of signatures and seals in the OIS.  In particular, at para.9.48 the Tribunal said,

“… of the 29 listed Orders in System it appears that no less than 24 … were unsigned and thus not ‘true and valid’ within the meaning of Clause 10.2 …”

21.Miss Cheng argued that all three limbs of Article 34(2)(a) mentioned at paragraph 4 above are engaged.  First, because the Respondents did not have any opportunity to deal with the Tribunal’s secret view on contractual requirements under PRC law, the Respondents were unable to present their case.  Second, because the Claimant did not adduce any evidence on PRC law contradicting the Respondents’ evidence on PRC law, the Tribunal took it upon itself to decide the PRC law requirements as a dispute beyond the scope of submission to arbitration.  Third, counsel said reading Article 34(2)(a)(iii) and (iv) with Article 28, due to the choice of law made under clause 23.1 of the SWDC, the Tribunal should decide the validity of the OIS by reference to the law of Illinois as opposed to PRC law.  In failing to do so, the Tribunal failed to conduct the arbitration in accordance with the Model Law and again made a decision beyond the scope of submission.

22.The last point can be disposed of shortly.  The extent to which the choice of law clause is applicable to the various disputes was a subject of arguments before the Tribunal.  As shown above, the Respondents contended in their closing submissions in the arbitration that the validity of the OIS was to be determined according to PRC law (see para.382 of the closing quoted above).  The Tribunal agreed with them.  It does not lie in their mouth to contend in the present proceedings that the validity of the OIS should be determined by Illinois law.  I therefore hold that there is no merit in the Respondents’ reliance on Article 34(2)(a)(iii) in this context.  Neither can the Respondents rely on Article 34(2)(a)(iv) which deals with arbitral procedure.  The determination on the applicability of the choice of law clause to the validity of the OIS is not a matter of arbitral procedure.

23.The first and second points are in substance two facets of the same underlying complaint: the Tribunal did not canvass with the parties its secret view on contractual requirements under PRC law before deciding the issue.  Miss Cheng referred this court to Fox v Wellfair Ltd [1981] 2 Ll Rep 514 and Paklito Investment Ltd v Klockner East Asia Ltd [1993] 2 HKLR 39.  These cases are authorities for the proposition that an arbitral tribunal should not act upon evidence received by it secretly without giving parties an opportunity to deal with it.  As Dunn LJ said in Fox at p.528,

“… an expert arbitrator should not in effect give evidence to himself without disclosing the evidence on which he relies to the parties … He should not act on his private opinion  without disclosing it.  It is undoubtedly true that an expert arbitrator can use his own expert knowledge.  But a distinction is made in the cases between general expert knowledge and knowledge of special facts relevant to the particular case.”

24.On the other hand, Mr Aiken SC contended that the arbitrators were entitled to use their expertise on PRC law and he relied on The Pamphilos [2002] 2 Ll Rep 681.

25.At p.686-7, Colman J said,

“The arbitrators’ duty was to give the parties a fair opportunity of addressing them on all factual issues material to their intended decision as to which there had been no reasonable opportunity to address them during the hearings …

It has to be emphasized, however, that the duty to act fairly is quite distinct from the autonomous power of the arbitrators to make findings of fact.  Thus, whereas it may normally be contrary to the arbitrator’s duty to fail to give the parties an opportunity to address them on proposed findings of major areas of material primary facts which have not been raised during the hearing or earlier in the arbitral proceedings, it will not usually be necessary to refer back to the parties for further submissions every single inference of fact from the primary facts which arbitrators intend to draw, even if such inferences may not have been previously anticipated in the course of the arbitration. … A typical situation is where arbitrators arrive at a conclusion on an issue of expert evidence which differs to some extent from that put forward by either opposing expert.  In many cases … the arbitrators have been appointed because of their professional legal, commercial or technical experience and the parties take the risk that, in spite of that expertise, errors of fact may be made or invalid inferences drawn without prior warning.  It needs to be emphasized that in such cases there is simply no irregularity, serious or otherwise.  What has happened is simply an ordinary incident of the arbitral process based on the arbitrator’s power to make findings of fact relevant to the issues between the parties.”

26.I readily agree that in the process of fact finding, arbitrators must have autonomy in drawing inferences as they deem fit and in that respect they are entitled to depart from the positions advanced by the parties.  However, on primary factual disputes, they have to act on evidence and give reasonable opportunity to the parties to put forward their respective case on such evidence. 

27.In my judgment, given that we are dealing with an arbitration in Hong Kong, the requirement of contractual validity under PRC law has to be decided on the evidence before the Tribunal.  As pointed out by Miss Cheng, the arbitrators were not appointed on account of their expertise in PRC law and the Respondents had no reason to expect the Tribunal to adopt a view on PRC law which had not been canvassed in the course of the arbitration.

28.In such circumstances, the Tribunal should have canvassed with the parties the particular provision in the PRC law on the topic and gave them an opportunity to respond before making a decision on the same.  The failure of the Tribunal in this regard furnished the Respondents a valid ground of complaint under Article 34(2)(a)(ii).  I prefer to rest my decision on this limb instead of Article 34(2)(a)(iii) because I can contemplate cases where an arbitral tribunal may feel obliged in the interest of justice to canvass issues not raised by the parties for the proper determination of the disputes submitted for arbitration.  Provided that the parties were given opportunity to present their case on the ‘new’ issues, the determination of the tribunal would still be within the scope of submission.

29.Even though the Respondents establish a valid ground under Article 34(2)(a)(ii), the court still has to consider whether the award under this head should be set aside as a matter of discretion.  I find it somewhat surprising that despite the diligence of counsel no decided case on how the discretion under Article 34 should be exercised has been found.

30.Miss Cheng took this court to the travaux prepatoir of Article 34 and the commentary in A Guide to the UNCITRAL Model Lawon International Commercial Arbitration by Holtzmann & Neuhaus and submitted that an award may be set aside irrespective of whether the ground established had materially affected the award.  However counsel accepted that the supervisory court may refuse to set aside the award if what is established is a minimal or trivial infraction of the procedural rules.

31.Mr Aiken relied on cases decided in the context of the New York Convention and contended that an arbitral award should only be set aside if there were procedural irregularities that caused manifest injustice.  Reference was made to the decision of the House of Lords in Lesotho Highlands Development Authority v Impregilo SpA [2006] 1 AC 221.  Putting it slightly differently, counsel also referred to Halsbury’s Laws of Hong Kong Vol.1(2) (2008 Reissue) Para.25.180 and 25.197 and submitted that in order to succeed in setting aside an award, it is necessary for the party to show the inability to present a case had led to significant prejudice.

32.As a further alternative, counsel advocated the test set out in Apex Tech Investment Ltd v Chuang’s Development (China) Ltd [1996] 2 HKLRD 155: even where there was a violation, the court may exercise its discretion to uphold the award if the party attacking it could not show the result would have been different if there was no violation.

33.One must bear in mind the difference in the legislative frameworks between England and Hong Kong in this connection when reference is made to English cases.  Section 68(2) of the English Arbitration Act 1996 specifically defines serious irregularity (that provides the ground for setting aside an arbitration award in England) as an irregularity that the court considers as having caused or will cause substantial injustice to the applicant.

34.There is no equivalent provision under the Model Law.  As Miss Cheng pointed out by reference to the travaux prepatoir of Article 34, an attempt by the representative of the United Kingdom to graft in a similar qualification to the Model Law was rejected, see Holtzmann & Neuhaus p.981 to 982 and p.1003.  At para.303 of the Commission Report A/40/17 (21 August 1985), the following understanding on Article 34 is recorded,

“It was understood that an award might be set aside on any of the grounds listed in paragraph (2) irrespective of whether such ground had materially affected the award.”

35.Against such background, I do not think one can import the English requirement of causation of substantial injustice into our law.  In other words, a party applying to set aside an award does not have to show that a violation under Article 34(2) has caused substantial injustice.

36.On the other hand, there is much to be said for making reference to the jurisprudence under the New York Convention as a guide to how the discretion under Article 34 is to be exercised.  Article V of the New York Convention is worded basically in similar terms and Miss Cheng accepted that the drafters of the Model Law did have regard to the Convention.

37.In Paklito Investment Ltd v Klockner East Asia Ltd [1993] 2 HKLR 39 at p.49, Kaplan J endorsed the view taken by Professor Albert Jan Van Den Berg that,

“Thus only if it is beyond any doubt that the decision could have been the same would a court be allowed to override the serious violation.”

His Lordship said,

“… I could envisage circumstances where the court might exercise its discretion, having found the ground established, if the court were to conclude, having seen the new material which the defendant wished to put forward, that it would not affect the outcome of the dispute.”

38.Similar approach was adopted by the Court of Appeal in Apex Tech Investment Ltd v Chuang’s Development (China) Limited [1996] 2 HKLR 155.  To the same effect is the following commentary at para.25.197 of Halsbury’s Laws of Hong Kong Vol.1(2) (2008 Reissue),

“The court does, however, have a residual discretion to permit enforcement of the award, notwithstanding that a ground of objection has been made out, if satisfied that the arbitral tribunal would not have reached a different conclusion but for the matter complained of.” 

39.I am of the view that the same approach is appropriate when one considers how the discretion under Article 34 is to be exercised.  As I put to Miss Cheng in the course of submissions, if the Tribunal said something by way of obiter which really has no bearing on the result, it is difficult to see why a court will set aside the award even though the Tribunal had not given the parties an opportunity to address on a perhaps somewhat unnecessary issue raised in the obiter.

40.Likewise, if the Tribunal gave several reasons for the award, with any single one of those being sufficient for its decision, the court may decline to set aside the award even if the Tribunal had not heard the parties on one of the reasons provided that the court is satisfied the result would be the same in the light of the other reasons given.

41.And this is precisely what happened in the present context.  In respect of the OIS claim, the Tribunal decided the case on various grounds,

(a) breach of Clause 6.1 in that the Respondents failed to complete the orders on or before 12 January 2001: see paras.9.17; 9.55 to 9.57 of the Appendix;

(b)    breach of Clause 10.2 in that the OIS were not true and valid for various reasons, see paras.9.46 to 9.54 of the Appendix. 

42.The Tribunal did not regard the breach of Clause 6.1 as giving rise to a separate cause of action, see Para.9.57 of the Appendix.  Thus the focus is on the breach of Clause 10.2.

43.As regards the breach of Clause 10.2, the lack of signatures and seals were reasons given under paras.9.47 and 9.48.  But they were by no means the only reasons for the decision of the Tribunal regarding Clause 10.2.  The Tribunal did consider the other complaints raised by the Claimant concerning the validity of the OIS at paras.9.49 to 9.51 and adjudicated in favour of the Claimant based on evidence canvassed at the arbitration: overstatement of values; sale of AMF branded lanes.  This is recapped by the Tribunal at para.9.53 of the Appendix.

44.A breach of Clause 10.2 is therefore established even without regard to the PRC legal requirement on signing and sealing.  The Tribunal assessed quantum of damages not by reference to loss of profit arising from the OIS but by reference to loss of revenue.  The rationale was set out at paras.9.58 to 9.61 of the Appendix.  In essence, the Tribunal simply offset the shortfall due to the Respondents during Period 1.  This is a matter that is subject to another challenge which I shall deal with below.  For present purposes, it suffices to highlight that the Tribunal’s award on quantum of damages does not depend on the PRC legal requirement as regards signing and sealing. 

45.Viewed in this light, the failure to afford the Respondents an opportunity to present their case on the Tribunal’s undisclosed knowledge of PRC contractual requirements is a matter that has no real impact on the result.  I am satisfied that even without such infraction, the Tribunal would have reached the same conclusion on the breach of Clause 10.2.  Hence, the court should not set aside the award on this ground.

Damages by way of loss of revenue

46.The Tribunal awarded damages for breach of Clause 10.2 on a basis other than that advocated by the Claimant.  In the expert report filed on behalf of the Claimant, the claim was formulated on the basis of loss of profits, viz. the profits that the Claimant would have earned but for the breaches and compared that with the actual profits earned.  The claim is for the difference.

47.The Tribunal rejected the Claimant’s loss of profits claim at para.11.36 of the Appendix by reason of the manner in which the contract was terminated.  As mentioned, the Tribunal awarded damages based on loss of revenue and simply offset it with the shortfall due to the Respondents.

48.Miss Cheng submitted that in so doing, the Tribunal decided an issue outside the scope of submission and failed to give an opportunity to the Respondents to present their case, as such committed errors falling under Article 34(2)(a)(iii) and (ii).

49.On the other hand, Mr Aiken submitted that setoff had been pleaded in the Claimant’s Reply filed in the arbitration proceedings and the Claimant had not confined its claim to loss of profits in the pleadings.

50.Unlike the question of contractual validity under PRC law, the Tribunal’s award of damages on the basis of loss of revenue and set off does not depend on any findings of primary fact not canvassed in the evidence.  Rather, the Tribunal took a different view from the parties on how damages for a breach under Clause 10.1 should be quantified.  Such a course is open to an arbitral tribunal as illustrated by what happened in Karaha Bodas Co LLC v Persusahaan Pertambangan Minydak Dan Gas Bumi Negara (Pertamina) FACV 6 of 2008, 5 Dec 2008, paras.86 to 88 though the focus in that case was on the adequacy of reasons.

51.The issue of quantum is one of the matters submitted to the Tribunal for determination.  The Tribunal is not bound by the positions taken by the parties if it can, on the basis of the evidence canvassed, come to a different conclusion.  The Tribunal did not act in excess of its jurisdiction when it made a determination based on loss of revenue and setoff.  There is no ground for complaint under Article 34(2)(a)(iii).

52.Since the determination does not involve any investigation into new evidence or facts not disclosed to the parties, the Tribunal was not obliged to consult parties before adopting a different approach in its assessment of quantum, especially when the question of setoff had been raised and argued, albeit in a different context.  As a matter of fact, the question of the loss in revenue would have offset the shortfall was raised in the Claimant’s post hearing submissions in the context of the OIS claim at p.53.

53.The Respondents’ challenge under this head fails.

Defence of cure

54.Under Clause 12.2 of the SWDC, in case of default, the non-defaulting party may give a Notice of Default to the defaulting party.  After that, the defaulting party has 30 days to cure the default.  The non-defaulting party can terminate the SWDC only when the default is not cured within the 30 days.  The Claimant served a Notice of Default on 31 August 2001 and a Notice of Termination on 15 October 2001.  The Tribunal held that the termination was valid.

55.The Respondents complained that the Tribunal had failed to address the issue whether the default was cured within the 30 days.  Miss Cheng contended that such failure constitute a breach under Article 34(2)(a)(ii).  In the Originating Motion, the failure was characterized as a breach under Article 34(2)(a)(iv).

56.With respect, even assuming for the sake of argument that the Tribunal did make such a mistake, I fail to understand how that could constitute a breach under Article 34(2)(a)(ii) or (iv).  The Respondents had full opportunity to present their case on this point.  Failure to consider an issue is matter that goes to the substantive decision rather than a failure to follow the arbitral procedure agreed by the parties.  Thus, the fact that the Tribunal failed to consider the Respondent’s case properly is at most an error of law which cannot be a basis for this court to set aside the award.

57.In any event, I am satisfied that the Tribunal did not fall into that error.  The Respondents referred to several documents filed in the arbitration to contend that they had raised the issue that the defects as to quality had been cured before the Notice of Termination.  Having read those documents, the only place where the issue was raised was in their closing submissions at paras.315 to 328.

58.The issue was not pleaded distinctly in the Amended Statement of Defence and Counterclaim at para.192(g).  In that paragraph, the Respondents only alleged that the Claimant terminated the contract without giving the requisite notice and opportunity to cure.  That was obviously incorrect in view of the Notice of Default of 31 August 2001.  Miss Cheng has not shown me any plea by the Respondents that the defects had actually been cured.

59.Neither did the witness statements of Mr Zhang (relied upon by the Respondents as set out by Mr Lai at para.49 of his Second Affidavit filed in these proceedings) make any specific reference to the curing of the defects after the Notice of Default.

60.Even if one were to examine the Respondents’ closing submissions at paras.315 to 328, they were not putting forward a firm case that all (as opposed to some) defects had been cured prior to the Notice of Termination.  Thus, at para.315, it was said,

“… the evidence does show that, by the time Brunswick issued its termination letter on 15 October 2001, Zhonglu had addressed at least the most significant items Brunswick claims to have identified.” (my emphasis)

61.The Claimant’s Notice of Default identified seven defaults.  In the end, the Tribunal only found it necessary to deal with three for the reasons set out at paras.11.25 to 11.27 of the Appendix.  Of the three defaults, there is no suggestion whatsoever by the Respondents that they had cured the breach under Clause 10.2 regarding invalid OIS.  By the very nature of the breach as found by the Tribunal (as discussed above), it is simply not curable.  In respect of the breach under Clause 7.1(d) regarding the use of material of highest quality, the Tribunal made specific findings on the lack of rectification at paras.10.63, 10.65 and 10.71.  In fact, the Tribunal had dealt with the question of quality extensively under Section 10 of the Appendix.

62.As the Tribunal held at para.11.27, it is only necessary for one allegation of default to be justified to validate the termination.  The defence of cure in respect of other defaults is a matter of no moment.

63.On proper analysis, the Respondents fail to persuade this court that the award should be set aside on this ground.

The Claimant’s conversion claims

64.The Claimant had a claim for damages for conversion of 2,000 bowling balls bearing the Claimant’s trademarks.  The Respondents contended that the Claimant had not fully paid for the same and property had not been passed.  Both parties argued the matter on the basis that Illinois law is the governing law for this claim.

65.The Tribunal addressed this claim at paras.13.14 to 13.43 of the Appendix.  At para.13.15, the Tribunal explained why it considered the conversion claim should be governed by PRC law.  It then proceeded to decide the matter by reference to PRC law notwithstanding that neither party had adduced any evidence of PRC law applicable to this claim.  The Tribunal had not canvassed with the parties on the relevant provisions of PRC law before adopting such a course.

66.The Respondents submitted that in such circumstances, a ground for intervention under Article 34(2)(a)(ii) and/or (iii) has been made out.

67.For reasons I have already given under the OIS claim, I do not think the Tribunal can apply its secret view on PRC law without giving an opportunity to the parties to address it on the same.

68.The Claimant contended that the Respondents did not allege that a different result would be reached if Illinois law were applied.  As discussed above, the Respondents do not have to show that the deprivation of opportunity to present their case had caused substantial injustice.  However, if the Claimant can demonstrate that the result would be the same but for the inability on the part of the Respondents to present their case on PRC law, the court may exercise its discretion in declining to set aside the award.

69.That does not mean that the court should examine the merits afresh as if it were sitting in the arbitration.  It would obviously be wrong to allow arguments pertaining to the exercise of the residual discretion to develop into a full-blown investigation over the claim.  The residual discretion to uphold an award despite a ground is established under Article 34(2)(a) should only be exercised when the result is plain and obvious based on what has been set out in the reasons for the award or other indisputable materials already placed before the arbitral tribunal.

70.Mr Aiken invited this court to examine the position under Illinois law in the light of the Respondents’ closing submissions.  Counsel said this court can readily conclude that the result would be the same even if Illinois law is applicable.

71.I do not agree.  The Tribunal itself thought that it is arguable under Illinois law that title over the bowling balls had not been passed, see para.13.27 of the Appendix.  It would not be appropriate for this court to substitute that view with its own assessment on the evidence of Illinois law.  Further, based on the materials before me, the Tribunal may well be correct in holding that the applicable law is PRC law and therefore the parties should be given an opportunity to present their evidence on PRC law and make submissions thereon.

72.Hence, I hold that the Respondents are successful in establishing that they had been deprived of the opportunity to present their case on PRC law pertaining to this claim and in this respect the award should be set aside.

73.The conversion claims also covered two other subject matters: (a) unauthorized sale of houseballs (paras.13.44 to 13.47 of the Appendix); and (b) conversion of office equipment, spare parts and documents (paras.13.48).  There was no reference to the latter in the Affidavit of Mr Lai in support of the Respondents’ application and parties have not addressed this court on that.  I therefore proceed on the basis that the Respondents are not seeking to set aside that part of the Award dealing with (b).

74.As regards (a), it suffers from the same objection as the claim regarding conversion of 2,000 balls.  The Tribunal actually made an award in favour of the Claimant on the basis of unjust enrichment under the PRC law as opposed to dealing with it as a claim for damages for conversion under Illinois law.  The Respondents were deprived of any opportunity to deal with the PRC unjust enrichment law.

75.I cannot see any basis to lead this court to conclude that the same result would be reached but for such mistake.  Hence, this part of the award must also be set aside.

Allocation of time

76.On 11 December 2003, the Tribunal made the following procedural order,

“In order to complete the oral hearing within the time agreed … a chess-clock method of allocating time shall be adopted.”

The order was made as a result of the agreement between the parties.

77.This was to ensure that the time allocated for the hearing would be shared equally between the parties.  There were so many factual and expert witnesses and because of budgetary constraint over the length of hearing, the parties could not have the luxury of cross-examining each and every witness.  As a result of this, the parties have to make strategic decisions on which witnesses were to be cross-examined and the extent of such cross-examination.

78.On Day 24 of the hearing, after the close of the Claimant’s case, in the course of the Respondents’ case, the Tribunal prolonged the hearing days with more time allocated to the Claimant in view of the fact that interpretation was required for the Respondents’ witnesses.  Such decision was made by the Tribunal after hearing submissions from the parties.  The Respondents objected to the prolongation.  I have read the transcript Mr Edmonds’ submission on behalf of the Respondents on Day 23 in which he criticized the proposal to extend the hearing time in the following terms,

“… this is a fundamental shift of the tectonic plates of this litigation after we have already done in effect, the sacrifices of not examining certain witnesses and it can only benefit the other side.  It seems to be a very one-sided decision …”

79.The Tribunal added 3 days to the final hearing time.  Most of which were allocated to the Claimant but the Respondents were also allocated one hour a day for re-examination or cross-examination of supplemental witnesses or rebuttal witnesses.

80.The upshot was that as of the close of evidence, the Respondents had used approximately 63 hours and the Claimant had used approximately 73 hours.  That has to be considered against the fact that 13 of the Respondents’ 14 factual witnesses gave evidence with interpretation whilst not more than 2 of the Claimant’s witnesses required interpretation.  The cross-examination of witnesses with interpretation inevitably took much more time and such time would be clocked as time taken up by the cross-examining party under the chess clock arrangement.

81.Miss Cheng submitted that the decision of the Tribunal is a breach of the agreed arbitration procedure and the rule of equal treatment of the parties.  She asked the court to set aside the award on the basis of Article 34(2)(a)(iv).

82.More precisely, counsel did not attack the Tribunal’s decision on extending the hearing days per se.  What is being challenged is the decision to allocate more time to the Claimant than the Respondents.

83.To be fair to the Tribunal, the following points should be noted,

(a) The number of witnesses had increased substantially since the making of the procedural order on 11 December 2003.  Whilst the time problem associated with interpretation should have been noticed even at that stage, the increase in number of witnesses requiring interpretation had magnified the problem;

(b)    The Tribunal obviously perceived a serious conflict between the chess-clock arrangement and the fair conduct of the hearing in which significantly more witnesses on one side required interpretation in their evidence.  The concern was raised by the Tribunal on Day 20 and reiterated in the Reasons for Ruling given on Day 24.  It was repeated at para.2.4 of the Appendix; 

(c) The parties did not regard the agreement on the adoption of chess-clock system as taking away the Tribunal’s general case management power in making more time available to a party when justice demanded.  Notwithstanding the very forceful submissions of Mr Edmonds on Day 23 against the proposal of extending time, he did not take the objection as far as saying that the extension and uneven allocation of time would render the arbitration being conducted in manner not in accordance with the arbitral procedure agreed by the parties;

(d)    After the decisions of the Tribunal on extension of the hearing days and allocation of time to the respective parties, the parties, including the Respondents, continued with the arbitration and paid for the same.  At no stage until the commencement of the present proceedings did the Respondents suggested that the arbitration is tainted by such unequal allocation of time in breach of the agreement of the parties;

(e) On Day 31, the last of the extended hearing dates, towards the end, one of the arbitrators Mr Neoh had confirmed with the parties that none of them wanted to have more oral evidence.  Hence, if the Respondents perceived any unfairness in terms of deficiency or inequality in time in the presentation of their case, they did have an opportunity to make an application at that stage.

84.Article 18 of the Model Law prescribes that the parties shall be treated with equality and each party shall be given a full opportunity of presenting his case.

85.The autonomy of the parties in agreeing to arbitral procedures is subject to this overriding objective.  Thus, Article 19(1) clearly states so at the very beginning,

“Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.” (my emphasis)

86.Likewise, the arbitrators’ duty to give effect to the agreement of parties on arbitral procedure is subject to the same overriding objective.

87.Hence, in a situation where the arbitrators discern potential problem with the opportunity to a party presenting his case fairly arising from a procedure agreed by the parties, they are obliged to raise it with the parties instead of following blindly what had been agreed.

88.After hearing submissions from the parties, if the arbitrators were of the view that the procedure agreed by the parties would result in a breach of Article 18, they should take steps to conduct the arbitration in such a manner that could redress the problem instead of being constrained by an unworkable agreement of the parties.  

89.In my judgment, this is precisely what happened in this instance when the Tribunal made its decision on Day 24 and subsequently on the allocation of time for the three extended days.  It follows that there is no breach under Article 34(2)(a)(iv) because in this particular instance, the slavish application of the chess-clock arrangement is in conflict with Article 18, as such the Tribunal was obliged to depart from it.

90.Further, the subsequent conducts of the Respondents after such decisions obviously indicate that they would continue with the arbitration despite such departure from the chess-clock arrangement.  As such, even assuming for a moment that there was any breach of Article 34(2)(a)(iv), the breach had been waived.

91.Miss Cheng submitted that it would be unrealistic to expect the Respondents to walk away from the arbitration at that stage.  That may be so.  But they had other options to rectify what they perceived to be a breach that could have rendered the award invalid.  They could have invited the Tribunal to give them more time to make up the 10 hours difference in the chess clock balance when Mr Neoh put the question to the parties on Day 31.

92.To hold otherwise is to allow the Respondents to blow hot and cold.  They continued to participate in the arbitration and seek an award from the Tribunal.  When the award is not that favourable, they somehow said they have an option to set it aside on the ground of procedural irregularity that might have been rectified by timely action taken by them.

93.For these reasons, the challenge under this ground fails.

Language

94.One of the challenges by the Respondents is that the arbitration was not conducted in the agreed language to be used by reason of the Tribunal’s failure to give an award in Chinese.

95.The Tribunal had produced an Appendix to Final Award, Section 1 of that document fully accounted for the reasons why the Tribunal considered inappropriate to issue a bilingual award despite the provision in Clause 23.2 of the SWDC that the language of arbitration shall be English and Chinese.

96.Miss Cheng had not spent much time on this challenge in her submissions.

97.In my judgment, the Tribunal’s approach cannot be faulted and the Respondents’ pursuit of this challenge is bordering on vexatious in the light of what had been said in the Appendix to Final Award.  I do not see any need to make any further comments on this challenge.

Impartiality of the arbitrators

98.Equally unmeritorious is the Respondents’ argument that the arbitrators were not independent or impartial.  It was put rather half-heartedly as an adjunct to the other substantive challenges.  By way of illustration, at Section A Para.(4) of the Originating Motion, the Respondents pleaded,

“… the approach of the Arbitral Tribunal in applying PRC law so as to come to the conclusion that the Orders in System Attributable to the Purchaser Group were not ‘true and valid’ gives rise to justifiable doubts as to the impartiality or independence of the Arbitral Tribunal.”

99.Similar pleas were made in the context of other substantive challenges.

100.To her credit, Miss Cheng did not spend much time on the ground at the hearing.

101.A challenge on the impartiality or independence of arbitrators is a serious matter.  It is an attack on the professional integrity of the arbitrators concerned.  Before such a serious allegation is made, the party advancing such allegation should consider whether he has cogent evidence to support the same.

102.The three arbitrators involved in the present case are distinguished professionals and well known in the arbitration circle.  The Respondents had not adduced an iota of evidence suggesting that they were acting other than impartially or professionally during the course of the arbitration.  Whilst I can understand that the Respondents might have arguable grounds to lead them to believe that the Tribunal got it wrong in the award, it is quite a separate issue to suggest because of the alleged mistakes the Tribunal was not impartial or independence.

103.I have dealt with the substantive complaints in this judgment.  Some have merits, some not.  In any event, in my view, the complaint about impartiality or independence has absolutely no leg to stand on.

The Respondents’ counterclaims

104.The Respondents raised a number of tortious and statutory counterclaims in the arbitration.  The statutory counterclaims were based on breach of American statutes.

105.The Tribunal decided that it has no jurisdiction to arbitrate on these counterclaims.  Its reasons are set out at paras.4.3 to 4.8 of the Appendix.  In essence, the Tribunal regarded these counterclaims as falling outside the scope of the arbitration clause under the SWDC.  Hence, the Tribunal made no award in respect of these claims.  Even though the Tribunal put its reasoning on this point under the heading “arbitrability”, the substance of its consideration is jurisdiction except the observation at para.4.8 of the Appendix with regard to the claim pertaining to invalidity of patents.

106.The jurisdiction point had not been taken by the Claimant.  In fact, the Claimant had indicated that it had no objection over the jurisdiction of the Tribunal in respect of the Counterclaim as recorded in the Fifth Procedural Order.  The Claimant had actually filed defence, evidence and made substantive submissions on these counterclaims.

107.In such circumstances, irrespective of whether the counterclaims fall within the scope of the arbitration clause, the parties had by conduct agreed to confer jurisdiction on the Tribunal to deal with them.  Participation in arbitral proceedings on the merits without challenging the jurisdiction of the tribunal is a submission to arbitration.

108.Since the Tribunal declined to consider the counterclaims on their merits, there is no award to be set aside.

109.Miss Cheng submitted that this court, as supervising court, should nonetheless regard this failure as a ground for granting relief under Article 34(2)(a)(iv).  She referred to a 2002 decision of the International Centre for Settlement of Investment Disputes in Case No.ARB/97/3 as authority for the proposition that an arbitral tribunal is acting in excess of its jurisdiction if it fails to exercise a jurisdiction conferred on it.  With respect, that decision was made in the context of an application to annul an award under Article 52 of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.  I was not told whether the general scheme of that convention is the same as the Model Law.  I find that decision to be of little assistance in terms of how the court should approach a case where the arbitral tribunal erroneously declined jurisdiction and made no award.

110.As a matter of principle, since no award has been made in respect of these counterclaims, the Respondents are at liberty to pursue the same afresh whether by way of arbitration or otherwise.  There is no question of res judicata or issue estoppel.  The decision does not prejudice the Respondents.  Further, as a matter of logic, given that the Tribunal made no award, there is simply nothing for the court to set aside.

111.Under Article 16(3), a party can request the supervising court to decide the question of jurisdiction if the arbitral tribunal had ruled on it as a preliminary question.  In The Incorporated Owners of Tak Tai Building v Leung Yau Building Ltd [2005] 1 HKC 530, the Court of Appeal held that a ruling on jurisdiction was a preliminary ruling which preceded an award on merits and this was so regardless whether the ruling was expressed in an award. 

112.But this is not the course adopted by the Respondents.  As I understand, the Respondents are not asking for the counterclaims to be remitted to the Tribunal for further consideration.

113.Hence, I do not see any basis for granting relief to the Respondents under this head even though I agree with them that the Tribunal should have entertained their counterclaims.

Double actionability

114.The Respondents also complained about the Tribunal’s application of the double actionability rule in dealing with some of the Counterclaims.

115.The Tribunal specifically addressed the implication of the double actionability rule with reference to the Respondents’ tort claims at paras.5.24 to 5.28 of the Appendix.  In respect of the claims considered at paras.5.24 to 5.26, the issue is academic since the Tribunal regarded the claims to be outside the scope of the arbitration clause, as such outside the jurisdiction of the Tribunal.

116.As regards the claims dealt with at paras.5.27 and 5.28, whilst the Tribunal took the view that those claims were not viable because of the double actionability rule, in the actual award the Tribunal made no award instead of dismissing them, see Interim Award Section II (4) and (5).

117.Thus, the same problem as regards the grant of relief as in the challenge based on the jurisdiction point arises.

118.Further, the Tribunal had alerted parties to its concern about the applicable conflict of laws issue and invited submissions from the parties.  This is recited at paras.3.18 to 3.20 of the Appendix.  The Respondents chose to take a particular stance in that regard.  It is a matter for them.  But they cannot complain that they were not given an opportunity to make submissions on the issue.

119.As an arbitral tribunal sitting in Hong Kong, the Tribunal is at liberty to come to its own conclusions on Hong Kong conflict of laws issues and their application to the claims after giving the parties an opportunity to make submissions.

120.Miss Cheng’s contended that the Tribunal had wrongly applied the double actionability rule to the Respondents’ counterclaims because the statutory counterclaims were based on foreign statutes and should only be governed by foreign law without any reference to any conflict of laws rules.  She submitted that double actionability rule has no place in international arbitrations and in this regard there is a distinction between litigating upon a foreign tort in court and advancing such claim in arbitration.

121.Whatever merits she might have in these submissions, these should be arguments deployed before the Tribunal instead of raising it in this court in the context of proceedings under Article 34(2).  Even assuming (without actually deciding) the Tribunal got it wrong in the applicability of the double actionability rule to the Respondents’ counterclaims, that would only be errors of law instead of affording a ground for setting aside the award.

122.I do not agree with Miss Cheng that such errors fall within the scope of Article 34(2)(a)(iv).  I do not regard the choice of law clause under the SWDC governs the applicable law in relation to the non-contractual counterclaims.  And this is not a case where the parties had agreed that the Respondents’ counterclaim were to be determined without regard to the Hong Kong conflict of laws rules.  The contents of such rules and how they were to be applied are matters for the Tribunal.

123.Therefore the challenge based on this ground also fails.

Result

124.The Respondents succeeded in the application to set aside the award on the conversion claims specified above.  Save as to that the Respondents’ application is dismissed.  I order accordingly.

125.As regards costs of the application, the Respondents only succeeded on one of their grounds, I make a costs order nisi that they shall pay - of the costs of the Claimant, such costs to be taxed if not agreed.

Mr Nigel Aiken, SC and Mr Vincent Lung, instructed by Messrs Lovells, for the Claimant

Ms Teresa Cheng, SC, instructed by Messrs J Chan & Lai, for the 1^st & 2^nd Respondents

Annex I

Annex II