X Chartering v. Y

HCCT 20/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 20 OF 2013

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D E C I S I O N

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Background

1.X Chartering (“Applicant”) entered into a contract of affreightment dated 9 September 2008 (“COA”) with Y (“Y”), whereby Y was supposed to make 15 shipments of coal from Indonesia to China during a period of 2 years commencing 1 January 2009.  The contract was not a time charter of any one particular vessel, as the owner could nominate different vessels to perform the voyages.  No shipments were made, and the Applicant claims that the COA was repudiated by Y.  Arbitration proceedings were commenced by the Applicant against Y in London (“Arbitration”).  By a Final Arbitration Award dated 5 June 2012, supplemented by a Supplementary Arbitration Award dated 12 July 2012, Y was ordered to pay to the Applicant the principal sum of US$7,025,449.30, together with interest at 5% per annum from 20 November 2009 until payment (“Awards”). 

2.On 27 July 2012, Y applied for leave from the High Court in England, which is the court of supervisory jurisdiction, to appeal against the Awards, on the ground that the Tribunal had erred in its calculation of damages.  The application was dismissed by the court on 10 October 2012.

3.On 26 June 2013, the Applicant applied to the Hong Kong Court for leave to enforce the Awards in Hong Kong, and by order of Au J made on 2 July 2013 (“Order”), leave was granted to the Applicant to enforce the Awards as a judgment of the Hong Kong Court.

4.Y now applies to set aside the Order, on the ground that it was deprived of the opportunity and was unable to present its case in the Arbitration on the Tribunal’s adoption of an erroneous measure of damages, and its erroneous reliance on expert evidence rather than legal submissions, and that it would be contrary to public policy to enforce the Awards in Hong Kong.  It is also claimed that as a result of the Tribunal’s errors, the arbitral procedure was not in accordance with the agreement of the parties or with English law.

5.After hearing the parties on 22 January 2014, I dismissed Y’s application, indicating that the reasons for my decision would be handed down.  The following are my reasons.

The application

6.Y’s grounds for setting aside the Order for enforcement of the Awards are set out and explained in paragraphs 8 to 12 of the 1^st affidavit of Mr S (“MS 1”):

“8. The Awards were made in the circumstances where serious procedural irregularities occurred during the arbitration process. These irregularities deprived (Y) of an opportunity to present its own case during the arbitration for the purposes of section 89 (c) (ii) of the Ordinance, and go to the root of the Awards in the calculation of damages under them. In these circumstances, it would be contrary to the fundamental principles of justice for the Awards to be enforced in Hong Kong.

…

10. At paragraph 47 of their Final Arbitration Award… the Arbitrators stated that:

‘… The experts agreed that the appropriate method of calculation [of damages] was to compare the rate under the COA with what would have been the cost of performing each of the voyages.’

11. This method of calculating the damages awarded to the Applicant carries with it several major problems which undermined the validity and integrity of the Awards:

(a) The Applicant’s and Y’s legal submissions were consistently based on the principle that the Applicant’s damages would be calculated according to the difference between the freight rate payable to the Applicant for carrying the coal under the COA (“COA Rate”) and the spot market rate at which the Applicant could have mitigated its loss by going out into the market and finding a replacement cargo (“Market Rate”). In contrast, the method of calculating damages applied by the Arbitrators was novel and had not been raised or argued in legal submissions (and was in fact based on expert opinion).

(b) The Arbitrators’ award of damages based on the COA Rate less the Applicant’s cost of performance failed to take into account the Applicant’s duty to mitigate its loss, which was raised by counsel for both parties in the arbitration.

(c) The Arbitrators’ method of calculating damages was based on the opinions of the experts, which was inadmissible on points of law.

12. For the purposes of section 89 (e) (i) and (ii) of the Ordinance, the arbitral procedure was not in accordance with the agreement of the parties, or indeed in accordance with English law.  As a consequence, the Respondent was deprived of an opportunity to present its case against the method of calculation of damages ultimately awarded, and in my opinion has thereby suffered significant losses in the form of an excessive award of unmitigated damages.”

7.What Mr S was saying on behalf of Y, in effect, is that the arbitrators have made an error of law in the calculation of damages. This has never been recognized as a ground for setting aside or refusing enforcement of an arbitral award.  The principles governing applications to resist enforcement of arbitral awards are clear, and are as stated by Tang VP (as he then was) in Grand Pacific Holdings Limited v Pacific China Holdings Limited (in liq) (No 1) [2012] 4 HKLRD 1 at paragraph 7:

“The Court’s approach to such applications is not controversial.  The Court is concerned with “the structural integrity of arbitration proceedings”. The remedy of setting aside is not an appeal, and the Court will not address itself as to the substantive merits of the dispute, or to the correctness or otherwise of the award, whether concerning errors of fact or law.  It will address itself to the process.”

8.In A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389, the court explained the rationale thus:

“Public policy itself leans towards the enforcement of foreign arbitral awards as a matter of comity. Parties agreed to resolve their disputes by arbitration rather than by the court. By choosing arbitration, the parties must be deemed to have undertaken the risk that an arbitrator might get matters wrong in his decision. An error (whether of law or fact does not matter here) by an arbitrator in an award cannot by itself counterbalance the public policy bias towards enforcement.”

9.On close analysis, it was not shown to my satisfaction that Y had been unable to present its case, or that the arbitrators had made an error of law, which is the premise of Y’s claim that the arbitration procedure was not in accordance with the parties’ agreement or in accordance with English law.

The alleged error of law

10.As Leading Counsel for the Applicant highlighted, the Tribunal was clearly alert to the fact that damages were to be assessed by comparison of the COA Rate and the Market Rate.  For the purpose of the Arbitration, the parties and the experts had agreed that there is no published index or market freight rate for the voyages contemplated by and provided for under the COA.  In order to establish the Market Rate for the assessment of damages, the experts had to “reverse engineer” and compute a market freight rate from a published market time-charter hire rate.  This was done by taking the daily time-charter hire rate published by the Baltic Exchange P3A route index and converting it to a freight rate, by calculating the duration of the voyage, and adding thereto additional costs that a shipowner would have to bear performing on a COA basis, but would not have to bear if he was merely time chartering his vessel. 

11.At paragraph 50 of the Final Award, the Tribunal expressly accepted Y’s submission that the purpose of the “reverse engineering” was “to establish a market rate to compare with the contractual rate of freight” (emphasis added).  The Tribunal pointed out in the Final Award that the expert witnesses appointed by the parties had been able to agree on various matters in calculating quantum, and referred in paragraph 51 (1) of the Final Award to the experts’ agreement that “the Baltic P3 (a) route was the appropriate route to take for the purposes of establishing the market rate” (emphasis added).  It is clear therefore that the arbitrators’ references to “cost of performance”, or “what would have been the cost of performing each of the voyages”, were references to this process of “reverse engineering”, a term used by Y’s own counsel at the Arbitration, for ascertaining the Market Rate.

12.The measure of damages based on the Market Rate already took into consideration the Applicant’s mitigation of damages, by going to the market and procuring substitute cargoes in place of those under the COA.

Whether unable to present case

13.I totally reject the argument that Y had not been able to present its case before the Tribunal, when it is clear that counsel for both parties at the Arbitration had been able fully to present their factual and respective expert evidence, and had made arguments through counsel both on liability and on quantum, on the basis of the factual and expert evidence presented in the course of the Arbitration.  Counsel for both parties had been able to put questions to the experts, and they were fully aware of the queries which the Tribunal had on the expert evidence, and of the questions which the Tribunal had put to the experts on the evidence and on the calculation of the Market Rate.  It is not a case of the arbitrators exploring the evidence or quantum of damages with the experts on their own, without the knowledge of the parties, or in their absence.  The Tribunal heard the expert evidence in the presence of the parties, and counsel for both parties had the full opportunity to make submissions and present arguments on the nature and effect of the expert evidence on the assessment of damages.  I reject the proposition that the method of calculating damages applied by the Tribunal was “novel”, and had not been raised or argued in submissions.

14.If, after hearing the evidence and the full submissions made by counsel, the Tribunal made any errors of law in the quantification of damages, the parties cannot challenge or oppose enforcement on the merits, or on the ground of such errors (see A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389, passage cited above).

15.Y had in fact applied to the supervisory court for leave to appeal against the Award, on the ground of an error of law made by the Tribunal.  This application was rejected by the English court, on the ground that the Award was neither obviously wrong nor open to serious doubt.

16.It is by now well established that the courts have a residual discretion to enforce an award despite the proven existence of a valid ground.  In Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2HKCFA 111, Sir Anthony Mason NPJ observed (at 136A-B):

“…it is appropriate that the courts should have regard to the principles of finality and comity to the extent to which they are consistent with the provisions of the Ordinance and the Convention. Both the Ordinance and the Convention give effect to the principles of finality and comity by prohibiting refusal of enforcement of a Convention award except in the cases for which they provide … But those provide for exceptions to that prohibition by stating the grounds on which enforcement may be refused.”

17.In the context of setting aside an award on the ground of public policy, Sir Anthony Mason NPJ further explained that estoppel or want of good faith is relevant when the court is called upon to exercise its discretion (at p 136J):

“It follows also that a failure to raise the public policy ground in proceedings to set aside an award cannot operate to preclude a party from resisting on that ground the enforcement of the award in the enforcing court in another jurisdiction. That is because each jurisdiction has its own public policy.

What I have said does not exclude the possibility that a party may be precluded by his failure to raise points before the court of supervisory jurisdiction from raising that point before the court of enforcement. Failure to raise such a point may amount to an estoppel or a want of bona fides such as to justify the court of enforcement in enforcing an award…” (emphasis added)

18.To the extent that the errors of law raised in the application to the court of supervisory jurisdiction for leave to appeal were not identical to those alleged errors now raised in this application for leave to set aside the Order for enforcement of the Awards (and Y claims they are not identical), I see no reason at all why they could not have been raised, and were not raised, in the application for leave to appeal.  In my view, this suggests lack of good faith on Y’s part, is consistent with its engaging dilatory tactics, and is relevant to this court’s exercise of its discretion not to permit setting aside of the Order for leave to enforce the Awards.

19.On the ground of a party’s inability to present its case, the Court of Appeal pointed out in Grand Pacific Holdings Limited v Pacific China Holdings Ltd [2012] 4 HKLRD 1 (CA), at paras 94 and 105 of the judgment:

“… the conduct complained of must be serious, even egregious, before a court could find that a party ‘was otherwise unable to present his case’.. The conduct complained of must be sufficiently serious or egregious so that one could say a party has been denied due process.

A party who has had a reasonable opportunity to present its case would rarely be able to establish that he has been denied due process.  Even so, the Court may refuse to set aside the award if the Court is satisfied that the arbitral tribunal could not have reached a different conclusion.  How a court may exercise its discretion in any particular case will depend on the view it takes of the seriousness of the breach.  Some breaches may be so egregious that an award would be set aside although the result would not be different.”

20.Bearing in mind the parties’ conduct of the Arbitration before the Tribunal, it seems clear to me that the Applicant had the reasonable opportunity to present its case, and it cannot be said that the conduct complained of in this case is so serious, to the extent of being egregious, that I can conclude that the Applicant had been unable to present its case on the assessment of damages.  In my view, the application as originally framed is totally devoid of merit.

Whether serious procedural irregularity/against public policy by reason of conflict of interest on the part of Reed Smith Richards Butler

21.In the 3^rd affidavit of Mr S made on 14 January 2014, Y sought to rely on a new ground to set aside the Order granting leave to enforce the Awards.  In the Arbitration, the Applicant had been represented by Reed Smith (“RS”), now known as Reed Smith Richards Butler (“RSRB”) after its merger with Richards Butler.  Y claims that it only discovered in December 2013 that RSRB, or Richards Butler (“RB”), had in fact acted for Y in Hong Kong and elsewhere on a number of transactions, including their advising Y on its litigation in New York, a due diligence exercise conducted on behalf of an investor in Y, advising on Y’s involvement in an equity raising round, and preparing the management service agreement for Y’s Chief Executive Officer.  According to Y, RB would have obtained confidential information concerning the structure, operations, business activities and financial position of Y, any litigation and winding up proceedings involving Y, credit lines obtained by Y from international banks, and Y’s “strategy in dealing with litigation”.  According to Y, there was a conflict of interest in RS’ acting for the Applicant against Y in the Arbitration, when RSRB or RB had acted for and obtained confidential information concerning Y in the years between 2007 and 2011.  This, according to Y, amounted to a fundamental procedural irregularity which is contrary to English law where the Arbitration was held, and tainted the propriety and fairness of the whole Arbitration proceedings, such as to render it contrary to public policy to enforce the Awards.

22.Y claims that prior to December 2013, it had not been aware that RS in London was the same firm as RSRB, or RB (prior to the merger between Reed Smith and Richards Butler), which had acted as Y’s solicitors.  Counsel argued for Y that there is accordingly no question of any estoppel, or lack of good faith in respect of Y’s failure to raise complaint or objection during the Arbitration itself.

23.Y claims that RSRB had acted in breach of their duty of loyalty to their client, Y, and their duty to avoid a conflict of interests to ensure that confidential information of Y would not be used against Y or be at risk of being used against Y.  Mr Shieh SC relied on rule 9.01 and rule 9.03 of the Hong Kong Solicitors’ Guide to Professional Conduct, which provide that solicitors must not accept instructions to act for two or more clients where there is a conflict or a significant risk of conflict between the interests of those clients.  If a solicitor or his firm has acquired relevant confidential information or knowledge concerning an existing or former client during the course of acting for him, he must not accept instructions where it is likely that he would be duty-bound to disclose or use such relevant confidential information or knowledge in breach of his duty of confidentiality to such client.

24.Relying on the first instance decision of the court in Gao Haiyan v Keeneye Holdings Ltd [2011] HKEC 514, where the court accepted that an arbitral award was “tainted by an appearance of bias” and enforcement of the award was set aside, counsel argued that a risk of RB having breached their duty to Y, and a risk of Y’s confidential information being disclosed and used against Y, is sufficient to warrant non-enforcement of the Awards.

25.It was further argued that RSRB’ breach of duty meant that the Arbitration procedure, which includes the propriety of legal representation at the Arbitration, was not in accordance with English law, and that it is contrary to public policy to enforce the Awards.

26.The court adopts a narrow approach in the construction of what constitutes “public policy”.  It “must not be seen as a catch-all provision to be used wherever convenient.  It is limited in scope and is to be sparingly applied” (Qinhuangdao Tongda Enterprise Development [1993] 1 HKLR 173, 178).  The term has been held by the Court of Final Appeal in Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, 139F to mean “contrary to the fundamental conceptions of morality and justice” of the forum.  In A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389, at paragraph 23 of his judgment, Reye J observed:

“If the public policy ground is to be raised, there must be something more, that is, a substantial injustice arising out of an award which is so shocking to the court’s conscience as to render enforcement repugnant.”

27.It is pertinent that Y has not identified any actual breach of confidentiality on RS’ part, or actual disclosure or misuse by RS of Y’s information.  Having considered the nature of the transactions in which Y claims RS or RB had been involved as Y’s solicitors, I have serious doubts that RS would have been in a position to have acquired any information which could have been relevant to the issues in dispute and capable of being used against Y in the Arbitration, or which would have affected the making of the Award against Y in the Arbitral proceedings.  At most, RS might conceivably have obtained information about Y’s assets, or the location of its bank accounts, which would have affected Y at the stage of enforcing the Awards, but such information, even if acquired during or before the Arbitration, would not have been relevant to the dispute in the Arbitration, or the issues for determination at the Arbitration, nor material to the Award.

28.With these in mind, I do not consider that in the circumstances of this case, any error or defect in the legal representation of the Applicant against Y in the Arbitration has undermined due process, or is contrary to law. 

29.Nor do I accept that the fact of RSRB having acted for the Applicant against Y in the Arbitration constitutes such substantial injustice which can be described as shocking to the court’s conscience, or being contrary to the fundamental conceptions of morality and justice, so as to render enforcement of the award in Hong Kong repugnant.

30.As explained in paragraph 15 above, even if a case of public policy, or a case of the arbitration procedure not being in accordance with the law, is made out, the court has a residual discretion to enforce the Award (Grand Pacific Holdings Limited v Pacific China Holdings Limited (in liq) (No 1) [2012] 4 HKLRD 1).  Even if there was an error in the process, I am not satisfied that it was material to the Award in the sense that the outcome of the dispute in the Arbitration could have been affected by RS’ breach of duty.

Conclusion

31.For the above reasons, I dismissed Y’s application to set aside the Order.  I now make an order nisi that Y is to pay to the Applicant the costs of the application to set aside, with certificate for 2 counsel, on indemnity basis (A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389).

Mr Charles Sussex SC and Mr Richard Zimmern, instructed by Tsui & Co, for the applicant

Mr Paul Shieh SC and Ms Bianca Yu, instructed by Howse Williams Bowers, for the respondent