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Authored by: Joseph Chung
In Canudilo International Company Limited v胡志强 (Wu Chi Keung) & Ors  HKCFI 700, the court set aside an Enforcement Order, whereby the Applicant had been granted leave to enforce an arbitral award made in its favour. It found that Arbitrator 2 (appointed after resignation of Arbitrator 1) had considered himself bound by the earlier award made by Arbitrator 1, and in doing so had failed to give the Respondents a reasonable opportunity to present their case.
The arbitration had been commenced by the Applicant (CIC) under sales contracts made between CIC as seller, and a Company as buyer. The Respondents were the Company’s guarantors (Guarantors). CIC claimed that the Company had defaulted in payment under the contracts and the Guarantors were liable for payment of the sums due. The Company did not take part in the arbitration. Two of the Guarantors were shareholders of the Company and according to them, due to disagreements amongst the shareholders and controllers of the Company, it was not possible to engage legal representatives to represent the Company independently in the arbitration or to file a defence on the Company’s behalf.
Interim Final Award of Arbitrator 1
After commencement of the arbitration, Arbitrator 1 was appointed. No step was taken by the Company in the arbitration and it did not file any defence or evidence or make any submissions. The Guarantors raised various issues and disputes in their Defence.
Having acceded to CIC’s application to bifurcate the arbitration into the determination of (i) CIC’s claims as to the Company’s liability for payment, and (ii) CIC’s claims against the Guarantors in respect of their liability, Arbitrator 1 then declared that the arbitration proceedings between CIC and the Company were closed. In a notice issued to the parties, he directed that an interim final award would be issued by him within 4 weeks and stated: “For avoidance of doubt, it is hereby declared that the Arbitration proceedings between CIC and the other Respondents should continue to proceed.” Throughout this time, the Company had no legal representation and no documents were filed for the Company in the arbitration.
Subsequently, Arbitrator 1 issued an Interim Final Award (2020 Award), in which he pointed out that the Company had failed to respond to the direction as to the service of written submissions and other documents and that the 2020 Award only involved the dispute between CIC and the Company and that the dispute between CIC and the other Respondents in the arbitration would continue, and that having considered the submissions and materials of CIC, Arbitrator 1 did not consider that the disputed matters between CIC and the other Respondents in the Arbitration had to be determined in the 2020 Award.
Arbitrator 1 concluded in the 2020 Award that as between CIC and the Company, the Company should pay to CIC the sums due under the Contracts and arbitration costs.
Subsequently, Arbitrator 1 issued a procedural order, notifying all parties that he had received a letter from solicitors acting for the Company, seeking an extension of time for making written submissions on the Company’s behalf, notwithstanding that Arbitrator 1 had already declared the proceedings between CIC and the Company closed. Arbitrator 1 then resigned on the grounds that he was of the view that to continue to act in the arbitration after the issue of the 2020 Award would give rise to reasonable suspicion or doubt as to his impartiality as arbitrator.
Final Award of Arbitrator 2
The HKIAC appointed a new arbitrator (Arbitrator 2). Arbitrator 2 notified the parties, including solicitors appointed by then for the Company, that the 2020 Award had already been issued, and that the entire arbitral proceedings between CIC and the Company had concluded. He pointed out that the Company had indicated to the HKIAC that the 2020 Award should be set aside, and it would be making the necessary application to the new tribunal. He also stated that he would only be dealing with the arbitration proceedings between CIC and the Guarantors.
Following a hearing, Arbitrator 2 issued a Final Award, in which he found the Guarantors liable under the contracts and ordered them to pay CIC certain amounts, with costs. Arbitrator 2 made it clear in the Final Award that he was bound to follow the 2020 Award, which was binding not only on the Company, but also on the Guarantors. Although Arbitrator 2 appeared to deal with the Guarantors’ defences, it was only on a peripheral basis, with the starting point that he was bound to follow the findings made by Arbitrator 1 in the 2020 Award.
Application to set aside Enforcement Order
The court granted leave for CIC to enforce the Final Award against the Guarantors as a judgment of the court and in terms of the Final Award. The Guarantors applied (out of time) to set aside that Enforcement Order on the grounds that the Tribunal had exceeded its mandate and jurisdiction by failing to determine the issues in dispute, that the arbitration was not conducted in accordance with the arbitration agreement and/or the agreed arbitration procedures, that the Guarantors did not have a reasonable opportunity to present their case, and that enforcement of the Award would be contrary to the public policy of Hong Kong. It was argued that Arbitrator 2 had failed to decide the key issue of the Guarantors’ Defence, that they as guarantors were not liable when there was no valid primary debt due from the Company, and that Arbitrator 2 had failed to apply an independent mind, and without being influenced by the 2020 Award made against the Company, when he made the Final Award.
Setting aside of Enforcement Order
The court granted the Guarantors’ application for an extension of time to make the setting aside application and set aside the Enforcement Order, holding that:
CIC’s application for leave to appeal this decision was recently refused.
Whilst the facts based on which the court set aside the Enforcement Order are quite unique, it illustrates the basic principle that if a party is deprived of the reasonable opportunity to properly present its case in the arbitration, any award rendered against it will not be enforceable. One should note that if the 2020 Award had been unfavourable to CIC, it may not have had the second bite of the cherry by continuing with the arbitration against the Guarantors.
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