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Court refuses to enforce arbitral award

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Authored by: Joseph Chung

In Canudilo International Company Limited v胡志强 (Wu Chi Keung) & Ors [2023] 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 Dispute

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:

  • Arbitrator 2 had considered that he was bound by and had to follow the 2020 Award.  In relation to the Guarantors’ defences, Arbitrator 2 stated that Arbitrator 1 had already made a decision on such and that the factual disputes that he was deciding were the same facts decided by Arbitrator 1 in the same arbitration and that since none of the parties had disputed the award, he had to abide by it.
  • Reading the Final Award as a whole, Arbitrator 2 had decided the essential issue of whether there was a primary debt established to be due from the Company, on the basis that this had already been decided in the 2020 Award, which he had to follow.
  • On an objective reading of the Final Award, the court had grave concerns that Arbitrator 2 had not applied his own independent mind pursuant to the mandate given to him under the arbitration agreement to decide the dispute between the parties. 
  • The Guarantors were entitled in law to test and challenge the evidence on the contracts, and on the alleged primary debt.  It was not reasonably clear from the Final Award and the dismissive approach adopted by Arbitrator 2 to the Defence, that he had independently considered the issues raised in the Defence and the evidence adduced in the second part of the arbitration heard by him, when deciding the liability of the Guarantors under the contracts. 
  • It had to be borne in mind that even if Arbitrator 1 had not resigned after hearing the first part of the bifurcated arbitration, the arbitrator would still have to determine the issues raised, the defences pleaded and evidence adduced by the Guarantors in the second part of the arbitration. 
  • It was grossly unfair and unjust that Arbitrator 2 considered that the Guarantors had already been given the opportunity to present their evidence and make their submissions before Arbitrator 1, had failed to do so, and should be bound.
  • Although there was one arbitration, there were two parts of the hearing against different parties: CIC against the Company in the first part, and CIC against the Guarantors in the second part.  Contrary to what was stated in the Final Award, the Guarantors did not have the “equal opportunity” to appear and to present and argue their case in the first part of the hearing against the Company.  The first part involved CIC proving its case of the Company’s liability, in circumstances when the Company had not filed a defence or put in any submissions or evidence, and in circumstances when Arbitrator 1 had made it clear that he would not deal with the issues and disputes raised by the other Respondents as guarantors in the first part of the arbitration.  The Guarantors were not seeking to have a second bite of the cherry, as Arbitrator 2 had stated.  They never had the first bite.
  • What was more disturbing, was not whether Arbitrator 2 had erred in law and on facts as to the matters put before and decided by Arbitrator 1, but that the Guarantors had not been given notice nor the reasonable opportunity to meet the case made against them in the hearing of the arbitration on their liability.
  • The primary liability of the Company for the debt under the contracts, and the Guarantors’ liability for such primary debt if established, were indeed the very issues for determination by Arbitrator 2.  Whether there was a primary debt due from the Company to CIC was the case the Guarantors had to meet and had been prepared to meet in the arbitration.  However, in deciding this issue, Arbitrator 2 considered himself to be bound by the 2020 Award and had entirely changed the landscape of the arbitration by taking such a stance.  As a result, the case against the Guarantors was that there was already a binding 2020 Award made against them, they were bound by the findings as to the validity and enforceability of the contracts and the lack of vitiating factors, and that they were therefore liable as Guarantors.
  • The arbitration had not been conducted in accordance with the arbitration agreement and/or the agreed arbitration procedures.  It would be contrary to basic notions of justice and requirements for a fair hearing to enforce the Final Award, when Arbitrator 2 had failed independently to determine the issues in dispute between CIC and the Guarantors, and had unfairly and unjustly deprived the Guarantors of the reasonable opportunity to present their case as to whether they were bound by the 2020 Award and the findings made in that Award.
  • The conduct of the arbitration by Arbitrator 2 was seriously flawed or egregious, such that due process was denied.  The Guarantors had been surprised by the case they had to meet – that there was already a binding 2020 Award on their liability.
  • It was obvious that Arbitrator 2 had failed to properly understand the facts and procedures which had taken place in the arbitration, and had failed to carry out the very task he was appointed to carry after resignation of Arbitrator 1, who had done so in order to avoid the appearance of bias after making the 2020 Award, and to ensure that there would be someone who could objectively and impartially render an award on the liability of the Guarantors.
  • The violation of the Guarantors’ rights in the arbitration was sufficiently serious and egregious, for the Final Award to be set aside.  It could not be said that it was beyond doubt that the Final Award would have been the same if all the evidence had been properly and seriously considered, and the Guarantors had been given the reasonable opportunity to properly present their case. The rationale must be that even if the Guarantors’ Defences were considered to be unmeritorious, they were nevertheless entitled to the reasonable and fair opportunity to present their case to the fact finding tribunal and to have their Defence properly and fairly determined.  This was fundamental to the process of fair trial, and the absence of such pre-requisites of due process cannot be condoned by the court, by recognizing and permitting enforcement of an award which had given rise to substantial injustice.

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.

Key Contacts

Joseph Chung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9647

Related Services and Sectors:

International Arbitration

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