Arbitral award against a wrong party set aside

In the recent case of AB V CD, HCCT 27/2020, 18 February 2021the Court granted the application of AB Engineering, to set aside a HKIAC arbitral award made against it in Hong Kong, finding that it was not a party to the relevant agreement containing the arbitration clause (Agreement). It held that there was no clear indication that AB Engineering was a party to the Agreement and no evidence that it had any role in relation to the performance under the Agreement, the rights conferred or the obligations imposed under it. The Court said it was incumbent on a claimant and its legal advisers to identify the proper defendant/respondent to arbitration proceedings and to verify its name, particularly after queries are raised.

Background

The Notice of Arbitration (NOA) had been issued by CD, naming AB Bureau as respondent. The HKIAC communicated with the named respondent by using the contact information supplied by CD and invited it to submit an Answer. As no Answer was received, the HKIAC determined that the arbitration should be referred to a sole arbitrator and invited the parties to designate the sole arbitrator by a specified date. After receiving CD’s designated candidates for sole arbitrator, the HKIAC sent a letter to CD by email and to the respondent by fax, email and courier informing them of the arbitrator it intended to appoint.

A critical event took place when CD’s representative received an email from a Ms X, who described herself as from the “Contracts & Legal Department of AB (AB Engineering, previously called AB Bureau) International”. The email went on to state that CD’s email had been received by their colleagues of AB Middle East and it requested further details about the arbitration proceedings and the Agreement, since it had many agreements with different corporations in different countries all over the world.

CD received another email from a Mr Y (copied to the HKIAC) stating that it was from the “Legal Department of AB Engineering Middle East (previously named AB Bureau) (‘AB’)”. It went on to say that one of its email accounts in the Middle East had received CD’s letter to the HKIAC regarding the arbitration and that that was the first letter it had received and it assumed that all previous correspondence regarding the case had not been properly delivered to the respondent. Mr Y also requested further details about the case, including the formal application for arbitration, so that it could properly respond and also give them the correct correspondence email account.

CD then submitted a revised NOA, revising the respondent’s name from AB Bureau to “AB Bureau also known as AB Bureau Co Ltd”, which was sent to AB Bureau as named respondent by email. No further communication was received from AB Bureau, Ms X or Mr Y, despite letters sent by the HKIAC and the arbitrator seeking the contact details of the respondent and inviting comments on the arbitrator’s draft Procedural Order 1. The arbitrator then requested AB Bureau, as named respondent, to submit its Defence by a specified date.

Subsequently, CD’s legal representatives made a request to the arbitrator by email to correct the respondent’s name from AB Bureau to AB Engineering. The arbitrator invited AB Bureau to comment on the request for amendment but nothing was received. The arbitrator then wrote to CD asking it to clarify the respondent’s name. In answer, CD attached a copy of the respondent’s website page and concluded “therefore according to the website, the Respondent’s correct name is AB Engineering (formerly AB Bureau)”. On the basis of this clarification, the arbitrator issued Procedural Order 2, stating that CD had been able to demonstrate that “the legal entity called AB Bureau has been renamed as AB Engineering”. The Court observed that there was in fact no statement on the website to the effect that AB Bureau had become AB Engineering after restructuring.

Following Procedural Order 2, no further amended NOA was issued or served on either AB Bureau or AB Engineering and ultimately a final award was made by the arbitrator against AB Engineering for US$18 million. The arbitrator noted in the Award that the respondent had chosen not to participate in the arbitration.

Was AB Engineering a party to the Agreement?

The Court said that looking at the business licenses of AB Bureau and AB Engineering it was clear that they were two distinct legal entities. According to AB Engineering, although it was a subsidiary of AB Bureau at the time of the Agreement, there had been a series of restructuring, after which it had been a subsidiary of another company.

There was no dispute that the Agreement was made between CD and AB Bureau, the latter referred to in the Agreement as “AB”. CD relied on the definitions section of the Agreement, which defined “AB” to mean “AB Bureau or any other Affiliated entity”. As AB Engineering was a subsidiary of AB Bureau at the time the Agreement was made, CD argued that AB Engineering fell within the contractual definition of “AB” / “AB Bureau”, and was a party to the Agreement.

The Court said that whether AB Engineering could be said to be a party to the Agreement by virtue of the definition of “AB”/”AB Bureau” was a matter of construction of the Agreement. The Court held that there was no indication from the description of the parties, how they were referred to in the entire Agreement and how they were defined, which made it clear that the parent company and its different subsidiaries were included as parties to the Agreement. Also, there was no reference to any other subsidiary or affiliate of AB/AB Bureau in other parts of the Agreement which set out the rights and obligations of the parties to the Agreement. There was no evidence, the Court said, that AB Engineering had any role in relation to the performance under the Agreement, the rights conferred or the obligations imposed under it.

Significantly, the Court said, even if AB Engineering could, by its status as a subsidiary of Bureau, fall within the definition of “AB” under the Agreement to be a party to it, the proper course would have been for CD to add AB Engineering as a party to the Arbitration, and not to include AB Engineering as the same entity as AB Bureau, the original respondent, by virtue of a change of name. The Court said that the existence of a valid arbitration agreement between the parties went to the jurisdiction of the tribunal, and the Court had to be satisfied as to the correctness of the decision of the tribunal that it had jurisdiction.

Accordingly, the Court found that AB Engineering was not the same entity as AB Bureau, and was not a party to the Agreement and as there was no arbitration agreement between CD and AB Engineering, the Award should be set aside.

Proper notice of arbitral proceedings

The Court said that even if it should be wrong and AB Engineering could be said to be a party to the Agreement, and could properly be made a party to the arbitration by the amendment made under Procedural Order 2, AB Engineering had not been given proper notice of the arbitral proceedings or the appointment of the arbitrator. The Court emphasized that service of arbitration is an important step and that a party is required to be given “proper notice” of such. It said that even if AB Engineering and AB Bureau had offices in the same building, being separate legal entities, the court and tribunal cannot expect either of them to take action and enquire into or respond to any notice directed at another, even an affiliated company. It would be totally unreasonable, onerous and unfair so to do.

The Court commented that it is incumbent on a claimant and its legal advisers to identify the proper defendant/ respondent and to verify its name, particularly after queries about the name have been raised.

Comment

When dealing with a counter party from a large group of companies, special care has to be taken to ascertain with whom you are entering into a contract or arbitrating. Companies with similar names can be very confusing. Sometimes, the description of the party may only be a trading name, not a legal entity. What unfortunately happened in the above case was that CD was under the wrong impression that after the arbitrator’s Procedural Order No.2, the issue of the correct identity of the respondent had been sorted out. It missed the point that the respondent did not participate in the arbitration and had never abandoned the defence that it was not a party to the arbitration agreement.