Expert commentary: Challenge to an arbitral award on the basis of no valid arbitration agreement; application for security as condition for setting aside award

Edward Liu, Maggie Lee and Nicole Wong discuss the recent cases of Weili Su and Another -v- Shengkang Fei and Others and X -v- Jemmy Chien, in which disputes arose in arbitration.

Weili Su and Another -v- Shengkang Fei and Others [2019] HKCFI 1257 

The arbitration in this case concerned a dispute between the defendants as claimants, and the plaintiffs as respondents, arising under a shareholders’ agreement made between the parties concerning their shareholding in Sky Solar Holdings Co (the Company), a Cayman Islands company. The first plaintiff (P1) was the founder of the Company. The second plaintiffs (P2) was the controlling shareholder of the Company. The defendants were the minority shareholders of the Company. 

In the arbitration, the claimants argued that the respondents restructured the Company to exclude the claimants from the benefit of an initial public offering of shares (IPO), where the Company’s shareholders were given the right to swap their shares in the Company for the shares in Sky Power Group (New Solar). A new company was formed as a subsidiary of New Solar and was listed, instead of the Company. The claimants claimed that the respondents had breached their obligations under the agreement to use ‘commercially reasonable best efforts’ to facilitate an IPO for the Company. 

Clause 15.2 in the agreement (the Clause) provided that ‘any dispute or claim arising out of or in connection with or relating to’ the agreement, ‘of the breach, termination or invalidity thereof (including the validity, scope and enforceability of this arbitration provision)’ shall be finally resolved by arbitration, provided that ‘the investors’ (who were also parties to the agreement) were to select one arbitrator, the Company and the second plaintiff (which was a party to the agreement as the controlling shareholder) were to jointly select one arbitrator, and the chairman of the arbitration centre was to select the third arbitrator. The tribunal made an arbitral award in favour of the defendants. 

The plaintiffs applied for setting aside the award on the basis that: (1) there was no valid arbitration agreement; (2) the composition of the tribunal was not in accordance with the agreement; (3) the defendants failed to plead their case; and (4) the tribunal made findings without evidential basis, the tribunal had acted in excess of jurisdiction, and/or contrary to public policy and/or the plaintiffs were deprived of a fair opportunity to present their case. 

By way of counterclaim, the defendants sought leave to enforce the award and security for costs under section 86(4) of the Arbitration Ordinance (Cap 609) and Order 73, rule 10A of the Rules of the High Court as a condition of pursuing the plaintiffs’ application, arguing that the plaintiffs lacking substantial assets in Hong Kong would render enforcement more difficult if enforcement was delayed. P1 opposed the counterclaim by arguing that he had sufficient assets worldwide to satisfy the award, but as he had no assets in Hong Kong, he should not be ordered to bring assets into Hong Kong by way of security. 

The court allowed the defendants’ application and held that:

• The award was manifestly valid. A right to appoint an arbitrator and a right to arbitrate should be distinguished. A party to an arbitration agreement may not necessarily have the right to appoint an arbitrator. A party may even agree to have an arbitrator appointed by a designated third party. 
• The clause was widely drafted, including arbitration of ‘any dispute or claim’, ‘arising out of or in connection with or relating to’ the agreement, which agreement set out rights and obligations of the minority shareholders as against the other parties. The clause extended to disputes or claims relating to ‘the breach’ of the agreement, and any dispute or claim as to the ‘validity, scope and enforceability of’ the arbitration provision contained in the agreement. 
• Although the named minority shareholders were not expressly granted the right to select an arbitrator under the clause, the third arbitrator was selected by the arbitration centre. All parties as ‘signatories’ to the agreement agreed to the process, as arguably protecting the interests of those parties which did not have the right to select the arbitrator of their choice. 
• Even if the Company was not a party to the arbitration had not jointly appointed the arbitrator selected by the plaintiffs, the plaintiffs had arguably waived any objection on this basis by not having raised this in their challenge to the jurisdiction of the tribunal. There was no prejudice to the plaintiffs caused by their own failure to seek the Company’s participation in a joint appointment. Even if there was a serious irregularity, as there was no resulting prejudice, the court had a residual discretion to enforce the award. 
• P1’s argument was that he had no assets of value in Hong Kong and should not be made to bring in assets as security was contradictory to his affirmations, incredible and self-serving. The plaintiffs were far from candid in disclosing the location and value of their assets, here or elsewhere, notwithstanding the requirement in a worldwide freezing order obtained by the defendants against P2’s assets for the plaintiffs to disclose P2’s assets worldwide. There was evidence that the plaintiffs, on receiving notice of enforcement proceedings by the defendants, took steps to dispose of their assets to frustrate the defendants’ actions to enforce the award. 
• Enforcement of the award would be rendered difficult by any further delay and security must be ordered as a condition for the further conduct of the plaintiffs’ application to set aside the award.

X -v- Jemmy Chien [2019] HKCFI 2172 

Disputes arose between X (a BVI company with a Taiwan-listed parent company) and Chien under a service agreement, whereby Chien agreed to provide marketing services to X in exchange for a 5% sales commission. X argued that the service agreement was invalid since Chien had signed the same as agent for his principal, Mr Chen, who was the true party to the service agreement, to conceal the conflict of interest of Mr Chen by virtue of his senior position at a third-party company. Chien maintained that he was the true party to the service agreement and the tribunal made arbitral awards in favour of Chien. 

X applied to set aside the arbitral awards, on the grounds that: (1) there was no valid arbitration agreement between the parties; and (2) the awards contravene the public policy of Hong Kong. Chien applied for leave to enforce awards, dismiss X’s application to set aside the award, sought security as a condition for the further conduct of X’s setting aside application under Order 73 rule 10A of Rule of High Court (Cap 4A) and applied for security for costs, on the basis that X was an overseas company. 

In considering Chien’s application for security as a condition for further conduct of the set aside application, the court applied the legal principles set out in Soleh Boneh International Ltd -v- Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208 at page 212 and refused to order X to provide security to Chien. 

Under the Soleh Boneh approach, there were two important factors to be considered by the court: 

1. The strength of the argument that the award is invalid. If the award is manifestly invalid, there should be an adjournment and no order for security, and if it is manifestly valid, there should be either an order for immediate enforcement, or else an order for substantial security. In between where there are various degrees of plausibility in the argument for invalidity, the court must be guided by its preliminary conclusion on the point, which in this case, it was concluded that the awards were not manifestly invalid. 
2. Whether the enforcement of the award will be rendered more difficult, for example, by movement of assets or by improvident trading, if enforcement is delayed. 

The court found that the service agreement was valid since there was no conclusive evidence that Chien signed as a representative or agent for any third party under PRC or Hong Kong law. Even if Chien had entered into the service agreement as an agent, he was entitled to enforce the terms of the service agreement, given that the terms of the service agreement were clear as to the duties and obligations imposed on X and Chien. 

Further, the ground on public policy should be narrowly construed. Since the court accepted that there was a valid service agreement, there was no reason to refuse enforcement of the awards that would be contrary to public policy in Hong Kong. 

In determining whether security should be ordered as a condition for the further conduct of the setting aside application, the focus should be on whether difficulty of enforcement was increased due to the delay between the hearing of application for security and the substantive hearing for setting aside the awards, as security was not to facilitate the enforcement process by requiring assets to be brought into a jurisdiction where there were none before. Although X had no presence, business or assets in Hong Kong, it had substantial assets internationally. There was no evidence of dissipation or risk of dissipation of assets by X, especially given that its parent company was listed on the Taiwanese stock exchange. Therefore, there was no real risk that enforcement of the awards would be more difficult due to the interim delay, such that security should be ordered as a condition for the further conduct of the setting aside application. 

In relation to the security for costs, since X had no assets in Hong Kong, Chien would have to incur additional costs to seek enforcement overseas of any order of costs made in his favour, should X’s application for setting aside fail. Therefore, the court ordered X to provide security for Chien’s costs of HK$500,000.