American built – Hong Kong court dismisses application to set aside leave to enforce U.S. award

In Construction Co v Guarantor [2021] HKCFI 2558, the Hong Kong Court of First Instance dismissed an application to set aside leave to enforce an arbitral award issued by the American Arbitration Association in Los Angeles.

The plaintiff carried on the business of general contracting and construction management in the United States. The plaintiff and a subsidiary of the defendant entered into a contract in July 2016 for construction of a project in Los Angeles.

The defendant issued a parent company guarantee in favour of the plaintiff, whereby the defendant guaranteed payment of sums of US$10 million, US$20 million, and US$24.4 million according to a funding schedule. The plaintiff commenced the arbitration after the defendant defaulted on payment.

The defendant contended that the plaintiff was not validly licensed and was prevented from relying on the guarantee as the underlying construction contract was unlawful or contravened public policy.

The sole arbitrator first determined that its jurisdiction was confined to the dispute in relation to the guarantee and that he did not have jurisdiction to decide on the illegality of the underlying contract. The sole arbitrator allowed the plaintiff's claims on the defendant's non-payment of more than US$38 million.

The U.S. Federal District Court later confirmed that the guarantee was valid under U.S. law and that the award was not contrary to U.S. public policy. The Hong Kong court subsequently gave leave to enforce the arbitral award.

The defendant applied for leave to enforce to be set aside on several grounds under section 89 of the Arbitration Ordinance, including the propositions that the award was not yet binding, the arbitration agreement was invalid, the defendant was unable to present its case during arbitration, and/or that it would be contrary to public policy to enforce the award.

The Hong Kong Court of First Instance noted that the parties had agreed on California law as the governing law of the guarantee, had submitted their disputes to arbitration in accordance with the relevant rules under the American Arbitration Association, and had submitted to the supervisory jurisdiction of the U.S. court at the seat of the arbitration. The court therefore had no choice but to give due weight to the decision of the U.S. Federal District Court as the supervisory court, which dismissed the defendant's motion to vacate the award.

The court dismissed the defendant's allegation that it had been unable to present its case during the arbitration. The sole arbitrator's refusal to deal with the illegality of the underlying construction contract was within the scope of his jurisdiction.

The court held that none of the grounds under section 89 to prevent enforcement of the award had been met. It was impossible for the court to find on the available evidence that the underlying construction contract or the arbitration agreement contained therein was illegal, and/or that it would be contrary to public policy to enforce the award. There was nothing contrary to the court's conscience or its fundamental conceptions of morality or justice to permit enforcement.

Key Takeaways

• Parties have the right to challenge the enforcement of foreign arbitral awards before the Hong Kong courts, as long as one or more grounds under section 89 of the Arbitration Ordinance are met. Those grounds are exhaustive.
• The burden is on the applicant for the setting aside application to prove the existence of the grounds set out under section 89 of the Arbitration Ordinance.
• That being said, the Hong Kong courts have to give due weight to the decision of the supervisory court when it decides on the issues of the validity of the contract or on the procedure of the arbitration.
• It would be generally inappropriate for the enforcement court of a New York Convention country, to reach a different conclusion on the same question of asserted procedural defects as that reached by the court of the seat of arbitration. The court endorsed and applied the observation made by Colman J in the English decision of Minmetals Germany GmbH v Ferco Steel Ltd [1999] 1 All ER (Comm) 315 at 311 as to the weight to be given to the views of the supervising court of the seat of the arbitration.
• As the Hong Kong courts generally adopt a pro-arbitration stance, it is generally very hard to "overturn" the decision of the supervisory court on the same grounds before the enforcing court when enforcing an arbitral award in Hong Kong (see for example Gao Haiyan v Keeneye Holdings Ltd [2012] 1 HKLRD 627).
• This is sound policy. Prior decisions on annulment or enforcement can, and should, be treated with deference, at least to the extent that they involve identical issues or arguments. This perspective is in line with the New York Convention and users' expectations when choosing arbitration as an efficient means to resolve their disputes in a final and binding manner.
• Interestingly, the Hong Kong court in Construction Co v Guarantor did not decide on the basis of issue estoppel. The Australian courts in Gujarat NRE Coke Limited v Coeclerici Asia (Pte) Ltd [2013] FCAFC 109 also declined to determine whether issue estoppel operated in the context of an English annulment court's prior rejection of an applicant's due process objection being raised again in enforcement proceedings. Even without applying issue estoppel, the Australian courts deferred to the English court's earlier decision, reasoning that it would "generally be inappropriate" to reach a different conclusion on the same question as that reached by the court of the seat of arbitration.
• The Hong Kong courts have also not applied issue estoppel in the context of enforcement where the grounds were rejected before a supervisory court. However, that is not the end of the matter. As pointed out in Gao Haiyan v Keeneye Holdings Ltd, due weight must be given to the decision of the supervisory court refusing to set aside an award.   

Read about other key decisions in the past year in our Arbitration Highlights in the Year of the Tiger.

Authored by James Kwan, Tim Hill, and Nigel Sharman.