Denial of process – Hong Kong court sets aside award, finding arbitrator's conduct "seriously flawed"

The Honourable Justice Mimmie Chan in Canudilo International Co Ltd v 胡志强 [2023] HKCFI 700 has set aside an HKIAC Final Award, finding that the arbitrator’s conduct was so "seriously flawed" and "egregious" that there had been a serious denial of due process, and the structural integrity of the Award had been undermined.

It is unusual for the Hong Kong courts to refuse enforcement of an arbitral award but here, the conduct of the arbitration was outside the bounds of what the court would find acceptable given the "violation" of the rights of the parties.

In this case, the replacement arbitrator (Arbitrator 2) had considered himself bound by a previous Interim Award, when there was no issue decided against two of the guarantors, and with the arbitrator who had issued the Interim Award (Arbitrator 1) having expressly stated that the issue would only be decided in the second part of the arbitration. 

A tale of two arbitrators

On 10 August 2021, the Hong Kong Court of First Instance granted the applicant (CIC) leave to enforce a Final Award made on 7 June 2021 in an arbitration commenced in Hong Kong between CIC and various other parties including a company, Apennine Holdings Limited, with which it had entered into sales contracts, and others who had acted as guarantors for payment under the sales contracts, CK Wu, CF Wu (together, the Wus), Ji Guanhua and Wang Liuxi.

CF Wu was the sole director and one of the two shareholders of the company with Ji Guanhua  being the other shareholder. The Wus argued that there was no binding contracts between the parties and that CIC never sold any goods to the company.

After commencement of the arbitration on 10 September 2019, Arbitrator 1 was appointed on 10 December 2019. No step was taken by the company in the arbitration and the company did not file any defence or evidence, nor made any submissions in the arbitration.

Arbitrator 1 made an Interim Award on 26 June 2020 but three days later notified the parties that he had received a letter from solicitors acting for the company asking for an extension of time for making submissions on behalf of the company, despite the fact that he had already declared the proceedings closed.

On 20 July 2020, Arbitrator 1 resigned stating that to continue to act after the issue of the Interim Award would give rise to reasonable suspicion or doubt as to his impartiality as arbitrator. On 17 September 2020, HKIAC appointed a new arbitrator (Arbitrator 2) who on 7 June 2021, issued a Final Award following a hearing.

Arbitrator 2 claimed he was bound by the Interim Award made by Arbitrator 1 on issues such as whether the guarantees had been procured by fraudulent misrepresentation and economic duress.

On 26 April 2022, the Wus applied (out of time) to set aside the 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 Wus did not have a reasonable opportunity to present their case and that enforcement would be contrary to the public policy of Hong Kong.

Already decided

The Honourable Madam Justice Mimmie Chan said that in her view, "and reading the Final Award as a whole, Arbitrator 2 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, and he had to follow the findings because he and all the guarantors including [the Wus] were bound by the 2020 Award."

Mimmie Chan J said that "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 job of Arbitrator 2 was to decide, "whether, as against the guarantors, there was a valid debt due and payable under the contracts and that the contracts were not vitiated by any misrepresentation or economic duress." The guarantors were entitled to test and challenge the evidence on the contracts and on the alleged primary debt.

What was material in this case was that "at the first part of the Arbitration, Arbitrator 1 had expressly stated that it was not necessary for him to deal with and decide on the dispute issues" raised in the defences of the Wus, Ji Guanhua and Wang Liuxi. As Arbitrator 1 had already pointed when making the Interim Award, the company itself had not adduced any evidence to refute CIC's claims made against it.

The disputed issues between CIC and the guarantors had not been decided by Arbitrator 1. Contrary to CIC's suggestion, the Wus "were not seeking to have a second bite of a cherry, as Arbitrator 2 stated. They never had the first bite."

The primary liability of the company for the debt due under the contracts and the guarantors' liability for the debt (if established), "were indeed the very issues for determination by Arbitrator 2." Arbitrator 2 had "entirely changed the landscape of the Arbitration by taking such a stance." The could be "no abuse of process in [the Wus] seeking from Arbitrator 2 a determination of the issues which Arbitrator 1 had expressly stated would only be decided in the second part of the Arbitration."

Mimmie Chan J said that in her judgment, it would "be contrary to our 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 Wus] as guarantors, and had unfairly and unjustly deprived [the Wus] of the reasonable opportunity to present their case as to whether they were bound by the 2020 Award and the findings made herein."

The court concluded that "the violation of [the Wus'] rights in the Arbitration was sufficiently serious and egregious, for the Final Award to be set aside". It could not be said to be beyond doubt that the Final Award "would have been the same if all the evidence had been properly and seriously considered, and [the Wus] had been given the reasonable opportunity to present their case". The "absence of such pre-requisites of due process" could not be condoned by the court, "by recognizing and permitting enforcement of an award which has given rise to substantial injustice."

The court also allowed the Wus an extension of time to apply for the set aside application since to refuse it "would be to deny [the Wus] a hearing where their application has decisively strong merits and would involve penalizing them for a delay when there is no evidence of prejudice to CIC which is uncompensatable by costs."

Fair trial

Even if a party's defences are unmeritorious, as explained by the court, a party has the right to a "reasonable opportunity" to present their case. This does not always equate to having a "full opportunity" (see Hogan Lovells alert A right to be heard – Hong Kong court says it need only be "reasonable").

Mimmie Chan J said this was "fundamental to the process of fair trial". The absence of due process could not "be condoned by the Court, by recognizing and permitting enforcement of an award which has given rise to substantial injustice."

Authored by James Kwan and Nigel Sharman.