Hong Kong Court of Appeal allows enforcement of PRC arbitral award and provides important guidance on objections to arbitral procedure and "arb-med"

In Gao Haiyan and another v. Keeneye Holdings and another CACV 79/2011, the Hong Kong Court of Appeal has allowed the enforcement of a mainland Chinese arbitral award, reversing a decision of the Court of First Instance to refuse enforcement on the grounds of public policy. The judgment contains useful guidance for practitioners and parties on raising objections to arbitral procedure and the use of "arb-med", where arbitrators act as mediators during the course of the arbitration.

Key points

• This case provides a powerful reminder to parties of how important it is to raise any objections to the procedure adopted in the arbitration promptly, since a failure to do so may result in a waiver of the right to object later, including in the context of enforcement proceedings.

   

• The judgment illustrates that, within certain parameters, arbitrators can act as mediators during the course of the arbitration ("arb-med") - consistent with the express provision to this effect in section 33 of Hong Kong's new Arbitration Ordinance (cap. 609). The acceptable boundaries of this role are likely to be the subject of continued debate in Hong Kong.
   

• This is a pro-enforcement decision which emphasises that the Hong Kong courts will not readily refuse to enforce arbitral awards, whether rendered in China or elsewhere. In particular, the public policy ground for refusal of enforcement will be interpreted narrowly.

   

• The Court of Appeal indicated that, in determining whether or not to deny enforcement of an award, weight may be accorded to any decision of the courts of the seat as to whether or not to set aside the award.

   

• It also made clear that it is not the role of a court that is asked to enforce an arbitral award to express any opinion on the merits of the award. This is consistent with existing caselaw which demonstrates the respect of the Hong Kong courts for the finality of arbitral awards.

Background

In a much-discussed decision earlier this year (reported here), the Hong Kong Court of First Instance (the "CFI") held in Gao Hai Yan and another ("Gao and Xie") v. Keeneye Holdings Ltd and another ("Keeneye") HCCT 41/2010 that the conduct of an arbitration in which one of the arbitrators and the General Secretary of the Xian Arbitration Commission acted as mediators (a so-called "arb-med" procedure) was tainted by apprehended bias.

The CFI therefore refused, pursuant to section 40E(3) of Hong Kong's old Arbitration Ordinance (cap 341) (which was then in force but has since been superseded by section 95 of the new Arbitration Ordinance), an application by Gao and Xie to enforce the arbitral award rendered by the tribunal in their favour on the basis that enforcement would be contrary to public policy in Hong Kong. Gao and Xie subsequently appealed to the Court of Appeal.

Decision of the Court of Appeal

The Court of Appeal allowed the appeal and approved the enforcement of the award in Hong Kong on two principal grounds.

Ground 1: waiver by Keeneye of its right to object

The first ground for the Court of Appeal's decision was that Keeneye had failed to raise any objection to the "arb-med" procedure during the arbitration itself, and had therefore waived its right to do so in the enforcement proceedings. This was the effect of the Xian Arbitration Commission Arbitration Rules, which governed the proceedings and specifically provided for waiver of the right to object in such circumstances. Similar rules on waiver exist in many institutional rules (for example, Article 28.1 of the HKIAC Administered Arbitration Rules, Article 33 of the current ICC Rules, Article 39 of the new ICC Rules which take effect from 1 January 2012, and Article 36.1 of the SIAC Rules).

The Court of Appeal also emphasised the principle that it is not open to a party to keep a complaint about impropriety or bias "up its sleeve" for potential use at a later point. For these reasons, it held that a clear case of waiver had been established and that Keeneye had lost its right to complain about the arb-med procedure.

Ground 2: no apparent bias

The second ground for the Court of Appeal's decision was that, in any case, the "arb-med" procedure adopted in this case did not disclose apprehended bias giving rise to an issue of public policy.

This part of the Court of Appeal's judgment is likely to give rise to considerable discussion and debate given the striking factual circumstances of this case. These included the facts that (i) the mediation took place in the form of a private meeting over dinner at the Xian Shangri-la Hotel, (ii) it was not held in the presence of both parties, and (iii) the mediators appeared to make a  settlement proposal on their own initiative. It was based on these facts, amongst others, that the CFI had held apprehended bias to be established.

In considering the factual circumstances of the "arb-med" procedure and concluding that there was no apprehended bias, the Court of Appeal appeared to consider that whether there was an apprehension of apparent bias might depend upon an understanding of how mediation was conducted in mainland China. In this regard, it placed considerable weight upon the fact that the local court in Xian with supervisory jurisdiction over the arbitration had refused an application to set aside the award, and cited with approval English authority that such circumstances will be a "very strong policy consideration" for the court to take into account in deciding whether or not to enforce an award.

Implications for "arb-med"

Having found that there was no apparent bias, the Court of Appeal noted that the test for determining what is contrary to public policy in Hong Kong is whether the relevant matter is contrary to "fundamental conceptions of morality and justice" in Hong Kong. Accordingly, the mere fact that the procedure adopted would give rise to an apprehension of bias if adopted in Hong Kong will not necessarily amount to a breach of public policy. If the procedure is acceptable practice in the jurisdiction in which it took place, it will not be in breach of public policy in Hong Kong unless it was so serious as to be contrary to fundamental conceptions of morality and justice.

This may provide some comfort to parties engaging in "arb-med" procedures in mainland China (where practices may differ significantly from those in Hong Kong and other jurisdictions) that the "arb-med" procedure will not in itself give rise to a ground to refuse to enforce the award in Hong Kong on the basis of public policy.

Of course, it remains to be seen whether or not the Court of Appeal's findings in this regard will be upheld in the event of any appeal or future cases. The most prudent course remains to avoid, wherever possible, scenarios which might give rise to allegations of procedural irregularities or other grounds to challenge an award or its enforcement.

If you would like to know more about this case or how it may impact your business, please contact any member of our Hong Kong arbitration team, listed on the right of this e-bulletin.

Herbert Smith, Gleiss Lutz and Stibbe are three independent firms that have a formal alliance.

© Herbert Smith 2011