Hong Kong court sets aside enforcement order of arbitral award procured under fraudulent setting on public policy ground

On 29 December 2021, the Court of First Instance (“CFI“) handed down its decision in the case of 廣東順德展煒商貿有限公司v Sun Fung Timber Company Limited [2021] HKCFI 3823, setting aside an enforcement order granting leave to the Applicant 廣東順德展煒商貿有限公司 (“GD“) to enforce an arbitral award made by Zhanjiang Arbitration Commission against the Respondent Sun Fung Timber Company Limited (“Company“). The order was set aside on three grounds, namely (i) the arbitration agreement was invalid; (ii) the Company was not given proper notice of arbitration and was unable to present its case; and (iii) enforcement of the award would be contrary to public policy – a ground which rarely succeeds.

The Company was a business operation carrying on timber retail business owned equally by two families (represented by DL and ST). The relationship between the families went sour and in the course of winding down the Company, ST entered into a suspicious transaction with GD on behalf of the Company. The “unusual features” of the contract (“Contract“) were found by the Court to include the following:

  • (i) the transaction being a sale by the Company to GD for a substantial amount of marble – instead of timber (which was its core business);
  • (ii) the contractual sum was 62 times larger than the Company’s previous annual sales revenue;
  • (iii) the marble was stated to be for delivery in an extremely short period of time after conclusion of the Contract – i.e. within 6 days of the Contract;
  • (iv) the Company was subject to a penalty clause of a huge sum – i.e. RMB 2.2 million for each day of delay;
  • (v) GD’s payment of RMB22 million deposit was satisfied only by a deposit of a cheque for the amount – which was never banked in or cashed;
  • (vi) GD was incorporated only 3 months before the Contract was signed.

On delivery, GD complained that cracks were detected in the marble and rejected the goods. Arbitration commenced one month after the dispute arose and an award was handed down 4 days after the commencement of the proceedings. During the proceedings, ST accepted liability on behalf of the Company and agreed to pay damages in the sum of RMB 59 million to GD (the “Award“). GD subsequently sought to wind up the Company on the basis of the Award and to enforce the Award in Hong Kong.

What appears surprising is that DL had no knowledge of the Contract, the arbitration or the Award at all until he was served by the Official Receiver as a contributory of the Company during the winding-up petition. What is more surprising is that the notice to arbitrate, the winding-up petition, and the order granting leave to enforce the Award were all served to the Company at the Company’s outdated registered office which has already been sold during the winding-down exercise.

Based on the above facts, the Court concluded that GD and ST carried out an orchestrated plan to make the Company indebted under the Award. This exercise would enable GD and ST to receive valuable assets and to avoid the need for ST to share the remaining assets of the Company with DL after the winding up. In ruling that ST “acting entirely in furtherance of his own personal interest”, the Court concluded ST had no authority to enter into the Contract (and consequently the arbitration agreement) on behalf of the Company. The Company was unable to present its case given its lack of proper notice. Notably, the Court also set aside the enforcement order on the ground of public policy, commenting that the arbitral process and the Award was “misused by ST with the assistance of GD” and it would be “shocking to the conscience of the Court” if enforcement of the Award is allowed.

Although the Hong Kong courts have all along adopted a pro-arbitration stance, this case demonstrates that Hong Kong courts are always ready to step in at the right moment to prevent Hong Kong from becoming a haven for impropriety, thereby maintaining Hong Kong’s integrity as a dispute resolution centre.

27 January 2022
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