Gao Haiyan v Keeneye Holdings
Gao Haiyan v Keeneye Holdings Ltd
Hong Kong Court of First Instance: Reyes J in Chambers: HCCT No.41 of 2010: 12 April 2011
Mr Edward Chan SC, Mr Peter Ng SC, Mr Laurence Li and Mr Eric Chow, instructed by Messrs C.L. Chow & Macksion Chan, for the Applicants, Gao Haiyan
Mr Patrick Fung SC and Mr Calvin Cheuk, instructed by Messrs Li & Partners, for the Respondents, Keeneye Holdings
ARBITRATION: ENFORCEMENT OF ARBITRAL AWARD OBTAINED IN CHINA: SETTING ASIDE: CONTRARY TO PUBLIC POLICY: AWARD TAINTED BY ACTUAL OR APPARENT BIAS: MEDIATION CONDUCTED IN COURSE OF ARBITRATION: “MED-ARB”: ESTOPPEL
Note: this decision was reversed by the Hong Kong Court of Appeal by a judgment dated 2 December 2011
The present case involved the enforcement of an arbitral award obtained in China. The Court held that although the parties agreed to the arbitrators trying to mediate the dispute before deciding on it themselves, the mediation was not conducted according to the relevant arbitration rules. Further, the manner in which the mediation was conducted would give a fair-minded observer an impression that the Tribunal favoured one party over another. Thus, the award was tainted by apparent bias. Although the Chinese court had dismissed a challenge to the award on the basis of bias, the Hong Kong court was entitled to decline enforcing the award on the same basis.
This note has been contributed by Ken To-ching Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.
In 2008, the Applicants (“GH”) entered into a Share Transfer Agreement (“the Agreement”) with the Respondents (“Keeneye”) under which GH agreed to sell and Keeneye agreed to buy shares in a company in China.
Subsequently dispute arose between the parties, and in July 2009, Keeneye commenced arbitration before the Xian Arbitration Centre (“the XAC”) pursuant to an arbitration agreement under the Agreement. They claimed that the Agreement was valid, while GH claimed that it was not.
The arbitral tribunal (“the Tribunal”) consisted of three members, one Chief Arbitrator and two members respectively nominated by the parties. At the end of the first arbitration hearing in December 2009, the Tribunal asked whether the parties were agreeable to mediation. The written record of the proceedings stated that the parties agreed with the suggestion.
Article 36 of the XAC Arbitration Rules (“the Rules”) stated that, subject to the parties being willing, the arbitral tribunal can “conduct mediation at any time before the rendering of an award”.
Article 37 of the Rules stated that the arbitral tribunal or the presiding arbitrator may conduct the mediation and, with the approval of the parties, any third party may be invited to assist in the mediation.
Subsequently, the Tribunal proposed a settlement whereby Keeneye would pay RMB 250 million to GH (“the proposal”). It also appointed a Mr Pan, XAC’s Secretary General, and Mr Zhou, one of the arbitrators, to contact the parties about this proposal. Mr Pan’s office communicated the proposal to GH’s lawyer. Mr Pan and Mr Zhou also met a Mr Zeng Wai over a dinner in a hotel in Xian in March 2010. Mr Zeng was “a person related to” or on friendly terms with Keeneye. He was told over the dinner about the tribunal’s proposal, and was asked “to work on” Keeneye. However, both Keeneye and GH rejected the proposal.
A second arbitration hearing took place in May 2010, but no one complained about the conduct of Mr Pan and Mr Zhou.
The arbitral award (“the Award”) was published in June 2010. The Tribunal rejected Keeneye’s claim, and the Agreement was rescinded. However, it “recommended” that GH “shall take the initiative to pay RMB50,000,000 as the economic compensation to [Keeneye] in order to end the disputes between the parties.” It was further stated that such recommendation was “based on the fairness and reasonableness arbitration principles, it is not binding and not included in the arbitral matters.”
Keeneye appealed to the Xian Intermediate Court on the ground that the Tribunal had shown “favouritism and malpractice”. However, the Xian Court dismissed the appeal and held that the mediation complied with Article 37 of the Rules.
GH then sought to enforce the Award in Hong Kong under the Arbitration Ordinance (Cap.341, Laws of Hong Kong). [The reasons why GH took this step are not clear from the judgment] Saunders J granted an order to that effect.
Keeneye now applied to set aside Saunder J’s order on the basis that it would be “contrary to public policy to enforce the Award” under Section 40E(3) of the Arbitration Ordinance and, in particular, that the Award was tainted by bias or apparent bias because of the way the mediation was conducted.
Reyes J allowed Keeneye’s application and set aside Saunders J’s order for the enforcement of the Award.
There were some factual disputes on whether the parties had actually agreed to mediate but, relying on the written record, Reyes J held that the parties did agree to mediate.
The Court was of the view that the mediation attempt was not conducted in accordance with Article 37 of the Rules. Neither the Tribunal as a whole nor the Chief Arbitrator conducted the mediation attempt. The parties had neither consented to the time and place of the mediation (in particular, the dinner at the Xian hotel in March 2010), nor had they agreed to Mr Pan acting as a third party in the mediation. Reyes J commented that it was indeed strange to mediate in such an informal setting.
Although these facts did not suggest actual bias on the part of the Tribunal, the Court did find apparent bias, as a fair-minded observer would apprehend a real risk of bias: Porter v Magill  AC 357.
The fair-minded observer would be concerned that the underlying message conveyed to Mr Zeng over the dinner was that the Tribunal favoured GH. Mr Zeng was not a party; yet he was asked “to work on” Keeneye to accept the proposal. An impartial observer might fear that Mr Zeng was chosen to be an intermediary between the parties because he was perceived to be able to wield influence with Keeneye and could press them to accept the proposal.
Further, GH had not authorised the Tribunal to put forward the proposal. The impression conveyed might be that Mr Pan and Mr Zhou were acting on their own initiative which favoured GH. It was also telling that the Award went in GH’s favour (in that Keeneye’s claim was dismissed), and that they were only recommended (but not required) to pay RMB 50 million to Keeneye.
On the facts, the Court did not regard Keeneye as having waived the right to object on the basis of apparent bias because of their failure to complain to the Tribunal. In choosing not to irritate the Tribunal by making a direct complaint about bias on the part of the Tribunal, they made a clumsy attempt to attack the GH’s credibility by relying on what happened during the mediation.
There was also no question of Keeneye being estopped from complaining about bias because the Xian Court had dismissed their complaint. Even if a party had unsuccessfully challenged an award before the supervising court, it was not estopped from arguing before the enforcing court that enforcement should be refused as a matter of public policy by reason of the very same ground: see Hebei Import & Export Corp v Polytek Engineering Co Ltd  1 HKLRD 665 (Hong Kong Court of Final Appeal). Public policy in Xian might be different from Hong Kong public policy, and a Hong Kong Court was not bound by a finding of the Xian Court relating to Xian public policy.
Therefore, although arbitral awards were usually to be enforced, enforcement of the Award in the present case was to be refused because it was tainted by apparent bias. Saunder J’s order was thus set aside.
This case raises the tricky issue how “med-arb” (whereby the arbitral tribunal would try to mediate the dispute before deciding on it themselves) could be done such that an impression of bias would not arise on the part of the arbitral tribunal; and similarly for the case of “arb-med”.
While saying that “[t]here is nothing wrong in principle with med-arb” (for such contingency is now provided for in the UNCITRAL Model Law (July 2006 version)), Reyes J did acknowledge that “the med-arb process runs into self-evident difficulties”, especially in terms of the potential for an appearance of bias. He did not attempt to offer any solution to these difficulties, but he hinted that the arbitrator has a fine line to tread. He has to be very careful not to convey to one party or the other the impression of favouring the case of either party, and it would be important that he conduct the mediation in a formal and proper manner, as opposed to what was done in the present case.