Grand Pacific Holdings v Pacific China Holdings
Grand Pacific Holdings Ltd and Pacific China Holdings Ltd (in liq) (No 1)
Hong Kong Court of Appeal: Tang VP, Kwan and Fok JJA: CACV No.136 of 2011,  4 HKLRD 1: 9 May 2012
Ms Teresa Cheng SC and Mr Adrian Lai, instructed by Herbert Smith, for the defendant/appellant, Grand Pacific Holdings Ltd
Mr Charles Manzoni SC, instructed by Sidley Austin, for the plaintiff/respondent Pacific China Holdings Ltd
ARBITRATION: APPLICATION TO SET ASIDE ARBITRAL AWARD: ALLEGED VIOLATION OF ARTS.34(2)(A)(II) AND (IV), UNCITRAL MODEL LAW: AWARD TO BE SET ASIDE ONLY IF VIOLATION SUFFICIENTLY SERIOUS: DISCRETION OF COURT TO REFUSE TO SET ASIDE DESPITE VIOLATION
The Court of Appeal overturned the decision of the trial judge and rejected the complaints by an applicant that an arbitral award against it should be set aside for being in contravention with arts.34(2)(a)(ii) and (iv) of the UNCITRAL Model Law. The Court of Appeal noted in obiter that before a court could find that a party “was otherwise unable to present his case”, the conduct complained of must be sufficiently serious or egregious so that one could say a party had been denied due process. Further, even if there was a violation of the UNCITRAL Model Law, the court had a discretion to refuse to set aside an award if the violation had no effect on the outcome of the arbitration, or where there had been no prejudice to the party resisting enforcement.
This note has been contributed by Ken T.C. Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.
The Applicant, Pacific China Holdings Ltd, was a BVI company and the Respondent, Grand Pacific Holdings, was a Hong Kong company. By a loan agreement entered into between the parties (“the Loan Agreement”), the Applicant agreed to pay the Respondent USD40 million with interest at 10% per annum.
The Loan Agreement provided that it should be construed and governed by the laws of the State of New York, and that any dispute or claim should be finally settled by arbitration in Hong Kong under the Rules of Conciliation and Arbitration of the International Chamber of Commerce as in force at the time of any such arbitration.
In March 2006, the Respondent referred disputes between the parties to arbitration. By an award dated 24 August 2009, the arbitral tribunal ordered the Applicant to pay some USD55 m., together with interest. The tribunal also dismissed the Applicant’s counterclaim that the Loan Agreement was unenforceable.
In March 2010, pursuant to s.34C(4) of the Arbitration Ordinance (Cap.341), the Applicant applied to set aside the award on the basis that (a) it had been unable to present its case (art.34(2)(a)(ii) of the UNCITRAL Model Law); and/or (b) the arbitral procedure was not in accordance with the agreement of the parties (art.34(2)(a)(iv)). The specific complaints were that:
(1) Leave was granted to the Applicant on 29 October 2007 to introduce for the first time a new defence that the Loan Agreement was void and unenforceable as it was illegal under the law of place of performance in Taiwan. The tribunal directed the Applicant to include in its pre-hearing submissions to be filed on 20 November 2007 its full argument and best case on the Taiwanese law issue and its expert witness statement, but allowed the Respondent to deal with these matters in supplemental submissions to be provided by 30 November 2007. This was contrary to the procedure agreed between the parties that expert reports and/or pre-hearing submissions should be exchanged at the same time.
(2) The tribunal imposed a leave requirement [fn.1] for adducing further authorities and noted that authorities would only be admitted if the experts found “something sensational that will save us time”. The tribunal refused to allow the Applicant to rely on additional authorities on Taiwanese law.
(3) The Applicant raised for the first time in its post-hearing submissions that a signatory of the Respondent had no authority to execute the Loan Agreement on behalf of the Respondent. The Applicant provided its reply to the Respondent’s defence on this issue, but the Tribunal refused the Applicant’s application for leave to make further submissions in reply.
In the Court of First Instance, Saunders J (the Judge) ( 4 HKLRD 188) upheld the Applicant’s complaints and set aside the arbitral award.
The Respondent appealed to the Court of Appeal.
The Court of Appeal unanimously allowed the appeal. The leading judgment was given by Tang VP.
The Court of Appeal noted that in approaching an application under art.34 of the UNCITRAL Model Law, the court was concerned with the structural integrity of the arbitration proceedings. The remedy of setting aside under art.34(2)(a) was not an appeal, and the Court would not address itself to the substantive merits of the dispute, or to the correctness or otherwise of the award, whether concerning errors of fact or law. The court would address itself to the process.
Tang VP rejected each of the complaints of the Applicant:
(1) Whether the Applicant was late in changing its case was a matter for the decision of the tribunal. The tribunal clearly took the view that the Respondent had been prejudiced by the Applicant’s late application to introduce its defence under Taiwanese law. The tribunal was entitled to use appropriate procedures to avoid unnecessary delay or expense so as to provide a fair means for resolving the dispute. There was no basis for the Judge to disagree with Tribunal’s decision on filing of submissions.
(2) The Judge was not entitled to interfere with the tribunal’s refusal to admit new Taiwanese law authorities. It was a case management decision which was fully within the discretion of the Tribunal to make.
(3) The tribunal was entitled to take the view that the issue of authority was raised at a late stage of the proceedings, that the Applicant had two opportunities to make submissions and that submissions should end with those of the Respondent. Thus, the tribunal could not be faulted for not allowing the Applicant another opportunity to deal with the issue.
In obiter, Tang VP noted that before a court could find that a party “was otherwise unable to present his case”, the conduct complained of must be serious or even egregious. Although he did not find it necessary to decide how serious or egregious the conduct must be before a violation could be established, or whether the conduct must be sufficiently serious to offend basic notions of morality and justice, Tang VP was inclined to the view that the conduct complained of must be sufficiently serious or egregious so that one could say a party had been denied due process.
Tang VP further noted in obiter that art.34 covered a wide spectrum of situations in which an award may be set aside on the ground that a party was unable to present its case; the Court had a discretion to refuse to set aside an award notwithstanding any violation of art.34(2)(a)(ii) or 34(2)(a)(iv). Estoppel was an obvious reason for enforcing the award notwithstanding a relevant violation. Another reason would be that the violation had no effect on the outcome of the arbitration, or that there had been no prejudice to the party resisting enforcement: see Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs of the Government of Pakistan  1 AC 763, China Agribusiness Development Corp v Balli Trading  2 Lloyd’s Rep 76. How the court would exercise the discretion in any particular case would depend on the view it took of the seriousness of the breach. As an applicant who complained of a violation was best placed to show that it had been prejudiced, the burden was on an applicant to show that he had or might have been prejudiced by the violation.
Note: (1) On 19 February 2013, the Applicant was refused leave to appeal to the Hong Kong Court of Final Appeal. (2) The Arbitration Ordinance (Cap.341) has since been repealed, but the power of the court to set aside arbitral awards under art.34 of the UNCITRAL Model Law is retained under s.81 of the new Arbitration Ordinance (Cap.609).
Fn.1 A ‘leave requirement’ means that the permission of the Tribunal is required before any further documents or submissions can be introduced into the proceedings