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Hong Kong court refuses to allow derivative action based on enforcement of arbitral award
Practical Law UK Legal Update Case Report 8-521-2601 (Approx. 4 pages)
Hong Kong court refuses to allow derivative action based on enforcement of arbitral award
by Practical Law
| Published on 06 Sep 2012 • Hong Kong - PRC |
Adam Silverman (Associate), Freshfields Bruckhaus Deringer
The Hong Kong High Court has dismissed a "derivative" action which sought, in the context of enforcement proceedings, to extend an arbitral award to cover remedies not contained within the arbitral award itself. In so doing, the court confirmed the exclusive jurisdiction of an arbitral tribunal to award remedies. The judgment also highlights the importance of seeking the most appropriate remedy from an arbitral tribunal in the course of the arbitration, rather than seeking to rectify any omissions at the enforcement stage.
Facts
In July 2003, Xiamen Xinjingdi entered into an Agreement with Eton Group regarding the development of land in Xiamen, the People's Republic of China (PRC). The land was owned by Xiamen Legend, which in turn was held by Hong Kong Legend, whose shares were held by the Eton Group.
Under the Agreement, it was anticipated that Xiamen Xinjingdi would pay the Eton Group up to RMB 120 million for possession of the land, upon which it would build apartments. Ultimately, the Eton Group would then transfer its shares in Hong Kong Legend to Xiamen Xinjingdi.
A few months later, and before the land or the shares in HK Legend had passed to Xiamen Xinjingdi, the Eton Group served Xiamen Xinjingdi with a written notice purporting to terminate the Agreement. Xiamen Legend then proceeded to develop the land itself, building and selling apartments.
CIETAC arbitration
Xiamen Xinjingdi commenced CIETAC arbitration in Beijing against the Eton Group for breaches of the Agreement, eventually obtaining an award (Award) ordering the Eton Group to "perform its obligations" under the Agreement, which would cover the transfer of the Hong Kong Legend shares to Xiamen Xinjingdi.
However, by this stage, and unknown to the tribunal, the Eton Group had restructured, pursuant to which it had transferred its shareholding in Hong Kong Legend to another company, Eton Properties.
Hong Kong court proceedings
Xiamen Xinjingdi then applied to the Hong Kong courts to enforce the Award. The Award was duly recognised by the Hong Kong courts, under sections 2GC and 40B of the old Arbitration Ordinance (Cap. 341). However, the resulting enforcement order lacked practical value as the restructuring of the Eton Group prevented the prospective share transfer of the Hong Kong Legend shares to Xiamen Xinjingdi, as ultimately envisaged under the Agreement.
In light of this, Xiamen Xinjingdi brought a further action in the Hong Kong courts against the Eton Group and nine other defendants, being companies or individuals associated with the Eton Group.
The action consisted of two elements:
- A common law "derivative" action against the Eton Group, whereby Xiamen Xinjingdi sought to use the enforcement order to seek damages/equitable compensation against the Eton Group in lieu of the specific performance of the Agreement ordered under the Award.
- A series of "original" actions against all eleven defendants, alleging that the restructuring of the Eton Group was, among other things, a conspiracy to injure Xiamen Xinjingdi and to avoid the Agreement.
The first element concerned an analysis of the jurisdiction of the Hong Kong courts with respect to the enforcement of a foreign arbitral award, and the court's decision is discussed below. As for the second element, which is of less legal significance, the court ultimately dismissed all Xiamen Xinjingdi's claims, as the case was not made out on the facts.
Decision
In considering the first element, the court considered that Xiamen Xinjingdi was, in effect, attempting to "recategorise" the specific performance remedy granted earlier by the CIETAC tribunal, with a new claim for damages/equitable compensation.
The court held that it did not have jurisdiction to perform this function, as the New York Convention procedure for recognising and enforcing foreign arbitral awards (identical in concept to the particular statutory enforcement of PRC arbitral awards under the old Arbitration Ordinance (Cap. 341) is "mechanistic". This means that a Hong Kong court sitting as an enforcement court does not review the merits of a tribunal's award. This principle is well-established in Hong Kong jurisprudence.
Therefore, the court refused to take over the exclusive jurisdiction of the tribunal and to award damages instead of specific performance. This was not a remedy which the tribunal had ruled on, nor had it been asked to rule on.
The court held that the claim for damages in lieu of specific performance was beyond the scope of the original Award and was never contemplated by the tribunal. As such, the court had no jurisdiction to usurp the arbitral tribunal and impose a new remedy under "the guise of enforcement".