Background
KZ and KY were brothers embroiled in a dispute following the restructure of various family companies.
As part of the company restructure, KZ agreed to give KY shares (the restructure agreement). Under the restructure agreement, the shares would be returned to KZ once the restructure had been completed. However, KY did not return them.
The proceedings
The parties went to arbitration to settle whether the shares should be returned. The tribunal declared that these shares belonged to KZ and that KY should transfer them back.
KZ went to the Court to enforce the Award. In response, KY sought to have the Court set the Award aside.
KY argued that the Award had to be set aside on the grounds that:
- the arbitration impacted third parties;
- People’s Republic of China (PRC) law governed the agreement but the tribunal had assessed the matter using Hong Kong law; and
- the matter itself was not capable of being arbitrated.
The decision
The impact of arbitration on third parties
Central to KY’s argument was that an associate, Mr Mak, held shares by way of the agreement subject to the arbitration. Therefore, the arbitration would impact a third party. KY argued that there was authority to suggest this would invalidate the award.
The Court agreed to an extent. When an arbitral award impacts rights of third parties, a court can set aside the award. However, that does mean a court must. Rather, it is open to the court faced with an application for leave to enforce an award to decide whether third party interests provide a reason not to allow enforcement. [1]
KY then argued that an analogy should be made with equity. Equitable remedies such as specific performance will not be ordered by a court when the remedy would negatively impact a third party.
However, in this case Justice Mimmie Chan did not see how the rights of third parties would be impacted. In order to demonstrate this, Justice Mimmie Chan broke down the particulars of the agreement to prove a lack of third party rights:Â
- Despite the third party’s arguments to the contrary, the share transfer at the heart of the dispute did not concern their sole share.Â
- The Award did not bind the third party.Â
- The third party was claiming that their rights had accrued by way of an oral agreement between them and the respondent. Justice Mimmie Chan reminded them that they were welcome to start their own independent proceedings.Â
The impacts of PRC law
One of KY’s arguments was that the matter was a succession issue and would therefore be governed by PRC Succession Law. However, Justice Mimmie Chan did not agree that this meant it could not be decided by arbitration. Any arbitrator would simply only have to consider the dispute on those terms.Â
Furthermore, as the companies were incorporated under Hong Kong law, Justice Mimmie Chan was doubtful that PRC law would apply in any case. Â
Non-arbitrable
Justice Mimmie Chan adopted the view of the Singapore Court of Appeal that the presumption of arbitration is that arbitral awards will be enforced.[1] One of the key exceptions to the rule is whether the enforcement of an award would contravene public policy in Hong Kong. With KY having failed on the other arguments, Justice Mimmie Chan could not see how this would occur. Â
Conclusion: arbitration is sensitive to third party interests
The difficulty in having a court set aside an award no doubt shaped KY’s argument around Mak being impacted by the award. The idea that Mak was an impacted third party was a stretch, but clearly there is something to the idea that arbitral awards are unenforceable when third parties are impacted.
References
[1] KZ v KY [2024] HKCFI 1880.
[2] Citing Sodzawiczny v McNally [2021] EWHC 3384 (Comm).
[3] Larsen Oil and Gas Pte Ltd v Petroprod Ltd [2011] 3 SLR 414.
