⚖️ Hong Kong Court of First Instance Set Aside an Arbitral Award Ordering the Termination of Court Proceedings, Finding That the Counterparty Had Not Exercised Due Diligence When Signing the Settlement Agreement

A Hong Kong-based developer (the "Developer") and a mainland Chinese holding company (the "Holding Company") entered into a cooperation agreement in 2012 for the development of land in the Fuzhou district (the "Agreement").

In 2021, the Holding Company filed a claim in the Hong Kong Court of First Instance against the Developer, alleging breach of the Agreement. The parties subsequently entered into a settlement agreement, which provided for a repayment schedule to the Holding Company, in exchange for which the Holding Company undertook to discontinue the court proceedings. The settlement agreement also contained an arbitration clause in favor of the Beijing Arbitration Commission and provided for the application of PRC law. On the Holding Company's side, the settlement agreement was signed by a person "having the ability to effectively direct the company's activities," as the Developer later stated.

Despite the settlement agreement, the Holding Company did not withdraw its claim in the Hong Kong court. In view of this, the Developer initiated arbitration and obtained an award requiring the Holding Company to terminate the Hong Kong proceedings and pay the Developer RMB 15 million in damages. In reaching this decision, the arbitral tribunal concluded that the settlement agreement had been signed on behalf of the Holding Company by an unauthorized person. Nevertheless, the agreement was binding on the Holding Company because the Developer had relied on the apparent authority of that person.

The Developer applied to the Hong Kong court for recognition and enforcement of the arbitral award. The respondent objected, arguing that the arbitration agreement was invalid due to collusion between the Developer and the signatory on the respondent's side, and that recognition of the award in Hong Kong would be contrary to public policy.

The Hong Kong Court of First Instance upheld the Holding Company's position, basing its decision on the following grounds:

🔘 Since the respondent had not challenged the tribunal's jurisdiction during the arbitration proceedings, it had lost the right to object to the validity of the arbitration clause on which the award was based;

🔘 At the same time, even if the settlement agreement were invalid, the arbitration agreement would still survive by virtue of the principle of separability, and therefore, contrary to the respondent's argument, the arbitration agreement was valid;

🔘 However, enforcement of the arbitral award would be contrary to Hong Kong public policy if the claimant knew, or ought to have known, that the settlement agreement containing the arbitration clause had been signed by an unauthorized representative of the Holding Company;

🔘 A reasonable person in the Developer's position would have at least conducted a basic check of the signatory's authority on the respondent's side — especially since the Developer's representative who signed the settlement agreement was a lawyer by training and held the position of Risk Management Director. Consequently, the Developer had no reasonable basis to rely on the apparent authority of the Holding Company's representative;

🔘 For this reason, recognition and enforcement of the arbitral award, which was based on a settlement agreement signed in the absence of the Holding Company's genuine consent, would be contrary to Hong Kong public policy — notwithstanding the arbitral tribunal's finding that under PRC law the Developer could rely on the signatory's apparent authority.

In the end, the Hong Kong Court of First Instance refused the claimant's application for recognition and enforcement of the arbitral award.

📎 The full text of the judgment is available here. An analysis of the judgment is available here.

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Original see here