The original dispute in this case arose out of a transfer of shares from the applicants to the respondents. The applicants commenced litigation in Hong Kong and the respondents commenced arbitration proceedings in Xian, China, claiming that the share transfer agreements were valid.

The arbitration took place over two arbitration hearings, in December 2009 and in May 2010. On 17 June 2010 an arbitral award in favour of the applicants was made by three arbitrators of the Xian Arbitration Commission. The respondents first attempted to set aside the award before the court at the seat of arbitration, which was the Xian Intermediate Court. That application was dismissed, and so the respondents then tried to resist enforcement of the award in Hong Kong, on the basis that the award was made in circumstances which would cause a fair-minded observer to apprehend a real possibility of bias on the part of the tribunal.

In dealing with the enforcement application, the Hong Kong court found that after the first arbitration hearing in December 2009, the parties had agreed to have the tribunal act as mediators, in a med-arb process. It noted that in March 2010, the Secretary General of the Xian Arbitration Commission (P) and one of the arbitrators (Z) met in a hotel restaurant with an individual, Zeng, who was associated with the respondents. No other parties were present.

The court was prepared to proceed on the basis, "with serious reservations", that the hotel meeting was part of an unsuccessful mediation by the tribunal. The court further accepted that on the facts, the tribunal had decided to suggest to the parties to settle the case by the respondents paying RMB 250 million to the applicants. The court further accepted that at the meeting, Zeng was told about the RMB 250 million proposal, and was asked "to work on" the respondents.

Despite this, the respondents refused to pay RMB 250 million to the applicants.

Subsequently, the tribunal made an award in June 2010 in which the respondents' claim was dismissed in its entirety and the share transfer agreements were revoked. In its award, the tribunal also "recommended" that the applicants pay RMB 50 million to the respondents as "economic compensation".

The Hong Kong Court of First Instance considered the background facts and refused to enforce the award, on the basis that the surrounding circumstances would cause a fair-minded observer to apprehend a real risk of bias. The court noted in particular that the meeting at the hotel restaurant would cause a fair-minded observer to "be concerned that the underlying message being conveyed to Zeng at the dinner…was that the Tribunal favoured the Applicants."

In particular, the court questioned why P and Z approached Zeng rather than the respondents directly, and considered that the impartial observer would fear that Zeng was chosen as an intermediary because he was perceived as a person wielding influence with the respondents, who could press the proposal of paying the applicants RMB 250 million.

The court also found that the expression "work on" had overtones of P and Z actively pushing for settlement at RMB 250 million. It also questioned why a figure of RMB 250 million was proposed by P and Z without authorisation from the applicants, and it held that the impression conveyed was that P and Z were acting on their own initiative, which favoured the applicants. The court also questioned why the mediation was held at a hotel restaurant, and it noted that eventually, the RMB 250 million not having been paid by the respondents, the award went in the applicants' favour. The court stressed that it was solely concerned with whether there was an appearance of bias and that it made no finding of actual bias. Nonetheless, based on the above, the court determined that a real apprehension of bias had been created and the enforcement of the award should be refused.

The decision in this case can be largely confined to its specific facts, and it represents a rare instance where enforcement of a foreign arbitral award has been refused in Hong Kong. In the course of its judgment, the court noted that the risk of a mediator turned arbitrator appearing to be biased will always be great, and that a mediator who may be sitting as an arbitrator in the same case must be particularly careful not to convey to one party or the other the impression of bias. This is consistent with the reluctance of many Hong Kong arbitrators to engage in an arb-med process, and it is a particularly salutary reminder of the risks involved in this process, given that the new Hong Kong Arbitration Ordinance (Cap. 609), which allows for the arb-med process, is set to come into effect on 1 June 2011 (see Legal update, New Hong Kong Arbitration Ordinance: official commencement date announced).

Gao Haiyan v Keeneye Holdings Ltd HCCT 41/2010.