Pre-hearing procedural order for refusal of defence

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It is not unusual to encounter a respondent reluctant or refusing to make a defence in an international arbitration. It deserves a discussion on the application of procedural measures for promoting efficiency of a hearing, as a hearing is very expensive. The author will present an international arbitral case of the Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC).

The dispute arose from a purchase contract for minerals between a Hong Kong company (the applicant) and a mainland company (the respondent). The applicant filed an arbitration claim against the respondent, requesting compensation for overdue debt and the loss of interest. The respondent, while receiving the arbitration notice and appointing its counsel for this case, did not submit any defence or relevant evidence material.

In accordance with the BAC arbitration rules, the ordinary procedure was applied and the arbitration tribunal (AT) comprised three arbitrators. An eminent international arbitrator based in Hong Kong was appointed as presiding arbitrator, while the author was one of the co-arbitrators. In considering the above-mentioned situation, the AT decided to issue a pre-hearing procedural order.

PRE-HEARING PROCEDURAL ORDER

Problems regarding hearing without respondent’s defence. In this case, the respondent’s counsel declared that they would attend the arbitral hearing and they had no intention of reaching any settlement with the applicant. Under this situation, if a hearing is arranged, problems faced may include the following:

  1. It may be unfair for the applicant, since the respondent would be very likely to submit its defence and evidence very close to or even during the hearing, giving the applicant no time to prepare if it is required to provide answers during a hearing, resulting in an “ambush”.
  2. It might delay the hearing or generate another hearing. The applicant would probably decline to respond to issues and evidence brought into the trial by the respondent in a prearranged hearing, and thus require a longer hearing or another hearing session, causing extra cost and time.
  3. Without necessary information from both parties, the AT would have no general idea of what the parties were arguing about, or take necessary preparation for an efficient hearing beforehand.

    Purpose of the pre-hearing procedural order. The reasons for the AT to make a pre-hearing procedural order are: (1) To push both parties to disclose evidence before the hearing, supporting factual issues and legal basis; and (2) to inform both parties about relevant risks and consequences, to avoid losing or abusing procedural rights due to misunderstandings.

    Two pre-hearing procedural orders. In this case, the AT issued procedural order No. 1 requiring: (1) both of the parties to submit documents and other material on which they wished to rely as evidence, and to examine the other party’s materials in documentary forms in time accordingly; (2) the respondent to submit defence opinions in writing and, if any, counterclaims ahead of the deadline, allowing the applicant enough time to prepare a defence to potential counterclaims made by the respondent. The applicant then submitted supplementary evidence material, whereas the respondent still did not hand in any documents and evidence material.

    In considering this situation, the AT issued another procedural order clearly indicating that the arbitral AT would like to draw the respondent’s attention to the following issues:

    1. If the respondent merely relies on oral statements to show its stance and defence against the applicant without submitting evidence to support the statements before a hearing, those statements will not easily be accepted by the AT.
    2. If the respondent does not submit evidence to support its oral statements until at the hearing, in considering the procedural fairness and the applicant raising objection, then the AT will not accept the evidence unless the respondent can prove that the evidence in question was only acquired at that time and was not available earlier.

The aim of this order was to inform the respondent about the consequences of disobeying the procedural order, but also to allow some extension. The order thus required that “should the respondent want to submit any written forms of opinion and evidence, please do so within seven days of receiving the notice. The AT will continue the arbitral proceeding after the expiry.”

Respecting procedure discretion of the parties. After issuing these two orders, the respondent still did not submit any material. Given that the AT had already clearly explained the consequences that might result from the respondent’s reluctance to co-operate, and allowed an extension of time for the respondent, in order to treat the parties fairly and process the dispute with efficiency, the AT then determined to open the hearing session.

The respondent, however, presented a defence based on the ground of periods of prescription (statute of limitations) during the hearing. As the AT noted, the applicant rebutted the defence with detailed legal bases and analysis, without any procedural objection. It was within the applicant’s discretion to respond to the respondent’s defence in the hearing session. The AT respected the applicant’s discretion. In the hearing, after allowing both parties to present their case, the AT then narrowed down their contentions, requiring both parties to only hand in material relevant to those contentions after that hearing session.

In this case, the AT had issued two procedural orders offering both parties opportunities to disclose evidence, ensuring the effectiveness and efficiency of the arbitral hearing. In the hearing, the AT respected the rights of both parties regarding procedural matters. The AT then made the award in 30 days after closing the hearing, with assistance from the BAC.

Audrey Huang is a former general counsel of China General Consulting & Investment, and also serves as an arbitrator at Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC). BAC/BIAC’s case manager Yang Rui also contributed to this article.