Serving notice: A Trap for the unwary

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A notice of arbitration that is not properly served can be set aside or refused enforcement, which diminishes parties’ confidence in the arbitration process. Unfortunately, parties often underestimate the importance of proper service of a notice because they are unaware of the complications in the process.

Two recent cases in Hong Kong and the US illustrate some of these complications and consequences when a notice is not properly served.

Hong Kong: Three addresses

In Sun Tian Gang v Hong Kong & China Gas (Jilin), decided by Judge Mimmie Chan of the Hong Kong Court of First Instance on 21 September 2016, the parties entered into a share sale agreement (SSA) governed by Hong Kong law, which provided for disputes to be referred to arbitration. Disputes arose, so the claimant commenced arbitration in 2005 and obtained an award in 2007. During this whole time, the respondent was deprived of contact with the outside world because he was under arrest by mainland authorities and thus unaware of the arbitration. After the respondent was released, he found out about the arbitration in May 2015 and applied to set aside the award because the notice, which was served on three addresses, was not properly served on him.

iStock-579433994The first address was expressly specified in the SSA. In addition, the SSA provided that a notice is regarded as “formally delivered” if it was sent to the contractual address, and that changes to the contractual address must be notified to the other party. However, the contractual address was non-existent, so the claimant’s server did not attempt service. Mimmie Chan J held that the respondent cannot take advantage of its own wrong in not informing the claimant of a valid address for service, or correcting the non-existent address. But since the server did not attempt service, there was no proper service of the notice.

The second address was the then current registered office of a company owned by the respondent. The deeming provisions within the Arbitration Ordinance (incorporating the UNCITRAL Model Law) provided that “any written communication is deemed to have been received … if it is delivered at his place of business …” Judge Mimmie Chan held that deeming provisions only presume that the notice was validly served, which can be rebutted if the respondent can prove that he had not received the notice. The respondent rebutted the presumption, and proved that the notice was returned to the claimant, who was told by the company that the respondent no longer worked there.

The third address belonged to the respondent’s agent allegedly authorized under a letter of authorization, which provided that the representative was authorized generally to undertake all matters and to make decisions “in the execution (or implementation) of the Agreement and in the process of the resolution of disputes relating to the Agreement…” Judge Mimmie Chan held that, even if the letter of authorization was genuine, the wording was not sufficiently wide to allow the agent to accept the notice, because a notice has serious consequences as the respondent may lose the right to appoint his arbitrator and carries the risk of an adverse award if the notice is ignored. This position is similar to that of solicitors, who have no authority to accept a writ or notice for their client, unless specifically authorized.

The US: A holistic approach

In CEEG (Shanghai) Solar Science & Technology v Lumos, decided by the US Court of Appeals, 10th Circuit on 19 July 2016, the claimant, a Chinese company, sold solar cells to the respondent, an American company, under a co-branding agreement. Each purchase order for solar cells would be made under a separate sales contract. The co-branding agreement provided for CIETAC arbitration in English, but the sales contract provided for CIETAC arbitration only.

The claimant sued for outstanding payment under the sales contract and served the notice in Chinese. The respondent could not read Chinese and realized that it was a notice only after the 15-day period under the CIETAC rules to nominate its arbitrator had passed.

CIETAC therefore appointed the respondent’s arbitrator on its behalf. The claimant won the arbitration and applied to enforce the award against the respondent in the US District Court of Colorado. The respondent sought to resist enforcement because it did not receive proper notice of the arbitration and thereby lost the right to appoint an arbitrator. The US court held that its standard of due process required that the notice “must be reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections”. The notice failed this test for three reasons:

1) All previous communications between the parties were in English. The claimant ought to have known that the respondent could not understand Chinese;

2) The parties had an understanding that English would be used in their dealings. This is evidenced by: the co-branding agreement, which provided for English as the language of arbitration; and the sales contract, which was in both English and Chinese, provided that English would prevail if there was any inconsistency.

3) Article 71 of the CIETAC rules (version applicable then) provided that, unless the parties agreed otherwise, the arbitration proceedings will be conducted in Chinese or any other language designated by CIETAC. The US court held that the claimant should have been proactive by applying to CIETAC for English to be the language of the arbitration.

Lessons Learned

These two cases illustrate the complications involved in ensuring proper service of the notice, particularly in Hong Kong and the US, which are often overlooked in practice.

Do verify whether the counterparty has provided a correct address for service of notices. When parties are drafting their contract, they tend to focus only on the commercial terms and rely on each other to deal with administrative matters, such as providing their contact addresses.

Although Judge Mimmie Chan in the Sun Tian Gang case held that the counterparty cannot take advantage of its wrong in not notifying the claimant of the proper address, she did not specify what the legal consequences would be if the claimant had attempted service on a non-existent address (or how the claimant could have done so). A claimant may then have to rely on deemed notice provisions to validate service of its notice.

Do not stop attempting to serve the notice on the respondent if you are using the deemed notice provisions, particularly if the notice is returned. Deemed notice provisions only shift the burden on proving the lack of service on the respondent. A claimant using deemed notice provisions may run the risk that the respondent can prove that it had not received the notice, as we saw in the Sun Tian Gang case.

Hence, it is important to keep attempting to serve the notice on the respondent to avoid any difficulties in enforcing the award later.

Do not assume that a notice served in a language permitted by the arbitral rules will be upheld as valid service. The most prudent approach is to specify a language of arbitration. Sometimes this is omitted because the parties may be unaware of what to include in an arbitration clause.

If there is no express language of arbitration in the contract, the notice (or its translation) may be served in the native language of the respondent to avoid what happened in the CEEG case.

Check that the respondent’s representative is properly authorized to receive a notice. As the Sun Tian Gang case shows, the scope of authorization given to the respondent’s representative to receive a notice is crucial. Always check with a lawyer to ensure that the scope is sufficiently wide to include receipt of a notice.

If in doubt, it is better to serve the notice on the respondent itself to maximize the chances of proper service. If the respondent cannot be found, then the claimant can consider serving the notice on the respondent’s representative as a means of last resort.

ANDREW CHIN is an associate in the dispute resolution practice at Baker McKenzie in Hong Kong