Denied a Site Inspection in Arbitration? How the Hebei Import & Export Case Highlights Due Process Concerns

In international arbitration, particularly in disputes involving technical or construction matters, site inspections and expert examinations can be crucial for the arbitral tribunal to understand the facts and assess the evidence. A fundamental tenet of due process is the right of parties to be heard and to confront the evidence presented against them. What happens, then, if a party is excluded from a pivotal site inspection, or if an arbitrator engages in communications with one side's associates during such an inspection without the other party present? Can such procedural irregularities lead to the resulting arbitral award being deemed unenforceable? The Hong Kong Court of Final Appeal's (CFA) seminal decision in Hebei Import & Export Corp v. Polytek Engineering Co Ltd ([1999] 2 HKCFA 111), delivered on February 9, 1999, provides a compelling examination of these issues, particularly through the lenses of public policy and the doctrine of waiver.

I. The Defective Equipment and the CIETAC Arbitration

The dispute arose from a contract for the sale of rubber tire recycling equipment. Hebei Import & Export Corp. (the Chinese buyer, "Hebei") purchased the equipment from Polytek Engineering Co Ltd. (a Hong Kong trading company, the seller, "Polytek"). The equipment was manufactured by a U.S. entity and was delivered to an end-user in mainland China. When the equipment failed to meet the contractual performance standards during commissioning, Hebei initiated arbitration against Polytek before the China International Economic and Trade Arbitration Commission (CIETAC), as stipulated in their contract. The arbitration was subject to CIETAC rules and Chinese arbitration law as the procedural law. Hebei sought termination of the contract, a refund of the purchase price, and damages.

In its defense, Polytek contended that the equipment was not entirely worthless and could be repaired to meet the required standards. It requested that the CIETAC tribunal appoint an expert to inspect the equipment at the end-user's factory in China and propose a rectification plan.

II. The Controversial Site Inspection

The CIETAC tribunal acceded to Polytek's request and appointed an expert. The expert, accompanied by the presiding arbitrator, conducted an inspection of the equipment at the end-user's facility. However, two critical procedural issues arose concerning this inspection:

1. Exclusion of Polytek: Polytek was not given prior notice of the date and time of the site inspection and was consequently unable to have its representatives present.
2. Communications During Inspection: During the inspection, the presiding arbitrator was in the presence of two technicians. While these technicians were not direct employees of Hebei, they had been involved in the initial installation and trial runs of the equipment for the end-user and were thus familiar with the buyer's perspective on its defects. These technicians provided explanations and information to the presiding arbitrator during the inspection, all in Polytek's absence.

Following the inspection, the expert prepared a report which concluded that the equipment could not be repaired to meet the contractual specifications. This report was provided to Polytek in mid-December 1995. Subsequently, on January 4, 1996, the arbitral tribunal sent a communication to Polytek, informing it about the inspection and stating that the presiding arbitrator had attended to ensure the expert's fairness and independence.

III. The Arbitral Award and Challenges at the Seat and in Hong Kong

Polytek, in its subsequent written submissions in January 1996, did not directly challenge the conduct of the inspection or the presiding arbitrator's communications. Instead, it argued that, as a trading company lacking technical expertise, the U.S. manufacturer of the equipment should be joined to the arbitration or called as a witness. Polytek also requested that the tribunal obtain the manufacturer's comments on the expert's report before rendering an award. Notably, Polytek did not, at this stage, specifically contest findings in the expert report nor request a hearing to question the expert about the inspection or the report itself.

The tribunal denied Polytek's requests and directed it to submit any written comments on the expert's report by February 16, 1996. On February 14, 1996, Polytek reiterated its request for a two-month delay in the issuance of the award to allow it to obtain the manufacturer's opinion, though it appeared that Polytek had not yet taken concrete steps to secure this opinion. The tribunal, citing the lengthy duration of the proceedings already, refused further delay and proceeded to issue an award largely in favor of Hebei, ordering a refund and damages, relying on the expert's report.

Hebei then sought to enforce this CIETAC award in Hong Kong. Polytek mounted a two-pronged challenge:

1. It applied to the Beijing No. 2 Intermediate People's Court (the court at the seat of arbitration in mainland China) to set aside the CIETAC award. This application was unsuccessful; the Beijing court found no grounds for annulment.
2. It applied to the Hong Kong courts to set aside the order granting enforcement of the award in Hong Kong. The Hong Kong Court of First Instance initially dismissed Polytek's application.

However, Polytek appealed to the Hong Kong Court of Appeal. In these appeal proceedings, Polytek, for the first time, explicitly argued that enforcement of the CIETAC award would be contrary to Hong Kong's public policy (a ground for refusing enforcement under Hong Kong's then-Arbitration Ordinance, mirroring Article V(2)(b) of the New York Convention). The Court of Appeal agreed with Polytek. It found that Polytek's exclusion from the site inspection, during which the presiding arbitrator had received information from technicians aligned with Hebei's position, coupled with the tribunal's subsequent refusal to grant Polytek a further hearing on the inspection and expert report, meant Polytek had been denied a proper opportunity to present its case and rebut evidence. Consequently, the Court of Appeal set aside the enforcement order, deeming enforcement contrary to Hong Kong's public policy.

Hebei then appealed this decision to the Hong Kong Court of Final Appeal (CFA).

IV. The Court of Final Appeal's Ruling: Enforcement Restored

The CFA, in its judgment of February 9, 1999, allowed Hebei's appeal and restored the order for enforcement of the CIETAC award. The CFA's reasoning addressed three main issues:

A. The Effect of the Seat Court's Decision (Beijing Court):
The CFA clarified that a decision by the court at the seat of arbitration (here, Beijing) refusing to set aside an award does not prevent a court in another jurisdiction (here, Hong Kong) from refusing enforcement of that same award based on its own grounds for refusal, particularly its own public policy. The New York Convention distinguishes between grounds for setting aside an award (primarily the domain of the seat court) and grounds for refusing recognition and enforcement (a matter for the enforcement court). Furthermore, a party is not necessarily estopped from raising a ground for refusing enforcement merely because it did not raise (or succeed on) that same ground in setting-aside proceedings at the seat, though such failure might be relevant to assessing good faith or waiver at the enforcement stage.

B. The Crucial Role of Waiver of Procedural Objections:
This was a central pillar of the CFA's decision. The Court emphasized the well-established principle in arbitration law that a party who becomes aware of a procedural irregularity must raise an objection promptly. If the party, knowing of the defect, continues to participate in the arbitration without objection, it is generally deemed to have waived its right to complain about that irregularity later, either in setting-aside proceedings or at the enforcement stage.

The CFA found that Polytek had indeed waived its right to object to the conduct of the site inspection:

• Polytek was informed by the tribunal (in January 1996) that the presiding arbitrator had attended the inspection and that communications with technicians had occurred in Polytek's absence.
• Despite this knowledge, Polytek did not, in its subsequent submissions to the tribunal, object to the manner in which the inspection was conducted, nor did it request a re-inspection, or the opportunity to cross-examine the technicians or the expert specifically about the circumstances of the inspection. Instead, its requests focused on involving the U.S. manufacturer.
• Polytek also failed to raise these specific procedural objections regarding the inspection before the Beijing court in the setting-aside proceedings.

The CFA concluded that by "not taking the point before the arbitrators or the Beijing Court and by continuing to take part in the arbitration, Polytek must be taken to have waived any irregularity."

C. Public Policy Violation and Opportunity to Present Case:
The CFA then considered whether, waiver aside, the exclusion from the inspection and the related communications constituted a breach of Hong Kong public policy so fundamental as to warrant refusal of enforcement.

• It reiterated the narrow construction of the public policy defense under the New York Convention: enforcement should be refused only if it would violate the enforcing state's "most fundamental notions of morality and justice." The right to be heard and the right to a fair and independent tribunal are indeed fundamental principles in Hong Kong.
• However, the CFA noted that parties, by agreeing to CIETAC arbitration, had agreed to be bound by its rules and the procedural law of China. The CIETAC rules in force at the time appeared to grant tribunals broad powers to conduct their own investigations and gather evidence, and did not necessarily mandate party presence at all such investigative steps unless the tribunal deemed it necessary.
• More importantly, the CFA found that despite its absence from the physical inspection, Polytek did have subsequent opportunities to address the expert's report and the evidence arising from the inspection. It could have:
  • Vigorously challenged the findings of the expert report in its written submissions.
  • Requested a hearing to cross-examine the expert on his methodology and conclusions, including what transpired at the inspection.
  • Submitted its own expert evidence to counter the tribunal-appointed expert.
  • Made concrete arguments and presented evidence that the equipment was, in fact, repairable.
    Polytek, in the CFA's view, largely failed to avail itself effectively of these opportunities to present its case and rebut the evidence against it. Therefore, even though being excluded from the inspection was a procedural irregularity that might be considered improper under Hong Kong domestic procedural norms, it did not, in the overall context of the arbitration and Polytek's subsequent conduct, amount to such a fundamental denial of due process as to violate Hong Kong's public policy and justify refusing enforcement of the award. The combination of waiver and the availability of subsequent opportunities to be heard was decisive.

V. Due Process, Site Inspections, and the Waiver Doctrine: Key Principles

The Hebei case offers critical lessons regarding procedural fairness in international arbitration:

1. The Right to Be Heard in Evidence Gathering: As a general principle, parties have a fundamental right to be heard, which includes a reasonable opportunity to participate in or respond to crucial evidence-gathering exercises like site inspections or expert examinations, especially if those exercises will materially inform the tribunal's decision. Unexplained exclusion from such events can raise serious due process (audi alteram partem) concerns.
2. Propriety of Arbitrator Conduct During Inspections: Arbitrators, particularly when attending inspections or interacting with potential sources of evidence ex parte (in the absence of one party), must act with extreme caution to maintain both actual and apparent impartiality. Communications with individuals aligned with one party concerning substantive issues, without the other party present or having an opportunity to respond, are generally improper.
3. The Imperative of Timely Objection (Waiver): This is a cornerstone of efficient and fair arbitration. If a party believes a procedural irregularity has occurred that prejudices its rights, it has a duty to raise a clear and specific objection to the tribunal (and/or the administering institution) as soon as reasonably practicable after becoming aware of the issue. Continuing to participate in the arbitration without such objection, especially by taking further substantive steps, will almost invariably be construed as a waiver of the right to later challenge the award or resist its enforcement on the basis of that irregularity.
4. Public Policy as a Narrow "Last Resort": The public policy ground for refusing enforcement of an award under the New York Convention is intentionally narrow and reserved for truly egregious cases where enforcement would offend the most basic and fundamental principles of justice and morality of the enforcing state. It is not a license for courts to re-examine the merits of the dispute or to refuse enforcement based on minor procedural flaws or differences between the arbitral procedure and the court's own domestic procedures.
5. Distinction Between Seat and Enforcement Court Roles: While an enforcement court is entitled to apply its own public policy standards, the primary venue for challenging procedural irregularities is generally the court at the seat of arbitration through setting-aside proceedings. A party's failure to vigorously pursue such challenges at the seat may weaken its arguments at the enforcement stage, as seen in Hebei.

VI. Practical Implications for Businesses in International Arbitration

The Hebei decision carries important practical implications for how businesses should manage their participation in international arbitration proceedings:

• Maintain Vigilance Throughout the Process: Parties and their counsel must actively monitor all stages of the arbitration, including any expert appointments, proposed site inspections, or other investigative steps undertaken by the tribunal. Do not assume the process will automatically conform to your expectations of fairness.
• Assert Your Procedural Rights Promptly and Clearly: If you believe a procedural step is improper, that your right to be heard is being compromised (e.g., by exclusion from an inspection or by improper ex parte communications), or that an arbitrator is acting with bias, you must raise a clear, specific, and preferably written objection to the arbitral tribunal and any administering institution without delay. Simply expressing dissatisfaction is not enough; a formal objection is required.
• Document All Procedural Issues: Keep meticulous records of all communications related to procedural matters, any objections raised, and any rulings or responses from the tribunal or institution. This documentation will be vital if a later challenge becomes necessary.
• Understand the Applicable Rules and Law: Be thoroughly familiar with the chosen arbitration rules (e.g., CIETAC, ICC, UNCITRAL) and the lex arbitri (the law of the seat) concerning matters like expert evidence, site inspections, tribunal powers, and party participation rights. These rules often define the expected procedural standards.
• Make Strategic Decisions Regarding Waiver: If a procedural defect occurs, a conscious decision must be made: object formally and risk antagonizing the tribunal (if that is a concern, though usually unfounded with professional tribunals), or remain silent and almost certainly waive the right to complain later. In most cases where a genuine due process issue arises, lodging a formal objection is the prudent course.
• Utilize All Available Opportunities to Present Your Case: As the CFA noted in Hebei, even if an initial procedural irregularity occurs, a party's failure to use subsequent opportunities to make its arguments, present evidence, or challenge opposing evidence can weaken a later claim that it was denied the right to be heard.

Conclusion

The Hong Kong Court of Final Appeal's judgment in Hebei Import & Export Corp v. Polytek Engineering Co Ltd is a powerful affirmation of the doctrine of waiver in the context of international arbitration. It demonstrates that even potentially significant procedural missteps, such as a party's exclusion from a site inspection during which an arbitrator engaged with individuals associated with the opposing side, may not ultimately lead to the refusal of an award's enforcement if the aggrieved party fails to make timely and specific objections during the arbitral proceedings themselves.

The decision reinforces the internationally accepted narrow interpretation of the public policy exception to enforcement and underscores the heavy burden on parties to actively safeguard their own procedural rights throughout the arbitration process. For businesses engaging in international arbitration, the paramount lesson from Hebei is the critical importance of vigilance, proactive assertion of procedural rights through timely objections, and full utilization of all opportunities to present one's case before the arbitral tribunal. Due process is a vital shield, but it must be actively and diligently wielded by the parties themselves.