Hong Kong Court sets high bar in setting aside arbitral awards: Insight from the latest rulings

Hong Kong is internationally renowned as a pro-arbitration jurisdiction in upholding arbitration agreements and enforcing arbitral awards. Despite the viable avenues for recourse against arbitral awards contained in Section 81 of the Arbitration Ordinance (Cap. 609) (the AO), high bars are set for any attempts to set aside an arbitral award in the Hong Kong Court.

In this article, we will examine four recent cases, analyse the Hong Kong Court’s approach in ruling in favour of or against the setting aside of an arbitral award and summarise the points to note for legal practitioners and parties to arbitration.

 

Deprivation of a reasonable opportunity to present its case - COG v. ES [2023] HKCFI 294

In the case of COG v. ES [2023] HKCFI 294, ES failed to make payment to COG pursuant to a sales contract and COG commenced arbitration under the CIETAC rules. The arbitral tribunal found in favour of COG, which then applied to the High Court of Hong Kong to enforce the arbitral award. ES argued that the award should be set aside on the grounds that it was deprived of a fair opportunity to present its case which undermined the process and was contrary to public policy. 

The basis of ES’ arguments was (i) inadequate time to prepare for the oral hearing; (ii) the arbitral tribunal did not adhere to ES’ application to hold a second oral hearing to deal with supplemental submissions and evidence filed by the parties; (iii) this decision to not hold a further hearing was not adequately explained or justified by the arbitral tribunal with reasons; and (iv) its counterclaim/ set-off was not addressed.

The High Court of Hong Kong dismissed ES’ application. The Court was of the view that ES’ defence was properly considered by the arbitral tribunal and, should ES have required more time to prepare for the oral hearing, it should have applied for an adjournment. It was further observed that the parties had agreed for the supplementary submissions and evidence to be dealt with on paper only, and the arbitral tribunal was entitled under the CIETAC rules to decide whether or not to hold a second oral hearing. ES had also never raised the alleged counterclaim/ set-off in the arbitration. Therefore, they can hardly complain about it now and have the enforcement of the award delayed or stayed by virtue of a new arbitration to be commenced based on these alleged counterclaims. In any event, it is not considered “shocking to the Court’s conscience” to enforce the award.

Importantly, the Court pointed out that the AO only requires the Tribunal to give the parties a “reasonable opportunity”, as opposed to a “full opportunity” to present their cases. Such right is limited in scope and breadth, and parties are not entitled to make unreasonable demands in ignorance of the efficiency and speedy resolution of the dispute. The arbitral tribunal’s decision not to conduct a further hearing is a case management decision which should not be lightly interfered with by the Court.

Finally, the Court clarified that the issues to be addressed in the arbitral award should be proportionate to the complexities of how that issue has been contended before the arbitral tribunal. It means that the award does not necessarily require lengthy elaborations on the issues decided, so long as the target audience of the award, i.e., parties to the arbitration who would be familiar with the case, could understand the arbitral tribunal’s reasoning. As such, although the award rendered was not particularly lengthy, the Court is of the view that the arbitral tribunal’s reasoning sufficiently enabled the parties to understand its decision.

 

Failure to consider issues in an award - LY v HW [2022] HKCFI 2267

In LY v HW [2022] HKCFI 2267, LY terminated a distribution agreement with HW based on HW’s failure to meet the minimum annual sales target.  HW commenced arbitration against LY alleging that the termination was invalid as LY’s method of calculation of the sales value was incorrect. The arbitral tribunal found in favour of HW. LY then applied to set aside the arbitral award contending that there had been a denial of due process and the enforcement of the award was contrary to public policy as the arbitral tribunal had failed to deal with and/or give sufficient reasons for its decision on the following issues in the award: (i) the implication of a Rollover Agreement in support of HW’s calculation of the sales value; and (ii) the existence of a Joint Review Committee which can determine the sales value. 

The High Court of Hong Kong dismissed HW’s application. It acknowledged that while the arbitral tribunal did not make any express findings in the award on the issues, this did not amount to a denial of due process because the arbitral tribunal simply did not consider it necessary to deal with the issues at length or with further details. The Court further held that the Tribunal was not bound to structure its decision in accordance with the issues put to the arbitral tribunal. In any case, the Court is of the view that such failure to consider the issue would, at most, amount to an error of law and does not go so far as to constitute a ground for challenging the arbitral award.  

The Court concluded that the public policy ground should not be lightly invoked unless there is proof that the arbitral tribunal had made a serious or egregious error which would cause substantial injustice to the parties.  In particular, the Court emphasised that it would be “extremely slow” to interfere with the arbitral tribunal’s decision on which issues are essential and necessary to be addressed, so long as the arbitral tribunal set out its decision and sufficiently explain how it arrived at the conclusion, parties should be bound by such award. The finality of the arbitral award should be upheld, and the Court should not allow parties to relitigate the case or put forward further submissions in the enforcement stage in order to circumvent the consequences of an unfavourable award. In September 2022, leave to appeal on this decision was granted. It remains to be seen if the decision will be reversed.

 

Lack of jurisdiction of the arbitral tribunal – H v G [2022] HKCFI 1372

In the case of H v G [2022] HKCFI 1327, G (a property developer) and H (a building contractor) executed two agreements, namely: (1) a building contract which contains an arbitration clause governed by HKIAC Rules; and (2) an ancillary warranty with H’s sub-contractor submitting the parties to the non-exclusive jurisdiction of Hong Kong courts. Due to a breach of warranty, G commenced arbitration proceedings against H. The arbitration tribunal ruled that it has jurisdiction to decide whether there is a claim under the warranty as the arbitration clause is widely drafted to encompass such claims.

H, represented by DLA Piper’s Hong Kong arbitration team, successfully applied to set aside the arbitral tribunal’s ruling on jurisdiction. It is well known that, following the principle of Fiona Trust v Privalov [2007] Bus LR 1719, parties as rational businessmen are likely to have intended that disputes arising out of their relationship be decided by the same tribunal. However, the High Court of Hong Kong held that this presumption was inapplicable in this case for the following reasons: (i) H’s sub-contractor (who is a party to the warranty to which H would like to seek contribution from) was not a party to the building contract; (ii) the arbitration clause was only contained in the building contract, whereas the warranty was a completely separate agreement where the parties expressly agreed to a non-exclusive jurisdiction clause in favour of Hong Kong Court; and (iii) the warranty dealt with separate matters and obligations distinct from the duties and obligations imposed by the building contract. Based on the facts of the case, the Court is of the view that the parties must have considered it sensible and rational to bypass the more cumbersome dispute resolution procedure contained in the building contract, and to have a separate mechanism for dispute resolution under the warranty by litigation, with the option of summary judgment available.

 

Award dealing with matters beyond the submission to arbitration - Arjowiggins HKK2 LTD v. X Co [2022] HKCFI 128

In Arjowiggins HKK2 LTD v. X Co [2022] HKCFI 128, the parties entered into a joint venture (JV) agreement. After their relationship broke down, X applied for the dissolution of the JV company in Mainland China and commenced HKIAC arbitration proceeding against Arjowiggins seeking an order for it to immediately return the relevant JV documents to X. The arbitral tribunal rendered an award deciding that X did not have the right to possess the JV documents during the liquidation process but that the parties should make further submissions as to what orders should be made concerning the disposal of the JV documents. X then requested, after the conclusion of the hearing of evidence, an order for Arjowiggins to deliver the JV documents to the compulsory liquidation group of the JV company.

Arjowiggins applied to set aside the arbitral award in the High Court of Hong Kong on the ground that the award dealt with matters beyond the scope of the submission to arbitration. The High Court of Hong Kong granted X’s application and set aside the arbitral award. It agreed with Arjowiggins that X’s claim for the JV documents to be delivered to the compulsory liquidation group was not pleaded in the arbitration. The Court clarified that (i) the parties’ reference and submission to arbitration should have been based on their pleadings, the Tribunal does not have the right to raise new issues that were not identified in the pleadings; (ii) the claim for delivery of the JV documents to the compulsory liquidation group could not have been reasonably anticipated from the pleadings, the evidence served before the commencement of the arbitration was outside the scope of the submission by X to the arbitration; and (iii) although the Court should be slow to interfere with the arbitral tribunal’s case management decisions, the question of whether X had a reasonable opportunity to call further evidence and present its case on the new claim is separate from the question of whether the arbitral tribunal had jurisdiction to make further orders. In this case, the Court is of the view that Arjowiggins had not been given a necessary and fair opportunity to present its case and to adduce necessary evidence to counter this claim. Therefore, the award fell outside of the scope of the parties’ submission, rendering it unenforceable and should be set aside.

 

Takeaways

These recent rulings illustrated the following key considerations of the Court in determining an application for setting aside arbitral awards:

1. Whether the arbitral tribunal had jurisdiction over the subject matter of the disputes. The source of the arbitral tribunal’s authority is the parties’ agreement to arbitrate. If there is a clear indication that the parties intended to resolve the disputes in another forum, the arbitral tribunal lacks jurisdiction, and the award is prone to be set aside. The award, in H v G, was set aside because the parties did not agree to submit disputes under the warranty to arbitration.
2. Once the tribunal’s jurisdiction is established, the Court will turn to consider the applicant’s grounds for setting aside the award in considering allegations of serious irregularity, due process, and public policy. A key question the Court will ask itself is whether the applicant has nevertheless had a reasonable opportunity to present their case.
3. In determining this question, the Court will carefully examine the arbitral award, the facts and circumstances of the case, and will be extremely slow in interfering with the arbitral tribunal’s case management power. Mere procedural decisions, which do not deprive the applicant of a reasonable opportunity to present their case, may not be sufficient grounds. In the case of COG v ES, the Court is of the view that despite the decision not to hold a second oral hearing, the applicant has had a reasonable opportunity to present its case.
4. Only in rare cases where it could be demonstrated that the applicant was indeed deprived of a reasonable opportunity to present its case, e.g. the arbitral award was rendered based on an unpleaded claim made after the conclusion of the hearing of evidence (Arjowiggins HKK2 LTD v. X Co), or that the arbitral tribunal had made a serious or egregious error which caused substantial injustice to the parties, will the Court set aside the arbitral award.
5. Where it could be demonstrated that the arbitral tribunal had considered an issue in dispute and the relevant evidence, it is not required to set out lengthy elaborations on its decision in the arbitral award, or structure the award in accordance with the issues put to the arbitral tribunal (H v G [2022] HKCFI 1327).

The decisions above emphasised the high thresholds imposed by the Hong Kong Court in setting aside arbitral awards. While we have seen some victories in setting aside the awards, they are only rare instances based on the specific facts and circumstances of the case. The Court generally construes the grounds under Section 81 of the AO narrowly and actively avoids parties relitigating their cases before the Court in an attempt to circumvent the consequences of an unfavourable award. Parties to the arbitration are expected to treat the arbitration proceedings seriously, make sure that all claims are identified and pleaded from the beginning, and raise procedural objections in a timely manner. Finally, parties should carefully consider, before making any application, to set aside an award, as an unsuccessful challenge will likely lead to adverse costs consequences (including indemnity cost orders).