Hong Kong city skyline view from Kowloon
    Notwithstanding a clear breach of natural justice, a HKIAC award narrowly avoided the cruel fate of being set aside when the Hong Kong court remitted the award back to the Tribunal for the breach to be cured.
      The recent Hong Kong Court of First Instance case of

A v B

    (HCCT 40/2014), decided on 20 June 2015, once again shows that arbitration friendly attitude of the Hong Kong courts in setting aside aside arbitral awards only in the last resort.

Facts

A (a PRC company) entered into a Development and Sales Agreement (“Agreement”) with B (a Cayman Islands company) for the joint development and sale of security solutions for various goods (the “

Products”). Under the Agreement, B was to pay the fees for the development of security products developed by A and purchase the Products. B complained about A’s poor performance and sought to recover the money paid to develop and then buy the Products. A denied B’s allegations and sought payment of the outstanding balance of the development fees and purchase price for the Products.

The dispute between the parties was referred to HKIAC arbitration on 18 February 2011. The Tribunal published the Award in June 2014, upheld B’s claims and dismissed A’s counterclaim. This was because the Tribunal found that A had failed to deliver Products that complied with the contractual specifications. Unfortunately, the Award did not address A’s argument that B’s claims were contractually time barred (“Limitation Defence”), which A had put before and argued before the Tribunal. Hence, A applied to set aside the Award in September 2014 because the Tribunal had failed to consider the Limitation Defence, so it would be contrary to public policy to enforce the Award. The setting aside application was heard by Mimmie Chan J on 20 May 2015.

Court’s Decision

B argued that the Tribunal must be taken to have implicitly rejected the Limitation Defence, so the Limitation Defence was dealt with and enforcement of the Award would not be contrary to public policy.   B’s argument ran as follows.

  1. There is no need for the Tribunal to give detailed reasons in their Award for rejecting the Limitation Defence. This is because an arbitration is private and confidential, so the Award is only meant to be read by the parties who would already be familiar with the background and how the issues have been argued.
  2. Hence, as long as the Parties can understand from the award how the Tribunal reached its conclusions on a particular issue, the reasons in the Award do not have to be elaborate or lengthy.

Mimmie Chan J therefore reviewed the Award and found that the reasons set out in the Award were insufficient to enable A to understand how or why the Limitation Defence was rejected, which contrasted with the meticulous way in which the Tribunal dealt with the other issues.

Public Policy

Her Lordship then had to consider whether enforcement of the Award in these circumstances would be contrary to public policy. In this regard, she noted that such public policy:

  1. must be narrowly construed; and
  2. would be breached only “where there is a substantial injustice arising out of an award which is so shocking to the court’s conscience as to render enforcement repugnant.”

In the context of natural justice, Her Lordship referred to similar English case law and held that “[i]t is fundamental to concepts of fairness, due process and justice, as recognised in Hong Kong, that key and material issues raised for determination, either by a court or the arbitral tribunal, should be considered and dealt with fairly.

Applying the above principles, she held that the Limitation Defence was a material issue which could have rendered the outcome of the Award materially different and the Tribunal’s failure to either consider it or explain how it was dealt with was unfair to A and caused a real risk of injustice.

The public policy ground was therefore established since there was sufficient injustice arising out of the Award, which cannot be overlooked by the Court’s conscience and that enforcement of the Award would offend the Court’s notions of justice.

Setting Aside or Remission

However, this was not the end of the matter. Under the Arbitration Ordinance, Her Lordship had two ways to deal with the breach of public policy:

  1. set aside the Award; or
  2. where appropriate and so requested by a party, suspend the setting aside proceedings to give the Tribunal an opportunity to resume the arbitration and/or take such corrective action to eliminate the causes of the breach of public policy.

A objected to the suspension of the setting aside proceedings and asked for a setting aside of the Award instead because:

  1. it had lost confidence in the Tribunal’s ability to grapple with the key issues;
  2. the Tribunal cannot reasonably be expected to have a clear recollection of the arguments since the hearing took place many months back; and
  3. the Tribunal has already made up its mind on all the issues and it would be impossible for the Tribunal to change its mind now.

Her Lordship rejected all of A’s arguments and held that the setting aside proceedings would be suspended for 90 days.

  1. The Limitation Defence is a separate and independent issue, so there is no risk of pre-judgment or bias by the Tribunal. Also, neither party had suggested that the Tribunal, who is an experienced professional, was biased or had misconducted himself.
  2. The Award is set out in 126 pages which recounts the background facts, issues raised and evidence in detail, so it would be easy for the Tribunal to recall the arguments made by the Parties. There are various observations arising from this case which the arbitration community can learn from.

 

Comments

Section 69 of the Arbitration Ordinance (Cap. 609) states (in part) that:

(3)      Unless otherwise agreed by the parties, a party, with notice to the other party, may request, within thirty days of receipt of the award, the arbitral tribunal to make an additional award as to claims presented in the arbitral proceedings but omitted from the award. If the arbitral tribunal considers the request to be justified, it shall make the additional award within sixty days.”

There was unfortunately no discussion on whether A had availed itself of its rights under Section 69 to ask the Tribunal to address the Limitation Defence. If A had done so, the time and costs of the setting aside proceedings could easily have been saved.

Given the arbitration friendly approach of the Hong Kong courts, it is suggested that the courts should not entertain an application to set aside an award unless the applicant first avails itself of its statutory rights to address any breaches of the arbitral procedure or natural justice. Rather, the fact that an applicant had not availed itself of such remedies should be a strong factor weighing against setting aside an arbitral award.

This case is also a clear illustration of how the Hong Kong court strive to uphold the integrity of the arbitration process, which should discourage setting aside applications unless the applicants have extremely strong grounds. This approach should give confidence to arbitration users that they do not have to endure follow up court proceedings before they can enjoy the fruits of an arbitration victory.