When would the Court exercise its power to set aside an arbitral award?

image_pdfimage_print

Introduction

Hong Kong is a jurisdiction where the policy encourages and upholds the autonomy and finality of arbitration, i.e. a policy of minimal interference with awards.[1]  Party seeking the Court’s leave to appeal an arbitral award pursuant to section 5 of schedule 2 of the Arbitration Ordinance (Cap. 609) (the “AO”) must satisfy that the Arbitral Tribunal’s decision is open to serious doubt rather than merely involving a question of law of general importance. Recourse against an arbitral award other than appeal would be an application to the Court of First Instance (the “CFI”) for setting aside the arbitral award under section 81 of the AO, equivalent to Article 34 of the UNCITRAL Model Law. In the case of P v M [2019] HKCFI 1864, the CFI set aside parts of an arbitral award because of the procedural unfairness therein resulting in substantial injustice.

Background

P engaged M to carry out construction works under a contract which incorporated an arbitration clause (the “Contract”). Disputes arose from whether M had fulfilled the notice requirement under the Contract for claiming site overheads and insurance costs by its email and letter, leading to the commencement of domestic arbitration proceedings by M against P. After the first hearing in November 2017, the Arbitral Tribunal issued an interim award against P, ordering it to pay M damages for loss and expense plus interest (the “First Award”). In the arbitration proceedings, it was M’s pleaded case that it was not contractually required to give notice for claims for extended insurance costs or for site and head office overheads, and even if it was required, P had either waived the requirement or was estopped from acting on M’s failure to give notice. While the Arbitral Tribunal had rejected M’s said pleaded claims, it nevertheless ruled in favour of M by finding that M’s said letter and email had constituted notice as required by the Contract.

P argued that the Arbitral Tribunal had exceeded its powers, or had failed to conduct the arbitral proceedings in accordance with the procedure agreed by the parties by finding M had satisfied the notice requirement. Consequently, P applied to the Court for an order to set aside certain parts of the First Award or declaring them to be of no effect, on grounds of serious irregularity under section 4(2)(b) and/or 4(2)(c) and 4(3)(c) of schedule 2 of the AO.

The application was heard before the Honourable Madam Justice Mimmie Chan in the CFI, who found that P had been deprived of a fair opportunity to make relevant submission to the tribunal in relation to the contractual requirement of notice. The relevant parts of the First Award were declared as having no effect pending reconsideration of the Arbitral Tribunal pursuant to section 4(5) of schedule 2 of the AO. Following the remission of the case for reconsideration of the arbitral tribunal and considering the parties’ further submissions, the Arbitral Tribunal delivered the second interim award reinstating its decision in relation to the notice requirement (the “Second Award”). P raised a challenge of the Second Award to the CFI on the same grounds.

The Court’s intervention in the arbitral process

The CFI reiterated that the Court is only concerned with the structural integrity of the arbitration proceedings, and not with the substantive merits of the dispute. It was held that the applicant who challenges an arbitral award must establish both serious irregularity and substantial injustice. In order to strike a balance between the need for finality of the award and the need to protect parties against unfair conduct in the arbitration, the CFI held that the threshold of establishing serious irregularity is high to justify the Court’s intervention in the arbitral process. As for substantial injustice, the test is whether the Arbitral Tribunal might well have reached a different view and there might well have been a significantly different result should there be absence of the irregularity.

In the case where an arbitral award or part of it is set aside or declared to be of no effect by the Court, the arbitration can revive or carry on as necessary to deal with the matters that were set aside or declared to be of no effect. Following a remission, the Arbitral Tribunal’s revived authority extends only to the matters that are so remitted but cannot go beyond the scope of the revived jurisdiction. The purpose of remission of the case to the Arbitral Tribunal is to remedy the unfairness and injustice by putting the parties back in the position they were in before the error occurred.

The Decision

The Honourable Mr Justice Coleman held that while the Arbitral Tribunal sought to provide proper opportunity for P to present its case by giving P the “final right of reply”, the defects could not be cured by allowing P to file further submissions. Given that the parties must be bound by their pleaded cases, evidence already traversed at the arbitration hearing and findings of fact made on that evidence once the direction has been made, if M had wished to advance its case to the arbitral tribunal that its letters had constituted a valid notice pursuant to the contract, M could have properly done so by making an application to amend its pleadings, which if allowed would almost certainly have required re-opening the evidentiary hearing. Therefore, intervention in this arbitration is justified and necessary.

The Honourable Mr Justice Coleman remarked that “the intended finality of arbitration is important, and the authorities identify the need for serious irregularities in the procedure for the court to be able to exercise a discretion to intervene”. His Lordship further commented that “it is just as important for the maintenance of integrity in the arbitration process for the Court to intervene in appropriate cases, as it is for the Court not to intervene when the high threshold for doing so has not been reached”.

Since the Arbitral Tribunal’s reconsideration had failed to cure the substantial injustice caused by the serious procedural irregularity, it was held that there was no purpose in further remitting the matter for further reconsideration. It was satisfied that P has lost all confidence in an arbitrator who has not just once, but twice, formulated a case for M which had not been advanced by M, and without giving a proper opportunity to deal with it and that a further remission is not appropriate. As a result, the relevant paragraphs in the arbitral award were declared to be of no effect with costs of the application payable by M to P.

Conclusion

While the Court is slow to amend an arbitral award to maintain the finality of arbitration, this case clearly demonstrates the Court’s intervention in arbitration where a party has not been given a fair opportunity to present its case in arbitration. In the extreme cases where remission to the original Arbitral Tribunal for reconsideration is not sufficient to remedy the substantial injustice resulting from the procedural irregularity, the Court will exercise its power to set aside the arbitral award as appropriate. However, it should be noted that the Court would have no power to intervene the award on the ground of serious irregularity or error on question of law if the parties do not expressly opt in the provisions under Schedule 2 of the AO or the arbitration agreement does not expressly states that arbitration under the agreement is a domestic arbitration. Therefore, care should be taken when drafting the arbitration clause and legal advice should be sought before agreeing to the terms of the arbitration clause.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:
E: arbitration@onc.hk                                                         T: (852) 2810 1212

W: www.onc.hk                                                                    F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2019

 

[1] Arbitration in Hong Kong: A Practical Guide, 4th Ed, 2017, Sweet & Maxwell, at para. 20.003.