Introduction

It is well established that a mere error of law made by the arbitral tribunal is not a sufficient ground for challenging an arbitral award under s. 81 of the Arbitration Ordinance (Cap. 609). However, in the event that the arbitral tribunal fails to consider all the key issues before it, can the parties challenge the award on the ground that it contravenes the natural justice and breach the public policy of Hong Kong? In the case of LY v HW [2022] HKCFI 2267, the Hong Kong Court of First Instance (the “Court”) was met with the question of whether or not an arbitral award could be set aside on the basis of the tribunal failing to deal with all the key issues and to provide sufficient reasons for its decisions on such.

Background

Both the Plaintiff, LY and the Defendant, HW are conducting pharmaceutical distribution business in the Mainland. The Plaintiff entered into a Distribution Agreement dated 29 January 2015 (the “Agreement”) with the Defendant, under which the Defendant, being the exclusive distributor of certain pharmaceutical products, needed to achieve an annual growth rate target as evidenced by its annual sales value (the “ASV”).

On 17 May 2019, the Plaintiff issued a notice of termination of the Agreement as they insisted that the Defendant could not meet the 2018 ASV target of RMB 354 million, and could only manage to reach a value of RMB 353.31 million. The Defendant denied the alleged breach and submitted that the ASV was wrongly calculated by the Plaintiff, which ignored the sales volumes rolled over from 2017. The Defendant counter-claimed the Plaintiff for breaching the Agreement and claimed for damages of the breach. The dispute was resolved by arbitration in accordance with the Agreement.

An arbitral award was granted in favour of the Defendant. The Plaintiff, in reliance that the arbitral tribunal (the “Tribunal”) failed to deal with 3 issues which had been expressly drawn to the attention of the Tribunal, applied to set aside the award under section 81 of the Arbitration Ordinance. The key issues are whether the “rollover” arrangement in the calculation of the ASV existed and binding on the parties, and whether the Joint Review Committee established under the Agreement had the power to decide on future ASV targets.

On top of that, the Plaintiff submitted that the Tribunal failed to provide sufficient reasons in the writing of the award, which violated due process and therefore their civil rights. They contended that the award went against Hong Kong’s public policy and hence should be set aside.

Decisions

Legal principles

The Court highlighted that the public policy ground for setting aside an award shall be narrowly construed, and setting aside of awards shall only be granted in cases of egregious errors causing substantial injustice. It must not be seen as a catch-all provision to be used whenever convenient but should be sparingly applied in limited scope.

The Court recognised the obligation of the Tribunal to state the reasons of the award upon which it is based, as prescribed in section 67 of the Arbitration Ordinance which applies Article 31 of the Model Law. However citing R v F [2012] 5 HKLRD 278, the Court emphasized that an arbitral award must be read and understood in its proper context. As it is intended to be read by the parties but not the public, it suffices that the tribunal clearly states its determination on the essential questions in dispute, and explains the reasons it came to the decision on the dispute. The reasons do not have to be elaborate or lengthy so as to achieve fair and speedy resolution of disputes without unnecessary expense.

Hong Kong, like other parties to the New York Convention, maintains a pro-arbitration approach. Hence the Court upholds the policy of minimal judicial intervention into the arbitral process, and should only interfere in the arbitration as expressly provided for in the Arbitration Ordinance. The Court endorsed the decision of Vinodh Coomaraswamy J in ASG v ASH [2016] SGHC 130 which held that “minimal curial intervention is underpinned by two considerations: first, the need to recognise the autonomy of the arbitral process by encouraging finality; and second, that parties who opt for arbitration acknowledge and accept the attendant risk of having only a very limited right of recourse to the courts.” The role of the Court is not to carry out a hypercritical analysis of what the arbitrator has written, but to read an award in a reasonable and commercial way, expecting that there will be no substantial fault that can be found with it.

Application

The Court accepted that the Tribunal did not make express finding on the 3 issues raised by the Plaintiff. However, the Court reiterated the approach that an award should be read in a reasonable and commercial way, without a meticulous exercise endeavouring to pick holes, but generously and only to remedy serious breaches of rules of natural justice which cause substantial injustice. When reading the award, the Court considered that the Tribunal was clearly aware of and had taken into consideration the arguments made for the Plaintiff. It is also apparent to the Court that the Tribunal did not consider it necessary to deal at length or with further details on certain issues. Agreeing with the Tribunal’s approach, the Court did not accept that the issues raised by the Plaintiff are key issues that are crucial to the Tribunal’s findings.

The Court further pointed out that the Tribunal is not bound to structure its decision and its reasons in accordance with the issues put to and argued before the Tribunal or the submissions made by the parties. When deciding whether the Tribunal had adequately dealt with an issue, or sufficiently explained its decision, the Court would not attempt to review the correctness of the award, in law or on facts. The Tribunal’s failure to consider the issues made on behalf of the Plaintiff in this case is a matter which goes to the substantive decision, which may amount only to an error of law, which is not a ground for challenging the award unless it is shown to be clear and virtually inexcusable.

The Court opined that even if an error of law is found in the award, the Court would be extremely slow to interfere with the Tribunal’s decision as it cannot by itself counterbalance the public policy bias towards enforcement of arbitration agreements and awards. The Court came to the conclusion that there were no grounds to set aside the award under section 81 of the Arbitration Ordinance in this case, and the Court dismissed the application accordingly.

Key takeaways

This case is a paradigm case showing the pro-arbitration position adopted by the Hong Kong Courts. The Court held that the reasons given in the award by the tribunal do not have to be lengthy, and not all issues have to be dealt with in the award. The Court would refrain from interfering with the decisions made by an arbitral tribunal, and would only allow for the setting aside of an award on the basis of there being egregious errors that would significantly affect the outcome of the decision. As a result, a mere error of law is not a sufficient ground for challenging an arbitral award.

 

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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 © 2022