Hong Kong Court of Appeal affirms partial set aside of an arbitral award for "serious" irregularity

The Hong Kong Court of Appeal ("CA") recently affirmed a decision of the Court of First Instance ("CFI"), in which an arbitral award was partially set aside due to an irregularity that the CA described as being at "the serious end". In China Property Development (Holdings) Ltd v Mandecly Ltd & Others CACV 92 & 93/2015 (click here for the full judgment), the CA agreed with the decision of the CFI (see our previous post) that the applicant had been denied an opportunity to present its case on certain issues. Interestingly, the CA went further than the CFI, finding that the award was also liable to be set aside on the ground that it dealt with a dispute not contemplated or falling within the terms of the submission to arbitration. 

The decision is a useful reminder that, whilst Hong Kong courts will generally uphold the finality of arbitral awards, they will still provide recourse in the rare situations where there is a serious irregularity in the arbitral process.

Facts

The dispute, which was decided under Hong Kong's old Arbitration Ordinance (Cap. 341), related to consideration payable under a share sale agreement. Pursuant to the agreement, China Property Development (Holdings) Ltd (CPDH) acquired a PRC entity referred to as “BPP“. CPDH and BPP commenced arbitration against the sellers and numerous issues fell to be determined by the Tribunal. In relation to one of those issues, the sellers expressly confirmed during the hearing that their arguments were directed against BPP only. CPDH consequently made no further submissions on the point. In its award, however, the Tribunal made a ruling on that issue against CPDH, and ordered it to make a payment to the sellers as a result.

CPDH sought clarification from the Tribunal as to whether the reference to “CPDH” in the relevant part of the award was a typographical error and should actually be a reference to “BPP”. The Tribunal confirmed that there was no typographical error and provided a written explanation of the reasons for its decision. The explanation revealed that, in making its finding against CPDH on the issue, the Tribunal had applied the reasoning underlying the sellers’ arguments on a different issue (which had also been directed against BPP only).

CPDH therefore applied to set aside the relevant parts of the award under Article 34 of the UNCITRAL Model Law on the basis that, inter alia, it had been unable to present its case on the arguments on which the Tribunal had relied.

The CFI accepted that CPDH had been denied an opportunity to present its case on arguments on which the Tribunal might have based its decision, and considered this to be a “sufficiently serious breach of due process” to justify the setting aside of the relevant parts of the award. The sellers and BPP appealed against the findings of the CFI, giving rise to the present judgment.

Set aside affirmed

The CA upheld the findings of the CFI that CPDH had been denied an opportunity to present its case. In reaching this decision, the CA repeated the exercise undertaken by the CFI, looking in detail at the grounds for set aside under Hong Kong law, as well as the arguments advanced in the pleadings and at the hearing against the findings of the Tribunal in the award. The CA found that it was clear that an irregularity had occurred, since the sellers had expressly stated that it was not their case that CPDH was liable in respect of the relevant issue, yet the Tribunal found that it was.

In fact, the CA went further than the CFI and found that the irregularity constituted a breach of Article 34 of the UNCITRAL Model Law, on the additional ground that the award dealt with a dispute beyond the terms of submission to arbitration. For an irregularity to justify set aside, it must be "serious, even egregious" (see our previous e-bulletin on Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1). The court must also consider the nature of the irregularity. The CA deemed the Grand Pacific criterion satisfied in this case, holding that the Tribunal's error was "at the serious end" of the irregularities that may occur.  The CA also noted that, even where the grounds for set aside are made out, the court retains discretion not to order set aside, if it considers that the outcome could not have been different had the irregularity not occurred. In this case, the CFI elected not to exercise that discretion, and the CA endorsed that decision.

Comment

This judgment is a useful reminder that the Hong Kong courts are willing to set aside an award where such a remedy is appropriate. While the grounds for set aside under both the old and new Arbitration Ordinances are limited, and the courts will look to uphold the finality of the arbitral process wherever possible, sufficiently serious irregularities will warrant intervention by the courts.

The case also highlights the importance of tribunals basing their reasoning only on the arguments made by the parties during proceedings. The courts can, and will, review the pleadings and hearing transcripts to determine what arguments were actually advanced before a tribunal. It is therefore important that tribunals take care not to introduce new arguments, without giving parties a chance to present their case on such arguments.

For further information, please contact Simon Chapman, Partner, Martin Wallace, Senior Associate, Bryan Fok, Associate, Briana Young, Professional Support Consultant or your usual Herbert Smith Freehills contact.