HONG KONG COURT SET ASIDE AN AWARD WHICH EXCEEDED THE SCOPE OF SUBMISSION TO ARBITRATION

In Arjowiggins HKK2 LTD v. X Co [2022] HKCFI 128, the Hong Kong Court of First Instance set aside an arbitral award on the basis that it fell outside the scope of the parties' submission to arbitration. Specifically, the award contained an order on an issue which had not been raised, or pleaded, by the parties before the merits hearing. The Court of First Instance also recently dismissed the respondent's application for leave to appeal against the court's set aside decision in Arjowiggins HKK2 LTD v. X Co [2022] HKCFI 859.

Background

In 2005, Arjowiggins HKK2 Ltd (HKK) and X Co (X Co) entered into a contract (JV Contract) to establish a joint venture in Mainland China (JV Company).

Following the breakdown of the parties' relationship, X Co applied to the Mainland court in 2010 to dissolve the JV Company.  A dissolution order was granted by the Mainland court in 2013, and a liquidation committee (LC) of the JV Company was formed in 2014.

In 2018, X Co commenced HKIAC arbitration proceedings against HKK.  Among other things, in its Statement of Claim, X Co claimed that HKK had possession, custody or control over account books and other documents of the JV Company (JV Documents), and sought an order for the immediate return of the JV Documents to X Co. HKK in its Defence denied X Co's claim on the basis that, during the liquidation process, the LC was the proper organ to have possession of the JV Documents, and X Co was not entitled to take exclusive possession of the JV documents. In its Reply, X Co alleged that it had made another application to the Mainland court for the compulsory liquidation of the JV Company, and the LC had therefore been disbanded and would be replaced by another liquidation committee.  On this basis, X Co claimed to be the party which was entitled to possession of the JV Documents.

Shortly before the merits hearing took place in December 2019 (Hearing), the Mainland court appointed a compulsory liquidation group (CLG) for the liquidation of the JV Company in October 2019.

Tribunal's Awards

Following the Hearing, the Tribunal rendered a Partial Final Award in May 2020.  It held that whilst HKK was in possession, custody and control of the JV Documents, X Co did not have a right to possession of the JV Documents during the liquidation process. The Tribunal then went on to note that, as HKK had a duty to cooperate with X Co to facilitate the liquidation, the parties should make further submissions as to what orders should be made in relation to the disposal of the JV Documents.

In response, X Co sought an order that HKK should deliver the JV Documents to X Co, for X Co to make copies before delivery of the same to the CLG; alternatively, that HKK should deliver the JV Documents to the CLG directly. HKK, on the other hand, contended that the Tribunal had no jurisdiction to make any further orders, other than dismissing X Co's claim with costs. It pointed out that the CLG did not exist at the commencement of the arbitration, and that X Co had never sought any relief that the JV Documents should be delivered to the CLG. Further, in relation to the Tribunal's reference that HKK had a duty to cooperate with X Co to facilitate the liquidation, HKK argued that this had never been pleaded.

In the Final Award issued in August 2020, the Tribunal ordered that the JV Documents be delivered to the CLG.

Issues

After the Final Award was issued, X Co applied to the Hong Kong court for leave to enforce. HKK in turn applied to the court for an order that the Final Award be set aside on the following grounds in section 81(1) of the Arbitration Ordinance:

• the Final Award exceeded the scope of the parties' submission to arbitration; and
• enforcement of the Final Award would be contrary to the public policy of Hong Kong.

Decision

Exceeding the scope of the parties' submission to arbitration

On the first ground, the court agreed with HKK that any claim of delivery of the JV Documents to the CLG fell outside the scope of the parties' submission to arbitration. Specifically, it was inconsistent with X Co's own pleaded case that it was the party entitled to exclusive possession of the JV Documents, notwithstanding the voluntary or compulsory liquidation. Further, the court found that, on a strict reading of the pleadings, HKK merely pleaded that it was the LC which had the right of possession, but it did not plead further as to the right of the CLG after it was appointed by the Mainland court.

In reaching this conclusion, the court emphasised the following:

1. It is trite that the pleadings, and not the evidence, dictate the proper course of the proceedings and the ambit of the orders to be made.
2. The fact that an issue or a matter may be within the wide scope of the arbitration agreement does not necessarily mean that the issue or matter is within the scope of the actual reference of the particular dispute to the tribunal in the particular arbitration.
3. The court rejected the Tribunal's reasoning that so long as each party was treated equally and given a reasonable opportunity to present its case on the new remedy, it would have the jurisdiction to award the proper remedy to X Co. In that regard, the question of whether each of the parties was given a fair and reasonable opportunity to present its case is separate to the question of whether the Tribunal has jurisdiction, by consensus of the parties, to act and to decide on the dispute referred to it under the relevant arbitration agreement. In that case, the parties' consensus was merely to refer to the Tribunal X Co's claim for possession and delivery to it of the JV Documents during the dissolution of the JV Company. The parties did not submit any dispute over the parties' right or duty relating to the proper liquidation of the JV Company to the Tribunal.
4. The court referred to the Court of Appeal decision in Choi Yuk Ying v Ng Kwok Chuen [2019] HKCA 171, which held "trial by ambush" has no place in modern litigation, and this includes "advancing new legal consequences" in opening submissions, which is unfair to the other side. The court further noted that parties to an arbitration should know in advance, before the hearing of the arbitration, and in as full an extent as possible, the pertinent claims and remedies sought by the other side, to enable them to consider all possible defences, and to decide on the full extent of the evidence to be adduced, rather than to have new issues raised with the witnesses only when they are called.
5. The court noted that fairness is important in arbitral process. By virtue of this principle, the court considered that the real question was whether, despite the inadequacies of the pleadings and in view of the evidence available, HKK had been surprised by X Co's new claim. Having considered all the evidence available, the court concluded that the order for delivery of the JV Documents to the CLG could not have been reasonably anticipated from the state of the pleadings and the evidence served before the commencement of the Hearing.

Public policy grounds

On the second ground of whether enforcement of the Final Award would be contrary to the public policy of Hong Kong, the court noted that the real substance of HKK's claim was that HKK was deprived of a reasonable opportunity to present its case on the new remedy and to adduce necessary evidence, as a result of the Tribunal acting beyond the scope of the parties’ reference to the arbitration. Since the court decided that the Tribunal's order was outside the scope of the reference, this was sufficient to set aside the Final Award and to dismiss X Co's cross application to enforce the Final Award.

Leave to appeal

On 24 March 2022, X Co applied for leave to appeal against the court's decision to set aside the Final Award. It claimed that the court erred in holding that the Tribunal had no right to raise new issues to ensure a proper remedy would be granted to the parties. The court dismissed X Co's application, noting that a high threshold is required to succeed in an appeal against the excise of the court's discretion.

Comment

As noted by the court, this is an unusual case on its facts. Nevertheless, this case serves as a useful reminder that, whilst strict rules of pleadings are not insisted upon in arbitration proceedings, parties should still set out clearly the scope of their claims - and defences - in the pleadings. Further, if there is a change in the circumstance giving rise to new legal grounds at a late stage, pleadings should be properly amended, or at the very least new issues clearly identified - and agreed between the parties - so that the parties are not taken by surprise, or "ambushed" at trial, by any new legal consequences not identified in the pleadings.

 For more information, please contact Kathryn Sanger, Partner, Tiffany Chan, Senior Associate, or your usual Herbert Smith Freehills contact.

The authors would like to thank Siqi Huang for their assistance in preparing this blog post.