Hong Kong Court Clarifies Threshold for Setting Aside Awards

A Hong Kong Court recently adopted a resoundingly pro-arbitration stance in a decision which emphasised the high thresholds of irregularity that would need to be established before an arbitration award can be set aside.

In LY v HW, [2022] HKCFI 2267, the Court dismissed an application to set aside an award based on claims that the Tribunal had failed to deal with the key issues and failed to provide sufficient reasons for its decision in the award. This decision underlines the narrow manner in which grounds for refusal of enforcement are to be construed and fortifies the enforceability of arbitration awards in Hong Kong.

Background

A Hong Kong company (LY) had entered into an Agreement with a Chinese company (HW), for the distribution of pharmaceutical products on the Mainland. Under the Agreement, the exclusive distributor HW was required to achieve a minimum annual sales value (ASV) target.

In May 2019, LY issued a notice of termination of the Agreement claiming that HW had failed to meet the ASV target. HW disagreed with LY's manner of calculating the ASV and initiated an arbitration claiming that such termination was invalid.

The Tribunal rendered an award in favour of HW, finding that LY's termination was invalid under the Agreement. LY subsequently filed an application for setting aside the award under section 81 of the Arbitration Ordinance, claiming that the Tribunal had failed to deal with the following issues that were integral to the resolution of the parties' dispute:

• The existence and nature of the Rollover Agreement put forward by HW for its calculation of the ASV.
• The power of the Joint Review Committee (established under the Agreement) to make determinations on the ASV for future years.

LY contended that the Tribunal had provided insufficient reasons in the award, which amounted to a denial of due process. On that basis, LY sought to set aside the award on grounds of it being contrary to the public policy of Hong Kong.

Decision

While considering the set aside application, the Court referred to a vast range of prior decisions that narrowly construed the public policy ground, setting aside awards only in cases of egregious errors causing substantial injustice.

The Court also considered section 67 of the Arbitration Ordinance, which implements Article 31 of the Model Law and requires an award to state the reasons upon which it is based. It held that the reasons provided by a tribunal do not need to be elaborate and lengthy, since the object of the Arbitration Ordinance is to facilitate fair and speedy dispute resolution without unnecessary expense or delay.

The Court highlighted the following key legal principles in its judgement:

• Parties to an arbitration do not have a right to have all their arguments addressed by the Tribunal in the award. So long as the tribunal gives sufficient reasons for its decision, the award will be enforceable.
• A tribunal is not bound to structure its decision and reasons in accordance with the issues or submissions as they are presented by the parties.
• An award should be read in a reasonable and commercial way, without a meticulous legal eye endeavouring to pick faults, but generously, with a view to remedy only serious breaches of natural justice.
• Any inference that the arbitrator had failed to consider an important issue, must be shown to be clear and virtually inexcusable. Even if the arbitrator misunderstood the evidence, or thought a point was unnecessary, the inference cannot be drawn.
• Courts must be circumspect in deciding whether a Tribunal has adequately dealt with an issue, so as to avoid any attempt of reviewing the correctness of the award either in law or on facts.

The Court found that while it was true that Tribunal did not make any express findings on the issues highlighted by LY, this was simply because the Tribunal did not consider them necessary to deal with at length. Further, contrary to LY's contention, the Court also did not find the issues to be crucial to the Tribunal's ultimate decision.

The Court held that the Tribunal's failure to deal with the aforementioned issues would at most amount to an error of law but that it was not a sufficient ground for challenging the Award. Adopting a policy of minimal curial intervention, the Court found that there were no grounds to set aside the award under section 81 and dismissed the application.

Comment

Courts will find violations of due process only in serious cases involving errors of egregious nature. Since the grounds for refusal for enforcement are limited in scope and narrowly construed, parties are advised to bear that in mind while considering whether to challenge the enforcement of the award. They cannot apply to a Court seeking to set aside an award, merely with a view to repeating arguments which may have been ignored or only briefly addressed by a tribunal in its award.

Further, it is crucial to note that even in cases where there is an error of law, an award cannot be set aside unless the tribunal's error constitutes a breach of natural justice or a failure to follow the parties' agreed arbitral procedure. Thus, only egregious errors causing a substantial failure of justice would warrant setting aside.

For more information, please feel free to get in touch with any of the contacts below, or your usual Herbert Smith Freehills contact.