Hong Kong court provides guidance on award challenges for failure to deal with an essential issue

The Hong Kong Court of First Instance has provided further clarity on when awards can be set aside for failure to deal with an essential issue, dismissing a challenge on the basis that the points in question were not the focus of submissions to the tribunal (X and YCo v ZCo [2024] HKCFI 695).

Simon Chapman KC of Herbert Smith Freehills appeared for the successful award creditor in the case, which emphasises that the onus is on the parties and their lawyers to clearly identify the key issues to be determined by the tribunal, and to include these in any list of issues.

Background

The underlying arbitration concerned the exercise by ZCo (the ultimate award creditor) of its right to exit its 65% shareholding in a healthcare business by selling the shares to X (the CEO of the company which operated the business) and YCo (which held the remaining 35% of the shares) pursuant to a share subscription and purchase agreement.  The tribunal issued an award upholding ZCo's right to sell its shares to X and YCo.

X and YCo applied to set aside the award on the grounds that (i) they were unable to present their case, (ii) the arbitral procedure was not conducted in accordance with the parties' agreement, and/or (iii) the award was in conflict with the public policy of Hong Kong.  Specifically, they alleged that the tribunal had failed to deal with two allegedly key defences which were framed as follows:

• Condition precedent defence: ZCo's exercise of its exit right was only triggered upon the satisfaction of a specific condition precedent which had not been satisfied; and
• Tax defence: on a proper contractual interpretation or by reason of an implied term, tax liabilities arising from the transfer of the exit shares should be borne by ZCo and deducted from the exit price payable by ZCo.

Decision

Mimmie Chan J dismissed the set-aside application and ordered indemnity costs against X and YCo at the hearing on 17 October 2023, with reasons for the decision issued subsequently on 7 March 2024.

The court noted that despite the various grounds relied upon by X and YCo, their real complaint was the tribunal's alleged failure to deal with the two defences.  The court pointed out that the relevant legal principles were set out in CNG v. G&G [2024] HKCFI 575 and LY v. HW [2022] HKCFI 2267.

Among other things, the proper approach in reviewing an award is by reading it generously, in a reasonable and commercial way expecting (as is usually the case) that there will be no substantial fault that can be found with it, and always bearing in mind the policy of minimal curial intervention.  Any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable.

The court then went on to consider the two issues which had allegedly not been addressed by the tribunal.

Condition precedent defence

The court noted that this case was different from the "usual instance" of a losing party claiming that the tribunal had failed to deal with an issue which had been included in an agreed list of issues.  Here, the condition precedent defence was not even mentioned in the agreed list of issues, even though such list expressly set out the other defences raised by X and YCo.

Moreover, the condition precedent defence was only briefly mentioned without particularisation by X and YCo in their answer to the notice of arbitration, and although it featured in X and YCo's statement of defence (to which ZCo responded in its reply), it did not surface again in the arbitration.  In particular, it was not mentioned in the rejoinder, written opening and closing submissions, or oral submissions made at the hearing, of X and YCo.

The court accordingly held that the condition precedent defence was not even a question which had been put to the tribunal to answer at all.  The mere fact that an issue which had been included in the list of issues had not been expressly dealt with in the award could not necessarily mean that the tribunal had failed to consider and deal with an issue, but the fact that an issue was not included in the list of issues was "a strong indication" that the issue was not regarded by either the parties or the tribunal to be relevant or key issue to consider and determine.  In another recent set-aside case, the court had observed that an agreed list of issues was "not an exam paper" with compulsory questions for the tribunal to answer.  In the present case, however, it was clear that the condition precedent defence had not even been put to the tribunal at all.

Chan J emphasised that the tribunal cannot be put under an onerous obligation to extensively comb through all the documents, materials and notes of the proceedings to ascertain and understand the issues expressly or by implication put by a party to the tribunal for determination.

Instead, the parties and their lawyers bear the onus to clearly identify and refer the tribunal to the key issues in dispute. To that end, the agreed list of issues was "the useful starting point".  If an issue was not addressed in the written opening and closing submissions or at the hearing, moreover, the tribunal and ultimately the court could reasonably infer and accept that such issue did not arise from the evidence adduced for decision in the tribunal's award and that it was not important at all.

The court went on to observe that, even if the condition precedent defence had been put to the tribunal as an issue for determination, the issue could not have made any difference to the outcome of the arbitration.  In particular, there was no evidence in the arbitration which could have supported a finding by the tribunal that the condition precedent defence could be established.  It was not open to X and YCo to make further submissions to the court on this point.  Instead, those submissions should have been made before the tribunal.

The court therefore dismissed X and YCo's claim that the tribunal had failed to deal with the condition precedent defence.

Tax defence

X and YCo also claimed that the tribunal had failed to consider the tax defence, which was pleaded by them in their rejoinder.  This was again rejected by the court.

In particular, Chan J noted that this issue had been addressed and refuted by ZCo in its written opening submissions, and that X and YCo had never raised or pursued it again in their written opening and closing submissions or at the hearing.

Moreover, and importantly, after service of the written closing submissions, the tribunal had specifically requested that the parties make submissions on the calculation of the exit price.  In making such submissions, however, X and YCo did not take into account any tax liability.  Nor had they at any time during the arbitration put forward the amount of any tax liability for the tribunal's consideration.  The court noted that if X and YCo's case was that tax should be deducted from the exit price, it was reasonable to expect them to have used this opportunity to make this point clear.

Commentary

This case serves as a useful reminder that the Hong Kong courts will not permit a losing party to challenge an award by "repackaging" arguments which were not advanced or maintained before the tribunal and presenting them as key issues which the tribunal failed to deal with.

It also underlines the importance of expressly maintaining all arguments that a party wishes to rely upon throughout the arbitration, including in the written opening and closing submissions as well as at the hearing.  It is also best practice to ensure that such arguments are included in any list of issues, which (whilst not necessarily determinative) will typically be taken as a starting point by the court in determining which issues were placed before the tribunal for determination.