Hong Kong court to consider whether grounds for challenging awards apply to arbitration settlement agreements

When a dispute covered by an arbitration clause is settled and the arbitration terminated by an order of the tribunal, can the settlement agreement and the termination order be challenged on the same grounds as an arbitral award?

The Hong Kong Court of First Instance ruled recently that there was a "serious question to be tried" on both issues, effectively giving the green light to full arguments on these points in due course (L v. R [2024] HKCFI 1611).

The settlement in issue arose out of an HKIAC arbitration which the tribunal terminated pursuant to Article 37.2(a) of the HKIAC Rules in the form of a procedural order rather than an award on agreed terms (notwithstanding a joint request by the parties that it do the latter).  The tribunal did so because, in its opinion, there were no settlement terms to record, having apparently taken account of an issue which had been raised as to whether the settlement agreement had been signed with the authority of the arbitration respondent.

The arbitration respondent subsequently applied to the court to set aside both: (i) the settlement agreement (which was governed by Hong Kong law and contained an exclusive jurisdiction clause in favour of the Hong Kong courts), on the grounds that its terms were contrary to a scheme of arrangement in the Seychelles and it had been signed by a director of the arbitration respondent without authority; and (ii) the termination order, on the basis that it was a final decision of the tribunal on the subject matter of the arbitration and was against public policy as it was based on the settlement agreement, and that the arbitration respondent had been unable to present its case on the lack of authority of the director who had signed the settlement agreement for the arbitration respondent.

When the arbitration respondent applied to the court to serve the proceedings on the arbitration claimant in St Kitts, the arbitration claimant argued that leave to do should not be granted because (amongst other things) there was no serious question to be tried on the merits.

Mimmie Chan J disagreed and held that there was a serious question to be tried on both issues:

• Settlement agreement: under section 66(2) of the Hong Kong Arbitration Ordinance, where the parties to an arbitration agreement settle their dispute and conclude a settlement agreement which is not recorded in the form of an award on agreed terms, the settlement agreement “is, for the purposes of its enforcement, to be treated as an arbitral award.”  If the settlement agreement was to be treated as an award for the purposes of its enforcement, there was therefore a serious question to be tried as to whether the grounds for challenging or resisting enforcement of an award should apply to it.

• Termination order: the arbitration claimant argued that the termination order was not a final determination of a claim or issue in the arbitration, was merely procedural, and the tribunal had made clear that it was not making any determination or ruling on the merits of any claim or counterclaim or on the validity of the settlement agreement.  The court noted, however, that the order ruled on the termination of the arbitration and costs, and rendered the tribunal functus officio.  As a result, "Nothing remained for the tribunal's decision."  Accordingly, there was at least a serious question to be tried that the termination order was a final and binding "award" in the sense that the grounds for setting aside an award under section 81 of the Arbitration Ordinance would apply to it.  In reaching this conclusion, the court referred to its recent decisions regarding the distinction between procedural decisions and awards in G v. N [2024] HKCFI 721 (reported here) and W v. Contractor [2024] HKCFI 1452 (reported here), as well as the English case of ZCCM Investments Holdings v. Kansanshi Holdings [2019] 1 CLC 770.

It is important to emphasise that this was a preliminary decision made in the context of what the court described as a "totally unnecessary" procedural "skirmish" in relation to service of proceedings outside Hong Kong.  The court noted that the threshold for a serious question to be tried is "not high", and its decision does not represent a final ruling on the status of the settlement agreement and the termination order.  Caution should therefore be exercised in drawing any conclusions from this decision about the relevant legal issues.

The decision and any future developments in the proceedings will nevertheless be of significant interest to users of arbitration in Hong Kong, given the frequency with which arbitral proceedings are resolved through settlement.