In P v. M  HKCFI 1864; HCCT 6/2019 (24 July 2019), the Hong Kong Court of First Instance set aside parts of domestic arbitral awards on the basis of procedural concerns which it considered had not been cured despite the remission of the original award back to the arbitrator.
While Hong Kong’s Arbitration Ordinance (Cap. 609) (“HKAO”) provides for a unified regime (for both international and domestic arbitration) based upon the UNCITRAL Model Law, it retains ‘opt-in’ provisions which under earlier legislation were specifically applicable to domestic cases. These provisions include a different basis, under Schedule 2 of the HKAO, by which parties may challenge enforcement of an arbitral award.
Notably, by Schedule 2, Section 4(2) a court may set aside an award where a “serious irregularity” gives rise to substantial injustice. This includes circumstances in which:
- “The arbitral tribunal exceeds its powers” (Section 4(2)(b)); or
- There has been a “failure by the arbitral tribunal to conduct the arbitral proceedings in accordance with the procedure agreed by the parties” (Section 4(2)(c)).
A court making a finding of serious irregularity may choose to set aside the award, declare it to be of no effect, or alternatively remit it to the arbitral tribunal for reconsideration. However, in line with their historically “light touch” approach to arbitration, courts treat remission as a default remedy, only setting aside the award where it “would be inappropriate to remit the matters in question”.
P engaged M as contractor. The contract incorporated an arbitration agreement providing for “domestic” arbitration, so activating the ‘opt in’ regime under Schedule 2 of the HKAO. During the course of performance of the contract, M claimed against P for financial entitlements. P disputed the payments, and commenced arbitration proceedings. Following exchange of pleadings and an evidentiary hearing, in April 2018, the arbitrator rendered an Interim Award in favour of M (“First Award”).
In the first set aside proceedings, P applied to the Hong Kong Court of First Instance to challenge parts of the First Award, including on grounds of serious irregularity under HKAO, Schedule 2, Sections 4(2)(b) and/or (c), namely that the arbitrator had exceeded its powers, or had failed to conduct the arbitral proceedings in accordance with the procedure agreed by the parties.
P contended that in making the First Award the arbitrator had failed to deal properly with the issue of a certain disputed sum relating to a site overheads and insurance costs. He had determined that this Disputed Sum was due and payable by P, finding that certain letters from M to P had comprised satisfactory contractual notice for this claim. However, M itself had not advanced this line of argument in the arbitration. On the contrary, it had “unequivocally pleaded in its Statement of Reply, and maintained in its Opening and Closing submissions, that no notice was either required or served”.
In deciding the first set aside proceedings, Chan J agreed with P that a procedural irregularity existed. The issue of the adequacy of the letters had not been pleaded, and so P had had no opportunity to present its case in that regard, so being “deprived of the fair opportunity to present its case”. Since, applying Section 4(5) of Schedule 2 of the HKAO, it would not be “inappropriate to remit” the matter to the arbitrator, Chan J made an order for remission.
In her judgment Chan J specifically required that the remission be “confined to the issue of whether notification of claim had been given of the Disputed Amount” and made specific orders for the submissions to be made, namely that (1) the remitted matter was strictly confined; (2) the procedure was for the arbitrator to direct proper submissions first from P, and then from M in reply; (3) the submissions were to be limited to the meaning and effect of the letters and whether they constituted valid notification of claims as required under the contract; (4) the submissions and consideration of them would be based on, and only on, and so limited to the factual findings already made in the First Award, and the case of the parties as already pleaded in the arbitration.
Following remission, the arbitrator directed various further submissions and on 27 December 2018 made his Second Interim Award (“Second Award”), where he reinstated the disputed amount granted in the First Award, but for different reasons.
On 25 January 2019, P brought a second set of set aside proceedings to the Hong Kong Court of First Instance, advancing the same principal grounds for challenge as it had previously: namely that the arbitrator had exceeded his powers, or had failed to conduct the arbitral proceedings in accordance with the procedure agreed by the parties.
P contended that, in rendering the Second Award, the arbitrator had erred, including in summarily rejecting P’s submission that the faults in the First Award gave rise to “threshold issues” which could not be rectified absent a further evidentiary hearing. P also contended that the arbitrator had once again wrongly entered into his own assessment, referring to matters not raised by either P or M in their submissions on remission but only canvassed upon the arbitrators own subsequent direction.
Coleman J restated some established general principles. It is for the applicant to establish both serious irregularity and substantial injustice. This is a high threshold. While a balance must be drawn between the finality of the award and the protection of parties from unfair conduct in the arbitration, a court striking this balance will only be justified in intervening in “extreme cases”. The court need not decide for itself what would have happened in the arbitration had there been no serious irregularity; a finding that absent the irregularity the tribunal might well have reached a different view and there might well have been a significantly different result is enough to get the applicant across the line.
Applying these principles, Coleman J agreed that despite the remission of the award, the defects had not been cured and there remained a serious irregularity leading to substantial injustice.
In particular Coleman J found as follows:
- M’s pleaded case was that no notice was given or required. Or in other words: “it was no part of M’s case” in the arbitration “that it had in fact given the relevant notice”.
- In the first set aside proceedings judgment Chan J had identified that (absent any amendment to its pleaded case) M was shut out from advancing such a case. Therefore the arbitrator had exceeded his jurisdiction in the First Award by considering such a case and so Chan J ordered the case to be remitted to the arbitrator, with specific procedural directions and limits on the matters to be considered.
- However, the arbitrator failed to conduct the remission proceedings in accordance with the procedure directed by the court, and referred to matters not raised by the parties in their submissions. Further, the arbitrator also considered a point that the Court held M was shut out from advancing.
- While it was open to M to seek to amend its case, by amending its pleadings, this “if allowed would almost certainly have required re-opening the evidentiary hearing”. Indeed, given its timing, M’s application to amend would likely have been refused.
- Finally, the arbitrator changed his mind on a particular issue, resulting in fact-sensitive issues arising which were not addressed at the substantive hearing.
Coleman J therefore set aside both the relevant paragraphs in the First Award and Second Awards and declared them to be of no effect.
While the decision relates specifically to the ‘opt in’ regime under the HKAO, its principles have wider applicability to international or domestic arbitration seated in Hong Kong. It is a salient reminder to arbitrators and parties of the potential dangers of raising or determining issues late in arbitral proceedings, without possibility of reply by all parties. While Hong Kong courts are extremely reluctant to intervene in the arbitral process, they will do so where they consider this high standard has been reached, including in circumstances where an arbitrator has decided a case on grounds not advanced by the parties.
The authors would like to thank Fangda Partners’ Associates Eliza Jiang, Ziwei Wong and Trainee Jennifer Mok for their assistance in preparing this article.