HK Court finds that only egregious errors warrant setting aside of award

In yet another decision from HK refusing to set aside an award, the High Court’s judgment in LY v HW [2022] HKCFI 2267, highlights the significant obstacles facing a party seeking to set aside an award.

The dispute arose out of a distribution agreement of pharmaceutical products on the Mainland requiring HW, the exclusive distributor, to achieve minimum annual sales value (ASV) target.  LY issued a notice of termination, claiming that HW had failed to meet the ASV, prompting the commencement of an arbitration by HW, claiming that such termination was invalid.  The 3-member Tribunal found in favour of HW, leading to an application by LY, under Article 34(2)(a)(iii) of the Model Law and as a matter of public policy, to set aside the award on the following basis:

The Court reiterated the basic principles to be applied, which should by now be very familiar to practitioners:

• That the authorities are clear on the general question of whether or not a ground has been established to seek setting aside as the exclusive recourse against an award under Article 34, given effect by section 81 of the Ordinance.  By reference to Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1, the Court noted the following from the judgment of Tang VP:

“I am inclined to the view that the conduct complained of must be sufficiently serious or egregious so that one could say a party has been denied due process.”

• A similarly narrow approach has been adopted by the courts to the construction of the “public policy” ground for setting aside; that it must not be seen as a catch-all provision, that it is limited in scope and is to be sparingly applied.  The Court referred to the well-known decisions in Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, 139F – where the CFA held that the reference to “Contrary to public policy” was held to mean “contrary to the fundamental conceptions of morality and justice” of the forum; and that if the public policy ground is to be raised, “there must be something more, that is, a substantial injustice arising out of an award which is so shocking to the court’s conscience as to render enforcement repugnant” (A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389).

• Whether the tribunal is right on its findings of facts and law, whether its decision is supported by evidence, whether the tribunal gave sufficient reasons for the findings, and the quality of the reasoning, are not matters for consideration.  Applications under s.81 of the Arbitration Ordinance are not appeals on the merits or on law; the court is not concerned with the substantive correctness of an award, but only with the structural integrity of the arbitral process and it is only when there is a serious or egregious denial of due process that the court can interfere.

In relation to the specific complaints raised in the case, the Court noted the following:

1. Article 31 (2) of the Model Law (s.67 of the Ordinance) provides that an award shall state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given.  The Court noted that:

• In determining whether the ground of the tribunal’s failure to deal with all issues is established, there has to be an ‘issue’ which has been put to the tribunal, and it has to be shown that the tribunal failed to deal with the issue and that such failure has caused substantial injustice.

• The tribunal does not have to set out each step by which it reaches its conclusion, and a tribunal’s decision on an issue without giving reasons does not constitute failure to deal with it.

• A failure to deal with an issue is not equivalent to failure to deal with an argument or a submission made or advanced at the hearing (N v C [2019] HKCFI 2292).

• The fact that the arbitrator had not given adequate reasons for his award, or sufficiently clarified that an issue fell away because of the findings which had been made, is not tantamount to the arbitrator having failed to deal with an issue: Secretary of State for the Home Department v Raytheon Systems Ltd [2014] EWHC 4375 (TCC).

• The tribunal should clearly state its determination on the essential questions in dispute, and explain the reasons it came to the decision on the dispute, but the reasons do not have to be elaborate or lengthy, as the award must be read against the context as to how issues had been argued before the tribunal, and an award is the result of a private consensual process.

• It is particularly important for the Court to bear in mind the object and principles of the Ordinance: which are to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense; that parties to a dispute should be free to agree on how their dispute should be resolved; and that the court should interfere in the arbitration of the dispute only as expressly provided for in the Ordinance; all in accordance with and to reflect the policy of minimal judicial intervention into the arbitral process.

• The issue of minimal judicial intervention into the arbitral process was dealt with by reference to the well-known Singapore case of Soh Beng Tee& Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR (R) 86, as summarised by Vinodh Coomaraswamy J in ASG v ASH [2016] SGHC 130:

“I summarise briefly the principles stated in Soh Beng Tee that are relevant to the present case:

– Parties to arbitration have, in general, a right to be heard on every issue that may be relevant to the resolution of a dispute.

– A successful party should not be deprived of the fruits of arbitration by technical challenges or an attempt to reagitate the merits of the dispute disguised as a setting‑aside application.

– Minimal curial intervention is underpinned by two considerations: first, the need to recognise the autonomy of the arbitral process by encouraging finality; and second, that parties who opt for arbitration acknowledge and accept the attendant risk of having only a very limited right of recourse to the courts.

– It is not the function of the court to comb an award to assign blame or to find fault in the process. Rather, the court should read an award generously so as to remedy only meaningful breaches of the rules of natural justice which actually cause prejudice.”

A raft of other cases were referred to, including Atkins Limited v The Secretary of State for Transport [2013] EWHC 139; Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14; AKN and another v ALC and others [2015] 3 SLR 488.  In the latter case, the Court emphasised the following statement:

“It will usually be a matter of inference rather than of explicit indication that the arbitrator wholly missed one or more important pleaded issues. However, the inference – that the arbitrator indeed failed to consider an important pleaded issue – if it is to be drawn at all, must be shown to be clear and virtually inescapable. If the facts are also consistent with the arbitrator simply having misunderstood the aggrieved party’s case, or having been mistaken as to the law, or having chosen not to deal with a point pleaded by the aggrieved party because he thought it unnecessary (notwithstanding that this view may have been formed based on a misunderstanding of the aggrieved party’s case), then the inference that the arbitrator did not apply his mind at all to the dispute before him (or to an important aspect of that dispute) and so acted in breach of natural justice should not be drawn.”

Dismissing the application under s.81 of the Arbitration Ordinance, the Court found that the Tribunal did not make any express findings on the issues highlighted by LY but that was because the Tribunal did not consider them necessary to deal with at length, and because the issues were not crucial to the Tribunal’s ultimate decision.  The Court stated [58]:

“As the Courts have emphasized in the authorities referred to, an award should be read in a reasonable and commercial way, without a meticulous legal eye endeavoring to pick holes, inconsistencies and faults, but generously, and only to remedy serious breaches of rules of natural justice which cause injustice. With such an approach, it is clear from the Award that the Tribunal found that HW’s calculation of ASV for 2018 was correct, that the inventory in excess of 40 days had been excluded in the calculation of ASV in 2017 as a result of the Rollover Arrangement, and that on the Tribunal’s construction of the Agreement, the same ASV should be used in ascertaining whether the Target had been achieved for 2018. The Tribunal’s analysis of the relevant provisions of section 10.2 and section 1.59 of the Agreement was set out in the Award. The Tribunal’s construction of section 17.2 and of the purpose of the maintenance of a reasonable inventory system, explained the Tribunal’s conclusion on the meaning of “ASV” under the Agreement, and how it should be calculated, for both purposes of rebate and annual target. It is obvious from paragraph 131 of the Award that the Tribunal was clearly aware of and had taken into consideration the argument made for LY, that there was no contractual basis for the Rollover Arrangement, as it was not spelt out in the Agreement. However, the Tribunal stated, at paragraphs 131 to 133 of the Award, the matters which it regarded as critical to its finding on the calculation of ASV, and why it accepted HW’s arguments that its calculation was correct, and that the calculations relied upon by LY to terminate the Agreement were wrong.”

And further [66]:

“As the Singapore Court of Appeal emphasized, any inference that the arbitrator had failed to consider an important issue, if it is to be drawn at all, must be shown to be clear and virtually inexcusable. If the facts are also consistent with the arbitrator having been mistaken as to the law, or having misunderstood the evidence, or otherwise consistent with the arbitrator choosing not to deal with a point because he thought it unnecessary, even if such view may have been formed on the basis of a misunderstanding of the case, the inference that the arbitrator had not applied his mind to the issue cannot be drawn.”

Concluding [68]:

“Parties to an arbitration do not have a right to have all their arguments addressed by the Tribunal. The Court would be extremely slow to interfere with the Tribunal’s decision on which issues are essential and necessary to be addressed in the Award. So long as the Tribunal sets out its decision on the dispute and gives sufficient reasons why it came to its particular decision, the parties are bound. No party is entitled to apply to the Court, to repeat its arguments or make further submissions to seek an outcome which enables it to avoid an unfavorable award. Any error in an award made by an arbitrator cannot by itself counterbalance the public policy bias towards enforcement of arbitration agreements and awards (A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389).  Even if the Tribunal had not dealt with the particular issues complained of by LY in this case, I can find no serious or egregious error which justifies the setting aside of the Award, whether on the ground of arbitral procedure or public policy.”