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Hong Kong court sets aside ICC award for procedural irregularity
Practical Law UK Legal Update Case Report 5-507-0839 (Approx. 4 pages)
Hong Kong court sets aside ICC award for procedural irregularity
by Practical Law
| Published on 04 Aug 2011 • China, Hong Kong - PRC, International |
John Choong (Senior Associate), Freshfields Bruckhaus Deringer
The Hong Kong Court of First Instance has taken the rare step of setting aside an International Chamber of Commerce (ICC) arbitration award because the applicant was unable to present its case and the procedure adopted by the tribunal was not in line with the agreement of the parties.
Background
Article 34(2) of the UNCITRAL Model Law (Model Law), which applies in Hong Kong, provides that an arbitral award "may" be set aside by the court, if, among other things, the applicant furnishes proof that:
"(ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or...
(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law…"
Facts
The original dispute arose out of a loan agreement and proceedings were started under the ICC Arbitration Rules. In August 2009, the arbitral tribunal rendered its award. The unsuccessful party applied to set aside the award under article 34(2) of the Model Law, for serious procedural irregularity.
The applicant relied on the following three issues.
Pre-hearing submissions
Under the agreed procedural timetable, both parties had to file their pre-hearing submissions at the same time, setting out their "best case on fact and law". The day before the filing date, the applicant was granted leave to amend its pleadings, in response to a late clarification by the respondent of its case.
Consequently, on the day the pre-hearing submissions were due, the tribunal directed that while the applicant had to set down its "best case" in full, the respondent's pre-hearing submissions need not address the applicant's latest amended case. Instead, the respondent would be given ten days to file supplemental submissions dealing with the latest amendments. The applicant protested on the ground that the tribunal's direction was unfair and inconsistent with the agreed procedural timetable.
Joint experts' report
The tribunal adjourned the cross-examination of the Taiwan law experts presented by both sides and, instead, directed that a joint experts' report should be produced. The tribunal further indicated, which was also agreed by the parties, that new Taiwan legal authorities could not be introduced without leave and that leave would only be granted if the authorities were "sensational".
Subsequently, the applicant applied for leave to rely on certain additional authorities, but leave was refused. The applicant complained that the procedure was not in line with the parties' agreement, and the applicant was unable to present its case.
Hong Kong law issue
This issue arose from the applicant's reference to certain Hong Kong law issues which were first made in its post-hearing submissions. The respondent, in its reply, objected to the introduction of such issues.
However, notwithstanding this objection, the respondent replied substantively to the Hong Kong law arguments. The tribunal then wrote to both parties in relation to this and the respondent replied, making further substantive submissions.
The applicant then applied for a right to respond to these submissions, which the tribunal denied. The applicant disagreed and wrote to the tribunal stating that this ruling deprived the applicant of its ability to present its case on the Hong Kong law issue.
Eventually, the award that was rendered referred to and relied on the additional authorities citied by the respondent in its further substantive submissions.
Decision
The court set aside the award.
On the first issue, the court accepted that by having the applicant's "best case" for ten days before having to file its supplemental submissions, the respondent was given an unfair advantage. The applicant's case could not be further developed during the hearing, because it had already filed its "best case". The tribunal was obliged to conduct the proceedings based on the procedural timetable. By not doing so, the procedure was not in line with the parties' agreement, and the applicant was unable to present its case. The court held that both of these were violations of article 34(2)(a), entitling the court to set aside the award.
On the second issue, the court found that the tribunal did not consider or review the authorities the applicant wished to rely on. As a result, there was no basis on which the tribunal could say whether or not the authorities came within the category of "sensational authorities", which it had indicated would be allowed. This refusal to receive and consider the additional authorities cited prevented the applicant from presenting its case, and therefore violated article 34(2)(a).
On the third issue, the court held that the applicant was denied an opportunity to present its case, as it was denied the right to respond to the new materials raised by the respondent, violating article 34(2)(a). Once the tribunal had invited the respondent to reply to the applicant's Hong Kong law submission, the tribunal was bound to give the applicant the opportunity to respond on these matters of law.
Exercise of discretion
Article 34(2) provides that an arbitral award "may" be set aside by the court, if grounds for setting aside the award are established. It is therefore clear that the court has the residual discretion not to set aside an award, even where the grounds for setting aside are satisfied.
As for the extent of discretion, the court, in this case, accepted the applicant's submission that materiality to the result in the award itself was not a proper basis on which to exercise the court's discretion, where grounds for setting aside have been established. Instead, the court held that where the applicant had established that there were grounds for setting aside an award, the applicant only had to establish that "it cannot be said that if the violation had not occurred the result could not have been different." Whether or not the result could have been different is a determination that is made not by examining the merits of the award, but by examining the nature of the violation and the potential consequences that flow from the violation.
The test set out above is construed narrowly, as seen from the facts of this case where, on all three issues above, the court held that it was unable to say beyond doubt that if the violations had not occurred, then the result could not have been different. Accordingly, the court exercised its discretion to set aside the award under article 34(2).
Comment
This decision is interesting for a number of reasons. First, it is a rare example of a Hong Kong court setting aside an international arbitration award. Second, the court's examination of the facts in this case, and its conclusion that the tribunal's conduct amounted to a breach of article 34(2), will be of great interest to counsel and arbitrators who have experienced similar situations. Third, in the course of its judgment, the court considered in some detail previous Hong Kong authorities on the proper exercise of its discretion, where grounds for setting aside an award have been established. If the court's preferred approach, as set out above, is adopted in future cases, this will limit the court's residual discretion, where grounds for setting aside have been established.