In P v. M [2019] HKCFI 1864; HCCT 6/2019 (24 July 2019), the Hong Kong Court of First Instance set aside parts of two arbitral awards which were found to be in breach of procedural fairness resulting in substantial injustice.

Background

This is the second of two set aside applications arising from the same underlying arbitration based on a construction contract (Contract) which provided for domestic arbitration in Hong Kong. M had claimed against P for monies to which it was entitled under the Contract. After a first hearing in November 2017, the tribunal issued an interim award against P, ordering it to pay damages for loss and expense (First Award).

Challenge to the First Award

P raised a challenge to the parts of the First Award relating to a sum in respect of site overheads and insurance costs (Disputed Sum).

  • P argued that M’s case on the Disputed Sum was that it was not required to give notice of the claim for the Disputed Sum, or that even if such notice were required, P had waived this requirement or was estopped from asserting M’s failure to do so.
  • While the tribunal had rejected M’s pleaded claims, it nevertheless awarded M the Disputed Sum by finding that certain letters from M to P constituted notice as required by the Contract. P argued that in doing so, the tribunal had exceeded its powers, or had failed to conduct the arbitral proceedings in accordance with the procedure agreed by the parties.
  • P thus sought to impugn certain paragraphs of the First Award pertaining to the Disputed Sum (Challenged Paragraphs), or alternatively, to set aside the First Award on the ground that P had been denied a reasonable opportunity to present its case in the arbitration.

P’s application was heard and granted by Mimmie Chan J.

  • Chan J found that P had been “deprived of the fair opportunity to present its case and to make submissions to the tribunal on the effect and adequacy of the [letters] as proper notices under the Contract”, given that P had not been informed of this argument during the arbitration proceedings.
  • While noting the need for finality of awards, and that only extreme cases would justify the court’s intervention, Chan J found that this was a case where a serious error had affected due process and the structural integrity of the arbitral proceedings, with the result that P had suffered substantial injustice.
  • Since the complaint was that P had been deprived of a fair opportunity to make relevant submissions to the tribunal, Chan J remitted the matter to the tribunal for reconsideration. In addition, she declared that the Challenged Paragraphs would have no effect pending the reconsideration, and ordered the parties to file further submissions to the tribunal on specific issues, including the meaning and effect of the letters and whether they constituted valid notification of claims as required under the Contract.

Challenge to the Second Award

Following Chan J’s decision, the parties filed further submissions and the tribunal issued a second interim award (Second Award), which reinstated the Challenged Paragraphs in the First Award. P then raised a challenge to the Second Award on the same grounds as its first challenge.

  • P again argued that the tribunal had exceeded its powers and/or failed to conduct the proceedings in accordance with the procedure agreed by the parties or as directed by Chan J by, among others:
    • summarily rejecting P’s submissions on “threshold issues” that injustice arising from matters not raised in the substantive arbitration could not be rectified by further submissions on remission in the absence of a further evidentiary hearing;
    • taking into account submissions made by M which were not “in reply” to P’s submissions on remission and had not been pleaded or dealt with in evidence in the arbitration;
    • directing further submissions on matters which could not properly and fairly be addressed by a further evidentiary hearing;
    • embarking on its own enquiry and making findings that were not contended by M.
  • P submitted that it was denied an opportunity to address such matters, of which P had had no prior notice.
  • P further submitted that there was no benefit in remitting such matters to the tribunal again.

Decision on the Second Award

Coleman J first canvassed the principles applicable to the challenge, which he regarded as “reasonably well-settled”:

  • it is for the applicant to establish both serious irregularity and substantial injustice. The test of a serious irregularity giving rise to substantial injustice requires a high threshold to be met, so as drastically to reduce the extent of intervention by the Court in the arbitral process;
  • the Court is concerned with the structural integrity of the arbitration proceedings, and not with the substantive merits of the dispute;
  • a balance has to be drawn between the need for finality of the award and the need to protect parties against unfair conduct in the arbitration. Therefore, only an extreme case will justify the Court’s intervention;
  • the effect of setting aside an award or declaring an award, or part thereof, to be of no effect is that the award, or the relevant part, is a nullity. The arbitration can revive or carry on as necessary to deal with the matters that were set aside or declared to be of no effect;
  • following a remission, the tribunal’s revived authority extends only to the matters that are so remitted; it cannot go beyond the scope of the revived jurisdiction.

On the evidence, Coleman J agreed with P that there had been a serious irregularity leading to substantial injustice.

  • Coleman J opined that “once it [was] identified and directed that parties are bound by their pleaded cases, and by the evidence already traversed at the arbitration hearing, and by the findings of fact made on that evidence, then there was really only one proper conclusion which the [tribunal] could have reached” – that the claim must fail.
  • If M had wished to advance a case on the suggestion of the tribunal that the letters constituted the required notice, then “it could only properly have done so by making an application to amend its pleadings, which if allowed would almost certainly have required re-opening the evidentiary hearing.”
  • While the tribunal was mindful of Chan J’s decision, and sought to provide proper opportunity for P to present its case by giving P the “final right of reply”, the defects “have not been cured, and could not have been cured, by the route taken by the Arbitrator”.
  • The Court had in fact already considered that intervention in this arbitration is justified and necessary. Despite the remission for reconsideration, the serious irregularity warranting intervention has not been cured.

Coleman J thus proceeded to set aside the paragraphs in the First Award that had been impugned by Chan J, as well as the relevant paragraphs of the Second Award that exceeded M’s pleaded case.

Conclusion

While Hong Kong courts are slow to set aside arbitral awards, they will do so where they consider that the high threshold of serious irregularity resulting in substantial injustice has been met. To avoid challenges based on serious procedural irregularities, arbitrators must resist any temptation to look beyond the case as set out in the parties’ pleadings.

 

May Tai
May Tai
Managing Partner, Greater China
+852 2101 4031
Simon Chapman
Simon Chapman
Partner, Hong Kong
+852 2101 4217
Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales) / Professional Support Consultant
+852 2101 4214