The Hong Kong Court of First Instance has refused to enforce an arbitral award because the procedure adopted by the tribunal was so “seriously flawed” and “egregious” that due process was denied (CIC v Wu and Ors [2023] HKCFI 700).

The unusual facts of this case underline the high threshold to successfully challenge arbitral awards on due process grounds in Hong Kong, whilst illustrating the willingness of the courts to intervene to prevent injustice in exceptional cases.

Background

The award creditor (“CIC“) brought claims under commodity sales contracts against a principal debtor and five individual guarantors, two of whom were named Wu (“Wu“).

The arbitration proceedings were bifurcated, such that liability as between CIC and the principal debtor would be determined in part 1 of the arbitration and liability as between CIC and the guarantors (including Wu) would be determined in part 2.

For substantially all of the part 1 proceedings, the principal debtor did not have legal representation and took no part in those proceedings.

After issuing an interim award in favour of CIC, the original arbitrator (“Arbitrator 1“) resigned to avoid the appearance of bias in part 2 (essentially because he would have to rule again on the liability of the principal debtor, on which he had already decided in part 1, to come to a decision on the liability of the guarantors in part 2).

A new arbitrator (“Arbitrator 2“) was then appointed, and the previously directed procedure for part 2 was followed, including a hearing.  Wu did not have legal representation from 10 days before the hearing.

The agreed list of issues put before Arbitrator 2 in advance of the hearing did not include any issues as to whether the interim award was binding as against the guarantors or whether (and if so in what respects) Arbitrator 2 was bound to follow the interim award.

In the final award, Arbitrator 2 nevertheless stated that he was bound to follow the interim award, which he held was binding not only CIC but also on Wu and the other guarantors.  He therefore held Wu and the other guarantors liable for the amounts due from the principal debtor to CIC.  Arbitrator 2 asserted that the guarantors were all parties in the same proceedings as CIC and the principal debtor, and that they could have made submissions in part 1 of the arbitration on any defence which they had in relation to the liability of the principal debtor or themselves.  Having failed to do so, they were seeking to have a “second bite of the cherry”, which was impermissible.

CIC obtained leave to enforce the final award against the guarantors.  Wu applied (approximately 8 months out of time) to have the enforcement order set aside.

Decision

Mimmie Chan J upheld Wu’s application and refused to enforce the award, with indemnity costs ordered against CIC (except in relation to Wu’s application for extension of time, which would be borne by Wu).  The Court’s reasoning was as follows:

  • First, Arbitrator 2 had failed to consider and decide Wu’s defences in an impartial and independent manner.  The Court had “grave concerns” that Arbitrator 2 had not applied his own independent mind to the liability of the guarantors, and had adopted a “dismissive approach” to their defence.  Arbitrator 1 had expressly stated that it was not necessary for him to address the liability of the guarantors in the interim award.  It was therefore “grossly unfair and unjust” for Arbitrator 2 to have held that Wu had already been given the opportunity to present their evidence and make their submissions before Arbitrator 1, had failed to do so, and should be bound by the interim award.  Wu were not seeking to have a second bite of the cherry, as Arbitrator 2 had claimed, but rather had “never had the first bite.”
  • Second, and “more disturbing”, Wu had been given neither notice of, nor a reasonable opportunity to address, the question of whether the interim award was binding on them and the other guarantors and whether Arbitrator 2 was bound to follow it.  They had therefore been “unfairly and unjustly” deprived of a reasonable opportunity to present their case.
  • As a result of these procedural defects, (i) Arbitrator 2 had failed to give Wu a reasonable opportunity to present their case, (ii) the arbitration had not been conducted in accordance with the arbitration agreement and/or the agreed procedures, and (iii) it would be contrary to basic notions of justice and requirements for a fair hearing (i.e. public policy) to enforce the Final Award.
  • The Court rejected CIC’s argument that it was “unlikely” that the final award would have been different even if Arbitrator 2 had not breached due process, and that it should therefore be enforced in any event.  The Court quoted the statement of Tang VP (as he then was) in the leading case of Grand Pacific Holdings Ltd v Pacific China Holdings Ltd [2012] 4 HKLRD 1 that “some breaches may be so egregious that an award should be set aside although the result could not be different.”  The violations of Wu’s rights were “sufficiently serious and egregious” for the final award to have been set aside.  Wu were entitled to the reasonable and fair opportunity to present their case and to have their defence properly and fairly determined.  These pre-requisites of due process were “fundamental to the process of fair trial”, and their absence could not be condoned by the Court by enforcing an award which had given rise to substantial injustice.

Commentary

The relevance of errors of fact and law

The Court observed that the case raised the question of “whether errors made by the arbitrator on facts and law can be so egregious and cause an outcome which is so unfair and unjust, that the Court cannot ignore the errors as enforcement of the award made would be repugnant.”

It is important to emphasise that the Court made its decision squarely on the basis of egregious breaches of due process.  It did not refuse to enforce the award on the basis that Arbitrator 2 made (or might have made) errors of fact or law.  Indeed, the Court reaffirmed that an error of law made by an arbitrator is not a ground to set aside or refuse enforcement of an award (per Reyes J in A v R [2009] 3 HKLRD 389).

The Court did conclude that Arbitrator 2 had made errors of fact (including by failing to properly understand the facts and procedures which had taken place in part 1 of the arbitration), and appears to have taken the view that he made (or at least might have made) an error of law in concluding that the interim award was binding upon the guarantors.

However, the relevance of any errors made by Arbitrator 2 appears to have been that they informed or contributed to the adoption by Arbitrator 2 of procedures which were held to be grossly unfair and unjust (and which were the grounds for refusing enforcement); the errors were not in themselves grounds for refusing enforcement.  The lack of legal representation of the principal debtor and the guarantors at material times, and the fact that the principal debtor had made no submissions and filed no evidence before the interim award was made against it, also appear to have been viewed by the Court as relevant contextual factors.

Time limits for challenging awards

The decision highlights an important distinction between the time limits for applying to set aside an arbitral award under Article 34(3) of the UNCITRAL Model Law as applied by section 81 of the Arbitration Ordinance, and the time limit to apply to set aside an order for enforcement.

In the former case, the time limit of 3 months is stipulated in the Arbitration Ordinance and the court has no jurisdiction to extend it (AW v PY [2022] HKCFI 1397).

In the latter case, the time limit will be stipulated in the enforcement order of the court and the court has the discretionary power to extend it pursuant to Order 3 rule 5 of the Rules of the High Court and in accordance with principles set out by the Court of Final Appeal in Astro Nusantara International BV v PT Ayunda Prima Mitra [2018] HKCFA 12.  The Court indicated that it would be prepared to do so where the defect complained of is sufficiently egregious to amount to a serious denial of due process.

For further information, please contact Simon Chapman KC, Partner, Kathryn Sanger, Partner, Martin Wallace, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Simon Chapman KC
Simon Chapman KC
Regional Head of Practice - Dispute Resolution, Asia
+852 21014217
Kathryn Sanger
Kathryn Sanger
Partner
+852 21014029
Martin Wallace
Martin Wallace
Professional Support Consultant
+852 21014134