Arbitral Award set aside by Hong Kong Court for breach of due process

In China Property Development (Holdings) Ltd v Mandecly Limited & Others HCCT53/2010, Hong Kong’s High Court (Court of First Instance) set aside part of an arbitral award on the basis of serious breach of due process, namely that the Applicant had not been able to present its case.

A dispute had arisen between China Property Development (Holdings) Ltd (“CPDH”) and the sellers in relation to a share sale agreement, under which CPDH acquired a PRC entity, BPP. CPDH and BPP commenced arbitration proceedings against the sellers. In relation to one of the issues to be determined by the arbitral tribunal (the Tribunal), the sellers had confirmed that their arguments were only directed against BPP and, as a result, CPDH, made no submissions in relation to that issue. However, the Tribunal made a ruling against CPDH in relation to that issue and ordered it to pay the sellers RMB10 million. Believing that the ruling must have contained a typographical error, CPDH sought clarification from the Tribunal as to whether the reference to “CPDH” in the Award should have in fact been to “BPP”.

The Tribunal confirmed that the Award did not contain the error suggested by CPDH and gave a written explanation for its ruling, namely that it had taken into account the parties’ arguments on a different issue (unjust enrichment).

As a result, CPDH sought to set aside the relevant part of the Award, under Article 34 of the UNCITRAL Model Law, primarily on the ground that it had been unable to present its case to address those matters upon which the Tribunal might have based its decision against CPDH.

The Court ruled that it might be that the Tribunal indeed took the view that the concept of unjust enrichment affected the incidence of the contractual obligation to pay RMB10 million and it might be that the concept of unjust enrichment was thought to have formed a ground for attaching to CPDH the liability to make such payment independent from the contract. However, if, the Court said, either of these propositions were on the mind of the Tribunal, which eventually led to its decision, CPDH should have been made aware of them and given a reasonable opportunity to present its case and to address the Tribunal. Accordingly, the Court held that CPDH had been unable to present its case to address those matters on which the Tribunal might have based its decision and that this constituted a sufficiently serious breach of due process.

In making its decision, the Court emphasized that although each case must turn on its own circumstances, the following are to be borne in mind in any application such as the present to set aside an award:

1. The court will not address itself to the substantive merits of the dispute or to the correctness or otherwise of the award, whether concerning errors of fact or law. The court is concerned with the structural integrity of the arbitration proceedings. The grounds for refusal of enforcement of an arbitral award as set out in the UNCITRAL Model Law are to be construed narrowly, and apply only to sufficiently serious or egregious cases where a party was effectively denied due process; and
2. The hurdle to cross is high.

In recent years, very few arbitral awards have been successfully challenged in the court. Here, however, there had been serious violations by the Tribunal, which undermined due process and justified the setting aside of the award. This case serves as an example of what can amount to “serious or egregious” conduct by an arbitral tribunal, justifying the setting aside of its award by the courts.