Court confirms high threshold for setting aside arbitral awards

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Authored by: Joseph Chung

In LY v HW, HCCT 96/2021 [2022] HKCFI 2267, the court dismissed the Plaintiff’s application to set aside an arbitral award on the ground that the  arbitral tribunal had failed to deal with key issues put before it and/or had failed to provide sufficient reasons for its decisions on key issues.  The court emphasized that an arbitral award has to be read in the context of the submissions and arguments made to the tribunal and that the court will be extremely slow to interfere with the tribunal’s decision as to 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 by the award.

The Parties

The Plaintiff (LY) and Defendant (HW) entered into a Distribution Agreement (Agreement), which LY terminated on the ground that HW had failed to achieve the annual growth rate target agreed, in that the annual sales value (ASV) was lower than that agreed.  

Arbitration Proceedings

HW disputed the termination and commenced arbitration proceedings, seeking a declaration that LY was in breach of the Agreement and that its purported termination was invalid. In the arbitration, HW put forward various contentions in relation to the calculation of the ASV figure, one being that HW had met the ASV target, as certain rollover sales volumes from the previous year should have been included in the calculation. LY relied on another calculation of the ASV. Hence, the parties were in dispute about how the ASV should be calculated under the Agreement and whether the ASV target had been met.  

If LY’s calculation of the ASV was not accepted by the tribunal, the purported termination of the Agreement would have been wrongful, LY would have been in breach of the Agreement and be liable for the damages sought by HW. 

LY’s application to set aside arbitral award

The tribunal found in HW’s favour.  LY applied to set aside the award on the ground that (i) the arbitral procedure was not in accordance with the parties’ agreement, in that the tribunal failed to deal with all key issues put before it, and/or had failed to provide sufficient reasons for its decisions on the key issues; and (ii) the award was in conflict with the public policy of Hong Kong.

According to LY, the tribunal failed in its award to deal with three issues which had expressly been drawn to the tribunal’s attention, which issues were integral to the resolution of the parties’ dispute concerning the Rollover Arrangement relied on by HW for its calculation of the ASV under the Agreement.  Further, that the reasons provided by the tribunal in the award were insufficient to enable the parties to understand the legal basis on which it had found against LY on the Rollover Arrangement issue, which amounted to a departure from the parties’ agreed arbitral procedure, was a denial of process, and hence in conflict with the public policy of Hong Kong and therefore the award should be set aside.

Legal Principles

The court referred to the relevant legal principles as follows:

1. S.67 of the Arbitration Ordinance applies Article 31 of the Model Law. Article 31(2) 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.
   
   
2. The grounds for setting aside and refusal of enforcement of an award are to be construed narrowly, and the applicant has to show that that the error complained of is egregious, to warrant the setting aside of the award.
   
   
3. 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.
   
   
4. 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.
   
   
5. In considering whether a tribunal has dealt with an issue, the approach is to read the award in a reasonable and commercial way, without a meticulous legal eye endeavouring to pick holes, inconsistencies and faults, but generously, and only to remedy serious breaches of natural justice which cause injustice.
   
   
6. The award should not be read in a vacuum. It has to be read in the context of the submissions and arguments made to the tribunal. The question is whether, properly understood, the award has dealt with an issue which is key to the tribunal’s decision on the dispute referred to it in the arbitration.  The tribunal is only required, under Article 31(2), to state the reasons upon which the award is based.
   
   
7. It suffices that 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.  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. 
   
   
8. It is particularly important for the court to bear in mind the object and principles of the Arbitration Ordinance, namely 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 Arbitration Ordinance; all in accordance with and to reflect the policy of minimal judicial intervention into the arbitral process.
   
   
9. An inference will not be made that a tribunal has failed to consider an important issue, unless such inference is clear and virtually inescapable. 
   
   
10. The tribunal is not bound to structure its decision and its reasons in accordance with the issues put to and argued before the tribunal or the submissions made by the parties.
    
    
11. In deciding whether the tribunal has adequately dealt with an issue, or sufficiently explained its decision, the court must be circumspect in its consideration of the award to avoid any attempt to review the correctness of the award, in law or on facts. 
    
    
12. 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. 
    
    
13. Any error in an award made by an arbitrator cannot by itself counterbalance the public policy bias towards enforcement of arbitration agreements and awards. 

Court’s Decision

The court said that in order to decide on the relevance of the issues in question and whether they had been dealt with by the tribunal and, if not, the consequences of such failure, it was necessary for it to consider what was the determination made in the award and how the tribunal came to its decision. After considering such, the court concluded that the tribunal’s failure to consider or deal with issues or aspects of the submissions made on behalf of LY in this case, was a matter which went to the tribunal’s substantive decision, which may amount to an error or law, but was not a ground for challenging the award.

Reading the award, the court was not satisfied that this was a case where the tribunal’s failure to deal with the issues complained of by LY was not due to the tribunal’s choice of not dealing with aspects of the submissions made for LY, because the tribunal considered it unnecessary to do so by reason of the issues it had dealt with and decided.

The court said that parties to an arbitration do not have the right to have all their arguments addressed by the tribunal and the court should 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, the court said, 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 unfavourable award.

The court concluded that even if the tribunal had not dealt with the particular issues complained of by LY, there was no serious or egregious error justifying the setting aside of the award, whether on the ground of arbitral procedure or public policy.

LY has subsequently been granted leave to appeal the decision. The court said that in arguing that the court had misconstrued the Award and the Tribunal’s conclusion on the issues to be dealt with expressly, it could not be said that the intended appeal had no reasonable prospect of success, which is not a very high threshold –the prospects of the intended appeal do not have to be probable and in this case, the court said, they could be said to be more than fanciful.

Comment

This judgment reinforces the court’s pro-arbitration stance and makes it clear that any error in an award made by an arbitrator cannot by itself counterbalance the public policy bias towards enforcement of arbitration agreements and awards. Further, the court will rarely interfere with the tribunal’s decision on which issues are essential and necessary to be addressed in the award and it is sufficient that the tribunal sets out its decision on the dispute and gives sufficient reasons why it came to its particular decision.

During the course of the hearing, counsel for the parties may raise various arguments, whether they are relevant to the key issues or not. If the tribunal is required to address all such arguments, it may render the task of the tribunal unduly daunting, if not impossible.

Key Contacts

Joseph Chung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9647