Overview

In LY v HW [2026] HKCA 936, the Hong Kong Court of Appeal dismissed LY’s appeal against the refusal to set aside a Hong Kong arbitral award. The award arose from a pharmaceutical distribution dispute and was made by a three-member tribunal in HKIAC proceedings. LY applied to set aside the award under section 81 of the Arbitration Ordinance (Cap 609). Its challenge turned on whether the tribunal had failed to deal with two alleged key issues: first, whether a rollover arrangement was consistent with the contract’s definition of “Annual Sales Value” and written-amendment clause (the Consistency Issue); and second, whether that arrangement bound LY as an assignee under PRC law (the Assignment Issue).

The Court agreed with first instance judge Mimmie Chan J. The tribunal’s reasoning made the answers to the Consistency and Assignment Issues sufficiently clear, so the tribunal did not need to address them expressly. The Court dismissed the appeal and ordered LY to pay HW’s costs on an indemnity basis.

 
Background

The dispute arose from a distribution agreement dated 29 January 2015. Under the agreement, HW became the exclusive distributor of certain pharmaceutical products in the PRC. The agreement required HW to achieve annual sales value (ASV) growth at a compound annual growth rate of 15% per calendar year. Section 10.2 defined ASV as “the Sales Volume of the Products throughout [the PRC] during a Calendar Year multiplied by the WASP of the Products for the same Calendar Year.” Section 38.1 required any amendment or modification to be “in writing and signed by authorised representatives of both Parties.”
 
A central question was whether excess inventory value deducted from one year’s ASV for rebate purposes could roll over into the following year’s ASV (the Rollover Arrangement). The parties agreed that if the 2017 excess inventory carried forward to 2018, HW would have met the 2018 target ASV of RMB 354 million. If it did not, HW’s 2018 ASV fell below target, and LY could terminate the agreement.
 
LY terminated the agreement on 17 May 2019, asserting that HW had failed to meet the 2018 target ASV. HW commenced arbitration, contending that LY’s termination was wrongful because the 2017 excess inventory, once rolled over, brought the 2018 ASV above target. The tribunal accepted HW’s rollover argument and found that HW had met the target ASV. It awarded HW RMB 239.4 million in damages.
 

The setting-aside application

LY applied to set aside the award under section 81 of the Arbitration Ordinance. It argued that the tribunal had failed to deal with the Consistency and Assignment Issues and had failed to give sufficient reasons. LY also contended that the award conflicted with Hong Kong public policy. The Court described this as an “infra petita” challenge—a challenge based on an alleged failure to decide all matters put before the tribunal.
 
Section 81 of the Ordinance gives effect to Article 34 of the UNCITRAL Model Law, which provides for setting aside as the exclusive recourse against an arbitral award. LY invoked two Model Law grounds. The first was Article 34(2)(a)(iv), which permits setting aside where the arbitral procedure was not in accordance with the agreement of the parties. LY argued that the parties’ agreed procedure required the tribunal to deal with all key issues put before it, and that the tribunal’s failure to address the Consistency and Assignment Issues amounted to a procedural irregularity. The second was Article 34(2)(b)(ii), which permits setting aside where the award conflicts with the public policy of Hong Kong. LY contended that the tribunal’s failure to give sufficient reasons rendered the award contrary to public policy.
 
The Consistency Issue was whether the Rollover Arrangement conflicted with the contractual definition of ASV and the requirement for written, signed amendments. The Assignment Issue was whether the Rollover Arrangement bound LY as assignee under Article 82 of the PRC Contract Law, given LY’s asserted lack of knowledge of the arrangement.
 
At first instance, Mimmie Chan J accepted that the tribunal had not made express findings on those two issues. Nonetheless, she held that the award, read fairly and holistically, adequately explained the tribunal’s reasons. She found no basis to set aside the award on public policy grounds. She also observed that parties to arbitration do not have a right to “have all their arguments addressed by the Tribunal.”
 

The Court’s decision

The Court dismissed LY’s appeal.

LY also argued that the first instance judge wrongly applied the test in the Singaporean decision of AKN v ALC [2015] 3 SLR 488. That test holds that a court should not infer a tribunal failed to deal with an essential issue unless the inference is “clear and virtually inescapable.” The Court did not need to decide whether AKN set too high a threshold. LY’s challenge failed even under its preferred formulation—the test in Z v R [2021] HKCFI 2312, which asks whether it is “apparent” that the tribunal considered all material issues. The Court held (at paragraph 41) that “it is (or should be) apparent to the parties” why the tribunal handled the Consistency and Assignment Issues as it did.
 
The Court accepted that the tribunal had cited section 10.2 and was “clearly alive to the definition of ASV contained therein.” It also found that paragraphs 130 to 135 of the award showed the tribunal engaging with the Rollover Arrangement—“undoubtedly an important issue” in deciding whether HW had met the 2018 target ASV.
 
The pivotal finding was at paragraph 130 of the award. The tribunal noted that LY did not dispute that RMB 1,174,079 had been deducted from the 2017 ASV for rebate purposes. LY also accepted that the rebate attributable to the deducted ASV should be paid in 2018. And LY accepted that, if the deducted ASV were included in the 2018 ASV, HW would have met the RMB 354 million target. At paragraph 131, the tribunal reasoned that the agreement contained “no explicit provision” for rollover, but there was not “an ASV for rebate under Section 11.4 and a different ASV for the purpose of Section 10.1 and 10.2.” At paragraph 133, it added that “common sense and logic” supported including the excess inventory in the following year. Under the “first-expired first-sold” principle, the previous year’s excess inventory would have been sold the following year.
 
The Court held that this reasoning answered the Consistency Issue. Because there was only one ASV concept, the amount deducted from 2017 ASV for rebate purposes—included with LY’s concurrence in the 2018 ASV for rebate—also had to count towards the Target ASV. As the Court put it at paragraph 43, “it is difficult to see how any point arises on section 10.2, and there was accordingly no need for the Tribunal to address that argument.”
 
The Court reached the same conclusion on the Assignment Issue. LY’s argument rested on the premise that it lacked knowledge of the Rollover Arrangement. But the tribunal found that LY itself accepted the deducted 2017 ASV should be added to the 2018 ASV for rebate purposes. That acceptance, the Court held at paragraph 44, meant “the premise of lack of knowledge on the part of LY about the arrangement was therefore without foundation.” It was therefore “not strictly necessary for the Tribunal to address this point.”
 
The Court also rejected LY’s public policy and inadequate-reasons challenges. At paragraph 45, it held that neither the Consistency Issue nor the Assignment Issue was, in light of the tribunal’s findings, a key issue whose lack of detailed discussion made the award susceptible to challenge—whether “on the ground that the Tribunal had thus committed an egregious error” or “on the ground that the Award was insufficiently reasoned and so contravened Hong Kong public policy.”
 

Comment

This decision reinforces Hong Kong’s pro-arbitration, minimal-intervention approach. A losing party cannot convert a merits complaint into a procedural challenge merely by identifying arguments the tribunal did not address in express terms. The question is whether, reading the award fairly and holistically, it is apparent how the tribunal dealt with the issue or why no explicit determination was necessary.
 
The decision also fits the empirical picture in Reed Smith’s International Arbitration Report 2025. The report found that only 22.2% of sampled cases resulted in a successful set-aside, a low success rate which was “consistent with the Hong Kong courts’ pro-arbitration stance.” In particular, challenges under Article 34(2)(a)(iv), the ground that the arbitral procedure was not in accordance with the parties’ agreement, which was LY’s primary ground, had a success rate of approximately 9%. The public policy ground under Article 34(2)(b)(ii), LY’s secondary ground, had an approximately 18% success rate.
 
Parties considering a challenge should weigh the costs risk carefully. The Court ordered LY to pay HW’s costs on an indemnity basis. Reed Smith’s report notes that, since 2012, Hong Kong courts have ordered indemnity costs in all reported cases where setting-aside challenges failed, save one exceptional case. This costs exposure reinforces the need to distinguish true procedural unfairness from an attempt to reargue the merits.

Client Alert 2026-116