Summary of facts
W and AW were parties to a Framework Agreement and a Share Redemption Agreement in relation to the shareholding in AW and were part of a series of transactions leading up to an acquisition. While W and AW were the only parties to the Share Redemption Agreement, the Framework Agreement involved several parties, including W and AW.
Disputes arose between the parties in relation to the Framework Agreement and the Share Redemption Agreement. W commenced arbitration against AW under the Framework Agreement (First Arbitration). In response, AW and the other respondents filed a counterclaim in the First Arbitration. Separately, AW commenced arbitration against W under the Share Redemption Agreement (Second Arbitration). AW’s counterclaim in the First Arbitration and claim in the Second Arbitration concerned identical claims of misrepresentation. AW appointed the same arbitrator in the First Arbitration and the Second Arbitration.
In March 2020, the award in the First Arbitration was handed down, in which the tribunal unanimously ruled in favour of W and dismissed AW’s counterclaim of misrepresentation (First Award). Four months later, however, in July 2020, the tribunal in the Second Arbitration issued an award that unanimously upheld AW’s claim of misrepresentation (Second Award).
W applied to set aside the Second Award on the ground that the Second Award ran contrary to the public policy of Hong Kong. In particular, W argued that the tribunal in the Second Arbitration made findings inconsistent with the findings in the earlier First Award on the same issues between the same parties, despite there being a common arbitrator.
AW subsequently applied for leave to enforce the Second Award and applied for security to be put up by W pending enforcement.
The Judge noted that an important factor to be considered on an application for security was the strength of the argument that the arbitral award was invalid. In this regard:
- The Judge found that the First Award and the Second Award revealed inconsistent and contradictory findings on the same issues relating to the misrepresentation claim that could not be reconciled on the basis of the same facts.
- The Judge held that a striking feature of this case was that there was a common arbitrator in the First Arbitration and the Second Arbitration. AW’s appointed arbitrator did not issue any dissenting decision in either Arbitration notwithstanding the inconsistent findings contained in the First Award and the Second Award.
- The Judge held that when AW’s appointed arbitrator became aware of the findings made in the First Award, he should have invited W and AW to make submissions on the First Award in the Second Arbitration in order to give W and AW the opportunity to be heard before any inconsistent findings were made, and so that the tribunal in the Second Arbitration would hear their submissions as to the effect of the First Award on the Second Award. The failure to do so and the lack of explanation of the inconsistent findings in the Second Award constituted injustice and grave unfairness to W.
- The Judge also noted that the confidentiality of the First Arbitration did not prevent AW’s appointed arbitrator from disclosing the First Award to the other members of the tribunal in the Second Arbitration, as “the legitimate use of an earlier award in a later arbitration between the same parties would not raise the mischief against which confidentiality rules are directed” (AEGIS Ltd v. European Reinsurance Co of Zürich  1 WLR 1041).
Accordingly, the Judge held that there was substantial injustice arising out of the Second Award and consequently found it to be “manifestly invalid”.
The Judge noted in the first paragraph of her judgment that “this is a highly unusual case”. It is indeed unusual for the Hong Kong court to set aside an arbitral award or consider an award “manifestly invalid”, but on this occasion, where two tribunals comprising a common arbitrator made inconsistent findings in their awards without giving the parties the opportunity to comment on the earlier award involving the same parties, there is little surprise that the court felt that there was sufficient injustice that required the intervention of the court. This decision serves as a good reminder not only to arbitrators but also to the parties that parallel arbitration proceedings must be handled with care. In appropriate cases, the possibility of consolidation or concurrent hearing of the parallel proceedings should be considered.
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Client Alert 2021-196