In its award (the “Award”), the tribunal made determinations on each of the following contested issues:

1. Whether C and D had personally guaranteed the liabilities of B under the Agreements;
2. The applicability and enforceability of the non-compete covenant under the Agreements (the “Non-Compete Covenant”), which was subject to a choice of law clause providing for the Agreements to be governed by the U.S. Federal Arbitration Act and the laws of the State of Maryland; and
3. The liability and amount of damages payable by B, C and D for the breach of the Agreements, considering the different effective dates of termination of the Agreements as argued by the parties.

The tribunal found in favour of A, ruling that the Non-Compete Covenant was enforceable, and awarded damages and injunctive relief against B, C and D.

Subsequently B, C and D applied to the Court to set aside leave to enforce the Award (the “Enforcement Order”) on the grounds that:

1. The arbitral procedure was not in accordance with the parties’ agreement;
2. Enforcing the Award was contrary to the public policy of Hong Kong given the tribunal’s failure to give adequate reasons on key issues; and
3. There was material non-disclosure on the part of A in obtaining the Enforcement Order.

Decision

Mimmie Chan J reiterated the principles applicable to the Court’s consideration of challenges against the enforcement of awards as previously set out in R v. F [2012] 5 HKLRD 278, Z v. Y [2019] 1 HKC 244 and LY v. HW [2022] HKCFI 2267 (on which we reported on 8 August 2022): “Awards are to be read generously, in a reasonable and commercial way expecting, as is usually the case, that there will be no substantial fault that can be found with it, and always bearing in mind the policy of minimal curial intervention… Any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable.” (emphasis added)

However, even with a generous reading, on each of the key issues considered by the tribunal, the arbitrator had failed to give adequate reasoning in the Award for her conclusions, and therefore the Award was contrary to Article 33 of the International Arbitration Rules and paragraph 5 of the Supplementary Procedures for International Commercial Arbitration of the American Arbitration Association, being the applicable rules in this arbitration.

Non-Compete Covenant Issue

The enforceability of the Non-Compete Covenant, which was a key and central issue in dispute between the parties, turned on the governing law of the Agreements. However, nowhere in the Award did the arbitrator provide any analysis as to how she arrived at the conclusion that the governing law clause in the Agreements was enforceable and that the law of Maryland applied. The arbitrator only recited the relevant clause with no explanation as to how she dealt with, or whether she had considered, the parties’ arguments regarding the rule that the law of the place of contract formation governs.

Chan J further found that the arbitrator had failed to give reasons as to why she considered the covenant was “reasonable” under Maryland law although this was also an essential issue to determine the Non-Compete Covenant’s enforceability and had been argued extensively before the tribunal.

Breach of Agreements Issue

In the arbitration, the parties were in dispute as to the date on which the Agreements were effectively terminated. B, C and D argued for an earlier effective date of termination given the existence of an earlier notice of termination. Upon reviewing the Award, Chan J once again found that the arbitrator had not given any reason as to why she rejected B, C and D’s argument for an earlier notice of termination.

Given that the effective termination date was crucial for determining damages and royalties due as well as the duration of the injunction granted, the Court found that B, C and D were entitled to query whether the arbitrator had even considered the issues concerning the Non-Compete Covenant’s enforceability and the effective date of termination, and if so, why these matters were determined against them.

On this basis the Court set aside the Enforcement Order on the ground that it would be contrary to public policy to enforce and recognise the Award when key and material issues raised for determination had not been dealt with to the extent of being reasonably sufficient and understandable by the parties.

Conclusion

In recent years the Hong Kong courts have heard a number of cases in which award debtors have challenged arbitral awards for lack of reasoning. This has included both set aside applications under section 81 of the Arbitration Ordinance (which gives effect to Article 34 of the UNCITRAL Model Law) and challenges to the enforcement of arbitral awards under section 86, 89 or 95 of the Arbitration Ordinance (concerning arbitral awards, New York Convention awards and Mainland awards, respectively). Consequently, the Court has warned against disguised challenges on law or fact, and/or meritless applications, by losing parties looking to find loopholes to avoid enforcement (see, e.g., CNG v. G and Another [2024] HKCFI 575, on which we reported on 13 March 2024).

However, as evidenced in A v. B and Others, the Hong Kong Court is not shy to refuse enforcement of faulty awards should principles of justice and fairness so require, including where the reasoning in the award is so lacking that the structural integrity of the arbitral process is undermined. In particular, a losing party may have recourse where the arbitrator merely sets out the provisions of the agreements/documents in dispute and the orders made, with no analysis made or explanations given (however brief) as to why they accepted, rejected or considered irrelevant the effects of a certain interpretation of a clause.

Client Alert 2024-065