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Key takeaways
- In AAB v BBA and BBC [2024] HKCFI 699, the Hong Kong Court of First Instance refused to set aside an award for lack of reasoning and lack of due process, but remitted it for failing to deal with an issue.
- Only wholly unreasoned awards (as opposed to awards with skeletal reasoning) are capable of being set aside. Courts also will not lightly interfere with a tribunal’s case management decisions, absent any egregious errors that unfairly prevented a party from putting forward important evidence or mounting a material argument.
- In certain cases of where an issue put to the tribunal was not dealt with (either expressly or in composition with other issues), resulting in substantial injustice, the court may choose to remit an award back to the tribunal instead of setting it aside.
Background
The underlying arbitration, which is still ongoing, concerns disputes between shareholders of a joint venture company (the “JV”) arising from the exploration of a mining concession.
AAB and BBA respectively held majority and minority shares in the JV. Pursuant to a sale and purchase agreement (the “SPA”), BBC as part of the group of companies of BBA transferred majority shares in the JV to AAB. By a shareholders agreement (the “SHA”), AAB was to make a performance-related payment to BBC, in return for AAB implementing “extensive exploration” of the mining concession and assessing its potential.
BBA and BBC contended that AAB was in breach of its obligations under the SPA and SHA by not implementing an “extensive exploration” of the concession in accordance with “good industry practice”.
Arbitration proceedings were commenced, and in June 2023, the tribunal issued a partial final award in favour of BBA and BBC (the “June 2023 Award”).
AAB sought to set aside the June 2023 Award under Article 81 of the Arbitration Ordinance (the “AO”) which gives effect to Article 34(4) of the UNCITRAL Model Law. AAB advanced three grounds, namely: (1) the award lacked reasoning, (2) there was a lack of due process in conducting the arbitration, and (3) the tribunal failed to address an issue which, if considered, would have led to the award being in AAB’s favour.
Decision
Lack of reasoning ground
In considering the first ground for setting aside for lack of reasoning, Anselmo Reyes SC (the “Judge”) reiterated the principle that, an application under section 81 of the AO is not an appeal on the merits or on law. The court is not concerned with the substantive correctness of an award, but only with the structural integrity of the arbitral process and it is only when there is a serious or egregious denial of due process that the court can interfere.
In the present case, at the end of the day, AAB was essentially protesting not that the June 2023 Award was unreasoned, but rather that it dealt only superficially with AAB’s case. In other words it was saying that, because the June 2023 Award did not specifically comment on numerous points raised by AAB, the June 2023 Award must be set aside as “arbitrary”.
However, as the Judge continued, the tribunal is not bound to deal with every argument raised by a party. The authorities carefully distinguish between (1) wholly unreasoned awards and (2) awards with skeletal reasons. The case law only characterises the former type of award as “arbitrary” and thus capable of being set aside.
The Judge pointed to the “range and diversity of arbitrators in the market” with some choosing to dispose of every argument raised by the parties, while others deal only with the gist of a losing party’s key arguments on an issue. The parties are free to appoint whom they wish. However, if the court becomes embroiled in determining whether a tribunal’s reasons are superficial or insufficient, the court will be impermissibly reviewing the rights and wrongs of the award.
As for AAB’s specific complaints, the Judge held that mere succinctness was insufficient to ground criticism on the tribunal’s reasoning on certain points, its preference for the testimony of one side’s expert over another, and its findings that AAB had failed to conduct extensive exploration. Even where not expressly stated, the tribunal’s reasoning was apparent by implication in view of the conclusions in the June 2023 Award.
Lack of due process grounds
As for the second ground for setting aside based on a lack of due process, the Judge again noted the court’s reluctance to intervene in a tribunal’s case management decision absent egregious error in conducting the arbitration, such that a party was unfairly prevented from having a “reasonable opportunity” to present its case by putting forward important evidence or mounting a material argument.
On the facts, the Judge held that AAB’s failure to apply for an adjournment of the evidentiary hearing was fatal to its contention of procedural unfairness due to an overly compressed timetable, and that AAB’s argument that there was a “volte-face” in expert evidence did not by itself substantiate its case that there was a lack of due process.
Failure to deal with an issue
On this third ground for setting aside, the Judge accepted that the tribunal had failed to deal with a material issue, but opted to remit the June 2023 Award back to the tribunal for reconsideration rather than setting it aside.
The Judge noted that, in the June 2023 Award, the tribunal had identified three issues for determination, but it had not explicitly dealt with the third issue on whether BBA and BBC were estopped from alleging breaches of AAB’s obligations by reason of the Respondent’s nominated directors’ approval of exploration plans (“Issue 3”).
Summarising the operative principles in determining whether a tribunal had failed to deal with a material issue, the Judge held that the court must be satisfied that the issue was not dealt with expressly, nor disposed of in composition with other issues, such that substantial injustice has resulted. However, the tribunal is not required to set out each step by which it reaches its conclusion nor is it bound to structure its reasons as the parties’ submissions dictate.
An inference that a tribunal has failed to consider an important issue will not be drawn lightly, unless (1) such inference is clear and virtually inescapable, or (2) the facts are also consistent with the arbitrator simply having misunderstood the aggrieved party’s case, having been mistaken as to the law, or having chosen not to deal with a point because it mistakenly thought it was unnecessary to do so.
Having established that on the facts the tribunal had indeed failed to deal with Issue 3, the Judge identified three options under Article 81 of the AO:
- remit the award to the tribunal to deal with Issue 3 (Option 1),
- set aside the award (Option 2); or
- do nothing and treat the tribunal as having implicitly determined Issue 3 by the reasoning of the award (Option 3).
In this case, the Judge found Option 2 to be disproportionate and premature as there was no serious irregularity in the June 2023 Award. Further, on the facts the award had not implicitly dealt with Issue 3 and as such Option 3 does not apply. Therefore, given that nothing in the June 2023 Award’s disposition precluded the tribunal from make a finding on Issue 3 nor was there any evidence suggesting that the tribunal was unfit to continue with the arbitration, the Judge found remitting the case to the tribunal to be “the most practical step to take”.
Conclusion
This is the latest in a series of cases in which award debtors have sought to challenge awards under section 81 of the AO on the basis that the tribunal has failed to provide reasons and/or deal with an issue. We have written previously on this subject on 8 August 2022 and 13 March 2024.
Parties to arbitral proceedings should be reminded that attempts to relitigate or re-argue the merits of their case via post-award proceedings are unlikely to succeed in a setting aside application, and challenges on procedural grounds will only succeed where there is serious irregularity with the tribunal’s conduct of the arbitration resulting in substantial injustice/unfairness.
It is also a useful reminder that the Hong Kong court will, in appropriate cases, consider remitting an award back to the tribunal to rectify any issues, as opposed to setting aside the award, as previously detailed on 30 January 2024.
Client Alert 2024-056
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