Client Alerts

Hong Kong Court sets aside arbitral award

Volterra Fietta Client Alert
22 July 2011

On 29 June 2011, a first instance decision by a Hong Kong court in Pacific China Holdings Limited (In Liquidation) v Grand Pacific Holdings Limited set aside an arbitral award issued by the International Court of Arbitration under the auspices of the International Chamber of Commerce.

Background

In 1998, both Pacific China Holdings Limited (“PCH”) and Grand Pacific Holdings Limited (“GPH”) were wholly owned by another company, Pacific Construction Company Limited. In 2001, a 40% stake in PCH was acquired by another entity. In order to further that acquisition, a number of documents were executed, including a loan agreement. This loan agreement was expressly governed by the law of New York and contained within it an arbitration clause.

A dispute arose when GPH began to make demands of PCH to make payments apparently due under the loan agreement. The parties were unable to resolve the dispute. In 2006, GPH commenced international commercial arbitration proceedings against PCH to enforce the loan agreement. On 24 August 2009, an arbitral tribunal, consisting of David Williams Q.C., James H. Carter and Sally Harpole issued an award in favour of GPH. PCH sought to have the arbitral award set aside in the Hong Kong courts.

Setting Aside an Arbitral Award under the UNCITRAL Model Law

The arbitration had been conducted under the UNCITRAL (United Nations Commission on International Trade Law) Model Law (“Model Law”). The exclusive method of recourse for a dissatisfied party is to make an application for the award to be set aside pursuant to Article 34(2) of the Model Law. Under Hong Kong law, the court charged with assessing that application is the Court of First Instance of the High Court of Hong Kong.

There are a number of grounds on which Article 34(2) of the UNCITRAL Model Law allows arbitral awards to be set aside. These include, for example, that the award deals with a dispute not contemplated by, or not falling within, the terms of the submission to arbitration or that the party making the application for setting aside was not given proper notice of the appointment of an arbitrator, or of the arbitral proceedings, or was otherwise unable to present its case.

In the present case, PCH stated that it was unable to present its case and, or in the alternative, that the arbitral procedure was not in accordance with the agreement of the parties. Accordingly, PCH argued that the arbitral award ought to be set aside.

The Decision

On 29 June 2011, Mr Justice Saunders, sitting as a Judge of First Instance in the High Court of Hong Kong, granted PCH’s application for the setting aside of the previous arbitral award.

As a starting point, Mr Justice Saunders remarked that it was well established that the court, when being asked to set aside an arbitral award, would not consider the substantive merits of the dispute, or the correctness of the award. It was also beyond argument that the Model Law reflected a view of arbitration that an award would generally be upheld and enforced. Against that background, the onus on establishing the basis for the court’s discretion in setting aside an arbitral award was on the party seeking to attack the award. In the present case, the onus was on PCH, first to establish one or more of the grounds under Article 34(2) of the Model Law, and secondly to establish that it could not be said that if the violation had not occurred the result could not have been different.

The Court held that PCH had been unable to present its case before the arbitral tribunal and had successfully established a violation of Article 34 of the UNCITRAL Model Law. First, the effect of procedural directions given by the arbitral tribunal had meant that GPH would have PCH’s best case on both fact and law for ten days prior to GPH itself being required to file its own case. Consequently, GPH had been given an advantage over PCH and could prepare their best case in the full knowledge of the case they had to answer. Second, the tribunal refused to receive and consider three additional authorities upon which PCH wished to rely. Mr Justice Saunders was “left in no doubt at all” that this refusal prevented PCH from presenting its case. Third, instead of allowing PCH the opportunity to respond to further substantive submissions made by GPH on 24 October 2008, the tribunal did not grant leave to PCH to make a response. Instead, the tribunal informed the parties that it had sufficient material to decide that issue. In so doing, the arbitral tribunal effectively denied PCH the opportunity to present its case. It was therefore ordered that the arbitral award be set aside.

Relying heavily upon the academic opinion of Professor Albert Jan van den Berg, the court held that only if it was beyond doubt that the decision could have been the same would a court be allowed to override a serious violation of procedure in the arbitration. This was a matter of basic fairness. In the words of Mr Justice Saunders:

“If the court cannot exclude the possibility – a real as opposed to a remote possibility that cannot be sensibly ignored – that the result might be different, then it will not be beyond any doubt that the decision would have remained the same.”

In the view of the court, if a party was denied the opportunity to make a submission on a matter central to its case on the award, as PCH had been, it would be rare for a court to state that the result could not be different:

“In so doing, the court cannot examine the submission that might have been made, and apply that to the result to which the tribunal has arrived, because to do so would be to pre-empt the tribunal’s decision-making power to the court. It is the quality of the violation that must be examined rather than the materiality and the effect on the outcome of the arbitration.”

Implications of the Decision

This decision should once again bring into sharp focus the fundamental importance which must be attached to the choice of seat and institution for arbitrations and the corresponding scope for challenge, if any, of an arbitral award which can be made.

Any entity that is engaged in drafting an arbitration clause in a contract or considering bringing an arbitral claim should actively seek expert advice on the process and risks involved in order to make an informed decision.