Hong Kong SAR courts unlikely to intervene in arbitration award outcomes

Arbitral awards in Hong Kong SAR are typically final and binding and, in most cases, there is no ordinary right to appeal based on errors of fact or law.

Parties who wish to challenge an arbitral award must apply to the Court of First Instance (CFI) for an order to set aside the arbitral award under one of the narrow grounds set out in the Arbitration Ordinance, which is the legal framework that governs arbitration proceedings in Hong Kong SAR. The CFI will then assess the grounds and substance of the award.

Under the Arbitration Ordinance, applications to set aside an award must be made either within three months of the date that the award is received or, if a correction has been requested, from the date the application for correction is made. Interim or procedural awards are generally not eligible for this process.

Grounds for setting aside an arbitration award

The grounds for setting aside an arbitral award typically fall into three categories – due process, lack of jurisdiction and public policy.

Due process

There are limited situations within the due process category which could be considered grounds to challenge an award. These include those where a party to the arbitration was under some incapacity. For an individual, they might be under legal age or have an impaired mental condition. For a company, it could be that the company is in liquidation.

If a party was not given proper notice of an arbitrator’s appointment or was unable to present their case, this could also be considered grounds to challenge an award due to a lack of due process.

This category also includes situations where the arbitration agreement was invalid. For an arbitration agreement to be valid, it must be proven that the arbitration agreement existed and that the claiming person or entity was a party to that agreement. The arbitration agreement must also be valid under the governing law chosen by the parties, or under Hong Kong SAR law if the parties have not chosen any.

In some scenarios, even if the main contract is null and void, the arbitration clause may still be valid and enforceable.

An award may also be challenged due to a lack of due process where the composition of the tribunal or the arbitral procedure was not in line with the agreement of the parties. While it won’t automatically invalidate the arbitration award if the tribunal doesn’t follow the pre-agreed procedure, or even the applicable law, the tribunal must be shown to have acted reasonably throughout the arbitration process.

A change to the procedural timetable to avoid unnecessary delays and expenses would be considered acceptable, as would a shift in the applicable law after a genuine attempt to apply the pre-agreed law. In general, courts take an unfavourable view of challenges to arbitration awards based on minor procedural issues. Such challenges would not be permitted unless they were raised before the tribunal during the arbitration proceedings.

A lack of due process can also be shown in situations where the tribunal failed to deal with key issues and did not provide adequate reasons for its decision. Courts have consistently emphasised that, while detailed and elaborate reasoning by a tribunal is not necessary, parties involved should be able to understand how and why a particular conclusion was reached for an award to be enforceable.

An award can also be deemed ‘manifestly invalid’ if the findings within the award are inconsistent with an earlier award issued in a separate arbitration involving the same parties and a common arbitrator.

Jurisdiction

Grounds for setting aside an arbitration award which fall within the jurisdiction category include situations where an award goes beyond the scope of submission, or there is no actual dispute between the parties.

An arbitration award can be considered beyond the scope of submission – and therefore set aside – if it addresses a matter that has not been formally pleaded.

Note however, that the tribunal can consider matters within the broader context of the dispute that have not been formally pleaded, as long as procedural rules are followed throughout the process and parties are given an opportunity to make submissions on these additional matters.

Additionally, the right of parties to activate an arbitration agreement only comes into effect when an actual dispute between the parties arises. Until then, the parties do not have the right to invoke the agreement.

Public policy

Within the public policy category, an arbitration award can be set aside if it is obtained through fraud, corruption, or unconscionable behaviour.

Recent Hong Kong SAR case law illustrates court’s caution

Recent Hong Kong cases have provided insight into the court’s cautious approach and the challenges parties might face when contesting an award.

CNG v G – 27 February

In a dispute between the shareholders of a company, which related to the rights and obligations of the parties under the shareholders agreement, CNG was alleged to have breached its contractual obligation, and the tribunal issued an award in favour of G.

CNG sought to set aside the arbitral award on the grounds that it was unable to properly present its case due to a lack of due process. It also argued the tribunal had failed to deal with key issues and said the award was in conflict with Hong Kong SAR public policy.

The court found that the tribunal is not required to consider all the arguments canvassed as long as a decision on one argument suffices to resolve an essential issue, and that a short number of paragraphs did not mean there was no good reasoning or answer to the issues raised for a decision. Equally, an inference of an arbitrator having missed one or more important pleaded issues can only be drawn it if is shown that the inference is “clear and virtually inescapable”.

In relation to procedural fairness, the court found that section 46 of the Arbitration Ordinance entitles parties to a “reasonable opportunity” to present its case, which does not mean a party can claim to have all the time it needs to prepare. The court held that CNG was not entitled to “make unreasonable demands and to ignore other relevant principles and aims of efficiency and speedy resolution of the dispute” when presenting its case and dealing with its opponents. The court was further influenced by the absence of any application for adjournment.

The court also ruled that this was not a case that could come within the public policy ground, as there was nothing contrary to the fundamental conceptions of morality and justice of this forum, and there was nothing which could in any way be said to be shocking to the conscience of the court to justify setting aside the Award.

The court ultimately ruled against the set-aside application and awarded costs against CNG on an indemnity basis.

G v N – 4 March

In this case, N initially appealed two partial awards on the grounds of public policy and, following the December 2023 CFI decision to remit the awards to the arbitrator to eliminate the grounds for setting aside, N sought leave to appeal against that decision.

In this case the CFI granted N leave to appeal to the Court of Appeal on several grounds. Firstly, N had a reasonable prospect of success, and the decision would raise an important and novel issue. The decision would therefore permit the Court of Appeal to provide guidance as to the permissible review by a supervisory court of a tribunal’s consideration of public policy, when illegality is raised by way of defence to a claim made.

Secondly, the Court of Appeal’s guidance on the relevant tests to be applied would benefit the development of arbitration law in Hong Kong and other UNCITRAL Model Law jurisdictions.

Lastly, the tribunal is not empowered to review an arbitral award on the ground of errors of law, so it was time for the Court of Appeal to step in and address the correct legal approach.

AAB v BBA – 8 March

In a dispute which arose from a joint venture agreement involving the exploration of a mining concession, the tribunal issued a partial final award on the basis that AAB had failed to discharge its contractual obligations.

AAB challenged the decision, citing a lack of reasoning, a lack of due process and failure to address an issue. On the lack of reasoning, the court held that the tribunal is not bound to deal with every argument raised by a party, and a failure to give reasons should be distinguished from a failure to give “adequate” reasons. On due process, the court was swayed by AAB’s failure to seek an adjournment or ask for more time during the proceedings and its compliance with the timetable it claimed was too short.

On failure to consider an issue of estoppel raised – estoppel being the principle whereby a party can be prevented from making assertions that go against something they have previously stated – the court noted that while this failure was important, it considered it disproportionate and premature to set aside the arbitral award.

The court ruled against AAB’s set aside application. Costs were reserved pending final determination of the proceedings.

Key takeaways

Key among the court’s reasons for not setting aside an arbitral award in these recent cases has been its primary concern of maintaining the structural integrity of the arbitral process. The court has noted that it will only intervene in circumstances where there has been a serious denial of due process.

In addition, it has stated that it will avoid delving into the rights and wrongs of an award simply because parties consider the tribunal’s decision to be “superficial or insufficient”.

The court has also warned against “embarking on expensive and time-consuming proceedings by way of unwarranted challenge to an award” and using baseless set-aside applications as a way of trying to achieve a more favourable outcome at court.

As such, parties that believe something has gone wrong in arbitration proceedings should swiftly raise an adjournment application as opposed to adopting a sit-and-wait approach and going to court to complain after receiving an unfavourable decision.

Parties that bring unwarranted challenges to an award to court may be penalised with indemnity costs and should therefore think twice to avoid incurring hefty costs for a likely hopeless bet on a more favourable decision at court.

Ultimately, before contesting an award, entities should assess the probability of success and consider the associated costs in terms of time and money. Ideally, clients should be advised on the strategic decision to challenge an award and the narrowness of the grounds available for setting aside an award under the Arbitration Ordinance. Clients looking to pursue a setting-aside application should also receive guidance on assessing the costs and benefits of such an application.

Co-written by Jade Wong of Pinsent Masons.