Arbitration awards will only be set aside in rare cases

On 9 May 2012, the Court of Appeal reversed the first instance decision of Saunders J in Pacific China Holdings Ltd v. Grand Pacific Holdings Ltd (2012) HKEC 645. Saunders J had set aside an arbitral award on grounds of procedural unfairness. The Court of Appeal concluded that there was no violation of due process, and set a very high threshold for the court to set aside an arbitral award. The judgment is helpful in providing some clarification on when the court should exercise its discretion in setting aside an arbitral award, and confirms that such cases will be rare.  

BACKGROUND

The appellant, Grand Pacific Holdings Ltd ("GPH"), commenced arbitration in March 2006 against the respondent, Pacific China Holdings ("PCH"), in respect of amounts owed under a loan agreement. The arbitration clause in the agreement provided that any disputes would be subject to arbitration in Hong Kong under the ICC Rules. In August 2009, a tribunal issued an award ordering PCH to pay GPH a sum in excess of US$55 million with interest. PCH complained of violations of due process in the way that the arbitration was conducted, and applied to have the award set aside pursuant to Article 34(2) of the UNCITRAL Model Law (the "Model Law"). PCH argued that it was unable to present its case or that the arbitral procedures were not in accordance with the parties' agreement.  

Court of First Instance

In his judgment, Saunders J considered that derogations from an agreed procedural timetable for the arbitration were such that the arbitration proceedings were not in accordance with the parties' agreement, and that PCH was unable to present its case. Accordingly, violations of Article 34(2) of the Model Law were found and the Court would have the discretion to set aside an award.  

In exercising the discretion, Saunders J considered that it was necessary for PCH to establish that, "it cannot be said that if the violation had not occurred the result could not have been different". As he was not satisfied that, notwithstanding the violation, there could be no possibility of a different outcome, Saunders J resolved to set aside the award. This "triplenegative" test has caused some confusion amongst practitioners and it was hoped that the position would be clarified by the Court of Appeal.  

Court of Appeal

The appellate court reversed the decision of Saunders J. In the leading judgment, Tang VP considered that Saunders J had improperly interfered with the tribunal's powers on case management, and that the tribunal was entitled to adopt procedures necessary for handling its cases efficiently. Accordingly, Article 34(2) of the Model Law did not require the arbitral tribunal to stick rigidly to the procedural timetable agreed at the outset of the arbitration as the case developed and new issues arose. Tang VP noted in particular several instances where the departures from the timetable complained of by PCH were the result of PCH's own conduct in raising new issues at a late stage.  

The judgment is notable for the high threshold it sets for arbitral proceedings to breach Article 34 of the Model Law: "the conduct complained of must be sufficiently serious or egregious so that one could say a party has been denied due process". In this case, the conduct complained of was not sufficiently serious, and so no violation was established.  

Although not relevant to its decision, the judgment went on to consider the court's discretion in setting aside an award in cases where a violation of Article 34(2) of the Model Law could be established. Tang VP agreed with the test set by Saunders J and restated it in simpler terms, "that the court may refuse to set aside an award notwithstanding a violation if the court is satisfied that the outcome could not have been different". It was also noted that some breaches may be so egregious that an award would be set aside even though a different result could not have been reached.  

New Arbitration Ordinance

The underlying arbitration agreement in this case was originally governed by the repealed Arbitration Ordinance (Cap. 341), which incorporated Article 34 of the Model Law into domestic legislation. Arbitration agreements entered into from 1 June 2011 are governed by the new provisions in the new Arbitration Ordinance (Cap. 609). As the new Arbitration Ordinance also incorporates Article 34 of the Model Law, the same principles will determine the court's discretion to set aside awards granted under new arbitration agreements.  

Takeaway Points

The Court of Appeal judgment affirms the judiciary's proenforcement attitude towards arbitral awards. It makes it clear that an arbitral award will only be set aside in exceptional circumstances, where the tribunal's conduct has been sufficiently serious or egregious.  

The same principles apply to arbitration agreements governed by the new Arbitration Ordinance that entered into force last year, so moving forward the judgment is expected to continue to provide guidance on the scope of the court's discretion to set aside awards granted under new arbitration agreements.  

The judgment confirms that arbitrators in Hong Kong have a high degree of discretion in their management of proceedings. This is good news for Hong Kong as an attractive forum for international arbitrations.