In a previous article we reported on the decision in P v M [2018] HKCFI 2280, whereby the Court held that the arbitral tribunal had failed to comply with section 46(3)(b) of the Arbitration Ordinance by not giving a party a fair and reasonable opportunity to present its case and remitted the award (First Award) back to the tribunal for reconsideration (the Judgment). The Court declared the relevant paragraphs of the First Award to be of no effect, pending the tribunal’s further order. After further submissions from the parties, the arbitrator made his second award (Second Award) in which he maintained his decision in respect of the amount in dispute, but for different reasons to those in the First Award and reinstated the relevant paragraphs in the First Award. P now applied to challenge parts of the Second Award, also on the ground of serious irregularity ([2019] HKCFI 1864).

P’s grounds for challenging Second Award

P argued that:

(1)

The arbitrator exceeded his powers and/or failed to conduct the proceedings in accordance with the procedure agreed by the parties or directed by the Court in the Judgment in:

  • summarily dismissing P’s submissions on “threshold issues” relating to the scope of the matters remitted and finding that the injustice to P had been rectified by the submissions on remission whereas matters not raised in the substantive arbitration could not be rectified without a further evidentiary hearing;

  • taking into account M’s submissions which were not in reply to P’s submissions on the remission, and matters which went beyond the remitted issues and had not been pleaded or dealt with in evidence in the arbitration;

  • directing further submissions on matters which could only properly and fairly be addressed by a further evidentiary hearing;

  • embarking on his own enquiry and making findings in the absence contentions of M;

  • failing to give P any opportunity to address such matters; and

  • finding that P sought an overly strict and onerous interpretation and application of the relevant clauses in the contract in question.

(2)

P was denied a reasonable opportunity and/or was unable to present its case in that the arbitrator wrongly entered into his own assessment, referring to matters not raised by either P or M in their submissions on remission (or in the substantive arbitration) and wrongly proceeded on his own to develop and expand their submissions by adding material findings of fact not suggested by M at any time and of which P had no notice.

(3)

New points raised by M on remission were beyond the scope of the matters remitted as M had not pleaded, advanced them in submissions or by way of evidence in the substantive arbitration and P was therefore denied a reasonable opportunity to adduce its own evidence and cross-examine M’s witnesses on those matters.

Applicable Principles

The Court referred to the following applicable principles:

  • the test of a serious irregularity giving rise to substantial injustice involves a high threshold to be met. It is deliberately high so as to maintain the intended effect of the Arbitration Ordinance to dramatically reduce the extent of the Court’s intervention in the arbitral process;
  • a balance has to be drawn between the need for finality of an award and the need to protect parties against unfair conduct in the arbitration. In striking this balance, only an extreme case will justify the Court’s intervention;
  • in deciding whether there has been substantial injustice, it is enough to show that in the absence of irregularity, the tribunal might well have reached a different view and there might well have been a significantly different result;
  • the Court is concerned with the structural integrity of the arbitration proceedings and not with the substantive merits of the dispute;
  • the effect of setting aside an award or declaring it to be of no effect is that the award is a nullity. The arbitration can revive or carry on as necessary to deal with the matters that were set aside or declared to be of no effect. The parties are put back in the position they were in prior to the relevant award being made; and
  • the arbitrator’s revived authority following a remission, only extends to the matters remitted to him and he cannot go beyond the scope of the revived jurisdiction.

Court’s Decision

The Court set aside the parts of First Award and Second Award as sought by P and declared them to be of no effect. It said:

  • once it was identified and directed that the parties were bound by their pleaded cases and by the evidence already traversed at the arbitration hearing, and by the findings of fact made on the evidence, then there was really only one proper conclusion that the arbitrator could have reached, unless M had successfully applied to amend its case i.e. the conclusion that the claim must fail;
  • if, in response to the arbitrator’s suggestion, M had wished to advance its case on the basis that letters constituted the necessary notice under GCC 27 and 28 of the Contract, it could only have properly done so by amending its pleadings, which if allowed, would almost certainly have required re-opening the evidentiary hearing;
  • although various paragraphs in the Second Award showed that the arbitrator was mindful of the Judgment and fully intended to comply with it, he had mistaken the extent of the defects found by the Judge and such defects had not been cured and could not have been cured by the route the arbitrator took;
  • the points rendering the Court’s intervention justified and necessary had not been overcome by the remission of the matter to the arbitrator. Both determinations by the arbitrator were the result of serious irregularity and created substantial injustice.

The Court said that since the reconsideration by the tribunal had failed to cure the substantial injustice caused by the serious irregularity, which continued, it was inappropriate to again remit the matter back to the tribunal for reconsideration. The Court said that the effect of its decision was that M’s claims in question were bad and could not now be resurrected. When the matter was remitted to the arbitrator, it had been open to M to apply to amend its case, but it chose not to.

Comment

This judgment is a reminder of the very high threshold that has to be met to challenge an arbitral award on the basis of serious irregularities and that the Courts will only intervene in the arbitral process in extremely limited circumstances. However, as the Court said, it is just as important for the maintenance of integrity in the arbitration process for the court to intervene in appropriate cases, as it is for the court not to intervene when the high threshold for doing so has not been reached. The judgment also highlights the importance of the arbitrator complying with the remission procedure and not exceeding his powers upon remission. Whilst theoretically speaking the effect of setting aside parts of an award, rather than remitting it back to the arbitrator, may mean that there is no award formally pronounced on those parts of the claims and that there might be another arbitration to determine such claims, the Court may nevertheless hold that such claims are bad with no basis to be resurrected.