In Arjowiggins HKK2 Ltd v X Co, HCCT 77/2020, the court set aside an arbitral award, as it found that the order made in the award, for delivery up of documents, went beyond the parties’ pleadings. The court refused to grant leave to appeal this decision. The court made it clear, that bearing in mind the requirement that there should be due process and fairness to both parties in arbitrations, it is not fair when a party is ambushed as a result of the tribunal allowing a party to advance new legal consequences not identified in the pleadings.
The dispute between the parties related to their Joint Venture Company (JV) on the Mainland-its operation and ultimate dissolution. X Co brought arbitration proceedings against HKK2 in Hong Kong (2018 Arbitration). In its Statement of Claim, X Co claimed that upon dissolution of the JV, as the former Chinese partner of the JV, it was entitled to take exclusive possession of account books and documents of the JV (JV Documents), as it was required to do so under PRC law, and keep them in its safe custody. X Co further claimed that its entitlement to exclusive possession of the JV Documents was a form of property right, entitling it to sue HKK2 for delivery up of the JV Documents. X Co’s pleaded case was that HKK2 had possession, custody or control of the JV Documents, but had deliberately withheld the same from X Co. By way of relief, X Co claimed an order for the immediate return and delivery up to it of the JV Documents.
In its Defence, HKK2 denied that X Co had any property right in, or right to, possession or recovery of the JV Documents against HKK. It referred to the fact that the JV was in the process of liquidation and that a Liquidation Committee (LC) had been formed. HKK claimed that the JV still existed as a legal entity and continued to exist and the JV remained the owner of the JV Documents until completion of the liquidation. The LC was the proper organ to have possession of the JV Documents, HKK2 said, unless and until a liquidation committee was appointed by the court. Just before the hearing of the 2018 Arbitration, the court appointed the Compulsory Liquidation Group (CLG) for the compulsory liquidation of the JV.
The Partial Final Award
The Tribunal found that it was the JV which retained the proprietary right to the JV Documents and X Co did not have any right to call for delivery of the JV Documents itself. According to HKK2, that should have been the end of the matter and the Tribunal should have simply dismissed X Co’s claims with costs to HKK2 as the successful party. Instead, the Tribunal pointed out in its Partial Final Award that as it had found that the JV Documents were in the possession, custody or control of HKK2, and that as a party to the JV, HKK2 had a duty to ensure that the terms of the JV in relation to the liquidation were complied with, and that it must cooperate with X Co to facilitate the liquidation, the Tribunal considered that there was scope to invite submissions from the parties, as to what, if any, orders the Tribunal should make in relation to the disposal of the JV Documents.
In its Final Award, the Tribunal pointed out that the question of whether HKK2 had possession, custody or control of the JV Documents had been the core of the 2018 Arbitration and was not a new question. The “new question” of what orders were appropriate as a result of the findings made as to HKK2 being in possession, custody or power of the JV Documents, and the JV Documents being necessary to the liquidation process, was a question of PRC law. The Tribunal concluded that the question of the remedies which were available to X Co concerned a matter as to the rights and obligations of the parties under the JV, and was within the Tribunal’s jurisdiction. The Tribunal considered that even if a remedy is not asked for by a party, it is its duty to act in accordance with the remit given to it by the parties’ arbitration agreement, and having given equal treatment to the parties by giving the them the opportunity to make further submissions on the appropriate orders to be made, the Tribunal was satisfied that X Co was entitled to the remedy of procuring delivery up of the JV Documents to CLG, which it ordered.
HKK2’s application to set aside the Award
HKK2’s position was that there was never a pleaded case, nor any dispute submitted to the Tribunal in the 2018 Arbitration, that HKK2 was in breach of an obligation to assist in the liquidation of the JV, or that the JV Documents should be delivered to CLG, or any party other than X Co. Despite the fact that CLG was appointed just before the commencement of the hearing of the 2018 Arbitration, X Co did not take any steps to amend its pleadings or its claim for delivery up of the JV Documents to it.
The Court set aside the Award, holding that the order made by the Tribunal for HKK2’s delivery of the JV Documents to CLG was outside the scope of the parties’ submission to the 2018 Arbitration and must be set aside, for the following reasons:
- Any claim of delivery of the JV Documents to CLG was inconsistent with X Co’s own pleaded case, that it was the party entitled to the exclusive possession of the JV Documents and the party to which HKK2 should be ordered to deliver them up to, notwithstanding and irrespective of the liquidation.
- It is trite, that the pleadings and not evidence, dictate the proper course of the proceedings and ambit of the orders to be made.
- The fact that an issue or a matter (in this case the parties’ contractual obligations and rights to a proper liquidation of the JV) may be within the wide scope of the arbitration agreement does not necessarily mean that the issue or matter is within the scope of the actual reference of the particular dispute to the tribunal in the particular arbitration.
- The Tribunal did not accept that it was precluded from awarding a proper remedy to a party, even though such remedy was not asked for. It considered that so long as there was equal treatment of the parties, and that each party was afforded a reasonable opportunity to present its case on the new remedy sought by X Co, it was entitled and had jurisdiction, indeed a duty, to resolve the dispute between the parties, and to award a proper remedy to X Co. However, the question of whether each of the parties was given a fair and reasonable opportunity to present its case is separate to the question of whether the tribunal has jurisdiction, by consensus of the parties, to act and to decide on the dispute referred to it under the arbitration agreement contained in the JV.
- It is not fair when a party in an arbitration is ambushed as a result of the tribunal permitting the other party to advance new legal consequences not identified in the pleadings served for the arbitration. Parties to an arbitration should know in advance, before the hearing of the arbitration, and in as full an extent as possible, the pertinent claims and remedies sought by the other side, to enable them to consider all possible defences, and to decide on the full extent of the evidence to be adduced, rather than to have new issues raised with witnesses only when they are called.
- The real question was whether, despite the inadequacies of the pleadings and in view of the evidence served before commencement of the hearing of the 2018 Arbitration, HKK2 had been surprised by the claim that the JV Documents should be ordered to be delivered to CLG, pursuant to its duty to properly complete the liquidation of the JV.
- The order for delivery of the JV Documents to CLG could not have been reasonably anticipated from the state of the pleadings and evidence served before commencement of the 2018 Arbitration and was outside the scope of the submission by HKK2 to the arbitration. A party cannot in its pleading simply recite all the rights and duties contained in an agreement, and pick and choose, or ask the tribunal to pick and choose, at the end of the hearing, which rights to enforce and to issue an award on that basis.
X Co’s application for leave to appeal
X Co sought leave to appeal the court’s decision above (Decision) on the grounds that the court had erred in holding that the issue of the parties’ reference and submission to arbitration should be based on the pleadings, and had erroneously held as a result, that the Tribunal had no right to raise new issues to ensure a proper remedy was granted to the parties. X Co argued that the court applied an overly stringent approach to the rules of pleadings in the context of arbitration and that the court should have exercised its residual discretion not to set aside the Award.
The court declined to grant X Co leave to appeal, holding that:
- The Decision on the Award being outside the scope of the submission to arbitration, was not made on the basis only of the pleadings in the arbitration, and the construction of the pleadings. A review of the court’s decision made it clear that the court had taken into consideration the pleadings served in the arbitration, the evidence submitted, and the arguments and submissions made by the parties on the basis of the pleadings and evidence, before concluding, after careful consideration of the same, that HKK2 had been surprised by the Tribunal’s decision to invite further submissions and that the order finally made by the Tribunal was outside the scope of the parties’ submission to the 2018 Arbitration.
- The court below had considered the pleadings, the HKIAC Rules, the role of pleadings and procedures used in arbitral proceedings, but had concluded that the key question was whether there was surprise, and whether it was fair for HKK2 to be confronted, after the conclusion of the hearing of evidence, with the questions raised by the Tribunal. The court had given full consideration to the evidence, including expert evidence, in deciding whether there was indeed any surprise to HKK2, and whether it could be said that it had the fair opportunity to deal with the so‑called unpleaded issues.
- It was in light of the court’s review of the pleadings and evidence adduced in the 2018 Arbitration that it reached a decision on what the parties’ consensus and agreement had been as to the dispute which was submitted to the Tribunal for determination in the 2018 Arbitration. The Decision was not therefore based on any erroneous application of the law as to the interpretation of what constitutes decisions outside the scope of the parties’ submission to arbitration, or on any disregard of the relevant arbitral rules.
Rules of pleadings in arbitration are said to be more flexible than in court litigation. Whilst that is true to a certain extent, this judgment is a good reminder that the test is whether the other party is taken by surprise and thereby deprived of the fair opportunity to deal with unpleaded issues.