Background

Pacific China Holdings Ltd (In Liquidation) vs. Grand Pacific Holdings Ltd (CACV136/2011) (Link to Judgment)

In 2006, Grand Pacific Holdings Ltd (“Grand Pacific”) commenced an ICC arbitration in Hong Kong against Pacific China Holdings Ltd (“Pacific China”) in relation to a loan agreement worth USD40 million. On 24 August 2009, an award was made in favor of Grand Pacific. 

Pacific China filed a petition to set aside the award in the Court of First Instance for serious procedural irregularity pursuant to Article 34(2) of the UNCITRAL Model Law.Three distinct issues were considered by the Court of First Instance to determine a violation of Article 34(2) of the UNCITRAL Model Law and thus, set aside the award:

Court of First Instance Decision

Three distinct issues were considered by the Court of First Instance to determine a violation of Article 34(2) of the UNCITRAL Model Law and thus, set aside the award:

  1. Pre-hearing submissions on Taiwanese Law

Both parties agreed on a procedural timetable whereby both had to file their pre-hearing submissions simultaneously.  Because Pacific China amended its pleadings the day before the filing date, the Tribunal gave Grand Pacific ten days to file supplemental submissions dealing with the latest amendments. Pacific China argued that this was unfair since it had already set down its “best case” in full and could not further develop the same. The proceedings were also no longer in accordance with the agreed timetable.

The Court of First Instance found that this resulted in Grand Pacific having advance notice of Pacific China’s best case before filing its submissions. Pacific China was also unable to present its case.  There were breaches of Article 34(2)(a)(ii) and (iv) of the UNCITRAL Model Law. 

  1. Additional legal authorities

The Tribunal had indicated that both parties agreed that no new Taiwanese legal authorities could be adduced without leave, and such introduction would not be granted unless the new authorities were “sensational”.  Pacific China subsequently made an application for leave to rely on additional authorities, which the Tribunal refused.  Because the Tribunal refused to receive or consider the additional authorities, it had no basis to determine whether such authorities are “sensational”.

The Court of First Instance found that by refusing to admit additional authorities, the arbitral tribunal prevented Pacific China from presenting its case and thus, it violated Article 34(2)(a)(ii) of the UNCITRAL Model Law.

  1. Post-hearing submissions on Hong Kong Law

While Grand Pacific objected to Pacific China's raising issues relating to Hong Kong law, it nonetheless responded substantively to Pacific China’s submissions on the issue. As a result, the Tribunal wrote both parties as regards the Hong Kong law issue to which Grand Pacific made further substantive submissions by citing two new cases.  Pacific China sought leave to respond to the new material provided by Grand Pacific, but the Tribunal refused and, informed the parties that it had sufficient material to decide the issue.  In deciding the Hong Kong law issue, the Tribunal relied upon the new cases referred to by Grand Pacific.

In this regard, the Court of First Instance found that Pacific China was denied the right to present its case, thus establishing a violation of Article 34(2)(a)(ii) of the UNICTRAL Model Law.

The Court of First Instance concluded that once a violation of Article 34(2) is found, it has the discretion to set aside the arbitral award.  If the court finds that the result of the arbitration may have been different had the violation not occurred, it must exercise its discretion to set aside the award.  Therefore, the court’s residual discretion of refusing to set aside the award, despite the requisite grounds being established, is narrowly construed.

Nonetheless, the Court of First Instance was unable to conclude that even if the violations of Article 34(2) had not occurred, the result could not have been different. The award was therefore set aside.

Grand Pacific appealed to the Court of Appeal. 

Court of Appeal Decision

On 9 May 2012, the Court of Appeal overturned the Court of First Instance’s decision and reinstated the award. 

The Court of Appeal stated at the outset that the court is concerned with “the structural integrity of the arbitration proceedings”. The remedy of setting aside is not an appeal, and the court will not consider the substantive merits of the dispute or the correctness of the award, whether concerning errors of fact or law. 

The Court of Appeal found that there was no violation of Article 34(2)(a)(ii) or (iv) of the UNCITRAL Model Law in each of the three issues:

  1. Pre-hearing submissions on Taiwanese Law

The Court of Appeal held that the Tribunal was entitled to use procedures that were appropriate to the case. The Tribunal clearly took the view that Grand Pacific was prejudiced by the late submission of Pacific China’s amendment. The lower court should not have questioned the merits of the Tribunal’s decision to grant leave for Pacific China to amend and the terms on which such leave was granted.   

  1. Additional legal authorities

The Court of Appeal held that the lower court was not entitled to interfere with a case management decision which was within the Tribunal’s decision to make.

  1. Post-hearing submissions on Hong Kong Law

The Court of Appeal considered that the Tribunal was entitled to take the view that the Hong Kong law issue was raised at a late stage of the proceedings and that Pacific China already had two opportunities to make submissions on the Hong Kong law issue, and that submissions should end with Grand Pacific’s submissions.

The Court of Appeal disagreed with the lower court’s view that the result might have been different if Pacific China had been given leave to respond.  

Obiter

Since the Court of Appeal was not satisfied that there was a violation of Article 34(2)(a)(ii) or (iv), it was academic for the court to resolve whether the court has the discretion to refuse to set aside the award in the event of any violation. The Court of Appeal briefly stated the following in its obiter:

  • The court may refuse to set aside an award notwithstanding a violation if it is satisfied that the outcome could not have been different.  If the violation had no effect on the outcome of the arbitration, that is a good basis for exercising one’s discretion against setting aside.
  • Only a sufficiently serious error could be regarded as a violation of Article 34(2)(a)(ii).  An error would only be sufficiently serious if it has undermined due process.  A party who has had a reasonable opportunity to present its case would rarely be able to establish that he has been denied due process. 
  • The court’s exercise its discretion will depend on its view on the seriousness of the breach.  Some breaches may be so egregious that an award would be set aside although the result could not be different. 
  • The burden of proof to show that he had prejudiced is on the applicant

Relevance

Overall, the Court of Appeal judgment confirms Hong Kong’s pro-enforcement approach. Although it remains to be answered what amounts to serious or egregious violations justifying an award to be set aside, this case illustrates that the Hong Kong court will be reluctant to interfere with arbitral awards except in rare circumstances.