2 March, 2013

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

The Court of Final Appeal (“CFA”) in Hong Kong has refused to interfere with the leading judgment on the setting aside of arbitral Awards in Hong Kong.

The CFA's decision of 19 February 2013 in Pacific China Holdings Ltd. v. Grand Pacific Holdings Ltd. (click here for a copy) means that the Hong Kong Court of Appeal's judgment in that case – which indicated that the Hong Kong courts will be slow to interfere with the procedural decisions of arbitral tribunals and arbitral Awards, in line with international standards – now stands as the authoritative statement of the law in relation to the setting aside of arbitral Awards in Hong Kong (click here for a copy of the Court of Appeal's judgment). The Court of Appeal's judgment highlighted the wide procedural discretion available to arbitral Tribunals seated in Hong Kong, providing welcome reassurance of their power to make robust case management directions where appropriate.

Along with a separate decision which indicates that, in Hong Kong, indemnity costs may be ordered against parties which unsuccessfully challenge arbitral Awards (clickhere for a copy of the judgment and here for a copy of our blog on the issue), the Court of Appeal's judgment should give dissatisfied parties pause for thought before launching challenges against arbitral Awards rendered in Hong Kong, and underlines Hong Kong's arbitration-friendly credentials.

Background

In a controversial judgment rendered on 29 June 2011, the Hong Kong Court of First Instance ("CFI") set aside a US$55 million ICC arbitral Award in favour of Grand Pacific Holdings Ltd. ("Grand Pacific").

At the core of the case were allegations by Pacific China Holdings Ltd. ("Pacific China"), the other party to the arbitration, that it had been denied an opportunity to present its case and that the procedure adopted in the arbitration was not in accordance with the agreement of the parties.

Pacific China argued that these alleged procedural irregularities were in breach of Article 34(2) of the UNCITRAL Model Law, which sets out the grounds on which arbitral Awards may be set aside (like many jurisdictions around the world, Hong Kong adopts the UNCITRAL Model Law as part of its legal framework for arbitration, through the Hong Kong Arbitration Ordinance (Cap. 609)).

The CFI held that Article 34(2) had been breached, and therefore set aside the Award.

The judgment of the Court of Appeal

In a unanimous judgment rendered on 9 May 2012, the Court of Appeal reversed the decision of the CFI and reinstated the Award.  In its judgment, the Court of Appeal:

•  Found that no breaches of Article 34(2) had occurred. In making this finding, the Court of Appeal highlighted the wide case management powers of arbitral Tribunals, which are a cornerstone of the arbitral process.
• Held that, in order for an arbitral Award to be set aside on due process grounds, it must be shown that any breaches of Article 34(2) were of a “serious” or even “egregious” nature.
• Opined in obiter comments that the Hong Kong courts have a discretion not to set aside Awards even where a violation of Article 34(2)(a) is established (Article 34(2) refers to the circumstances in which an Award “may” be set aside), if it is satisfied that the result could not have been different.
• Held that the burden is on the applicant wishing to set aside an Award to show that it had been, or might have been, prejudiced by the conduct of the Tribunal.

The CFA's refusal to grant leave to appeal

On 19 February 2013, the CFA refused to grant leave for Pacific China to appeal against the judgment of the Court of Appeal. 

After the Court of Appeal itself had declined in June 2012 to grant leave to appeal from its judgment, Pacific China had applied directly to the CFA for leave pursuant to Section 22(1) of the Hong Kong Court of Final Appeal Ordinance, arguing that it was entitled to appeal both “as of right” and because the case involved questions of “great general or public importance”.

The CFA did not accept that Pacific China was entitled to be granted leave to appeal, and dismissed the application.  In setting out the reasons for its decision, the CFA firmly endorsed the Court of Appeal's judgment, stating that:

"In our view, the Court of Appeal was entirely correct to hold that the complaints advanced by PCH do not constitute viable grounds for setting aside the award under the aforesaid provisions. The rulings complained of were made by the tribunal in the proper exercise of its procedural and case management discretions, reflecting its assessment of the requirements of procedural fairness as appropriate to the circumstances. There is no basis for interference by the Court. No reasonably arguable basis has been disclosed for granting leave to appeal."

Commentary

The decision of the CFA brings welcome certainty to the law in relation to the setting aside of arbitral Awards in Hong Kong. The confirmation by the Court of Appeal of the threshold which a party must meet in order to establish a violation of Article 34(2) on due process grounds provides reassurance that the Hong Kong courts will not lightly interfere with the procedural discretion of arbitral Tribunals seated in Hong Kong, including the exercise of that discretion to take robust case management decisions where appropriate. The Court of Appeal's judgment should therefore discourage parties from pursuing unmeritorious challenges to arbitral Awards in Hong Kong, particularly in light of the separate judgment of the Court of Appeal as to costs in this case. In its judgment on costs, the Court of Appeal applied caselaw to the effect that, where a party unsuccessfully applies to set aside an Award, it should in principle expect to pay costs on a higher basis than normal, because a party seeking to enforce an arbitral Award should not have to contend with such a challenge.

Both decisions of the Court of Appeal underline the Hong Kong courts’ long-standing support for arbitration and indicate that they will be slow to interfere with the procedural decisions of Tribunals and with arbitral Awards. They are likely to be influential in other UNCITRAL Model Law jurisdictions as well.