Ly v Hw

REDACTED & AMENDED VERSION

HCCT 96/2021

[2022] HKCFI 2267

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 96 OF 2021

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D E C I S I O N

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Background

1. In these proceedings, the Plaintiff (“LY”) applied to set aside a final arbitral award on merits and quantum dated 21 October 2021 (“Award”) made by a tribunal of 3 arbitrators (“Tribunal”) in an arbitration which had been commenced by the Defendant (“HW”) in Hong Kong against LY (“Arbitration”). The grounds relied upon for the setting aside are that the arbitral procedure was not in accordance with the parties’ agreement, in that the Tribunal failed to deal with all the key issues which had been put before it, and/or the Tribunal had failed to provide sufficient reasons for its decisions on the key issues; and that the Award is in conflict with the public policy of Hong Kong.

2. HW opposed the application, firstly on the ground that a failure to deal with key issues cannot give rise to an order setting aside the Award under section 81 of the Arbitration Ordinance (“Ordinance”). Reliance was placed on the decision in Brunswick Bowling & Biliards Corp v Shanghai Zhonglu Industrial Co Ltd [2011] 1 HKLRD, where the Court pointed out that a tribunal’s failure to consider an issue is a matter which goes to the substantive decision rather than a failure to follow the arbitral procedure agreed by the parties. It is at most an error of law which cannot be a basis for the Court to set aside the award.

3. On behalf of HW, Mr Manzoni SC also referred to the travaux preparatoires to Article 34 of the Model Law (“Article 34”), which suggested that the drafters had considered the possibility of adding a separate ground of infra petita for setting aside, but it was not eventually adopted. However, as Mr Yu SC pointed out on behalf of LY, the Working Group was then considering the possibility of adding infra petita as a specific ground for setting aside, and the eventual decision of the Working Group was to limit the scope of Article 34 to the grounds specified in the New York Convention, to ensure a high degree of consistency with the Convention. The drafters of Article 34 considered that a claim or complaint of infra petita would in any event fall within the ground of public policy already included in Article 34. The authorities show that once infra petita is made out, it would be a valid ground of challenge, as an arbitral procedure which is in contravention of principles of natural justice and basic standards of fairness would not be a procedure to which parties to an arbitration agreement would have agreed. The authorities referred to by Counsel include Joseph, Jurisdiction and Arbitration Agreements And Their Enforcement (3^rd ed), para 16.42- 16.43; Binder, International Commercial Arbitration and Mediation in UNCITRAL Model Law Jurisdictions (2019), p 448; Born, International Commercial Arbitration (3^rd ed) pp 3899-3900; and Waincymer, Procedure and Evidence in International Arbitration (2012) para 16.19.1. Counsel also referred to this Court’s earlier decisions in Z v R unreported, HCCT 11/2021, 9 August 2021 and N v C unreported, HCCT 3/2019, 16 September 2019.

4.N v C was a case decided on the ground of serious irregularity, under section 4 of Schedule 2 of the Ordinance, which expressly includes as a ground for challenging an arbitral award a failure by the tribunal to deal with all the issues that were put to it, which has caused substantial injustice to the applicant.

5. As for the judgment in Brunswick, I would agree that it is generally correct to say that a tribunal’s failure to consider an issue would normally be a matter which goes to the substantive decision, which may amount only to an error of law, which is not a ground for challenging the award. It remains to be seen whether the tribunal has failed to actually decide or deal with an issue, what the issue is, and in the context of the present dispute, whether the tribunal failed to give reasons for its decision on an issue claimed to be essential to the determination of the dispute submitted to the tribunal, and whether such failure can constitute a failure to follow the parties’ agreed arbitral procedure, to become a ground under section 81 of the Ordinance for setting aside.

6. In A v B[2015] 3 HKLRD 586, for example, the tribunal’s failure to deal with the important defence, of the claim being time-barred, was considered to be not just an error of law made, but a denial of due process causing substantial injustice and unfairness to the parties, as the parties were entitled to expect the limitation defence, which would have defeated any and all claims raised, to be addressed and to be seen from the award to have been considered by the tribunal. It was most evidently a key and critical issue, which was not considered or dealt with by the tribunal at all.

7. In the present case, however, the arguments made by Counsel on this preliminary point on Article 34(2)(a)(iii) make no difference of significance, since LY has applied under both Article 34 (2) (a) (iii) and Article 34 (2) (b) (ii) to set aside the Award. Even if the Tribunal’s alleged failure to deal with a key issue does not come within the ground of non-compliance with the agreed arbitral procedure under Article 34 (2) (a) (iii), LY is still entitled to claim that such failure is against the public policy of Hong Kong as a matter undermining due process, and being contrary to basic notions of justice and fairness, to invoke the Court’s discretion to set aside the Award as a result. That was the approach adopted by this Court for the setting aside in A v B[2015] 3 HKLRD 586.

8. On the general question of whether or not a ground has been established to seek setting aside as the exclusive recourse against an award under Article 34, given effect by section 81 of the Ordinance, the authorities are clear. In Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1)[2012] 4 HKLRD 1, the Court referred to the commentary of Professor van den Berg in “The New York Convention of 1958: An Overview”, that “the grounds for refusal of enforcement are to be construed narrowly”, which means that “their existence is accepted in serious cases only”, and that “the courts appear to accept a violation of due process in serious cases only, thereby applying the general rule of interpretation of article V of the New York Convention that the grounds for refusal of enforcement are to be construed narrowly”. At paragraph 94 of the judgment of Tang VP (as His Lordship then was), it was observed:

“I am inclined to the view that the conduct complained of must be sufficiently serious or egregious so that one could say a party has been denied due process.”

9. A similarly narrow approach has been adopted by the courts to the construction of the “public policy” ground for setting aside. In Qinhuangdao Tongda Enterprise Development Cov Million Basic Co Ltd [1993] 1 HKLR 173, 178, the Court emphasized that the “public policy” ground must not be seen as a catch-all provision to be used wherever convenient. It is limited in scope and is to be sparingly applied. “Contrary to public policy” has been held by the Court of Final Appeal to mean “contrary to the fundamental conceptions of morality and justice” of the forum (Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111, 139F). If the public policy ground is to be raised, “there must be something more, that is, a substantial injustice arising out of an award which is so shocking to the court’s conscience as to render enforcement repugnant” (A v R (Arbitration: Enforcement)[2009] 3 HKLRD 389).

The dispute in the Arbitration

10. LY is a company incorporated in Hong Kong, and HW is a company incorporated on the Mainland. Both are in the business of pharmaceutical distribution on the Mainland.

11. HW entered into a Distribution Agreement dated 29 January 2015 (“Agreement”), under which HW was appointed the exclusive distributor of S products (“Products”) of XXXXXXXXXXXXXXXXXX (“AZ”), a company also engaged in the business of manufacturing and distributing pharmaceutical products. AZ is an affiliated company of XXXXXXXXXXXXXXXXX, whereas HW is a member of the group of companies forming part of XXXXXXXXXXXXXXXXX, a publicly listed company in Hong Kong.

12. Under the Agreement, HW was to purchase the Products in its own name from AZ, and sell them in its own name within the Mainland, subject to and in accordance with the terms set out in the Agreement.

13. By a notice dated 27 June 2018 (“Notice”), AZ assigned to LY all its rights and obligations under the Agreement, with effect from 28 June 2018 (“Assignment”). The validity of the Assignment is not disputed in the Arbitration. By virtue of the Assignment, LY stepped into the shoes of AZ, and HW became LY’s exclusive distributor of the Products on the Mainland. Further, it is not disputed that Schedule 1 of the Notice referred to a letter dated 1 August 2016 (“2016 Letter”), from HW’s parent company and accepted by AZ’s parent company, as a supplemental agreement between HW and AZ, and that both HW and AZ agreed to be bound by the 2016...