R v F

HCCT 32/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

ACTION NO 32 OF 2011

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J U D G M E N T

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A. INTRODUCTION

1. This is the plaintiff’s application to set aside an arbitral award (“the Award”) pursuant to Article 34(2) of the UNCITRAL Model Law (“the Model Law”).

2. The Award was issued pursuant to an international arbitration administered by the Hong Kong International Arbitration Centre (“HKIAC”). By s 34C of the old Arbitration Ordinance (Cap 341) (“the old AO”), the Model Law applies to international arbitration in Hong Kong.

3. The arbitration concerns the dispute between the plaintiff and the defendant under an Agreement (“the Agreement”) whereby the defendant purchased the plaintiff’s business. The plaintiff commenced the arbitration to claim for the balance of the purchase price in the sum of X. The defendant at the same time mounted substantial counterclaims (which had been divided under various subheadings) in the arbitration for various breaches of warranties under the Agreement.

4. Although the plaintiff succeeded in its claim for X, the defendant was also successful in some of its counterclaims, including its counterclaim 5 (“Counterclaim 5”). At the end, after setting off the plaintiff’s claim against the defendant’s successful parts of the counterclaims, the plaintiff is held to be liable to pay to the defendant a sum of Y.

5. In this application to set aside the Award, the plaintiff’s only complaint of the Award is in relation to the tribunal’s ruling on the quantum of Counterclaim 5.

6. In order to better understand the plaintiff’s grounds in support of this application, it is necessary to explain Counterclaim 5 in greater details first.

B. BACKGROUND

B1. The dispute in the arbitration

7. As mentioned above, the dispute arose from the defendant’s purchase of the plaintiff’s business under the Agreement.

8. Under the Agreement, it was provided that payment of Z% of the consideration of W (ie, X) was to be deferred. This “holdback” was payable to the plaintiff under any of the two circumstances set out under section 4.1(a) and 4.1(b) of the Agreement.

9. It was the plaintiff’s case that it satisfied section 4.1(a) condition but the defendant still refused to pay the holdback amount. The plaintiff thus commenced the arbitration to seek payment of the sum of X with interest.

10. In the Defence and Counterclaim, the defendant pleaded in gist that:

(1) The plaintiff was not entitled to the X holdback, and

(2) The defendant was also entitled to counterclaim the plaintiff pursuant to the warranties under the Agreement.

B2. Counterclaim 5

11. The defendant raised five heads (pleaded as 1 to 5) of the counterclaim for losses it said it had suffered due to the plaintiff’s breaches of the warranties.

12. Counterclaim 5 concerned the quality of the plaintiff’s goods. The defendant counterclaimed S as damages under this head. There were r items of loss under Counterclaim 5 as pleaded.

13. In its Reply and Defence to Counterclaim, the plaintiff effectively denied all the allegations made in the defendant’s Defence and Counterclaim. The defendant was thus put to prove both the liability and quantum of the counterclaims.

14. The plaintiff succeeded in its claim, but failed to defend some of the counterclaims, including Counterclaim 5.

B3. The Award relating to the Counterclaim 5

15. The arbitration tribunal consisted of experienced arbitrators. The arbitration took place at the HKIAC. The parties also made further submissions after the hearing.

16. The tribunal issued the Award.

17. In relation to Counterclaim 5, the tribunal dealt with it at paragraphs O to P of the Award. After considering at length the parties’ contentions on liability, the tribunal upheld the defendant’s said counterclaim and concluded that the plaintiff was in breach of various warranties under the Agreement.

18. Then, at paragraph P, it further said as follows:

“Having upheld the [defendant’s] counterclaim on this issue [ie, Counterclaim 5], the Tribunal decides that the [plaintiff] shall pay the [defendant] [S], being the amount claimed by the [defendant].”

19. It therefore awarded the defendant S under Counterclaim 5.

C. THE PRESENT APPLICATION TO SET ASIDE THE AWARD

C1. The plaintiff’s grounds

20. The grounds in support of the application to set aside the Award are directed only at its adjudication on the quantum of Counterclaim 5. There are no complaints on the tribunal’s adjudication on the plaintiff’s liability under this counterclaim.

21. The basis of the challenge is that the tribunal conducted the arbitration and awarded the Award on Counterclaim 5 “without any adjudication and/or any findings of fact and/or any evidence as to the alleged quantum of losses and contrary to the agreed procedure and the Administered Arbitration Rules of HKIAC ”.

22. Based on the above basis of challenge, the plaintiff says the Award should be set aside under Article 34(2)(a)(iii), (iv) and/or (b)(ii) of the Model Law.

23. These relevant parts of Article 34(2) provide as follows:

“(2) An arbitral award may be set aside by the court…only if:

(a) the party making the application furnishes proof that:

(i)…

(ii)…

(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or failing such agreement, was not in accordance with this Law; or

(b) (i)…

(ii) the award is in conflict with the public policy of this State.”

24. The plaintiff says, by reason of the alleged absence of adjudication on quantum:

(1) The tribunal had acted outside of its jurisdiction to decide a matter without adjudication (under Article 34(2)(a)(iii));

(2) The arbitral procedure was not in accordance with the agreement of the parties (under Article 34(2)(a)(iv));

(3) The Award is an affront to the public policy of Hong Kong (under Article 34(2)(b)(ii)).

25. The plaintiff’s arguments in gist run as follows.

26. Damages for actual loss claimed by the defendant under Counterclaim 5 must be proved by evidence[1]. At the same time:

(1) Rule 23 of the HKIAC Administered Arbitration Rules (“the Rules”) provided that each party shall have the burden to prove the facts relied on to support its claim or defence. Rule 17.2(b) of the Rules also required the defendant to particularize its loss in a “statement of the facts”. The defendant did rely on such statement of facts to support Counterclaim 5. As such, it would have been necessary for it to exhibit to the Defence and Counterclaim documents the defendant relied upon as required under Rule 17.3 of the Rules.

(2) But no particulars and no source documents supporting the defendant’s Counterclaim 5 was put into the evidence by the defendant.

(3) The defendant’s only evidence relating to the items of loss under Counterclaim 5 was that of paragraphs M to N of the 1^st Statement of A.

27. However, in relation to quantum, the tribunal concluded at paragraph P of the Award that the plaintiff shall pay the defendant S on the only basis that it “being the amount claimed by the [Defendant].”

28. Against the above background relating to the evidence made in support of the quantum of loss under Counterclaim 5 (in particular the lack of source documents and the hearsay nature of the evidence contained in the relevant parts of A’s statement), in its ruling on quantum at paragraph P of the Award, the tribunal has (the plaintiff contends) simply failed to make or disclose the factual and legal basis in relation to this finding on the quantum of damages under each of Counterclaim 5’s r items of loss.

29. The adjudication in the Award regarding the quantum of Counterclaim 5 made in such an absence of evidence and legal reasoning is therefore (the plaintiff further submits) in breach of:

(1) The agreed arbitral procedures embodied in the Agreement, which provides that “…all awards shall be reasoned awards which disclose the factual and legal basis for the same…”[2].

(2) The fundamental principle of natural justice, which therefore offends Hong Kong’s most basic notions of justice and morality, which must be part of her public policy[3].

30. The Award should (the plaintiff says) therefore be set aside under:

(1) Article 34(2)(a)(iii), as the tribunal did not have jurisdiction to decide a matter without proper adjudication with reasons;

(2) Article 34(2)(a)(iv), as the arbitral procedure was not carried out in accordance with the agreement of the parties to have reasoned...