In a significant decision in the case of Arjowiggins HKK2 LTD v. X Co  HKCFI 128, the Hong Kong Court of First Instance (the “CFI”) set aside an arbitral award issued by a three member arbitral tribunal (the “Tribunal”) under the Hong Kong International Arbitration Centre Rules as the Tribunal had decided on matters beyond the scope of the parties’ pleadings in granting a remedy that was only sought after the evidentiary hearing and after the Tribunal had rendered a partial award. The CFI clarified the basic principle that the scope of the reference of an arbitration ought to be determined by the parties themselves, and that arbitral tribunals, however well intended, should be cautious about raising or deciding issues, or formulating relief, that fall outside the parties’ pleadings. A court will not hesitate to set aside an arbitral award rendered in these circumstances as it could be viewed as an assault on due process and fairness, and could fall foul of the basic tenet of party autonomy in arbitration.
Key Background Facts
Arjowiggins HKK2 LTD (the “Applicant”) and X Co (the “Respondent”) were shareholders in a joint venture company established in Mainland China (“JV Company”) pursuant to a joint venture agreement in 2005 (“JV Contract”). Disputes arose between the parties, which led to the Respondent applying for judicial dissolution of the JV Company in June 2010. In July 2013, the Weifang Intermediate People’s Court ordered the dissolution of the JV Company and the formation of a liquidation committee (“LC”) in around August 2014.
In 2018, the Respondent commenced a HKIAC arbitration against the Applicant (the “2018 Arbitration”). The Respondent pleaded in its statement of claim, inter alia, that (i) the Applicant had possession, custody or control over certain account books and documents of the JV Company (the “JV Documents”), and (ii) sought an order for the immediate return of the JV Documents to the Respondent and an order for the immediate examination of the JV Documents by the Respondent.
The Applicant denied these allegations and argued, inter alia, that the LC was the proper organ entitled to possession of the JV Documents until the deregistration of the JV Company.
On October 28, 2019 while the 2018 Arbitration was underway, a “compulsory liquidation group” (“CLG”) was formed by order of the Weifang courts upon the Respondent’s application for compulsory liquidation of the JV Company.
Subsequent Developments in the 2018 Arbitration
The Partial Final Award
The hearing for the 2018 Arbitration took place in December 2019 (“Hearing”). The Tribunal handed down a partial final award on May 19, 2020 (“Partial Award”). In the Partial Award, the Tribunal found as a factual matter that the Applicant had possession, custody or control of the JV Documents. The Tribunal held, inter alia, that the Respondent did not have the right to possess the JV Documents, and instead, CLG had a better right to possession of the JV Documents during liquidation. At this point, it would appear the Tribunal had rejected the claim of the Respondent for delivery of the JV Documents to itself.
However, the Tribunal further held that the Applicant had the duty to comply with the terms of the JV Contract with regard to facilitating the proper liquidation of the JV Company.
Further Submissions Following the Partial Award
Following the Partial Award, the Tribunal then invited the parties to make further submissions on the orders that the Tribunal should make in relation to the disposal of the JV Documents to facilitate the proper liquidation of the JV Company.
In such further submissions, the Respondent claimed that the Applicant should be ordered to (i) deliver the JV Documents to the Respondent to make copies before such documents were delivered to the CLG, or alternatively (ii) to deliver the JV Documents to the CLG directly.
On the other hand, the Applicant submitted that the Tribunal had no jurisdiction make any further orders (including delivery of the JV Documents to the CLG instead of the Respondent) following the Partial Award other than to dismiss the Respondent’s claims in the 2018 Arbitration. Further, the Applicant submitted that the way in which the JV Company should be “properly liquidated” was never in issue between the parties in the 2018 Arbitration.
The Final Award
In the final award handed down by the Tribunal on August 5, 2020 (“Final Award”), the Tribunal held the Respondent was entitled to the remedy of procuring the delivery up of the JV Documents to the CLG (instead of the Respondent). Even though such remedy had not been sought or pleaded by the Respondent prior to the Partial Award, the Tribunal considered that it had the requisite jurisdiction and a duty to act in accordance with the remit given to it by the parties’ arbitration agreement in the JV Contract. The Tribunal also considered that the parties were accorded equal treatment, having given each party the opportunity to make further submissions on the appropriate orders to be made following the Partial Award.
Application for setting aside
The Applicant applied to the CFI to set aside the Final Award under section 81(1) of the Arbitration Ordinance (Cap. 609) (“Arbitration Ordinance”) on two grounds: (1) “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” (Article 34(2)(a)(iii) Model Law) (“Scope of Submissions Ground”) and (2) “the award is in conflict with the public policy” (Article 34(2)(b)(ii) Model Law) (“Public Policy Ground”).
The CFI’s reasoning turned on whether the Final Award dealt with matters beyond the parties’ pleaded case, and if so, whether this was sufficient under the Arbitration Ordinance to set aside the Final Award.
Scope of Submissions Ground
The Applicant contended that the Respondent did not plead case that it was in breach of the JV Agreement to assist in the liquidation of the JV Company pursuant to the JV Contract, or that the JV Documents should be delivered up to any party other than the Respondent itself. In particular, while the CLG had been appointed just before the Hearing, the Respondent had never taken any steps to amend its pleadings to plead that the JV Documents should be delivered to the CLG.
The CFI agreed that any claim of delivery of the JV documents to the CLG was inconsistent the Respondent’s pleaded case. The CFI set aside the Final Award and made the following salient observations and comments:
- There is a distinction between whether the fact that an issue or matter was within the scope of reference of a particular dispute in an arbitration (on one hand) and whether the Tribunal had jurisdiction to decide the matter by virtue of the parties’ arbitration agreement (on the other hand).The CFI noted that the issue of the parties’ duties to facilitate the liquidation of the JV Company – which underpinned the remedy of delivery of the JV Documents to the CLG in the Final Award – was not pleaded and the Tribunal did not have complete evidence on this matter.
- The scope of the reference in the 2018 Arbitration, as evidenced by the consensus of the parties, was the dispute relating to the Respondent’s claim for delivery up of the JV Documents to itself during the dissolution of the JV Company.It was not the dispute over the Respondent’s claim of its right to the proper liquidation of the JV Company, which formed the basis of the remedy awarded in the Final Award. Even if the Applicant had been given the full opportunity during the arbitration to present its case in this regard, the Final Award is still liable to be set aside as it dealt with issues that were entirely outside the scope of the reference to the 2018 Arbitration.
- Parties are entitled to know in advance, before the Hearing, 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. However informal the procedure might be in an arbitration (in contrast to court litigation), surprise should be avoided.To ensure that the principles of fairness are adhered to, material facts and adequate particulars of the allegations relied upon must be clearly set out in a party’s documents served to formulate the claims. To this end, it is not fair to a party in an arbitration for the Tribunal to permit the other party to advance new legal consequences not identified in the pleadings.
Public Policy Ground
The CFI dealt with this argument very briefly and recounted the settled legal principles in Hong Kong for the setting aside of an arbitration award on the ground of public policy. However, in light of the finding that the Tribunal’s order was outside the scope of the reference, the CFI concluded that basis alone was sufficient to set aside the Final Award. The CFI therefore did not make any express findings whether enforcement of the Final Award would be contrary to public policy.
This is a rare setting-aside decision by the Hong Kong courts for a number of reasons.
First, it appears that a basis of the decision was the fact that the Applicant had properly objected during the pendency of the arbitration. If Applicant had not objected to enlarging the scope of the issues in the arbitration, the fact that the Tribunal had accorded the parties opportunities to present its case on whether the JV Documents should be delivered up to CLG could present a less compelling case for setting aside.
Second, this case is a reminder of the adversarial nature of arbitration proceedings in Hong Kong. The parties’ case and the arbitration should be dictated by the parties themselves. Instead, in the 2018 Arbitration, the outcome was essentially reversed as a consequence of the Respondent’s amending its pleaded case after an issue was decided against it (namely that it was the CLG, not the Respondent, with the right to the JV Documents).
Third, while it is not uncommon for arbitral tribunals to raise a point that they consider relevant to the resolution of the dispute between the parties or invite submissions on orders sought following the issuance of a partial award, this case is a reminder that there may be limits as to an arbitral tribunal’s liberty in this regard. Based on this decision, an arbitral tribunal should not assume that full opportunity to present a party’s case on an unpleaded point would be sufficient to inoculate the award from a successful challenge. It would not if the remedy granted in the award falls outside the scope of the reference of the arbitration and therefore outside the arbitral tribunal’s jurisdiction.
Fourth, the relatively informal nature of arbitration proceedings as a manner of dispute resolution (as opposed to court litigation) must not yield to the requirements of fairness and due process. In this connection, the CFI observed that parties to an arbitration should know in advance and in as full extent as possible the claims and remedies sought by the other side, in unambiguous terms.
Finally, this case serves as a reminder to parties that their claims should be properly formulated and pleaded at the outset. From a practical perspective, this case suggests there is some utility for the parties to clearly set out or draw up a form of agreed list of issues or terms of reference that records the parties’ consensus and defines the scope of reference to the Tribunal.
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