In A v B & ORS[2024] HKCFI751, the court refused to enforce an arbitral award. It held that objectively read and in the context of the issues raised and submissions and arguments made in the arbitration, the arbitrator had failed to adequately explain in the Award the reasons for her conclusions made on the key issues raised in the arbitration. The court said that the key is that a party reading the award should understand why a key issue in the arbitration was decided against him. In this case, it could not be said that the Respondents would so understand.
Background
The court had granted the Applicant leave to enforce the arbitral award (Enforcement Order) made in its favour by the sole arbitrator in an arbitration at the International Center for Dispute Resolution, under the Rules for International Commercial Arbitration of the American Arbitration Association. The Respondents applied to set aside the Enforcement Order, on the grounds that the arbitral procedure was not in accordance with the parties’ agreement and it would be contrary to the public policy of Hong Kong to enforce the Award. The Award was in A’s favour on all the issues, but the Respondents claimed that the arbitrator had failed to give any reasons for her decisions, simply making findings and conclusions, without any analysis.
Failure to give reasons
The court referred to the relevant legal principles, namely that arbitral awards are to be read generously, in a reasonable and commercial way expecting, as is usually the case, that there will be no substantial fault that can be found with it, and always bearing in mind the policy of minimal curial intervention. Further, any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable.
The court said that in the present case, however generously the Award was read, the arbitrator had failed to adequately explain in the Award the reasons for her conclusions made on the key issues raised in the arbitration, namely the applicable governing law of the Agreements, effective date of termination of the Agreements, and on the enforceability or reasonableness of the Non‑Compete Covenant, all of which were disputed by the parties.
Non-Compete Covenant Issue: governing law
The court noted that the enforceability of the Non-Compete Covenant was a key and central issue in dispute between the parties in the arbitration and turned on which law governed the Agreements in question. However, nowhere in the Award, the court said, was there any analysis by the arbitrator as to how she came to the conclusion that the governing law clause was enforceable and that the law of Maryland applied to the Agreements. The arbitrator merely recited the governing law clause, without any explanation as to how she dealt with or considered the parties’ arguments regarding the applicable law. The court said that although an arbitrator does not have to deal with each and every argument made by the parties, the lex loci contractus rule was an essential issue underpinning the decision on enforceability of the Non-Compete Covenant, and arguments on the issue were not dealt with or explained by the arbitrator in the Award. The court noted that there was not even a statement from the arbitrator that she accepted the Applicant’s submissions on the issue. Nor did she explain why she considered Maryland law to have the more substantial relationship to the parties or the transaction.
The court referred to the observations made by the English Court in Buyuk Camlica Shipping Trading and Industry Co Inc v Progress Bulk Carriers Ltd [2010] EWHC 442 (Comm), namely: “It is not sufficient for an arbitral tribunal to deal with crucial issues in pectore, such that the parties are left to guess at whether a crucial issue has been dealt with or has been overlooked: the legislative purpose of section 68(2)(d) is to ensure that all those issues the determination of which are crucial to the tribunal’s decisions are dealt with and, in my judgment, this can only be achieved in practice if it is made apparent to the parties (normally, as I say, from the Award or Reasons) that those crucial issues have indeed been dealt with.” The court said that although those observations were made in the context of an application made under s.68 of the Arbitration Act 1996 to set aside an award on the ground of serious irregularity, they apply with equal force in the context of whether enforcement of an award should be allowed on the ground that the arbitrator failed to deal with a key issue, or failed to give reasons for the decision, to render the arbitral procedure non-compliant with the agreed procedure, or to make enforcement of the award contrary to public policy. The key, the court said, is that a party reading the award should understand why a central issue in the arbitration was decided against him. In this case, it could not be said that the Respondents would so understand.
Non-Compete Covenant Issue: reasonableness of covenant
The court found that there was no reason given, as to why the injunction granted by way of enforcement of the Non-compete Covenant was considered by the arbitrator to be reasonable under Maryland law.
Breach Issue
On the Breach Issue, the parties were in dispute as to the date when the Agreements had been effectively terminated. The arbitrator did not give any reason why she rejected the Respondents’ case on termination, which was not mentioned in the Award at all. The court said that the Respondents had legitimate cause for concern as to why their case was not considered, when the effective termination date was important for calculation of the damages and royalties found due, and for the duration of the injunction granted by way of enforcement of the Non-compete Covenant.
What the arbitrator did in the Award, the court said, was to set out the provisions of the Agreements in question and then simply state the orders she made. There was no analysis nor any explanation, however brief, as to why she accepted the effect as held by her, and why the Respondents’ contentions – as to the clauses on governing law, on the enforceability and unreasonableness of the Non-Compete Covenant, and as to the effective date of termination of the Agreements – were rejected by her, or were considered by her to be irrelevant to her conclusions.
Court’s conclusion
The court held that the failings of the arbitrator were sufficiently serious to affect the structural integrity of the arbitral process, and to have undermined due process. The Respondents were entitled to expect key issues which affected their rights and liabilities to be dealt with and explained with sufficient reasons in the Award.
Under the Agreements, the arbitration was to be conducted under the International Arbitration Rules (Rules) and Supplementary Procedures for International Commercial Arbitration of the American Arbitration Association (Procedures). Under Article 33 of the Rules, the tribunal “shall” state the reasons upon which an award is based, unless the parties have agreed that no reasons need be given. Paragraph 5 of the Procedures contains an identical provision. There was no suggestion, the court said, that the parties had waived the need for reasons. Accordingly. the Award did not comply with Article 33 of the Rules and paragraph 5 of the Procedures, as no reasons were given, and it could not be said to have been made in accordance with the procedure of the arbitration to which the parties had agreed.
The court added that it is fundamental to concepts of fairness, due process and justice, as recognized in Hong Kong, that key and material issues raised for determination, either by a court or arbitral tribunal, should be considered and dealt with fairly. An award should be reasoned, to the extent of being reasonably sufficient and understandable by the parties. Readers of the award, namely the parties themselves, should understand how and why the tribunal reached its conclusion on a particular issue, in the context of how the relevant issues had been argued before the tribunal. Having carefully considered the Award, the court said, the Respondents were entitled to query whether the Non-Compete Issue, the governing law, and effective date of termination issues had been considered at all by the arbitrator, and if considered, why the issues were determined against them.
The court concluded that it would be contrary to public policy to enforce and recognize the Award when those important issues, which the parties were entitled to expect to be addressed in the Award, were not in fact addressed or explained. Accordingly, the court set aside the Enforcement Order and refused to enforce the Award.
Comments
The parties may agree that no reasons upon which the award is based are to be given, pursuant to Article 31(2) of the UNCITRAL Model Law (given effect by Section 67 of the Arbitration Ordinance). In practice, it is seldom so agreed. This judgment highlights the importance of giving reasons in an arbitral award. The award will be read generously. Even a statement from the tribunal that it accepted one of the parties’ submissions on the issue may suffice as the reason for making an award in its favour. However, judicial plagiarism i.e. copying the submission of one party without proper attribution and presenting it as its own in the award is not allowed, as can be seen from the Hong Kong Court of Appeal’s decision in Wong To Yick Wood Lock Ointment Ltd v Singapore Medicine Company Ltd [2023] HKCA 740.
For further information, please contact:
Kwok Kit (KK) Cheung, Partner, Deacons
K.K.Cheung@deacons.com
