In X & Anor v ZCo [2024] HKCFI 695, the court dismissed an application to set aside an arbitral award on the basis that the tribunal had failed to deal with certain issues. The court said that this was another case of a losing party in an arbitration coming to court to launch a challenge to an award by “repackaging” arguments which had not been made the focus of submissions to the tribunal, and presenting them to the court as key issues which had not been dealt with by the tribunal.
Arbitral award
Disputes arose under a Share Subscription and Purchase Agreement (SPA) and ZCo, as Claimant, commenced arbitration against X and YCo,as Respondents, for their alleged failure to complete the purchase of shares following ZCo’s exercise of an exit right conferred on it under the SPA (Exit Right). X and YCo denied their liability to purchase the Exit Shares, and the arbitration concerned whether ZCo was entitled to exercise the Exit Right, and if so, whether ZCo was entitled to specific performance and/or damages in lieu. The tribunal issued an award in ZCo’s favour.
Application to Court to set aside arbitral award
X and YCo applied to court to set aside the award, on the grounds of their inability to present their case, and/or that the arbitral procedure was not conducted in accordance with the parties’ agreement, in that:
(i) X and YCo’s obligation to repurchase ZCo’s shares under the SPA was only triggered upon the satisfaction of a condition precedent as set out in the SPA (Condition Precedent), and as the Condition Procedent was not satisfied, they had no obligation to repurchase the Exit Shares at all (Condition Precedent Defence); and
(ii) Even if they were liable for specific performance, on the proper interpretation of the SPA or by reason of an implied term, tax liabilities arising from completion of the transfer of the Exit Shares should be borne by ZCo and should thus be deducted from the Exit Price payable (Tax Defence).
The court noted that the real complaint of X and YCo and basis of their setting aside application was that the tribunal had failed to deal with issues, as a result of which, they had been unable to present their case.
Court’s decision
The court dismissed the application to set aside the award. It emphasized that the grounds for refusal of enforcement of an award are to be construed narrowly, such that only conduct “sufficiently serious or egregious” amounting to a denial of due process suffices to warrant an order to either set aside or refuse enforcement of an award. As regards, the ground of a tribunal’s failure to deal with an issue, the court referred to its summary of the relevant principles in the recent case of CNG v G [2024] HKCFI 575 (please see our article above). As stated in CNG v G, the proper approach in reviewing an award is by reading it 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. Any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable.
Condition Precedent Defence
The court said that a more unusual feature of this case, which was different to the usual instance of a party claiming that an issue included in an Agreed List of Issues for the tribunal (List) was not dealt with by the tribunal in the award, was that the Condition Precedent was not even mentioned in the List submitted to the tribunal, even though the List set out the other defences raised by X and YCo.
The court noted from the various case authorities, that although the List is a useful document to frame the issues which the parties consider and agree to be relevant to the tribunal’s consideration, it cannot dictate the manner in which the tribunal deals with the issues raised in the award and how it answers the key issues. The mere fact that an issue which had been included in the List was not expressly dealt with in the award cannot necessarily mean that the tribunal had failed to consider and deal with it, but the fact that an issue was not included in the List is a strong indication that the issue was not regarded by either the parties or the tribunal as being a relevant or key issue for consideration and determination in the arbitration. As observed by the court in CNG v G, an agreed list of issues is not an exam paper with compulsory questions for the tribunal to answer in the award. In the present case, it was clear, the court said, that the Condition Precedent was not even a question put to the tribunal to answer at all.
It should not be left to the tribunal, the court said, to extensively comb through all the documents, materials and notes of the proceedings to ascertain and understand the issues expressly or by implication put by a party to the tribunal for determination. The arbitral process is intended to be more cost‑effective than litigation in the courts, and the object of the Arbitration Ordinance is to facilitate “the fair and speedy resolution of disputes without unnecessary expense”. It is not consistent with such object, the court said, if the tribunal is expected to find out for itself what the issues put to it are, or to look for unequivocal abandonment of any claim or issue on which the parties or their counsel had not focused or made submissions on in the course of the hearing.
The court added that it would be more ludicrous to suggest that the court, at a hearing for setting aside an award, should go through the voluminous documents filed in the arbitration and transcript of the entire hearing, in order to ascertain whether any issue raised in any document had been unequivocally abandoned, before accepting that all issues, however minor, and irrespective of whether submissions had been made on them, had actually been dealt with, and decided upon in the award. Hence, the prime duty and the onus, the court said, must be on the parties and their representatives in the arbitration to clearly identify and refer the tribunal to the salient issues in dispute, the issues to be decided by the tribunal, and key issues in particular and the List is the useful starting point. The pleadings may have to be reviewed, but the tribunal, and ultimately the court, can reasonably expect that the key issues put to the tribunal for determination would be identified in counsel’s opening and closing submissions in the hearing. If they were not, and were not addressed at the hearing, the court and tribunal could reasonably infer and accept that such issues did not arise from the evidence adduced for decision in the tribunal’s award, either because they were not disputed or no longer disputed by the parties, or because the evidence available did not support the issue(s) which had been raised in the pleadings, and that in any event, they were not important issues at all.
The court said that each case must be considered on its own particular facts and the particular grounds relied upon, either to set aside or resist enforcement of the award. On the particular facts of this case, and against the background of the pre-hearing memorials and opening and closing submissions made in the arbitration, the court was not satisfied on the materials that the Condition Precedent Defence was a matter which remained to be an issue, or any key issue which was put to the tribunal for determination Even if it could somehow be shown that the Condition Precedent Defence had been put to the tribunal as an issue for determination in the arbitration, the issue could not have made any difference to the outcome of the arbitration. There was nothing in the evidence of X or YCo in the arbitration, the court said, which could support the tribunal finding that the Condition Precedent Defence could be established.
The Tax Defence
The court concluded that the alleged Tax Defence as argued before the court, was clearly an instance of a losing party seeking to reargue the claims made in the arbitration with a totally different focus. The court found that even if the Tax Defence was an issue which had been put to the tribunal, in the light of the parties’ submissions on the calculation of the Exit Price, the tribunal obviously considered that it was no longer necessary to deal with the issue. Accordingly, the court rejected the claim that the Tax Defence was an issue put to the tribunal for decision, and that the tribunal had failed to deal with it.
Comments
This is another example which demonstrates how difficult it is to challenge an arbitral award.
For further information, please contact:
Joseph Chung, Partner, Deacons
joseph.chung@deacons.com
