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13 August 2021
 

My company obtained two conflicting arbitral awards, what can I do about them in the Hong Kong SAR?
 

In the Hong Kong SAR, a creditor may bring an arbitral award to court and make an ex parte application (i.e. with the debtor being absent) for leave to enforce it. The court may or may not order a summons to be issued and served on the debtor. Either way, if leave is ultimately granted, the creditor will need to serve the court order to that effect on the debtor. Usually, the debtor then has 14 days to decide whether to apply to set aside the order, during which period it remains unenforceable. If the debtor does so apply, the order continues to be unenforceable until after the application is finally disposed of. 
 

Crucially, when the debtor has made such an application, the creditor may apply for a court order commanding the debtor to give security for costs (i.e. a sum of money payable into court primarily to safeguard a party's interest in case the other side loses the application and cannot afford to pay the former's costs).

What happened in the current case?
 

The Decision in W v AW [2021] HKCFI 1707 addresses AW's (as creditor) application for W (as debtor) to provide security for costs. AW and W (the "Parties") were parties to a share redemption scheme where various agreements, including a Framework Agreement (the "Framework Agreement") and a Share Redemption Agreement (the "Share Redemption Agreement"), were entered into. The scheme fell through and the Parties, amongst others, commenced two largely parallel arbitral proceedings:
 

 

Positions of W and AW 

Main grounds of claim 

Outcome

Arbitration 1

W against AW

– Breach of contract by AW under the Framework Agreement
– Counterclaim by AW: misrepresentations by W under Framework Agreement

Award in favour of W handed down on 13 march 2020 ("Award 1")

Arbitration 2

AW against W

Misrepresentations by W under the Share Redemption Agreement

Award in favour of AW, handed down on 13 July 2020 ("Award 2")

 

AW sought the court's leave to enforce Award 2, upon which W applied to set it aside and AW applied for W to provide security for costs. AW's application for security for costs was dismissed.

The Decision 
 
The court accepted that the first step to decide whether to order security is whether the arbitral award is "manifestly invalid". If the award is manifestly invalid, there should be no order for security. On the contrary, if the award is manifestly valid, the court should either order immediate enforcement or make an order for substantial security. The court also considered the merits of W's set aside application, although that would be dealt with formally in another hearing.
 
One of W's arguments why Award 2 should be set aside was the "issue estoppel" principle: Tribunal 2 was bound by the findings on common issues between the same parties already determined by Tribunal 1, for example whether W made misrepresentations as to its shareholding. W also argued that making findings inconsistent with the earlier findings made by Tribunal 1 was contrary to the principles of fairness, due process and justice (the "Procedural Ground").
 
Before making the Decision, the court highlighted the unusual nature of this case:
 
(1) The two sets of proceedings involved overlapping issues and in fact the same claims of misrepresentation between the same parties whose determination was essential for the determination of the disputes;

(2) AW appointed the same arbitrator (the "Common Arbitrator") to both sets of proceedings; and

(3) Despite having a common arbitrator, the awards contained inconsistent findings as to whether W made misrepresentations.
 

In reaching the Decision, the court relied heavily on the Procedural Ground and accentuated the injustice which W suffered. The court pointed out that:
 
(1) The Common Arbitrator must have been aware of the findings in Award 1, yet he did not explain in Award 2 why the findings on the same facts were different;

(2) Having submitted its dispute to determination by Tribunal 2 and having informed it of the concurrent Arbitration 1, W was entitled to expect Tribunal 2 to deal with the question of issue estoppel;

(3) The Common Arbitrator should have invited submissions from both W and AW as soon as he became aware of the findings in Award 1, this would have allowed Tribunal 2 to determine whether they were bound by issue estoppel; and (4) Confidentiality of Award 1 was no excuse for the Common Arbitrator.
 

For the above reasons, the court was of the view that Award 2 was manifestly invalid and therefore dismissed AW's application for security for costs. Without setting aside Award 2, as that would be dealt with in a separate hearing, the court invited the Parties to consider whether the setting aside application could be dealt with by consent instead.
 
Takeaway 
 
Parallel arbitral proceedings are not uncommon, especially when multiple parties and multiple contracts are involved in series of related commercial transactions. Sophisticated arbitral institution rules, such as the HKIAC Administered Arbitration Rules (2018) provide opportunities for and rules on joinder (Article 27), consolidation (Article 28) and concurrent proceedings (Article 30). In principle, parties should consider and seek early and proper legal advice on how best to utilise these rules to avoid parallel arbitral proceedings so as to avoid conflicting arbitral awards and to save time and costs.
 
In the event that parallel or concurrent arbitral proceedings are unavoidable or tolerated due to strategic considerations, then early and careful legal advice on the availability and effect of interim measures, such as security for costs on the enforcement or nonenforcement of conflicting arbitral awards are crucial in proarbitration and pro-enforcement arbitral seats, such as Hong Kong SAR.
 

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For further information, please contact:

 

Dr Fan Yang, Partner, Stephenson Harwood

Fan.Yang@shlegal.com

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