Hong Kong Court’s Application for Annulment of Arbitral Award Failed for Failure to Properly Notice Appointment of Arbitrator and/or Non-Compliance of Arbitral Proceedings | Bryan Cave Leighton Paisner

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K vs. T ([2022] HKCFI 1194, HCCT 53/2021, April 26, 2022) was a judicial motion filed by the defendant in the arbitration seeking an extension of time to vacate an arbitration award.

Quick facts

The sum in dispute was the small sum of HK$356,500, which was part of the sums (a) invested by the plaintiff under a shareholders’ agreement and (b) which the defendant accepted, but did not successful, to be returned to the claimant in installments pursuant to a repayment agreement.

Both the shareholders’ agreement and the repayment agreement contained an arbitration clause, stating that (a) the agreements were governed by Hong Kong law and (b) “any dispute or dispute arising out of or in connection with the Agreements shall (if not arbitrated) be referred and determined by arbitration to HKIAC in accordance with its national arbitration rules”.

On March 23, 2018, Claimant initiated arbitration against Respondent.

In May 2018, Plaintiff’s attorneys and HKIAC exchanged correspondence (with a copy to Respondent) regarding Plaintiff’s request that HKIAC appoint a sole arbitrator. See number (2) below for details. By letter dated June 15, 2018, the HKIAC notified the parties that an arbitrator had been appointed.

On July 3, 2018, the arbitrator, by email, informed the parties that he agreed to act as sole arbitrator and ordered the parties to pay a deposit for the fees of the arbitrator (the “To pay”). On September 5, 2018, the Claimant responded to the Adjudicator’s email.

On September 21, 2018, the Respondent, by email, advised the Arbitrator that it would not (a) participate in the arbitration, nor (b) provide any deposit. Immediately thereafter, Claimant asked the arbitrator to make an award against Respondent on the basis that Respondent did not intend to defend Claimant’s claim in arbitration.

On October 3, 2018, the arbitrator ordered that unless the defendant provided its portion of the deposit by October 10, 2018, it would be barred from producing evidence for the arbitration.

The Respondent made no payment of the deposit and filed no other defenses or submissions.

On March 4, 2019, the arbitrator proceeded with the arbitration hearing as originally scheduled. The respondent did not attend the hearing.

On August 15, 2019, the arbitrator issued the arbitration award. In the arbitration award, the arbitrator recalled (a) his duty to weigh the evidence and (b) that the non-participation of the respondent by its failure to file a defense and to attend the hearing did not abrogate this duty, and was not to be treated as an admission of the Claimant’s case. The arbitrator found against the defendant and condemned it to pay the sum claimed by the plaintiff of HK$356,500, with interest and costs.

In June 2021, the defendant applied to the Court of First Instance (the “To research”) to extend the time to seek the annulment of the arbitration award. His grounds for the alleged annulment request were:-

    1. The respondent was not given proper notice of the appointment of the arbitrator (Article 34(2)(a)(ii) of the UNCITRAL Model Law as incorporated by Article 81(1) of the Arbitration Ordinance (Cap. 609) (the “Model Law”)); and
    2. The composition of the tribunal or the arbitral proceedings were not in accordance with the parties’ agreement (Article 34(2)(a)(iv) of the Model Law).

On April 26, 2022, the Court dismissed the defendant’s claim with costs paid by the defendant on the basis of the indemnity. In this blog, we will examine the Court’s reasoning for the dismissal.

Burden of proof for the plaintiff

According to Article 34(2)(a) of the Model Law, it is the applicant in an application for annulment who must prove the existence of one or more grounds for annulment. If grounds are established, the Court nevertheless has a residual discretion to set aside the award.

Question (1): Was proper notice of the appointment of the arbitrator given to the respondent?

The respondent argued that (a) it never approved or confirmed the appointment of the arbitrator, (b) it disagreed with the arbitrator’s fees because those fees were unreasonably high, and disproportionate to the amount in dispute, and (c) it had never indicated its agreement to the appointment of the arbitrator.

Article 34(2)(a)(ii) of the Model Law provides: “the party making the claim has not been given proper notice of the appointment of an arbitrator or of the arbitral proceedings or has not been able to present its case”.

The Court stated that if a party has been duly notified of the appointment of a particular arbitrator, in the manner agreed upon in the arbitration agreement, that party has no reason to complain that it was not satisfied or has not approved the appointment of the arbitrator. particular arbitrator.

In this case, neither (a) the respondent’s disagreement with the arbitrator’s fees nor (b) the refusal to pay the deposit could mean that the respondent had not been notified of the appointment of the ‘arbitrator. If the Respondent believed that the arbitrator’s fees were unreasonable, there were avenues open to it to challenge them. This was a separate issue from whether the respondent had “due notice of the appointment of an arbitrator”.

Based on the following, the Court rejected the Respondent’s argument and concluded that the Respondent had been duly informed of the appointment of the arbitrator:-

    1. The Respondent never invoked the non-receipt of the letter from the HKIAC dated June 15, 2018 by which the HKIAC notified the parties of the appointment of the arbitrator.
    2. Respondent responded to the arbitrator’s email dated July 3, 2018, in which the arbitrator informed the parties that he agreed to act as sole arbitrator in the arbitration.
    3. Obviously, the Respondent was notified by both the HKIAC and the Arbitrator of the appointment of the Arbitrator.
    4. This notice has been duly given (a) in accordance with the HKIAC’s National Arbitration Rules and (b) in accordance with the parties’ agreement in the Arbitration Clause.

Question (2): Was the composition of the tribunal or the arbitral procedure in accordance with the agreement of the parties?

The Respondent relied on the same assertions in (1) above to allege that the appointment of the arbitrator was not in accordance with the parties’ agreement and that, therefore, the arbitral award should be canceled pursuant to Article 34(2)(a)(iv) of the Model Law.

Article 34(2)(a)(iv) of the Model Law provides: “the composition of the arbitral tribunal or the arbitral proceedings were not in accordance with the agreement of the parties, unless that agreement conflicts with a provision of this law from which the parties cannot derogate, or, failing such an agreement, did not comply with this law”.

In this case, the arbitration clause did not provide for any procedure for the appointment of arbitrators or specify the number of arbitrators. There was no obligation for the Claimant and Respondent to endorse or consent to the HKIAC-appointed arbitrator.

The actions taken by the parties and the HKIAC in appointing the arbitrator were as follows:-

    1. By Notice of Arbitration dated March 23, 2018, Claimant proposed that a sole arbitrator be appointed by HKIAC. This was in accordance with Article 1 of the HKIAC National Arbitration Rules, which requires the Claimant to send the Respondent a Notice of Arbitration, which must include a proposal that the HKIAC appoint the arbitrator or a list of three names maximum from which the respondent can choose an arbitrator.
    2. On May 7, 2018, plaintiff’s attorneys requested the HKIAC to appoint an arbitrator.
    3. On May 16, 2018, plaintiff’s attorneys wrote to HKIAC and proposed the appointment of a “less experienced arbitrator.”
    4. On May 21, 2018, the HKIAC invited the Respondent to submit its comments on the Claimant’s proposal to appoint a “less experienced arbitrator”.
    5. On June 15, 2018, in the absence of a response from the defendant, the HKIAC proceeded with the appointment of the arbitrator.

The Court held that the appointment of the arbitrator was in accordance with the HKIAC’s National Arbitration Rules and Article 23 of the Arbitration Ordinance.

Even if there was a failure to adhere to the HKIAC National Arbitration Rules with respect to the appointment of the arbitrator, the Respondent did not plead and the Court found no prejudice that could have been suffered by the respondent.

Question (3): Was the request out of time and should an extension of time be granted?

By questions (1) and (2), the Court dealt with the Respondent’s request for annulment on the merits. Therefore, the judge held that it was not necessary to further decide whether (a) the defendant’s motion was brought on time or out of time and (b) whether an extension of time should be granted.

Nevertheless, the Court stated that in this case, no extension of time should be granted to the Respondent:-

    1. The arbitration award was rendered on August 15, 2019. The defendant requested an extension of time to vacate the arbitration award in June 2021.
    2. Under article 34, paragraph 3, of the model law, an application for annulment “cannot be made after 3 months have elapsed from the date on which the party making the request received the award“.
    3. The Respondent’s only explanation for the almost two-year delay was that she had “forgotten” the arbitrator’s email containing the arbitral room, as she had not expected it.
    4. The Court said “if the Court has the power to grant an extension of time to the [Respondent] make the request, he can only do so in exceptional circumstances”.
    5. In this case, the Court found no good reason to exercise the discretion in favor of the respondent, in light of the respondent’s (a) unjustified delay and (b) the absence of any valid defense to claims against it in arbitration.

BCLP comments

Hong Kong courts maintain a strong approach to not lightly intervening in an arbitral award, in order to preserve the finality of the arbitration process. Requests to set aside an arbitral award should be considered exceptional and granted only if a legal ground for setting aside is clearly demonstrated.

When the Court rejects a request for annulment, and by default, compensation costs will be awarded against the disputing party, except in special circumstances that can be demonstrated. The imposition of adverse cost consequences is intended to deter unfounded and spurious challenges to arbitral awards.

In this case, the Respondent was ordered to pay the costs of the request for annulment on the basis of compensation, on the grounds that the Respondent’s request was devoid of any foundation.

This judgment is a useful reminder that a party intending to seek the annulment of an arbitral award must carefully assess the merits of the alleged request and be aware of the potential serious consequences in the event of an unsuccessful challenge.

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