Wisdom Newsletter - Arbitration (Issue 42)

Arbitration

Silence is not always golden

Z v R [2021] HKCFI 2312

HCCT 11/2021, Hon Mimmie Chan J in Chambers, 9 August 2021

Fact

Both the plaintiff and the defendant were companies and shareholders of a joint venture company (“Company”). In 2014, the Shareholders Agreement was varied by a Supplemental Agreement (“SHA”). Clause 11 of the SHA contained several restrictive covenants, including a non-compete clause which would not apply when “the Company does not have a suitable self-owned or bareboat chartered vessel available to bid for the projects”. It was further stipulated that preference should be given to the Company so long as the vessels owned by the Company or the vessels available are qualified to meet the requirements to submit bids for the potential projects.

Despite the fact that the Company submitted bids and possessed suitable vessels for the certain projects, the plaintiff’s 50% affiliate also submitted bids for the projects. Hence, an HKIAC arbitration was commenced by the defendant in 2019 against the plaintiff in Hong Kong. The defendant claimed that the plaintiff materially breached the restrictive covenants provided in Clause 11 of the SHA.

The arbitral tribunal issued the First Partial Final Award in October 2020 which declared that the plaintiff did commit a material breach of its SHA obligation and had failed to remedy the breach. The Second Partial Final Award was issued one month later and entitled the defendant to relief.

In January 2021, the plaintiff made an application to the court to set aside the two Awards. The plaintiff argued that the arbitral tribunal had failed to deal with all the issues put before it since it had overlooked the plaintiff’s arguments on other clauses. The plaintiff further submitted that the court should set aside the arbitral awards as the plaintiff was unable to present its case on (i) the possibility of a bareboat charter of the vessels being made available for the project and (ii) the “wholly new interpretation” of the word “available”.

Ruling

The court dismissed the plaintiff’s application to set aside the arbitral awards. It was concluded that all the grounds raised by the plaintiff failed. The court considered that it is simply a case where the plaintiff failed to obtain the desired outcome although it had presented and made submission on its case.

Firstly, the court held that the tribunal did deal with the relevant issues by referring to the reasons put forward by the defendant. The court suggested that reliance on the inadequate reasons proposed by the defendant does not equal failure to deal with all the issues. In this regard, the court emphasized that no determination shall be made as to the correctness of the decision made by the tribunal and the quality of the reasoning.

Secondly, the court found that the issue concerning the availability of the vessel for the project to be an issue “in the arena”. The court found that the issue was in fact referred to in the notice of pleadings as well as statement made by the Defendant’s witness, it could not be said that the plaintiff had no opportunity to prepare its case and address the issue. As the plaintiff chose not to address the tribunal when the alleged procedural irregularity arose, the plaintiff waived the irregularity as well as the opportunity to further explore the issue.

Thirdly, the court applied the same logic when dealing with the plaintiff’s complain about the tribunal construction of the word “availability”.  Considering that (i) the tribunal adopted the natural meaning of the word and (ii) the word itself was not of complex nature, the court held that the plaintiff should have raised the possible meaning in mind if it did not agree with the tribunal. In this regard, the court further drew a distinction between “the lack of opportunities to deal with the case and the failure to recognize or take such opportunity”. The court, again, expressed that the plaintiff could hardly complain if it failed to alert the tribunal in the first place.

Comments

The court has always been restrained from commenting on the merits of the case or the substantive correctness of the awards. With the exhaustive list provided by section 81 of the Arbitration Ordinance which lays down the circumstances when the court should interfere in an arbitration, the court would only interfere when there is “serious or egregious denial of due process”. The court, just as all the cases it cited, underscored the ultimate concern about the structural integrity of the arbitral regime, demonstrating the court’s genuine respect and support for arbitration.

More importantly, this case also reflects the decisive role played by applicant in ensuring fairness of an arbitration. As shown in the court’s analysis, an applicant who wishes to set aside the arbitration awards should proactively raise his objection against any perceived procedural irregularity during the arbitration. In this sense, before scrutinizing whether an applicant is deprived of the opportunities to present his case, the court is more concerned about whether the arbitral tribunal is deprived of the opportunities to comprehensively deliberate on the entire case.

When the idea of “fairness” is fundamental to the integrity of the arbitration regime, one should note that safeguarding fairness of an arbitration is never the sole responsibility of the arbitral tribunal. Not only does this case confirm the supportive role played by the court in the arbitration regime, but it also highlights the mutuality between the arbitral tribunal and the parties. As a result, one should make sure that he has done his part to insure fair play among the parties in the arbitration proceeding, or it will be difficult to convince the court to set aside the arbitral awards.