In a recent decision in the case of Arjowiggins HKK2 LTD -v- X Co, the Hong Kong Court of First Instance set aside an award on the grounds that an order made by the tribunal in a final award was beyond the parties’ pleadings. This is very significant, not only because the pro-arbitration and pro-enforcement approach of HCAJ Kong courts is widely recognised, but also, more importantly, the judge re-affirmed the long-established principle that it is for the parties themselves, not the tribunal, to determine the scope of the reference of an arbitration, i.e. the basic doctrine of parties’ autonomy in arbitration.
The facts
Since the date of the joint venture contract between the applicant (HKK) and the respondent (X Co) in October 2005 (the ‘JV Contract’) set up the joint venture company (the ‘JV Company’), the relationship between the former partners irretrievably broke down and became extremely hostile.
Liquidation in mainland China
The joint venture became deadlocked and in June 2010 X Co applied to the mainland court for the judicial dissolution of the JV Company. The JV Company was dissolved by order of a mainland court in July 2013.
Despite opposition from HKK, an order for compulsory liquidation was further made by the same mainland court on 18 June 2019, on the grounds that the JV Company had deliberately delayed the liquidation, which might seriously damage the interests of creditors and shareholders. On 28 October 2019 the mainland court appointed a compulsory liquidation group for the compulsory liquidation of the JV Company.
Arbitration in 2012
However HKK also commenced arbitration in Hong Kong in October 2012, claiming that X Co was in breach of the JV Contract by failing to supply steam to the JV Company for its business operation, and by commencing dissolution proceedings against the JV Company. An award was then issued in November 2015, under which X Co was ordered to pay RMB167 million to HKK as damages which had remained unpaid.
Arbitration in 2018
In 2018 X Co commenced another arbitration as a shareholder of the JV Company against HKK. In this arbitration X Co claimed: (a) upon dissolution of the JV Company, it was entitled to take exclusive possession of the account books and documents of the JV Company, as it was obliged under PRC law, as the former Chinese party to the joint venture to keep these JV documents in its safe custody; and (b) its entitlement to take exclusive possession of the JV documents was a form of property right, which entitled it to sue HKK for the delivery of the JV documents.
HKK denied these allegations and argued that the JV Company remained the owner of the JV documents and during the liquidation process the liquidation committee was the proper organisation to have possession of the JV documents, and to be responsible for liquidation matters until the completion of liquidation and deregistration of the JV Company.
A four-day hearing was subsequently conducted in December 2019 before an arbitral tribunal. A partial final award was handed down by the tribunal on 19 May 2020.
In its award, the tribunal, upon consideration of the evidence adduced, found that the JV documents had been taken from the JV Company by HKK in 2013, and that the JV documents had remained in HKK’s possession, custody or control.
The tribunal further accepted that there was a process from dissolution to liquidation, that the JV Company continued to exist as a corporate entity in the course of its dissolution, and that the legal entity was terminated only upon completion of liquidation and deregistration. Thus, the tribunal concluded that it was questionable whether X Co’s obligation under PRC law to preserve the JV documents can turn into a right, let alone an exclusive right, to possession of the JV documents.
The tribunal then found that it was the JV Company which retained the proprietary right to the JV documents, and that the parties of the JV Contract, and both the compulsory liquidation group and X Co, merely had duties relating to those documents. Thus, the tribunal found that X Co did not have any right to call for delivery of the JV documents
Nevertheless, the tribunal went further to point out that as it had found that the JV documents were in the possession, custody or control of HKK, and that as a party to the JV Contract, HKK had a duty to ensure that the terms of the JV Contract in relation to liquidation were complied with, and that it must cooperate with X Co to facilitate the liquidation. Thus, the tribunal considered that there was scope to invite submissions form the parties, as to what, if any, orders the tribunal should make in relation to the disposal of the JV documents.
In response to such invitation, HKK argued that the tribunal had no jurisdiction to make any further orders, other than to dismiss X Co’s claim. HKK pointed out that the compulsory liquidation group was not in existence at the commencement of this arbitration, and that X Co had never in this arbitration sought any relief that the JV documents should be delivered to the compulsory liquidation group. HKK submitted that the tribunal only had jurisdiction to decide those matters stated in the notice of arbitration, and the way in which the JV Company should be properly liquidated was never in issue between the parties in this arbitration.
On 5 August 2020 the tribunal handed down its final award. The tribunal pointed out that as a matter of new question under the PRC law, what orders were appropriate as a result of the findings made as to HKK being in possession, custody or control of the JV documents, and the JV documents being necessary for the liquidation process. It concluded that the question of the remedies which were available to X Co concerned a matter as to the rights and obligations of the parties under the JV Contract, and was within the jurisdiction of the tribunal. The tribunal considered that even if a remedy was not asked for by a party, it was its duty to act in accordance with the remit given to it by the parties’ arbitration agreement, and having given equal treatment to the parties by giving them the opportunity to make further submissions on the appropriate orders to be made. Thus the tribunal ordered that X Co was entitled to the remedy of procuring the delivery up of the JV documents to the compulsory liquidation group.
Application for setting aside
HKK subsequently made an application to the Hong Kong Court to set aside the final award of the tribunal. HKK submitted that the orders made in the award were decisions on matters beyond the scope of the submissions to arbitration, and should be set aside under s.81(1) of the Arbitration Ordinance (giving effect to Article 34(2)(a)(iii) of the UNCITRAL Model Law). An additional ground also relied upon by HKK was that enforcement of the ward would be contrary to public policy of Hong Kong.
The law
Accepting that this was an unusual case on its facts, and after careful consideration of the submissions made by the parties, Mimmie Chan J decided to set aside the award and the orders made therein, and to dismiss X Co’s application to enforce the award.
Ground 1: Outside the scope of the submission
It was trite that the pleadings, and not the evidence, dictated the proper course of the proceedings and the ambit of the orders to be made. On review of the pleadings in the arbitration, the judge accepted that there was no doubt that any claim of delivery of the JV documents to the compulsory liquidation group was inconsistent with X Co’s own pleaded case. The following reasons were as below:
- HKK did not plead further as to the right of the compulsory liquidation group after it was appointed, and whether the JV documents should properly be delivered to the compulsory liquidation group as the party entitled to possession, or when and how this should be done.
- There was a distinction between whether an issue or matter was within the wide scope of the arbitration agreement, and whether the issue or matter was within the scope of the actual reference of the particular dispute to the tribunal in the particular arbitration. The issue of the parties’ breach of their respective duties under the JV Contract to facilitate or complete the proper liquidation was not pleaded, nor did the tribunal have complete evidence on this matter.
- The question of whether each of the parties was given a fair and reasonable opportunity to present its case was separate to the question of whether the tribunal has jurisdiction, by consensus of the parties, to act and decide on the dispute referred to it under the arbitration agreement contained in the JV Contract. In this case, the consensus between the parties, and HKK’s agreement, was to refer to the tribunal the dispute relating to X Co’s claim for possession and delivery to it of the JV documents in the course of the dissolution of the JV Company, and not the dispute over X Co’s claim of its right or entitlement to the proper liquidation of the JV Company. Nor was it the consensus of the parties to refer to the tribunal the dispute as to HKK’s alleged breach of the JV Company upon the compulsory liquidation ordered by the mainland court.
- Bearing in mind the requirement that there should be due process and fairness to both parties in arbitrations, it was unfair when a party in an arbitration was ambushed as a result of the tribunal permitting the other party to advance new legal consequences not identified in the pleadings served for the arbitrations. Parties to an arbitration should know in advance, before the hearing of the arbitration, and in as full an extent as possible, the pertinent claims and remedies sought by the other side, to enable them to consider all possible defences, and to decide on the full extent of the evidence to be adduced, rather than to have new issues raised with the witnesses only when they were called (Choi Yuk Ying -v- Ng Kwok Chuen [2019] HKCA 171 considered). In the particular circumstances of this case, the order for delivery of the JV documents to the compulsory liquidation group, which the tribunal referred to as giving effect to the compulsory liquidation group’s right to seek performance of the JV Contract, could not have been reasonably anticipated from the state of the pleadings and the evidence served before the commencement of the arbitration in 2018, and was outside the scope of the submission by HKK to the arbitration.
Ground 2: Contrary to public policy
The real substance of HKK’s claim on the public policy ground was that it had not been given the reasonable opportunity to present its case and to file further evidence, as a result of the tribunal acting beyond the scope of the parties’ reference to the arbitration, by deciding to consider X Co’s claim for delivery up of the JV documents to the compulsory liquidation group, and by ordering HKK to deliver the documents to the compulsory liquidation group in performance of its obligation to complete the proper liquidation of the JV Company.
Given that the tribunal’s order was already found outside the scope of the reference, the judge considered that it was sufficient to set aside the award. Thus, the judge did not go into details to discuss whether the enforcement of the award would be contrary to the public policy or not.
Comments
The Hong Kong Judiciary is renowned for its pro-arbitration stance. It is therefore rare for the Hong Kong court to set aside an arbitral award on the ground that the tribunal had strayed beyond the scope of the reference, especially as the tribunal, as noted in the judgment, was comprised of three eminent and experienced arbitrators. Arbitration practitioners and arbitrators should take note of the following three key points from this decision:
- It should be the parties’ pleadings rather than evidence to determine the proper course of the proceedings and the scope of the order that the tribunal is entitled to give. It is common to see that the arbitration agreement provides for all disputes arising from the contract to be resolved through arbitration. However, it should not be confused with the particular issue or matter submitted by the parties for arbitration before the tribunal. In other words, the scope of the parties’ agreement to arbitration can be much wider than the issue(s) submitted to the tribunal for arbitration. When the claimant commences an arbitration, the scope of the actual reference of the parties’ disputes to the tribunal in the particular arbitration should be carefully formulated, and the claim(s) should be properly pleaded at the notice of arbitration.
- It is not uncommon for a tribunal to exercise its own discretion by inviting the parties to supplement their submissions on a particular issue in an arbitration, or even re-open the proceedings for the parties’ further submissions (e.g. as permitted under Article 31.4 of the HKIAC 2018 Rules). Sometimes, exercising such discretion is necessary as the parties may not have sufficiently elaborated their arguments in the original submissions. The tribunal may sometimes facilitate or assist the parties in resolving the disputes between them. However, the present decision serves as a useful reminder that the tribunal’s liberty is not unlimited. Even if the parties are given a fair and reasonable opportunity to present their respective case, as long as the issue is not within the parties’ consensus or not pleaded, the tribunal would have no jurisdiction to act and decide on such an issue.
- More importantly, it appears that HKK’s objection to the tribunal’s jurisdiction on the issue outside the scope of the parties’ submissions during the arbitration proceedings was of vital importance despite the fact the judge did not expressly state this in her decision. If HKK did not raise such an objection but only chose to rely on it for setting aside application at the enforcement stage, it may be less compelling for the court to accept the objection and set aside the award.
