Beyond the scope – Hong Kong court sets aside award that fell outside pleadings

The Hong Kong Court of First Instance in Arjowiggins HKK2 Ltd v X Co [2022] HKCFI 128, decided to set aside an arbitral award issued by a tribunal consisting of three arbitrators under the HKIAC Rules.

The Court of First Instance ruled that the award was beyond the scope of the parties' pleadings in the arbitration and clarified that the courts will not hesitate to set aside arbitral awards which fall outside the scope of the parties' pleadings, and reiterated that arbitral tribunals should keep in mind not to decide or formulate any relief that is not within the pleadings.

Background

The parties, Arjowiggins HKK2 Ltd (the applicant) and X Co (the respondent) entered into a joint venture agreement in 2005. The relationship between the parties broke down and in 2010 the respondent applied to the mainland court for a judicial dissolution of the joint venture (JV) company.

The applicant then commenced arbitration proceedings in Hong Kong in October 2012, alleging breach of the JV contract by the respondent. A damages award in favour of the applicant was issued in 2015.

The mainland court ordered the dissolution of the JV company in 2013 and the formation of a liquidation committee the following year. The respondent subsequently commenced an arbitration at the HKIAC against the applicant in 2018 (the HKIAC arbitration) in respect of books and records of the JV company. The mainland court ordered the formation of a compulsory liquidation group (Liquidation Group) upon the respondent's application whilst the HKIAC arbitration was ongoing.

Key issues

The key issue related to the pleadings in the HKIAC arbitration. The respondent claimed that the applicant had possession, custody or control over account books and other documents of the JV company, and sought an order for return of these documents as well as an order for examination of the documents.

The tribunal consisted of three eminent and experienced arbitrators. After the hearing in December 2019, the tribunal handed down a partial award, finding that the applicant had possession, custody or control over the documents and that the respondent did not have such right. The tribunal found however that the Liquidation Group did have the right.

The applicant submitted that the tribunal had no powers to make further orders other than dismissing the respondent's claim in the arbitration, and that since the Liquidation Group did not exist when the arbitration was commenced, the tribunal "only had jurisdiction to decide those matters referred to in the Notice of Arbitration".

In the final award issued in August 2020, the tribunal ordered that the documents should be delivered up to the Liquidation Group even though the remedy had never been sought or pleaded by the respondent.

The court's decision

The applicant applied to the Court of First Instance to have the award set aside pursuant to section 81(1) of the Arbitration Ordinance based on two grounds: (i) the awards handed down were outside the scope of the submission to arbitration; and (ii) the awards were against public policy.

On the first ground, the court agreed that delivery of the documents to the Liquidation Group was inconsistent with the pleadings in the HKIAC arbitration. In particular, the respondent had never pleaded that the applicant was in breach of the JV contract by failing to assist in the liquidation of the JV company or that it should have delivered up the documents to parties other than the respondent.

The court reiterated that it is trite law that "the pleadings, and not the evidence, dictate the proper course of the proceedings and the ambit of the orders to be made". The court also emphasized that there is a difference between a tribunal's jurisdiction to decide on matters in an arbitration agreement and whether an issue was within scope of a dispute. In this case, the applicant's duty to facilitate the JV company's liquidation, hence resulting in the order of delivering the documents to the Liquidation Group, was never pleaded and there was insufficient evidence for the tribunal to decide on the matter.

Furthermore, referring to the Court of Appeal's decision in Choi Yuk Ning v Ng Kwok Chuen [2019] HKCA 171, the Court of First Instance remarked that "trial by ambush has no place in modern litigation" which included "advancing new legal consequences in opening submissions", as it would be unfair to the counterparty.

On the second ground, the applicant claimed that the tribunal should not have ordered delivery of the JV documents to the Liquidation Group before receiving further evidence and that consequently, the enforcement of the award would be contrary to public policy. The court further opined that the real substance of the applicant's claim on the public policy ground was that it had not been given a reasonable opportunity to present it's case and to file further evidence, as a result of the tribunal acting beyond the scope of the parties' reference to the 2018 arbitration.  The court found that the evidence presented by the applicant was insufficient.

The court set aside the award. Mimmie Chan J has recently dismissed leave to appeal the decision noting the "high threshold" needed to appeal against an exercise of the court's discretion – Arjowiggins HKK2 Ltd v X Co [2022] HKCFI 859.

Key takeaways

• This is a positive decision by the Hong Kong courts which act as a safeguard to the arbitral proceedings to ensure their integrity. The tribunal should only rule on claims and reliefs pleaded.
• Parties should formulate their claims and issues well before they are pleaded and should not rely on the tribunal's jurisdiction and power to change the scope of the proceedings.
• Parties in 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".
• This enables the parties to consider all possible defences, and to decide on the full extent of what evidence should be adduced, rather than to have new issues raised with the witnesses only when they are called.

Please see our publication Arbitration Highlights in the Year of the Tiger for other significant arbitration decisions in the past year

Authored by James Kwan, Tim Hill, Nigel Sharman, and Joshua Lee.