R v. F

HCCT 32/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

ACTION NO 32 OF 2011

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J U D G M E N T

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A. INTRODUCTION

1.  This is the plaintiff’s application to set aside an arbitral award (“the Award”) pursuant to Article 34(2) of the UNCITRAL Model Law (“the Model Law”).

2.  The Award was issued pursuant to an international arbitration administered by the Hong Kong International Arbitration Centre (“HKIAC”).  By s 34C of the old Arbitration Ordinance (Cap 341) (“the old AO”), the Model Law applies to international arbitration in Hong Kong.

3.  The arbitration concerns the dispute between the plaintiff and the defendant under an Agreement (“the Agreement”) whereby the defendant purchased the plaintiff’s business.  The plaintiff commenced the arbitration to claim for the balance of the purchase price in the sum of X. The defendant at the same time mounted substantial counterclaims (which had been divided under various subheadings) in the arbitration for various breaches of warranties under the Agreement.

4.  Although the plaintiff succeeded in its claim for X, the defendant was also successful in some of its counterclaims, including its counterclaim 5 (“Counterclaim 5”).  At the end, after setting off the plaintiff’s claim against the defendant’s successful parts of the counterclaims, the plaintiff is held to be liable to pay to the defendant a sum of Y.

5.  In this application to set aside the Award, the plaintiff’s only complaint of the Award is in relation to the tribunal’s ruling on the quantum of Counterclaim 5.

6.  In order to better understand the plaintiff’s grounds in support of this application, it is necessary to explain Counterclaim 5 in greater details first.

B. BACKGROUND

B1.  The dispute in the arbitration

7.  As mentioned above, the dispute arose from the defendant’s purchase of the plaintiff’s business under the Agreement. 

8.  Under the Agreement, it was provided that payment of Z% of the consideration of W (ie, X) was to be deferred.  This “holdback” was payable to the plaintiff under any of the two circumstances set out under section 4.1(a) and 4.1(b) of the Agreement. 

9.  It was the plaintiff’s case that it satisfied section 4.1(a) condition but the defendant still refused to pay the holdback amount.  The plaintiff thus commenced the arbitration to seek payment of the sum of X with interest.

10.  In the Defence and Counterclaim, the defendant pleaded in gist that:

(1) The plaintiff was not entitled to the X holdback, and

(2) The defendant was also entitled to counterclaim the plaintiff pursuant to the warranties under the Agreement.

B2.  Counterclaim 5

11.  The defendant raised five heads (pleaded as 1 to 5) of the counterclaim for losses it said it had suffered due to the plaintiff’s breaches of the warranties.

12.  Counterclaim 5 concerned the quality of the plaintiff’s goods.  The defendant counterclaimed S as damages under this head. There were r items of loss under Counterclaim 5 as pleaded.

13.  In its Reply and Defence to Counterclaim, the plaintiff effectively denied all the allegations made in the defendant’s Defence and Counterclaim.  The defendant was thus put to prove both the liability and quantum of the counterclaims.

14.  The plaintiff succeeded in its claim, but failed to defend some of the counterclaims, including Counterclaim 5.

B3.  The Award relating to the Counterclaim 5

15.  The arbitration tribunal consisted of experienced arbitrators.  The arbitration took place at the HKIAC.  The parties also made further submissions after the hearing.

16.  The tribunal issued the Award.  

17.  In relation to Counterclaim 5, the tribunal dealt with it at paragraphs O to P of the Award.  After considering at length the parties’ contentions on liability, the tribunal upheld the defendant’s said counterclaim and concluded that the plaintiff was in breach of various warranties under the Agreement.

18.  Then, at paragraph P, it further said as follows:

“Having upheld the [defendant’s] counterclaim on this issue [ie, Counterclaim 5], the Tribunal decides that the [plaintiff] shall pay the [defendant] [S], being the amount claimed by the [defendant].”

19.  It therefore awarded the defendant S under Counterclaim 5.

C. THE PRESENT APPLICATION TO SET ASIDE THE AWARD

C1.  The plaintiff’s grounds

20.  The grounds in support of the application to set aside the Award are directed only at its adjudication on the quantum of Counterclaim 5.  There are no complaints on the tribunal’s adjudication on the plaintiff’s liability under this counterclaim.

21.  The basis of the challenge is that the tribunal conducted the arbitration and awarded the Award on Counterclaim 5 “without any adjudication and/or any findings of fact and/or any evidence as to the alleged quantum of losses and contrary to the agreed procedure and the Administered Arbitration Rules of HKIAC ”.

22.  Based on the above basis of challenge, the plaintiff says the Award should be set aside under Article 34(2)(a)(iii), (iv) and/or (b)(ii) of the Model Law.

23.  These relevant parts of Article 34(2) provide as follows:

“(2) An arbitral award may be set aside by the court…only if:

(a) the party making the application furnishes proof that:

(i)…

(ii)…

(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or failing such agreement, was not in accordance with this Law; or

(b) (i)…

(ii) the award is in conflict with the public policy of this State.”

24.  The plaintiff says, by reason of the alleged absence of adjudication on quantum:

(1)     The tribunal had acted outside of its jurisdiction to decide a matter without adjudication (under Article 34(2)(a)(iii));

(2)     The arbitral procedure was not in accordance with the agreement of the parties (under Article 34(2)(a)(iv));

(3)     The Award is an affront to the public policy of Hong Kong (under Article 34(2)(b)(ii)).

25.  The plaintiff’s arguments in gist run as follows.

26.  Damages for actual loss claimed by the defendant under Counterclaim 5 must be proved by evidence[1]. At the same time:

(1) Rule 23 of the HKIAC Administered Arbitration Rules (“the Rules”) provided that each party shall have the burden to prove the facts relied on to support its claim or defence.  Rule 17.2(b) of the Rules also required the defendant to particularize its loss in a “statement of the facts”.  The defendant did rely on such statement of facts to support Counterclaim 5.  As such, it would have been necessary for it to exhibit to the Defence and Counterclaim documents the defendant relied upon as required under Rule 17.3 of the Rules.

(2) But no particulars and no source documents supporting the defendant’s Counterclaim 5 was put into the evidence by the defendant.

(3) The defendant’s only evidence relating to the items of loss under Counterclaim 5 was that of paragraphs M to N of the 1^st Statement of A.

27.  However, in relation to quantum, the tribunal concluded at paragraph P of the Award that the plaintiff shall pay the defendant S on the only basis that it “being the amount claimed by the [Defendant].” 

28.  Against the above background relating to the evidence made in support of the quantum of loss under Counterclaim 5 (in particular the lack of source documents and the hearsay nature of the evidence contained in the relevant parts of A’s statement), in its ruling on quantum at paragraph P of the Award, the tribunal has (the plaintiff contends) simply failed to make or disclose the factual and legal basis in relation to this finding on the quantum of damages under each of Counterclaim 5’s r items of loss.

29.  The adjudication in the Award regarding the quantum of Counterclaim 5 made in such an absence of evidence and legal reasoning is therefore (the plaintiff further submits) in breach of:

(1) The agreed arbitral procedures embodied in the Agreement, which provides that “…all awards shall be reasoned awards which disclose the factual and legal basis for the same…”[2].

(2) The fundamental principle of natural justice, which therefore offends Hong Kong’s most basic notions of justice and morality, which must be part of her public policy[3].

30.  The Award should (the plaintiff says) therefore be set aside under:

(1) Article 34(2)(a)(iii), as the tribunal did not have jurisdiction to decide a matter without proper adjudication with reasons;

(2) Article 34(2)(a)(iv), as the arbitral procedure was not carried out in accordance with the agreement of the parties to have reasoned awards under arbitration;

(3) Article 34(2)(b)(ii), as the Award in lacking reasoning with factual and legal basis is in conflict with the public policy of Hong Kong.

C2.  Discussion

31.  It is trite that:

(1) Arbitral tribunal conclusions, findings of fact or holding of law are not reviewable or correctable, and they are final and binding on both parties, this being a fundamental feature of international arbitration[4].

(2) Further, in applications to set aside arbitral awards, the court should not go into merits of the case.  The court’s role under Article 34(2) of the Model Law is not to act as an appellate court.

(3) Applications to set aside an award should only be made in exceptional events: A v R[5]at paragraphs 67-68 per Reyes J.

32.  Bearing these principles in mind, in particular that the court will not review the merits (on facts or law) of the Award, in order to succeed in this application, central and fundamental to the plaintiff’s above contentions is the argument that the tribunal had failed to give any reasons to explain why it awarded the defendant the quantum as claimed under Counterclaim 5.

33.  It is only if the plaintiff is correct on this fundamental argument that it could further contend that any of the three submitted grounds under Article 34(2) of the Model Law has been met.

34.  In other words, if the plaintiff’s above central argument is incorrect, the question of whether any of the grounds under Article 34(2) have been met in the present case does not even arise.

35.  In relation to this fundamental question, I do not accept the plaintiff’s arguments that the tribunal’s conclusion on Counterclaim 5’s quantum is without reasons.  I will explain why.

36.  An arbitral award must be read and understood in its proper context, in particular against the context as to how the relevant issues have been argued before the arbitration tribunal.  This is particularly so as arbitration is a private and confidential dispute resolution process based on party autonomy.  An award made thereunder is intended to be read by the parties (who would be familiar with the background and how the issues have been argued) and, unlike a judgment of the court, not to be made public.  

37.  Further, it has often been said that a judgment of a court is not intended and should not be read as if it were a transcript of the proceedings before it.  This must also apply with equal (if not greater) force in relation to arbitral awards.  Of course, the reasoning process expressed in an award must be one that the readers of the award (who are mostly if not always the parties themselves only) can understand how and why the conclusion is reached on a particular issue.  However, the way the reasons expected to be given in an arbitral award for a particular issue should be proportional to the complexities of how that issue is contended (or not contended) before the arbitral tribunal.  Depending on how the issues are contended, the reasons do not necessarily need to be elaborate or lengthy, provided they could be understood in its proper context.  It must be borne in mind that an arbitration award is the result of a private consensual process, which is intended and expected to be cost effective, and shorn of complexities and technicalities.

38.  Thus, in the present case, the Award in relation to its ruling on quantum under Counterclaim 5 must also be read and understood in the context of how this issue was laid before the tribunal. 

39.  In the arbitration, insofar as the quantum of loss under Counterclaim 5 was concerned, as mentioned above, the defendant relied on paragraphs M to N of the 1^st statement of A as evidence in support.

40.  In this part of the statement, A effectively set out the itemized amount of losses suffered under this counterclaim and the sources of how he obtained the information on these losses.

41.  The plaintiff had not put in any evidence to rebut or respond to this part of A’s evidence.

42.  At the arbitration, A gave evidence as a witness, and his statements (including the 1^st statement) were thus admitted and relied upon as evidence-in-chief.

43.  On the other hand, as fairly confirmed by Mr Scott SC (who appeared for the plaintiff in this application but not at the arbitration) on instructions, the plaintiff’s legal representatives at the arbitration did not cross-examine A on this part of his evidence.  Further, the plaintiff also did not make any submissions (in its opening and closing submissions) to say why this part of the defendant’s evidence relating to quantum should be doubted or should not be accepted.  As a matter of fact, the plaintiff did not even submit and ask the tribunal not to accept this part of the defendant’s evidence on quantum.

44.  The dispute at the tribunal in relation to Counterclaim 5 was focused on liability.

45.  The burden was of course still on the defendant to prove quantum.  The defendant relied on A’s evidence set out in his 1^st statement to support its claim for quantum under Counterclaim 5.  At the same time, the arbitral tribunal is not bound by strict rules of evidence and can admit any evidence that it considers relevant to the proceeding before it[6].  In my view, in the present context that the plaintiff had not challenged A’s said evidence on quantum, it was entirely open to, and proper for, the tribunal to accept it and award the same accordingly[7]. One must also note that the tribunal has emphasised in the Award that it has given consideration to all the submissions and evidence submitted in the arbitration although it would not attempt to recount comprehensively all the evidence[8]. Specifically, in relation to Counterclaim 5, it had also recited at paragraph W of the Award the itemized loss as claimed by the defendant and repeated at paragraph Z that it “had carefully considered those submissions, as well the evidence tendered by the Parties in support of those submissions”.

46.  In these circumstances, reading paragraph P of the Award objectively and properly in the above context of how the issue of quantum under Counterclaim 5 was dealt with by the parties, I am of the clear view that, in concluding that the quantum under this counterclaim was “as claimed” by the defendant, what the tribunal must have meant was that they had accepted A’s evidence on this as this was not challenged and contested.  This must be the clear and obvious reason behind this ruling on quantum, which reason must also be obvious to the parties.

47.  At the hearing before this court, Mr Scott SC, doing the best as he could, sought to go through in detail the defendant’s alleged refusal and failure to discover the source documents relating to Counterclaim 5 before the hearing of the arbitration[9].  In doing this, presumably Mr Scott was now trying to cast doubt on A’s statement evidence on quantum by showing that there was no documentary support of his related evidence, and to show that the tribunal could and should not have accepted it.

48.  However, these arguments, even if valid (of which I am not expressing a view), were fully available to the plaintiff in the arbitration to be put forward to challenge the quantum claimed by the defendant.  As I mentioned above, it did not do so and did not cross-examine or make any submissions to dispute A’s evidence.  As I see it, albeit put as a complaint that the tribunal had failed to give reasons as to why they had accepted the quantum as claimed by the defendant, this is effectively an attempt by the plaintiff to re-argue this issue before this court now.  This cannot be a proper ground to seek to set aside the Award.

49.  I therefore do not accept that the tribunal has not provided a reasoned Award in relation to its ruling on Counterclaim 5’s quantum.

50.  On this basis alone, the applicant must fail in this application. 

51.  Given this conclusion, I do not think it is either necessary or appropriate for me to further decide, if I had accepted that the tribunal had failed to give reasons as contended, whether the plaintiff would have satisfied any of the grounds under Article 34(2) of the Model Law, and that I should exercise my discretion in the present case to set aside the Award.

D.  CONCLUSION

52.  For the above reasons, I dismiss the application.

53.  Ms Cheng SC submits that the defendant should be entitled to costs on an indemnity basis, citing in support Reyes J’s decision in A v R, supra, at paragraphs 68-72.  The effect of this part of Reyes J’s decision is that unless special circumstances are shown, the practice of this court (in the exercise of its discretion) should be that indemnity costs should in principle be granted against the losing party who applies to set aside or resist the enforcement of an arbitral award.  Reyes J’s said decision on costs has recently been re-affirmed by the Court of Appeal in Pacific China Holdings Ltd (in liquidation) v Grand Pacific Holdings Ltd[10].

54.  Although not disputing the said approach on costs, Mr Scott SC contends that there are special circumstances in the present case which justify otherwise.  The circumstances (Mr Scott further submits) are that the plaintiff has a genuine grievance in the present case, as it entered into an arbitration clause (in the Agreement) expecting that reasons and basis should be given by the tribunal in their ruling.  Instead, there was only a one sentence ruling on quantum under Counterclaim 5.

55.  I do not accept Mr Scott’s submissions.  I have already decided above that it must be clear to the parties as to the reason and basis of the tribunal’s ruling at paragraph P of the Award.  This must be particularly clear to the plaintiff as it had itself decided not to make any submissions to dispute the defendant’s related evidence.  In any event, if it did have any queries on this part of the ruling, under Article 33 of the Model Law, it was entitled to request the tribunal for interpretation.  This it did not do.  Instead, it applied to challenge the Award by (as I observed above) effectively seeking to re-argue the matter.  I therefore see no special circumstances in this case not to award costs on a higher scale as observed under A v R.

56.  I therefore further make an order that costs of this application be to the defendant on an indemnity basis, to be taxed if not agreed.  There is also certificate for two counsel.

57.  Lastly, I thank counsel for their assistance in the matter.

[1] McGregor on Damages (18^th ed)at paragraph 8-001.

[2] The plaintiff relies on PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operations [2010] SGHC 202 (High Court of Singapore) at paragraph 39, [2011] SGCA (Court of Appeal of Singapore) 33 at paragraph 101 to support the interpretation under Article 34 of the Model Law and that the complaint in that case was that the majority of the award was not made in accordance with the agreed arbitral procedure.

[3] Soh Beng Tee v Fairmont Development Pte Ltd [2007] SGCA 28 at paragraph 65.

[4] See the comment by the learned editors in Redfern and Hunter on International Arbitration (5^th ed), at paragraph 10.68 that “… there is no provision in the Model Law for challenging an award on the basis of mistake of fact or law.”; A v R, infra, at paragraphs 22-23.

[5]  [2009] 3 HKLRD 389.

[6] See: s 2GA(2) of the old AO; Arbitration in Hong Kong: A Practical Guide (2^nd ed), at paragraph 13.079.

[7] Cf also: Lingrade Development Ltd v Secretary for the Environment (unrep, FACV 4/2010, 4 April 2011, Ma CJ, Bokhary, Chan, Ribeiro PJJ, Hoffmann NPJ) at paragraphs 25-26.

[8] See for example, paragraphs P (with express reference to A’s 3 witness statements filed at paragraph Pc).

[9] Ms Cheng SC for the defendant in opposition also took the court through various correspondences and documents in the arbitration seeking to show that, in any event, the relevant source evidence was eventually provided to the plaintiff by way of correspondence.  For the reasons explained in this judgment, it is unnecessary for me to look into and decide on this dispute.

[10] Unrep, CACV136/2011, 23 July 2012, Tang VP, Kwan and Fok JJA, at paragraphs 4-19.