ARIMA PHOTOVOLTAIC & OPTICAL CORPORATION v. FLEXTRONICS COMPUTING SALES AND MARKETING (L) LTD

CACV 194/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 194 OF 2012

(ON APPEAL FROM HCCT 32/2011)

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Barma JA (giving the Reasons for Judgment of the Court):

Introduction

1.  This was an appeal against the judgment of Au J dated 3 August 2012, by which he dismissed an application by the plaintiff seeking to set aside an arbitral award dated 11 April 2011 pursuant to Article 34(2) of the UNCITRAL Model Law on Arbitration, which applies to international arbitration in Hong Kong by virtue of section 34C of the old Arbitration Ordinance (Cap 341), this being the version of the Arbitration Ordinance in force in respect of this arbitration.  At the conclusion of the appeal, we dismissed it with costs to the defendant on the indemnity basis, with certificate for two counsel.  So far as an application by the defendant for leave to file a respondent’s notice out of time was concerned, we made no order on the summons and no order as to the costs of it. We indicated that we would in due course hand down our reasons for the orders we made, and now do so.

2.  The arbitration arose out of a dispute between the parties under an agreement by which the defendant purchased the plaintiff’s notebook and server business.  In the arbitration, the plaintiff claimed the sum of US$10,500,000.00 as the balance of the purchase price payable by the defendant.  For its part, the defendant resisted the claim and counterclaimed for damages for alleged breach of certain warranties under the agreement.  The outcome was that although the plaintiff succeeded in its claim, it was also held to be liable to the defendant on some of the defendant’s counterclaims, the overall result being that the plaintiff was held liable to pay the defendant a net sum of US$4,151,843.31 (the total award in favour of the defendant being US$14,651,843.31).

3.  By its application to set aside, the plaintiff sought only to set aside the tribunal’s award in respect of one element in the defendant’s counterclaims, namely Counterclaim E. Counterclaim E related to the quality of certain server boards shipped to Google, Inc.  These were said to be defective, and to have resulted in the defendant suffering loss and damage of US$4,390,948.00, which was made up of 10 items of loss, as set out in the defendant’s Defence and Counterclaim.  The only complaint in relation to Counterclaim E related to the tribunal’s ruling on the quantum to be awarded to the defendant in respect of that counterclaim.  No complaint was made as to the tribunal’s decision on liability.

4.  The arbitration lasted five days, with further written submissions being lodged by the parties after the conclusion of the hearing, which ended on 1 October 2010.  The award by the tribunal ran to some 278 paragraphs over 88 pages.  Counterclaim E was dealt with over 26 paragraphs (paragraphs 230 to 255), in which the tribunal dealt in detail with the rival contentions on liability and found in favour of the defendant, but dealt only briefly with the question of quantum, saying at paragraph 255 that “having upheld the [defendant’s] counterclaim on this issue, the Tribunal decides that the [plaintiff] shall pay the [defendant] USD 4,390,948, being the amount claimed by the [defendant].”

5.  The plaintiff complains that this statement did not constitute a reasoned award in relation to the quantum of Counterclaim E, and that it therefore gave rise to breaches of Articles 34(2)(a)(iii) and (iv), and 34(2)(b)(ii) of the Model Law, thus entitling the court to intervene.  These provide, so far as relevant, as follows:-

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

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

…

(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 …; or

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties … or failing such agreement, was not in accordance with this Law; or

(b) …

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

6.  On behalf of the plaintiff, Mr Ho S.C. (who did not appear in the court below), contended that each of these provisions was engaged by reason of the alleged failure of the tribunal to give reasons for its decision to award the amount it did in respect of Counterclaim E. He pointed out that Article 31(2) of the Model Law requires an award to state the reasons on which it is based, unless the parties have agreed that no reasons are to be given, or it is an award on agreed terms, and that there was nothing in the parties’ agreement dispensing with the need for reasons to be given – on the contrary, clause 30.3 of the agreement expressly called for a reasoned award.  He submitted that, by failing to give reasons, the award made by the tribunal was given in excess of its authority (thus contravening Article  34(2)(a)(iii)), was not in accordance with the procedure agreed by the parties (thus contravening Article 34(2)(a)(iv)) and should be regarded as being contrary to the public policy of Hong Kong (thus contravening Article 34(2)(b)(ii)), as being a breach of natural justice in that it left the plaintiff not knowing the basis on which it had been found liable in the amount determined by the Tribunal.

7.  It is clear from these submissions that in order to succeed on any of these grounds, the plaintiff must establish that the award rendered by the tribunal was one that was not reasoned – i.e. one that did not disclose the basis on which the quantification of the defendant’s losses in respect of Counterclaim E was arrived at.  We therefore deal first with the suggestion that the award was not a reasoned one.

8.  Au J held that it sufficed, in the context of this arbitration, for the panel to deal with the quantum of Counterclaim E in the brief manner that it did, noting that although details of the various items of loss making up the claim under Counterclaim E had been provided in the defendant’s pleading, and were attested to by the witness statement of Mr  Kee Tung given on behalf of the defendant, the plaintiff by its pleadings only put the defendant to proof of such losses, did not advance any positive case that the losses were not as the defendant claimed, did not challenge Mr Tung’s evidence on this aspect of the case in the course of cross-examining him, did not put forward any evidence of its own to suggest that the losses were different or overstated, and made no submissions to challenge the amount of such losses in its post-hearing brief submitted to the arbitrators.  In our view, he was entirely justified in so holding.

9.  By paragraph 255 of the award, the arbitrators stated that they found the quantum of Counterclaim E to be US$4,390,948.00, on the basis that this was the amount claimed by the defendant.  The award thus disclosed to the plaintiff the basis on which the losses arising under this counterclaim had been arrived at.  It seems to us to be entirely appropriate, when considering the sufficiency or adequacy of the short reason given, to have regard to the circumstances of the arbitration, and in particular the manner in which the matter under consideration was dealt with by the parties to the proceedings.  The parties can be expected to know how the issue had been approached by them, and the nature of such arguments as they may have put forward in relation to it.  In the present case, it cannot be supposed that the plaintiff was other than well aware that it had advanced no case contrary to what was being claimed by the defendant, had put forward no contrary evidence of its own, had not sought to challenge the evidence put forward by cross-examination of the defendant’s witness who spoke to such losses, and had made no positive submissions on this aspect of the case.  In those circumstances, we consider that paragraph 255 of the award did enough to inform the plaintiff of the basis on which it had been found liable to pay to the defendant the amount awarded under Counterclaim E.

10.  Mr Ho argued that more was required, relying on the observations of Henry LJ in Flannery v Halifax Estate Agencies Ltd [2000] 1 WLR 377 at 381-382, which were cited with approval by Kwan JA in Wear Me Apparel LLC v Lam Na [2013] 2 HKLRD 1156 at paragraph 26, in which Henry LJ explained that an important rationale for the duty to give reasons was to enable the parties to be left in no doubt as to why they had won or lost, and concluded by stating that:-

“ The rule is the same: the judge must explain why he has reached his decision. The question is always, what is required of the judge to do so; and that will differ from case to case.”

However, the situation in the Flannery case was very different to that here.  There, the judge in the court below had heard reasoned analysis by expert witnesses for the parties before deciding to accept the evidence of one side’s expert.  In those circumstances, it was unsurprising that it should be held that it was necessary to provide a reasoned rebuttal of the evidence of the other side’s expert, whose evidence was not accepted.  The position here is, as noted above, very different – there was no competing case as to the quantum of Counterclaim E put forward for the tribunal’s consideration.  As Henry LJ observed in Flannery, what is required by way of reasons will differ from case to case, and for the reasons we have explained, we are of the view that what was provided by the tribunal in this case was adequate to meet what was called for.

11.  Mr Ho also submitted that:-

(1) The quantum of Counterclaim E was clearly not accepted by the plaintiff, as was apparent from its defence and counterclaim, and it was therefore a matter in dispute, which needed to be fully addressed by the arbitrators.

(2) There were documents from the defendant which appeared to be inconsistent with the quantum that was being claimed.

(3) The evidence of Mr Tung was mere assertion, based on information he had obtained, and as such should be regarded as being of little worth.

(4) The failure of his clients to put forward a positive case, cross-examine Mr Tung, or make submissions on this aspect of the matter did not absolve the tribunal from having to consider the matter for itself – in particular, it was suggested that the common law principle in Brown v Dunn, by which unchallenged evidence is taken to be accepted, should not be assumed to apply to an international arbitration.

12.  With respect, we do not think that any of these further points are well founded.

13.  Although it is right that the quantum of Counterclaim E put forward by the defendant was not accepted by the plaintiff, in that the defendant was being put to proof of it, the nature and extent of the challenge to the defendant’s case was, in our view, highly relevant to the question of what needed to be done by the arbitrators in dealing with this aspect of the case.  For the reasons which we have explained, we consider that the response of the arbitrators was entirely adequate.

14.  As for the documents that Mr Ho referred us to, these were not put to Mr Tung while he was giving evidence.  Indeed, they were not referred to at all before the arbitrators, whose attention was never drawn to them.  In these circumstances, it is scarcely surprising that the panel did not deal with them.

15.  The evidence of Mr Tung, having been set out in his witness statement and adopted as his evidence in chief at the hearing before the arbitrators, clearly formed part of the evidence before them, on which they could rely in coming to their award.

16.  As for the suggestion that the absence of challenge should not be taken as acceptance of the case advanced by the defendant, or of the evidence put forward by it in support of its case, we do not think that the panel is to be taken to have thought that the defendant’s case as to the quantum of Counterclaim E was accepted by the plaintiff.  It was plain that the plaintiff did not accept that case, but given that the form of the arbitration involved an adversarial process, with statements of case, evidence, cross-examination and submissions from both sides, it seems to us that in the absence of any challenge to the matters put forward by the defendant, whether by way of positive evidence to the contrary, or by way of drawing attention to deficiencies or unsatisfactory aspects of the case being advanced, the arbitrators were entitled to conclude that the defendant’s case was made out.  We do not regard this as necessarily involving the application of the common law principle identified in paragraph 11(4) above, but as being a simple matter of common sense, which arises from the nature of the arbitral procedure adopted.

17.  For the foregoing reasons, we are satisfied that there was, in the circumstances of this case, no failure on the part of the arbitrators to give reasons (or sufficient reasons) for their decision in respect of the quantum awarded in relation to Counterclaim E.  That being so, the question of whether or not Articles 34(2)(a)(iii) and (iv) and 34(2)(b)(ii) of the Model Law are engaged does not therefore arise, and, like the judge, we express no view as to this.

18.  For these reasons, the appeal was dismissed.  It was thus unnecessary to consider the point sought to be raised in the defendant’s proposed respondent’s notice, and we therefore made no order on the application for leave to file that notice out of time.

19.  So far as costs were concerned, we considered that the practice of awarding indemnity costs against a party who unsuccessfully applies to set aside or resist the enforcement of an arbitral award, as established by A v R [2009] 3 HKLRD 389 and Pacific China Holdings Ltd (in liquidation) v Grand Pacific Holdings Ltd (unreported, CACV 136/2011, 23 July 2012, CA) should be followed, as there were no special circumstances that called for a departure from that course.  On the contrary, we considered that this appeal had no realistic prospects of success, and that an order for indemnity costs, with certificate for two counsel, was entirely justified.