Hong Kong Court Clarifies Threshold For Setting Aside Awards

• Published date: 11 August 2022
• Subject Matter: Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution
• Law Firm: Herbert Smith Freehills
• Author: Ms May Tai, Simon Chapman, Antony Crockett, Kathryn Sanger and Briana Young

A Hong Kong Court recently adopted a resoundingly pro-arbitration stance in a decision which emphasised the high thresholds of irregularity that would need to be established before an arbitration award can be set aside.

In LY v HW, [2022] HKCFI 2267, the Court dismissed an application to set aside an award based on claims that the Tribunal had failed to deal with the key issues and failed to provide sufficient reasons for its decision in the award. This decision underlines the narrow manner in which grounds for refusal of enforcement are to be construed and fortifies the enforceability of arbitration awards in Hong Kong.

Background

A Hong Kong company (LY) had entered into an Agreement with a Chinese company (HW), for the distribution of pharmaceutical products on the Mainland. Under the Agreement, the exclusive distributor HW was required to achieve a minimum annual sales value (ASV) target.

In May 2019, LY issued a notice of termination of the Agreement claiming that HW had failed to meet the ASV target. HW disagreed with LY's manner of calculating the ASV and initiated an arbitration claiming that such termination was invalid.

The Tribunal rendered an award in favour of HW, finding that LY's termination was invalid under the Agreement. LY subsequently filed an application for setting aside the award under section 81 of the Arbitration Ordinance, claiming that the Tribunal had failed to deal with the following issues that were integral to the resolution of the parties' dispute:

• The existence and nature of the Rollover Agreement put forward by HW for its calculation of the ASV.
• The power of the Joint Review Committee (established under the Agreement) to make determinations on the ASV for future years.

LY contended that the Tribunal had provided insufficient reasons in the award, which amounted to a denial of due process. On that basis, LY sought to set aside the award on grounds of it being contrary to the public policy of Hong Kong.

Decision

While considering the set aside application, the Court referred to a vast range of prior decisions that narrowly construed the public policy ground, setting aside awards only in cases of egregious errors causing substantial injustice.

The Court also considered section 67 of the Arbitration Ordinance, which implements Article 31 of the Model Law and requires an award to state the reasons upon which it is based. It held that the reasons provided by a tribunal do not need to be elaborate and lengthy, since the object...