8 Apr 2024
Case Note - Re: A v B & ors [2024] HKCFI 751 (13 March 2024)
Introduction
Hong Kong is well known to be an arbitration hub bolstered by its status a finance centre and a strong pro-arbitration judiciary. Yet it seems that there has been a flurry of decisions whereby arbitral awards have been set aside or their enforcement been refused. Strangely, in a number of such cases, the basis for these decisions relate to matters outside the control of the parties and stem directly to errors committed by the arbitrator/tribunal.
The Decision in A v B & Ors
A v B & ors [2024] HKCFI 751 (13 March 2024) is the latest in a slew of recent decisions where enforcement of arbitral awards has been refused for what one might call “elementary” defects. (see also Song v Lee[2023] HKLRD 488; [2023]; HKCFI 2540, the infamous “arbitrator Q” case and also G v P [2023] 4 HKLRD 563; [2023] HKCFI 2173 where enforcement was refused as service of notice of arbitration was defective.)
The dispute underlying in A v B concerned a series of license agreements executed between A and B (the “Agreements”). A is a US corporation with its principle place of business in Maryland and B is A’s corporate licensee, a Hong Kong company. C and D, against whom injunctions were entered into for prohibiting them from engaging in any educational business anywhere in Hong Kong (the “Injunctions”), are B’s shareholders and operated the relevant learning centers under license from A (together with A, the “Respondents”).
There were at least three key issues for the Arbitrator to determine:
1) Whether Hong Kong law or Maryland law was applicable to the enforceability of non-compete covenants (the “NCCs”) in the Agreements (the “Governing Law Issue”);
2) The limits of the restraint imposed upon C and D vis-à-vis the NCCs and the Injunctions (the “Reasonableness of Covenant Issue”); and
3) The date on, which the Agreements had been effectively terminated (the “Termination Date”) (particularly of note since the calculation for damages was directly tied to payment of royalty fees from when the learning centres closed up until the Termination Date) (the “Date Issue”).
The Arbitrator, offering virtually no explanation in the award (the “Award”) as to why she came to her conclusions, found in favour of A on all issues.
The Authorities
The case law in this area is unequivocal on the following points:
1) The reasoning process expressed in an arbitration award must be such that the readers of the award, who are usually if not always only the parties themselves, can understand how and why conclusions are reached on key issues (see R v F[2012] 5 HKLRD 278; HCCT32/2011, (3 August 2012));
2) It is expected that the reasons in arbitral awards should be proportional in length and depth to the complexities of how the issue was contended (or not) before the tribunal (see R v F);
3) Although courts should not review the merits of an award, recognition of an arbitral award should be refused if a court is not satisfied that the tribunal had thoroughly considered all the key issues of the dispute (see Z v Y[2019] 1 HKC 244; [2018] HKCFI 2342; and
4) An applicant has a high threshold when it claims that a tribunal has failed to deal with an issue in an award and any inference sought to be drawn that a tribunal failed to consider a key issue can only be made if it is clear and virtually inescapable (see LY v HW [2022] HKCFI 2267; and
5) The tribunal’s failure to deal with an argument or submission made is not equivalent to a failure to deal with an issue, as long as all key issues were dealt with in some way, whether for better or worse, that is enough (see AI & ors v LG II [2023] 4 HKC 135;
[2023] HKCFI 1183, AAB v BBA [2024] HKCFI 699.
On the Governing Law Issue, both parties agreed that Maryland’s lex loci contractus rule applied, i.e. a contract is governed by the law of the place where the last act necessary to make the contract binding had occurred. The Respondents argued that the last act was the signing and delivery of the Agreements by mail in Hong Kong whereas A argued that the last act was the execution of the Agreements by A’s representative in Maryland. In the Award, there was no analysis on how the Arbitrator arrived at the conclusion that the law of Maryland applied to the Agreements, nor was there any statement that she had accepted A’s submissions on this issue.
On the Reasonableness of Covenant Issue, the Respondents argued that the NCCs were not enforceable in Hong Kong because, inter alia, they imposed unreasonable restraints on trade and were not necessary to protect any legitimate interest in Hong Kong. A submitted that the NCCs were enforceable, but only insofar as reasonably necessary for the protection of A’s business. Therefore, if an injunction were to be considered against C and D, there ought to have been analysis as to the period and applicable area of the same; there was none. Furthermore, there was no reason given as to why the Injunctions extended to the whole of Hong Kong as opposed to only where the learning centres had been licensed to operate.
Similarly, on the Date Issue, the Arbitrator did not offer any discussion whatsoever on the competing cases. The Arbitrator merely accepted A’s version as fact without any analysis, comment, or scrutiny.
Against this background, the Hon. Mimmie Chan J found that the Respondents were entitled to question: whether the Arbitrator had considered the key issues (above) at all; and if she had considered them, why she found for A. Accordingly, the learned judge refused to enforce the Award.
Conclusion
A v B along with the recent cases of Song v Leeand G v P serve as a useful reminder for arbitrators, tribunals and parties on the bare minimum of what is expected at arbitration. At the very least, arbitrators must give reasons for decisions on key issues of disputes and stay focused during hearings; and parties must ensure that service of essential documents is properly effected.
In a similar vein, in the UK, Mr. Justice Calver held in H1 v W [2024] EWHC 382 (Comm) that an arbitrator’s failure to remain unbiased, essentially trusting anything that an expert witness had to say without scrutiny or second thought, constituted grounds for his removal; no doubt any application to enforce an award arising from such hearings would also have been refused.
Such obvious points of practice may have gone without saying in the past. Nonetheless, this recent wave of cases only serves to provide guidance, albeit simultaneously highlighting some of the downsides of a private, confidential, yet binding dispute resolution mechanism.
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The article is also available at Lexology here.