In American International Group and AIG Capital Corporation v. X Company [2016] HCCT 60/2015 (30 August 2016), the Hong Kong Court of First Instance has dismissed an application to set aside an arbitral award. In its judgment, the Court found that although the Tribunal may have made errors of law, it could not be established that it had “consciously disregarded” the applicable law in order to reach what it believed to be the fair and equitable outcome.
Background
A dispute arose between the parties to a Share Purchase Agreement (“SPA”), under which the Plaintiffs agreed to sell up to 90% of a subsidiary to the Defendant. The SPA provided a long stop date for closing of the sale and provided for a deposit, representing 10% of the purchase price (the “Deposit”), to be paid into an escrow account. The SPA specified that the Deposit “constitutes a reasonable estimate of the damages that will be suffered by (Plaintiffs) as a result of any breach or failure”. The Defendant failed to raise the necessary funds and completion of the SPA did not take place as envisaged.
The dispute was referred to arbitration in Hong Kong. The tribunal was asked to determine on whether the Plaintiffs were entitled to keep the Deposit as liquidated damages under the SPA, or whether the Defendant had the right under the Escrow Agreement to seek return of the Deposit, since it had failed to obtain the regulatory approvals required to complete the purchase.
The Majority of the arbitral tribunal found that the Plaintiffs were not entitled to keep the Deposit, and that it should be returned to the Defendant. The Plaintiffs applied to the Hong Kong court for the Award to be set aside under s.64 Arbitration Ordinance (Cap 609), on grounds that the arbitrators had disregarded basic principles of New York law, which the parties had agreed would govern the dispute, in order to arrive at what the Majority considered the fair or equitable result. This, it was argued, amounted to the Majority deciding the dispute ex aequo et bona or as amiable compositeur when it was not authorised to do. The Plaintiffs also applied for set aside under various limbs of s.81 Arbitration Ordinance, including that the tribunal had exceeded its mandate.
Judgment
The Court first made clear that even if the findings made by the Majority were wrong in law, this was not a ground for the Award to be set aside (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1). The setting aside remedy under Article 34 of the Model Law is not an appeal on the law. The Court is concerned only with the structural integrity of the arbitration process.
Therefore, the main question for determination was whether the errors of law contended by the Plaintiffs to have been made by the Majority amounted to a “conscious disregard” of the agreed New York law. From a review of the Award, it could not be said that the tribunal had totally disregarded the governing law, since it had considered a host of decisions from the Court of Appeals of New York and of the Supreme Court. The Plaintiffs sought to argue that, notwithstanding the references to New York law, the Award could not have been made but for the Majority’s conscious and deliberate decision to disregard the law. According to the Plaintiffs, the Majority’s conclusion was intentionally “cloaked in purported legal analysis”.
The Court affirmed the need for a disciplined approach to drawing inferences, in particular for inferences of serious misconduct. Such inferences should be drawn only where there is compelling evidence to support them, rather than on a mere balance of probabilities. Experienced lawyers and arbitrators may still make mistakes. It is unjustifiable to conclude, from these errors, that the Majority understood that they had made errors, but chose deliberately to ignore them. There must be proper foundation for any inference to be drawn, and “it is not permissible merely to choose what may be considered to be the more likely of two guesses if neither is properly justified by the primary facts found”. Based on the primary facts of this case, inferring that the Majority had made a conscious and deliberate choice to ignore the binding New York authorities in order to arrive at what the Majority perceived to be the fair result in the arbitration, required a “quantum leap” that was not justified by a fair, objective reading of the Award.
Since the Plaintiffs "failed at the first hurdle" in not establishing conscious disregard of the law, the Court did not need to decide whether the tribunal had exceeded its mandate under s.81 Arbitration Ordinance.
The Plaintiffs’ application to set aside the Award was dismissed with costs on an indemnity basis.
Commentary
In Hong Kong, as in any Model Law jurisdiction, an error of law made by an arbitral tribunal is not a valid ground for setting aside an award. An applicant must prove that there was a "conscious disregard" of the applicable law. Such an inference is often considered an attack on the professional integrity of the tribunal. Therefore, when raised, it must be properly grounded in the primary facts of the case. The Courts will not easily speculate on the reasons or motives behind a tribunal’s decision, nor will they correct an error of law.
