On 22 December 2016 Justice Mimmie Chan delivered her reasons in A v D, where the Plaintiffs had applied to set aside an arbitrator's decision on the ground of serious irregularity under section 4 of Schedule 2 of the Hong Kong Arbitration Ordinance (Cap. 609) (Ordinance). Justice Chan dismissed the Plaintiffs' application.
The judgment demonstrates the high threshold required for setting aside a decision by an arbitrator in Hong Kong. While Justice Chan did not provide detailed reasons for her costs order, it is noteworthy that costs were awarded against the Plaintiffs on an indemnity basis.
1. Background
The Plaintiffs and the Defendant had been equity partners in a law firm pursuant to a letter agreement dated 11 May 2007 (Agreement). The Defendant gave notice of his intention to retire from the firm with effect from 15 November 2009. Disputes then arose as to amounts alleged to be due. The parties submitted their dispute to arbitration pursuant to the arbitration clause in the Agreement. The Plaintiffs sought payment of loans and reimbursement of profits tax in the arbitration and the Defendant counterclaimed for outstanding commissions, basic drawings and an account of profit costs since his retirement.
In a preliminary ruling dated 13 November 2015 (Ruling), the arbitrator ruled that the Defendant was an equity partner of the Firm "during the Relevant Period ie between 1 May 2007 and 15 November 2009" and "the Defendant would have no entitlement to Further Profit Costs beyond the Relevant Period". The Ruling was not contested by the parties.
After the Ruling, the Plaintiffs applied to the arbitrator to strike out the Defendant's counterclaim in the Arbitration. The strike-out application was dismissed by the arbitrator in a decision dated 23 March 2016 (Decision). The Plaintiffs applied to the High Court of Hong Kong to set aside the Decision on the ground of serious irregularity under section 4 of Schedule 2 of the Ordinance.
2. Judgment by the Hong Kong court
The court's jurisdiction to set aside an arbitrator's decision on ground of serious irregularity under Schedule 2
Justice Chan pointed out that a set-aside application on the ground of serious irregularity under section 4 of Schedule 2 of the Ordinance is available only if the parties have expressly opted for Schedule 2 of the Ordinance to apply. The Agreement did not expressly provide that the provisions of Schedule 2 applied.
Section 100 of the Ordinance provides that Schedule 2 also applies to arbitration agreements entered into before the commencement of the Ordinance on 1 June 2011 that "has provided that arbitration under the agreement is a domestic arbitration". The Agreement did not expressly provide for domestic arbitration.
However, the Plaintiffs argued that the arbitration should nevertheless be considered domestic, relying on the distinction between the expression "which has provided" in section 100 of the Ordinance and "has provided expressly" in section 102 of the Ordinance. The Plaintiffs argued the absence of a requirement in section 100 for there to be "express" provision means that Schedule 2 of the Ordinance will automatically apply under section 100 so long as the arbitration meets the test for a domestic arbitration under the repealed Arbitration Ordinance Cap 341.
Justice Chan did not accept the Plaintiffs' argument, pointing out that "If the intention behind … section 100 … is that Schedule 2 is to apply to domestic arbitrations or domestic arbitration agreements within the meaning of the repealed Cap 341, section 100 could simply have provided for Schedule 2 to apply to 'domestic arbitrations' or to 'domestic arbitration agreements'. As presently drafted, section 100 … not only refer to an arbitration agreement, but also to provision having been made in the agreement, that the arbitration is a domestic one."
Justice Chan also did not accept the Plaintiffs' argument that the arbitration was by implication a domestic arbitration simply because all the parties are Hong Kong residents and have a place of business in Hong Kong. Justice Chan pointed out that under repealed Cap 341, parties to a domestic arbitration agreement could still opt out of the domestic arbitration regime by agreeing that their agreement is to be treated as an international arbitration.
Set-aside application under section 81 Arbitration Ordinance and section 34 UNCITRAL Model Law
The Plaintiffs also sought to set aside the Decision under section 81 of the Ordinance, which incorporates Article 34 of the UNCITRAL Model Law and provides a number of grounds for an applicant to set aside an arbitration award. Justice Chan dismissed the application, as the Plaintiffs failed to state any specific ground to asset aside the Decision under section 81 of the Ordinance.
Specifically, Justice Chan referred to Order 73 rule 5(4) Rules of the High Court, which requires that an application to set aside an arbitral award under section 81 of the Ordinance must state the grounds of the application. Justice Chan also referred to KB v SHCCT 13/2015 and Free Form Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] 3 HKC 415 and stated that "it is an abuse of process if an applicant fails to state in the originating summons the grounds of its application under section 81 … of the [Arbitration] Ordinance."
OBITER COMMENTS ON THE SERIOUS IRREGULARITY ALLEGED
Justice Chan further said in obiter that "even if I was wrong, in ruling that section 4 of Schedule 2 does not apply to the Arbitration, the Plaintiffs' application has no merit". The basis of the Plaintiffs' application to set aside the Decision was that the arbitrator was revisiting and/or reinterpreting his earlier Ruling when he made the Decision. Justice Chan held the Decision was neither a reversal nor a reinterpretation of the Ruling and was a logical consequence of the findings in the Ruling.
CONCLUSION
Justice Chan's decision in this case is consistent with the pro-arbitration approach adopted by the Hong Kong judiciary, and provides some clarification on the "automatic application" of Schedule 2 of the Ordinance to arbitration agreements entered into prior to the coming into effect of the Ordinance. The decision also affirms the decision in Free Form Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] 3 HKC 415 that any application for setting aside an arbitral award under section 81 of the Ordinance and Article 34 of the Model Law must specifically set out the grounds of application and failure to do so will be regarded as an abuse of process.
