In a "highly unusual case", the Hong Kong High Court has held an award rendered in HKIAC arbitration proceedings "manifestly invalid" on the basis that the tribunal's findings were inconsistent with an earlier award rendered in a separate arbitration but involving the same parties and one of the same arbitrators.
The dispute in W v AW [2021] HKCFI 1707 arose from two related agreements, each containing HKIAC arbitration clauses. Two separate arbitrations were commenced involving the same parties and overlapping issues of fact, with one of the parties appointing the same arbitrator to both tribunals. An award in the first arbitration was handed down in March 2020. An award in the second arbitration followed 4 months later in July 2020. The two awards reached different conclusions on an identical claim for misrepresentation.
W, as the successful party in the first arbitration, applied to the Hong Kong court to set aside the second award on the basis that it was in conflict with the public policy of Hong Kong. Amongst other things, it was argued that the second tribunal had ignored findings on common issues made in the first award, and had in fact reached inconsistent findings notwithstanding that one of the arbitrators had been involved in both cases. AW, in turn, applied for leave to enforce the second award together with an order that W pay security for the sums owed under that award.
The Court rejected AW's application for security. In reaching this decision, the Court acknowledged that in the particular circumstances of this case, the second award was invalid, could not be enforced, and it was likely that W's application to set aside the second award on public policy grounds would succeed. The fact that AW had nominated the same arbitrator in both proceedings, but that this arbitrator had made contradictory findings, was a material factor in the court's decision. The inconsistency of the arbitrator's approach called into question the overall integrity of the process and was a matter of "grave unfairness" to W.
This is a rare instance of the courts in Hong Kong considering an arbitral award invalid. Although the facts of the case are somewhat extreme, the decision does illustrate the pitfalls of running parallel arbitration proceedings under related contracts involving the same parties. Many arbitral institutions, including the HKIAC, introduced consolidation and joinder provisions several years ago to avoid precisely this scenario where separate tribunals might reach inconsistent decisions on common issues of fact. This case therefore provides a practical example of why parties to multi-party disputes should give early consideration to the use of consolidation provisions at the outset of the dispute, or the appointment of common arbitrators between parallel proceedings to minimise the risk of inconsistent decisions.
Background
In late 2015, W and AW entered into two related agreements, a Share Redemption Agreement and a Framework Agreement, as part of a broader transaction involving the acquisition of AW's interests. W and AW were the only parties to the Share Redemption Agreement, whereas the Framework Agreement also involved four other parties. Both contracts contained HKIAC arbitration agreements.
A series of disputes subsequently arose. W commenced arbitration against AW under the Framework Agreement and, in response, AW filed a counterclaim in the proceedings and commenced a separate arbitration under the Share Redemption Agreement. In both proceedings, AW appointed the same arbitrator and made identical claims of misrepresentation. The remaining arbitrators in both sets of proceedings were different.
On 13 March 2020, the first tribunal issued an award in W's favour, dismissing AW's claim for misrepresentation. Just a few months later, however, on 13 July 2020, the second tribunal issued an award in AW's favour in which it essentially upheld the same misrepresentation claim. Both awards were unanimous decisions.
W applied to set aside the second award arguing (amongst other things) that the discrepancy between the two decisions ran contrary to Hong Kong public policy. In turn, AW applied for leave to enforce the second award and sought an order that W pay security. The decision of Mimmie Chan J was made in the context of the security application, although in rejecting that application she made clear that W had a strong case to set aside the second award on the basis that it was "manifestly invalid".
Decision
W's claim that the second award should be set aside was based on the principle of issue estoppel, which arises where a particular issue forming a necessary ingredient in a cause of action has been already decided, but then that same issue is re-opened in subsequent proceedings between the same parties involving a different cause of action.
In the present case, Mimmie Chan J found that it was "clear" that the arbitrators in the two sets of proceedings had "made inconsistent findings, on the same issue of fact and law forming a necessary ingredient in the cause of action of misrepresentation". Although the two proceedings had ultimately been concerned with different causes of action arising from two distinct contracts, the common issues relating to the alleged misrepresentation were necessary and essential to the reasoning of both arbitral tribunals. Their findings, however, were contradictory and could not be reconciled.
Crucially, the Court found that W was entitled to expect the second tribunal to have dealt with the question of issue estoppel after the first award had been handed down. The fact that AW had appointed the same arbitrator in both sets of proceedings was an important point of distinction in this case. The arbitrator should have been alive to the potential for inconsistent decisions once he had seen the reasoning adopted in the first arbitration, such that "fairness and justice of the case required him to invite submissions to be made by W and AW in Arbitration 2 as to the effect of Award 1 on the issues to be decided in Arbitration 2". Instead, the arbitrator himself made inconsistent findings across the two arbitrations, because he did not issue a dissenting decision in either case even though the findings of the tribunal were contradictory.
Importantly, the Court noted that it was not an answer to say that the two arbitrations were confidential. Specifically, this did not prevent AW's appointed arbitrator from disclosing the first award to the other members of the second tribunal. Citing previous authority on this issue, Mimmie Chan J noted that: "the legitimate use of an earlier award in a later arbitration between the same parties would not raise the mischief against which confidentiality rules are directed".
The Court therefore found the failure to deal with and explain these inconsistencies constituted "injustice and grave unfairness to W", which fell short of fairness and due process underpinning the arbitral process. Accordingly, the Court held that the second award was "manifestly invalid".
Comments
As noted above, and as acknowledged in the decision, this is a highly unusual case. The fact that AW had appointed a common arbitrator in both proceedings – and that this arbitrator should have been able to deal with the potential inconsistency in the two awards – was a material factor in the court's reasoning. This heightened the sense of unfairness to W. This was not simply a case where two separate tribunals had reached inconsistent decisions. Rather, in this case, the same arbitrator in two proceedings had reached findings which were plainly contradictory. It was this point in particular which appears to have tipped the scales.
The practical significance of the judgment is that it highlights the risks of running separate, parallel proceedings on matters arising from the same underlying suite of contracts. As indicated above, most institutional rules now provide comprehensive mechanisms for the consolidation of arbitrations, or the joinder or parties, to prevent this sort of difficulty arising. There may also be advantages in this situation from appointing the same arbitrators in related proceedings to mitigate the risk of inconsistent findings. That being said, the Court noted expressly in this case that it did not consider W to be "at fault" for having appointing different arbitrators in the two proceedings, even though it knew that AW had appointed the same co-arbitrator in both cases: "It is the right of a party to appoint any arbitrator of its choice. It is entitled to expect that whoever it appoints, the candidate would discharge his/her duty to act fairly and impartially".
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