One of the advantages of arbitration is that an arbitral award granted by a competent tribunal is final and binding with limited options for appeal or review. The award is then enforceable including in other jurisdictions.
As Hong Kong is a party to main conventions and agreements for the enforcement of arbitral awards including the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Hong Kong Courts are often asked to recognise and enforce foreign arbitral awards against Hong Kong parties. Whereas the Courts usually will not interfere with foreign arbitral award in view of the principle of minimum curial intervention, in a recent case of A v. B and Others [2024] HKCFI 751, the Hong Kong Court of First Instance upheld an award challenge and refused to enforce an American arbitral award on the ground of lack of reasons : the arbitrator’s failure to give reasons in her decisions.
Case Background
A is a Maryland USA corporation and it operates learning centres and is also the franchisor of “supplemental education business” providing courses outside the school environment. It has licensees throughout the USA and other countries. B is a Hong Kong company and was a long-time corporate licensee of A (the “Licensee”). A and the Licensee executed, among others, 3 licence agreements (the “Agreements”) to operate learning centres adopting A’s system in various locations in Hong Kong (the “Learning Centres”). After several years of operation, the Licensee closed all the Learning Centres and afterwards, the director and shareholder of the Licensee (the “Other Respondents”) commenced operation of education centres through a separate company out of the same locations as the Learning Centres.
A commenced arbitration proceedings against the Licensee and the Other Respondents at the International Centre for Dispute Resolution under the Rules for International Commercial Arbitration of the American Arbitration Association (the “Arbitration”).
After hearing arguments and submissions from all parties, the sole arbitrator made an award in favour of A on all the issues (the “Award”).
A then applied to enforce the Award and seek for, among others, injunctive reliefs (as specified in the Award) in Hong Kong and initially obtained leave from the Hong Kong High Court. The Licensee and the Other Respondents then applied to set aside the leave on the grounds that the arbitral procedure was not in accordance with the parties’ agreement, it would be contrary to public policy of Hong Kong to enforce the Award, and that there was material non-disclosure on A’s part in obtaining the enforcement order.
Issues before the Arbitration
In the proceedings before the Court, it was not disputed that the key issues raised for determination in the Arbitration were :-
(1) whether the Other Respondents had personally guaranteed the liabilities of the Licensee under the Agreements;
(2) the applicability and enforceability of the restrictive covenant under the Agreements; and
(3) the liability and quantification of the damages payable by the Licensee and the Other Respondents.
Court’s Findings
Mimmie Chan J first explained that in considering a challenge to award on the ground of lack of reasons, “awards are to be read generously, in a reasonable and commercial way expecting, as is usually the case, that there will be no substantial fault that can found with it, and always bearing in mind the policy of minimal curial intervention … Any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable”.
The Judge however found that in making the Award, the arbitrator simply set out the provisions which were applicable (which the interpretation and effect of these provisions were in dispute) and stated the orders she made. However generously the Award is read, by objectively reading it and in the context of the issues raised and submissions and arguments made before the arbitration tribunal, there was no analysis made nor any explanation given, however brief, as to how the arbitrator rejected the Licensee and Other Respondents’ submissions and arrived at her conclusions. For example, nowhere in the Award can be found any analysis made by the arbitrator as to how, in the context of the submissions made by the parties, she came to the conclusion that the governing law clause which provides that the Agreements are governed by US Federal Arbitration Act and the laws of the state of Maryland can be enforced, and the law of Maryland applied to the Agreements. There was only a recitation of or reference to clause 28, the governing law clause, without any explanation from the arbitrator as to how she dealt with or considered the parties’ arguments as to the last act necessary to make the Agreements binding, to render the law of Maryland applicable. It is true that an arbitrator does not have to deal with each and every argument made by the parties but the lex loci contractus rule was an essential issue underpinning the decision on the enforceability of the non-compete covenant, and although the last act argument was the key if not the only argument on this issue, it was not dealt with or explained by the arbitrator in the Award.
Mimmie Chan J also ruled that the failings of the arbitrator were sufficiently serious to affect the structural integrity of the arbitral process, and to have undermined due process. She added that for parties who had submitted their dispute to the tribunal for arbitration and determination, they were entitled to expect key issues which affected their rights and liabilities to be dealt with and explained with sufficient reasons in the award.
Finally, the Judge set aside the order to enforce the Award and refused enforcement of the Award.
Conclusion
The above case is considered by some to be unusual in that the threshold to successfully challenge an arbitral award whether local or foreign award on the ground of lack of reasons is very high. Nonetheless, this case demonstrates that the Hong Kong courts will safeguard the minimum standards expected from an arbitrator in order to protect the interests of the parties who submitted their dispute to arbitration. Lastly, parties should also be cautious about the governing law and dispute resolution clauses in agreements.
Our Litigation and Dispute Resolution team has extensive experience assisting international and domestic clients in registration of foreign judgments, complex companies disputes, contractual and commercial disputes and arbitration in the Greater China region especially those of a cross-border nature. If you have any questions on the above eNews or relating to litigation and / or arbitration matters, our experienced Dispute Resolution lawyers would be happy to assist you.