In the recent case of W v AW,[1] W sought to set aside an award in the Hong Kong Court of First Instance, relying on issue estoppel. Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided, and one of the parties seeks to re-open that issue in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant.[2]
AW sought to enforce the award and applied for security pending the Court’s decision on the setting aside application.
The Honourable Madam Justice Mimmie Chan, the judge in charge of arbitration-related court proceedings, refused to grant security because there was substantial injustice arising out of the award which she considered manifestly invalid. The findings made in the award contradicted the findings made in an earlier award on the same issues between the same parties. Although there was a common arbitrator in both arbitrations, the second tribunal neither explained in its award as to why there were inconsistent findings, nor did it give the parties an opportunity to address it on the previous award before it made its own award.
The case highlights the potential risks of inconsistent outcomes in related, but separate arbitrations, and clarifies the duty of an arbitrator sitting in related arbitrations between the same parties but with different tribunals members.
Factual Background
In September 2015, W, AW and related parties entered into a Framework Agreement setting out their rights in relation to an envisaged acquisition by a Mainland investor of 80% of the shares in AW’s company for around RMB 1 billion. In December 2015, W and AW entered into a Share Redemption Agreement for AW to redeem W’s shares in AW. Both agreements were part of a series of transactions intended to pave the way for the acquisition.[3]
The acquisition did not complete and disputes arose under both agreements. The disputes were referred to HKIAC arbitration: (i) in January 2017, W and a related party commenced Arbitration 1 against AW and related parties under the Framework Agreement; and (ii) in June 2017, AW commenced Arbitration 2 against W under the Share Redemption Agreement.
Different tribunals were constituted, except that AW appointed the same co-arbitrator (“A”) in both arbitrations.
In Arbitration 1, W sought specific performance of the Framework Agreement and alternatively damages for breach of contract. AW counterclaimed for damages alleging misrepresentations as to W’s shareholding in AW. In Arbitration 2, AW sought to rescind the Share Redemption Agreement for misrepresentation and claimed damages. Although the agreements which gave rise to the arbitrations were different, the pleadings of the misrepresentation claims against W were essentially identical.
In March 2020, Tribunal 1 rendered its award in Arbitration 1 and in July 2020, Tribunal 2 rendered its award in Arbitration 2. Tribunal 1 found in favour of W on its claims for breach of the Framework Agreement and dismissed AW’s misrepresentation counterclaim. However, Tribunal 2 found in favour of AW’s misrepresentation claim, allowed AW to rescind the Share Redemption Agreement and ordered W to repay around USD 3.8 million to AW, plus interest and costs.
W challenged Award 2, while AW sought to enforce it
In October 2020, W applied to the Court to set aside Award 2, relying on issue estoppel. W argued that Award 2 was in conflict with Hong Kong public policy as it contravened principles of fairness, due process and justice. Although Tribunal 2 (including A) was bound by the findings on common issues already determined in Award 1, it ignored these findings and instead made inconsistent findings on the same issues between the same parties.[4]
In December 2020, AW applied for leave to enforce Award 2 and for security to be provided by W in respect of the sums payable under Award 2 as a condition for the further conduct of W’s setting aside application.
In deciding whether to order security, the Court has to consider two key factors.[5] First, the strength of the argument that Award 2 was invalid – if Award 2 was manifestly invalid, the Court would not grant security, but if it was manifestly valid, the Court would either grant immediate enforcement or substantial security. Second, the ease or difficulty of enforcement of Award 2 and whether it would be rendered more difficult.
In June 2021, Chan J decided on AW’s application for security. She found that Award 2 was manifestly invalid and that enforcement would not be rendered more difficult because neither party had assets in Hong Kong which was chosen as a neutral forum. Chan J dismissed the security application because it would not have been just to order security given that W had a strong case on the merits to set aside Award 2.
The manifest invalidity of Award 2
The misrepresentation claims in the arbitrations turned on the same alleged representations. However, while Tribunal 1 held unanimously that there was no actionable misrepresentation, Tribunal 2 held unanimously that the Share Redemption Agreement was rescinded by misrepresentations. Chan J found that it was clear from the awards that the tribunals made inconsistent findings on the same issues of fact and law forming a necessary ingredient in the cause of action of misrepresentation.
The Court is only concerned with the structural integrity of the arbitral process and the award. Therefore, the Court may only consider whether the award should be set aside and not enforced if there is conduct which is serious or egregious, such that due process is undermined.[6]. Accordingly, Chan J had to consider whether it would be just to permit both awards to stand and bind the same parties notwithstanding the inconsistencies in the awards. This turned on the issue of whether W was at fault in failing to draw to the attention of Tribunal 2, before Award 2 was made, to the relevant factual findings made in Award 1.
The parties submitted as follows. AW argued that arbitration proceedings were adversarial and that Tribunal 2 could not be expected to deal with issues decided in Award 1, when W neither pleaded issue estoppel nor informed Tribunal 2 of Award 1. W replied that it was only after Award 2 was made that it became aware that the findings of Tribunal 2 were inconsistent with those in Award 1. Moreover, W had advised Tribunal 2 during the hearing that there were concurrent proceedings between the parties with a risk of inconsistent findings. W also highlighted that A was a member of Tribunal 1 and aware of the issues decided in Award 1.
Chan J concluded that Award 2 could not be enforced because it lacked the necessary fairness and due process. That A was a common arbitrator in both arbitrations was material to her decision:
- A did not issue any dissenting decision in either award which meant that A himself had made inconsistent findings. A did not explain in Award 2 why the findings on the same facts were different nor why A did not consider W and AW to be bound by the findings in Award 1. A’s failure constituted injustice and grave unfairness to W.[7]
- Fairness and justice would have required A to invite submissions from W and AW in Arbitration 2 as to the effect of Award 1 on the issues to be decided in Arbitration 2.
- Confidentiality of Arbitration 1 and Award 1 did not prevent A from disclosing Award 1 to the other members of Tribunal 2. This is because the legitimate use of an earlier award in a later arbitration between the same parties did not raise the mischief against which confidentiality rules are directed.[8]
- W was entitled to appoint a different arbitrator of its choice in Arbitration 2 after AW had appointed the same arbitrator, and to expect that the arbitrator would discharge his duty to act fairly and impartially.
Comments and takeaway
Parties who enter into agreements which form part of the same transaction or a series of transactions should make an informed and conscious decision as to whether disputes arising out of or in relation to any of these agreements should be resolved in one arbitration. If so, parties should adopt identical – or at least compatible – arbitration clauses in all related agreements and to choose arbitration rules which offer multi-party and multi-contract contract regimes. These regimes seek to reduce the risk of parallel proceedings and inconsistent outcomes by allowing parties to make claims arising out of more than one contract in a single arbitration, to join additional parties, or to have related proceedings consolidated or at least conducted concurrently.
However, even such regimes are available, it is not always possible to engage them. For example, it may be too late to consolidate two arbitrations into one because the first arbitration is too advanced when the seconds commenced and/or different tribunals are constituted (as was the case in W v AW). Reasons for parties to appoint different arbitrators in related proceedings may vary; the decision may be strategic or a party may prefer an arbitrator with different qualifications in the second arbitration.
While the risk of inconsistent outcomes cannot be eliminated where related disputes involving the same or similar are to resolved in separate arbitrations, the risk can be mitigated. Parties should consider carefully what information to introduce in the second arbitration through pleadings, evidence, legal submissions and communications with the tribunal. If the same issues comes up in the second arbitration, it is important to raise issue estoppel rather than merely relying on a common arbitrator to bring any previous decisions on the same issue between the same parties to the co-arbitrators’ attention.
[1] W v AW [2021] HKEC 2792; [2021] HKEC 2792.
[2] See Arnold & Others v National Westminster Bank plc [1991] 2 AC 93, 105, endorsed in Mohammed Amjad v John M Pickavant & Co [2013] 1 HKC 145.
[3] The facts and structure of the transaction have been simplified for the purpose of this article.
[4] W also complained of apparent bias of the presiding arbitrator in Arbitration 2 but the Court saw no merit in W’s complaint.
[5] The applicable principles, which were not in dispute between the parties, are as set out in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208 at 212 and have been applied in Hong Kong in Guo Shun Kai v Wing Shing Chemical Co Ltd [2013] 3 HKLRD 484 and Dana Shipping and Trading SA v Sino Channel Asia Ltd [2017] 1 HKC 281; see also: Hong Kong court upholds arbitral award challenged on grounds of lack of arbitration agreement and public policy.
[6] See Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1 (CA) at paras 94 and 105.
[7] The court relied on A v B [2015] 3 HKLRD 586 where it was held that it was a serious irregularity and a denial of due process which caused substantial injustice and unfairness to the parties if an important issue was not addressed in the award.
[8] See Judicial Committee of the Privy Council in AEGIS Ltd v European Reinsurance Co of Zürich [2003] 1 WLR 104 1.
