When will the Hong Kong courts set aside arbitral awards for arbitrator misconduct?

17 December 2018, Construction, by Joseph Chung,

Background

N v W [2018] HKCFI 2405 concerned a project in which the Government was the employer, the Plaintiff’s parent company (Parent) the main contractor, the Plaintiff the administrator, and the Defendant a sub-contractor. In a related arbitration between the Government and the Parent, WL acted as lawyers for the Parent. In the present arbitration, the Defendant’s legal representatives (TC) worked in collaboration with WL for the Defendant. It was the Plaintiff’s case that WL acted in a position of conflict of interests, since it was in possession of confidential information of its former client, the Parent, and/or the Plaintiff, and there was a risk that WL had disclosed to the Defendant such confidential information, so as to prejudice the Plaintiff’s interests as well as the fairness of the arbitration. 

The Plaintiff made its complaint concerning WL acting for the Defendant in the arbitration and requested that closing submissions be postponed or the arbitration stayed, pending investigation by the Law Society of Hong Kong into the Plaintiff’s complaint against WL (Investigation).

The arbitrator refused its request and issued his award because:

(1)     the closing submissions and publication of the award should not be indefinitely delayed pending the Investigation;

(2)     the Plaintiff did not explain how and in what way the Plaintiff might have been prejudiced by the collaboration between WL and the Defendant’s legal representatives; and

(3)     the Plaintiff did not suggest what documents/evidence produced in the arbitration had been improperly obtained, should be struck out or given little weight in view of their having been obtained improperly.

The arbitrator pointed out that if there was further development in the Investigation and new matters should be raised or discovered in the Investigation which would materially affect the admissibility of evidence because of any breach of confidentiality, the Plaintiff could raise those matters with the arbitrator before publication of the award. The Plaintiff did not pursue any further relief. 

The Plaintiff then applied for an ex parte injunction to restrain TC and WL from continuing to act in the present arbitration. For reasons not explained by the Plaintiff, such injunction was refused by the Court.

Application to CFI

The Plaintiff claimed that the arbitrator had misconducted the arbitration proceedings in that he (i) failed to address the professional misconduct of the Defendant’s legal representatives and the credibility of the Defendant itself, causing substantial injustice to the Plaintiff; and (ii) did not accede to its request to postpone the making of closing submissions, or to stay the arbitration, pending the outcome of the Investigation. Pursuant to the previous version of the Arbitration Ordinance (Cap 341), the Plaintiff applied to the Court to:

(1)     remit the arbitration award for reconsideration by the arbitrator by reason of a defect or error patent on the face of the award and/or misconduct of proceedings by the arbitrator (Section 24); or

(2)     set aside the arbitration award by reason of misconduct by the arbitrator (Section 25).

Decision

The Court referred to some of the cases in which awards have been set aside for misconduct, including instances of: 

  • Corruption, bribery, and the arbitrator calling witnesses or taking evidence in secret without giving the parties an opportunity of dealing with the evidence.
  • Failure to act fairly and impartially, giving the parties a reasonable opportunity to present their cases and to deal with the cases of their opponents. 

The Court pointed out, however, that the mere fact that the arbitrator made errors of fact or law does not constitute “misconduct”. Further, bearing in mind the objectives of the Arbitration Ordinance to uphold the validity of arbitration agreements and the finality of arbitral awards, the Court would only exercise its discretion to set aside an award for the arbitrator’s misconduct under section 25 of the Ordinance, if there was serious, even egregious, conduct of the arbitrator which offends the Court’s most basic notions of justice, morality, and fairness, and which results in a denial of due process and serious prejudice to a party.

Rejecting the Plaintiff’s application, the Court found that:

(1)      Even if the arbitrator had made a mistake of law or of fact in applying the wrong test for ascertaining whether the Plaintiff had valid grounds to complain of WL working in collaboration with TC for the Defendant in the arbitration, that did not by itself constitute misconduct. The Court was not entitled to review the merits of the arbitrator’s decision and had no jurisdiction to set aside or remit an award on the ground of errors of fact or law. 

(2)      When the Plaintiff made its complaint concerning WL acting for the Defendant, the Plaintiff only requested the arbitrator to adjourn or postpone the parties’ closing submissions. The Plaintiff had not pursued any further relief from the arbitrator after its failed application to the Court for injunctive relief against TC and WL and after the arbitrator refused its application for an adjournment. The Plaintiff could have made submissions to the arbitrator when the hearing resumed on (i) the prejudicial effect of WL and TC continuing to act for the Defendant in the arbitration, (ii) WL’s breach of professional duties, and (iii) the credibility of the Defendant’s witnesses, if the Plaintiff claimed that the Defendant had knowledge of WL’s role and had lied about WL’s collaboration with TC and/or WL’s possession of confidential or other information of the Plaintiff. That was not done. The Plaintiff was simply content to proceed with making the closing submissions and made no further application to the arbitrator to withhold or stay the publication of the award. The arbitrator did not therefore have the opportunity to deal with and cure the alleged irregularity now said to constitute misconduct and it was unfair to now permit the Plaintiff to set aside the award on the basis of such irregularity. It could be said that the Plaintiff had waived any alleged irregularity that may have arisen by virtue of WL’s involvement in the arbitration.

(3)      By failing to produce evidence of any actual misuse or wrongful disclosure of the Plaintiff’s confidential information which had affected the award, the Plaintiff had failed to demonstrate to the Court the serious prejudice it sustained as a result of the alleged misconduct of the arbitrator. On the face of the award, it could not be seen how the arbitrator’s findings on repudiation could have been affected. 

Comment

When asked to exercise discretion to set aside an award for the arbitrator’s misconduct, the court is only concerned with the structural integrity of the arbitration proceedings. If a party failed to make submissions or produce evidence, such that the arbitrator did not have the opportunity to rule on the issues, and the court could not see how the arbitrator could have reached a different decision after hearing its submissions, the court is likely to uphold the validity of the arbitration agreement and the finality of the arbitral award.

Given that the construction circle in Hong Kong is relatively small, it is not uncommon for law firms to run into conflicts, directly or indirectly. The usual remedy sought by the party who feels aggrieved is to obtain an injunction restraining the law firm conflicted out from continuing to act. In McKenna  & Co (a firm) v. Johnson, Stokes & Master (a firm) (1992), it was held that the test to be applied for granting an injunction was whether a reasonable man, informed of the facts, reasonably anticipates a danger that confidential information provided to solicitors might be used to damage the interests of those who provided it. The Plaintiff in the present case did apply for such injunction but failed (unfortunately, the reason for the Court refusing to grant it is unclear from the judgment). In such case, the plaintiff has to show actual misuse or wrongful disclosure of its confidential information in order to set aside the award-the mere danger of the same happening is not good enough.