Hong Kong Court Of Appeal Rejects Infra Petita Challenge To HKIAC Award

The Hong Kong Court of Appeal has refused an application to set aside an HKIAC award advanced on the basis of a failure to deal with allegedly key issues, holding that it had been unnecessary for the tribunal to address them because of its findings on other points (LY v. HW [2026] HKCA 936).

The appeal court agreed with the conclusion reached at first instance by Mimmie Chan J, the specialist judge in charge of the Construction and Arbitration List of the Hong Kong Court of First Instance, that there were no grounds to set aside the award (reported here).  The award debtor's contentions that the tribunal had committed an egregious procedural error and the award contravened Hong Kong public policy were both rejected.

The Court of Appeal declined to express a view as to whether an inference that a tribunal has failed to consider an important issue must be "clear and virtually inescapable" (the test applied by the Singapore Court of Appeal in AKN v. ALC [2015] 3 SLR 488), or whether the court should simply ask whether it was apparent to the parties from the award that key issues had been dealt with (the test contended for by the award debtor on the basis of the Hong Kong case of Z v. R [2021] HKCFI 2312).  Even applying the latter test, it was (or should have been) apparent to the parties why the relevant issues were handled by the tribunal as they were.

The decision underscores the high threshold for challenging an award in Hong Kong on infra petita grounds (i.e. failure to deal with a material issue), as illustrated by the summary below extracting key legal principles discussed in the first instance decision (which the Court of Appeal did not interfere with).

Key principles on infra petita challenges in Hong Kong

• The applicant must show that an issue was put to the tribunal, the tribunal failed to deal with the issue, and such failure was "egregious" (in the case of a challenge on due process grounds) or caused "substantial injustice" (in the case of a challenge on public policy grounds).
• An issue is distinct from an argument or submission.  Parties to an arbitration do not have a right to have all their arguments addressed by the tribunal in the award.  Failure to deal with an issue is a failure of a tribunal to deal at all with the case of a party, such as where a claim has been overlooked, or a key issue which is crucial to the result has not been decided.
• The tribunal does not have to set out each step by which it reaches its conclusion and is not bound to structure its decision and reasons in accordance with the issues or submissions as they are presented by the parties.
• It is sufficient for the tribunal to clearly state its determination on the essential questions in dispute and explain the reasons for its decision.  The reasons do not have to be elaborate or lengthy, as the award must be read in the context of how issues were argued before the tribunal, and an award is the result of a private, consensual process.
• An award should be read in a reasonable and commercial way, without a meticulous legal eye endeavouring to pick holes, inconsistencies and faults, but generously, and only to remedy serious breaches of natural justice which cause injustice. 
• Courts will be extremely slow to interfere with the tribunal's decision on which issues are essential and necessary to be addressed in the award, and must be circumspect in deciding whether a tribunal has adequately dealt with an issue or sufficiently explained its decision, to avoid any attempt to review the correctness of the award on either law or facts.

Background

The dispute arose under a distribution agreement pursuant to which the award creditor (a company incorporated in the PRC) had been appointed the exclusive distributor in the PRC of a line of pharmaceutical products.  The rights and obligations of the original seller under the agreement were later assigned to the award debtor (a company incorporated in Hong Kong).

The award debtor purported to terminate the agreement on the ground that the award creditor had failed to meet the 2018 target annual sales value ("ASV").  The award creditor commenced arbitration, arguing (amongst other things) that the 2018 target ASV had been met because 2017 excess inventory should be rolled forward into 2018 (the "rollover argument").  The rollover argument was said to be evidenced by an arrangement whereby 2015 excess inventory had been rolled over to 2016 for the purposes of calculating a contractual rebate (the "rollover arrangement").  The notice of assignment expressly referred to the rollover arrangement as part of the contract being assigned, although it did not in terms provide for the arrangement to apply to future years.

The arbitration proceeded on the basis that PRC law was the substantive governing law of the agreement.  The tribunal rejected most of the award creditor's arguments as to why it had met the target ASV for 2018, but accepted the rollover argument.  It therefore held that the award debtor had wrongfully terminated the agreement, and awarded damages.

The award debtor applied to set aside the award under section 81 of the Hong Kong Arbitration Ordinance on the basis that the tribunal had failed to deal with certain allegedly key issues, including (i) whether the rollover arrangement conflicted with contractual provisions regarding ASV and requiring any amendment of the agreement to be signed and in writing (the "contractual issue"), and (ii) whether it bound the award debtor as assignee under PRC law (the "assignment issue") (a third issue was advanced at first instance but abandoned before the Court of Appeal).  There was no dispute that the tribunal had not made any express findings on these issues in the award. 

Mimmie Chan J rejected the set-aside application on the basis that the relevant points had either been implicitly dealt with by the tribunal or had not needed to be determined in light of the tribunal's findings.  In rendering her decision, the judge conducted an extensive survey of relevant authorities from Hong Kong and other common law jurisdictions.  As part of that discussion, she referred to the judgment of the Singapore Court of Appeal in AKN v. ALC [2015] 3 SLR 488, to the effect that an inference that a tribunal has failed to consider an important issue should only be made if it is "clear and virtually inescapable". 

The award debtor appealed to the Court of Appeal, arguing amongst other things that the judge had wrongly applied the test in AKN v. ALC and that the correct test was simply whether it was apparent to the parties from the award whether key issues had been determined or otherwise dealt with (as set out in Z v. R [2021] HKCFI 2312).

Decision of the Court of Appeal 

The Court of Appeal held that Mimmie Chan J's reliance on well-established legal principles could not be faulted.  The "only point of possible controversy" was the reference to AKN v. ALC, but it was unnecessary for the Court of Appeal to resolve this.  Even applying the test in Z v. R contended for by the award debtor, it was (or should have been) apparent to the parties why the arguments on the contractual issue and the assignment issue were handled by the tribunal as they were. 

The tribunal was "clearly alive" to the contractual definition of ASV and it was clear that the tribunal was engaging with the rollover argument, which was undoubtedly an important issue in determining the ultimate question of whether the award creditor had met the target ASV for 2018.  The conclusion of the tribunal's chain of reasoning was effectively that the amount deducted from the 2017 ASV for rebate purposes was deemed, with the acceptance of the award debtor, to be part of the 2018 ASV for rebate purposes, and hence, in the view of the tribunal, for all other purposes, including the purpose of assessing whether the 2018 target ASV had been met.  It was therefore difficult to see how any point arose in relation to the contractual definition of ASV, and there had accordingly been no need for the tribunal to address that argument.

Similarly, it was not strictly necessary for the tribunal to address the assignment issue, because its premise of a lack of knowledge on the part of the award debtor about the rollover arrangement was without foundation.

Accordingly, neither the contractual issue nor the assignment issue was a key issue in relation to which the lack of detailed discussion by the tribunal rendered the award susceptible to challenge, whether on the ground that the tribunal had committed an egregious procedural error or on the ground that the award was insufficiently reasoned and so contravened Hong Kong public policy.  The set-aside application was therefore dismissed, with the costs of the appeal being awarded against the award debtor on an indemnity basis. 

Comment

The Court of Appeal's judgment is a strong reaffirmation of the high threshold for challenging arbitral awards in Hong Kong, including for failure to deal with a material issue.  When considering such a challenge, the court will read the award reasonably and commercially, rather than searching for omissions.  Depending on the nature of the issue, a party may face difficulty in challenging an award merely because an issue was dealt with implicitly rather than expressly.

Where a party wants a tribunal to decide a particular issue expressly, it should therefore consider making clear during the arbitration why the issue is independently decisive and cannot be bypassed by other findings. 

From a commercial perspective, the decision highlights the importance of clearly documenting recurring operational arrangements such as the rollover arrangement, and ensuring that these are expressly addressed in future contractual amendments or assignments, where appropriate. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.