Parallel arbitration risks: HK Court decision in W v AW

On 17 June 2021, Mimmie Chan J in the Hong Kong High Court handed down a judgment in what she termed a “highly unusual case”, W v AW [2021] HKCFI 1707, which illustrates the setting aside risks in running parallel arbitrations.  In gist, Chan J held, in the context of a security for costs application, that a HKIAC arbitral award was “manifestly invalid” on public policy grounds because the Tribunal made findings that were contradictory to an earlier arbitral award issued in a separate arbitration involving the same parties and a common arbitrator.  While the decision was made in the context of a security for costs application, Chan J invited the parties to confer to set aside an arbitration award.

What the case was about

W and AW (and others) entered into a Framework Agreement on 21 September 2015 and a Share Redemption Agreement on 15 December 2015.  Both agreements contained HKIAC arbitration agreements and were part of a series of transactions concerning acquisition of interests in AW.

Subsequently, disputes arose between the parties:

1. W commenced an arbitration against AW and others under the Framework Agreement (“First Arbitration”); and
2. AW commenced an arbitration against W under the Share Redemption Agreement (“Second Arbitration”).

Both arbitrations were referred to three arbitrators.  AW appointed the same arbitrator (“Common Arbitrator”), and lodged an identical misrepresentation counterclaim / claim against W in both Arbitrations.

This was the result:

1. On 13 March 2020, the first arbitral tribunal (“First Tribunal”) handed down an award (“First Award”) in favour of W, dismissing AW’s misrepresentation counterclaim;
2. However, on 13 July 2020, the second arbitral tribunal (“Second Tribunal”) rendered an award (“Second Award”) upholding AW’s misrepresentation claim.

Both Awards were made unanimously.

W applied to set aside the Second Award, while AW applied for leave to enforce the Second Award, and for security for costs.

W relied on, amongst other grounds, the doctrine of issue estoppel, and argued that the Second Tribunal was bound by the findings on common issues already determined in the First Award, but it chose to ignore these findings without dealing with the matter of issue estoppel.  W therefore claimed that the Second Award was in conflict with the public policy of Hong Kong.  AW argued that W had not drawn the attention of the Second Tribunal to the First Award after the First Award had been issued, so W could not now dispute the Second Tribunal’s findings.

The hearing before Mimmie Chan J concerned AW’s security for costs application.

What the Hong Kong Court decided

When considering AW’s application for security, Chan J first considered the strength of W’s argument that the Second Award was invalid.  Having reviewed the parties’ pleadings in the two Arbitrations and the two Tribunals’ findings in the Awards, the judge found, amongst other things, that:

1. AW’s misrepresentation claims in the two Arbitrations concerned identical representations and the material time of making such representations, as found by the Second Tribunal, fell within the timeframe examined by the First Tribunal; and
2. The inconsistencies in the two Awards cannot be reconciled because the representations and their dates were identical, and the arguments were based on the same facts.

Chan J agreed that these inconsistent findings might be sufficient to establish issue estoppel.  However, the judge emphasized that arbitral awards were final and binding between the parties, and the Court’s role was not to review the correctness of the award on either facts or law.  Accordingly, Chan J held that even though it might be said that the Second Tribunal was wrong in law to have ignored the doctrine of issue estoppel, this was not a ground to set aside the Second Award.

That being said, the judge went on to consider the structural integrity of the arbitral process and the Second Award.  Fairness and due process underpin the arbitral process and are the prerequisites for recognition of the arbitral award by the Court.  The judge noted that any conduct undermining due process might render an award liable to be set aside on public policy grounds.

The judge concluded that the Second Award was “manifestly invalid” on the following grounds:

1. Enforcing the Second Award would be contrary to conceptions of justice, as the findings made in the Second Award contradicted and were inconsistent with the findings which had already been made by the First Tribunal on the same issues, and these findings were binding on the same parties in the two Awards;
2. The Common Arbitrator who was appointed by AW in both Arbitrations was obviously aware of the common issues which had already been decided in the First Award and which issues were to be determined in the Second Award.  However, absent any dissenting decision by the Common Arbitrator, the Arbitrator made inconsistent findings on the same facts;
3. The Common Arbitrator’s failure to deal with and explain the inconsistent findings amounted to injustice and grave unfairness to W.  Conceptions of fairness and justice required the Arbitrator to invite W and AW to make submissions in the Second Arbitration as to the effect of the First Award, i.e. whether the parties and the Second Tribunal were bound by the findings made by the First Tribunal, and how and the extent to which they were bound.  The parties were entitled to be heard before any inconsistent findings were made against either of them; and
4. Confidentiality did not prevent the Common Arbitrator from disclosing the First Award to the other members of the Second Tribunal, as “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.”

Chan J therefore dismissed AW’s application for security.  Significantly, although this judgement was given in the context of an application for security, given that Chan J extensively considered the merits of a setting aside application, Chan J acknowledged that it would be highly unlikely for the setting aside application to have a different outcome.  Chan J therefore invited the parties to sensibly confer on whether orders can be made by way of consent summons to set aside the Second Award and refuse leave to enforce the Second Award.

How this affects the drafting of your contracts

Arbitration is now the dispute resolution forum of choice for cross-border transactions, not least because a complex transaction involves multiple related agreements entered into between the same or different parties  (see the latest Queen Mary International Arbitration Survey results here where 90% of respondents picked arbitration as preferred).  When disputes arise and relationships turn sour under these agreements, a party wishing to arbitrate against multiple parties will need to ensure that they can consolidate related arbitration proceedings for cost efficiency and to avoid inconsistent findings.  However, they would need to do this with utmost care.

Given the Hong Kong Court’s overtly pro-arbitration position, it is unusual for the Hong Kong Court to hold an arbitral award to be “invalid” (but given this was a security application, the award had not been “set aside”).  Having said that, the decision in W v AW does not go against that stance; instead, it ought to be looked at as a decision in a case based on highly unusual facts.

Nonetheless, as early as the contract drafting stage, parties in complex transactions should plan their multi-party, multi-contract dispute resolution strategies:

1. To pre-empt the risk of running parallel arbitral proceedings, parties should craft their agreements in order to be able to rely on the consolidation and/or joinder provisions found in the arbitration rules of leading arbitration institutions.  One great way to do this is to ensure that the arbitration clauses in different agreements are virtually identical.  Further, parties can set out express clauses as to consolidation and/or joinder within their arbitration agreement and provide for agreement as to consolidation / joinder;
2. Choose arbitration rules that cater for complex arbitrations.  The 2018 HKIAC Administered Arbitration Rules are an excellent example of cutting-edge arbitration rules that allow for consolidation and joinder in a variety of complex transactional situations (for which, see our client alert here).  The three methods in those rules to avoid parallel proceedings are: (i) consolidating separate existing arbitrations, (ii) commencing a single arbitration covering multiple agreements, and (iii) joining an additional party to an existing arbitration.

If parallel proceedings are inevitable, appointing common arbitrators in separate proceedings concerning related agreements usually mitigates the risk of inconsistent decisions.