Legal Challenges to Adequacy of Reasons in an Arbitral Award: Hong Kong and Singaporean Case Studies
KEY TAKEAWAYS
When will inadequate reasons provided by an arbitral tribunal render an award vulnerable to judicial intervention? Where, on the spectrum of inadequacy, do the courts draw the line?
One of the limited grounds in Hong Kong and Singapore for challenging an arbitration award is for a breach of natural justice. The fair hearing rule requires that an arbitral tribunal apply its mind to the essential issues in the parties’ arguments before it and provide a reasoned decision on the facts and arguments presented. In Part 1 of our series of articles on natural justice in arbitration, we look at the adequacy of a tribunal’s reasons.
Successful challenges to arbitration deriving from an alleged inadequacy of a tribunal’s reasons are exceptionally rare. However, in recent years, there have been several such challenges in both Hong Kong and Singapore, including cases in each jurisdiction where the courts refused to enforce the award.
The key lessons emerging from these cases are:
• In both Singapore and Hong Kong, the bar for judicial intervention is a high threshold, a product of the prevailing pro-arbitration judicial sentiment in both jurisdictions. Instances where courts will set aside or remit arbitral awards on natural justice grounds are exceptional. In Hong Kong, only conduct “sufficiently serious or egregious” amounting to a denial of due processes may warrant an order setting aside or refusing to enforce an arbitral award (Grand Pacific Holdings v Pacific China Holdings Ltd [2012] 4 HKLRD 1).
• It is not settled law in Singapore as to whether a tribunal’s failure to give adequate reasons is in itself a reason to set aside an award but the failure to give reasons may demonstrate that the tribunal has failed to apply its mind to the parties’ submissions in breach of the fair hearing rule (CVV and others v CWB [2023] SGCA(I) 9).
• In both jurisdictions, a tribunal’s misunderstanding or error in fact or law does not amount to a breach of the fair hearing rule for inadequacy of reasons.
• Similarly, arbitrators are not expected to give responses to all submissions and arguments made. The court accords the tribunal ‘fair latitude’ to determine what is and is not an essential issue (BZW v BZV). The absence of a response to all submissions would not constitute a breach of the fair hearing rule. A tribunal is only required to determine the essential issues in the matter, and any such failure must be “clear and virtually inescapable” before it would impugn the award.
• To establish that the tribunal failed to apply its mind on the basis of a failure to give reasons, the “omission to give reasons must logically be so grave or so glaring as to point to the inescapable inference that the tribunal did not even attempt to comprehend the essential issues in the arbitration” (CVV and others v CWB [2023] SGCA(I) 9).
• The Singapore Court of Appeal observed that the scope of a tribunal’s duty to give reasons differs from that of a judge’s and it is inappropriate to apply standards applicable to judges in the context of arbitration proceedings. The Court adopted the observation of the Australian High Court (Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37), that what is required of the tribunal “will depend upon the nature of the dispute and the particular circumstances of the case” (CVV and others v CWB [2023] SGCA(I) 9).
• The primary two cases surveyed in this article are rare examples of successful challenges to arbitral awards on the basis of inadequate reasons. Both involved serious deficiencies of reasoning, or as the Singapore Court of Appeal in BZW v BZV put it, a failure to “connect the proverbial dots” between the facts, analysis and award. In the Hong Kong case, this entailed the arbitrator merely stating the facts, and then stating the award, absent any analysis in her reasoning. In the Singaporean case, however, the tribunal’s award provided analysis – indeed it was 78 pages long, with 34 pages of analysis – but the reasons were “manifestly incoherent” such that the Court found the tribunal had not paid attention to the arguments and evidence presented and the respondent had been deprived of a fair hearing.
A v B: Failure to give adequate reasons grounds for setting aside in Hong Kong
Recent decisions highlight that Hong Kong’s approach to reviewing an arbitral award entail reading the award generously in a reasonable and commercial manner and with an expectation that there will be no substantial fault (X YCo and ZCo [2024] HKCFI 695). Judicial decision-makers must keep front of mind the policy of minimal curial intervention in arbitrations (AI & ors v LG II [2023] 4 HKC 135, adopting AKN & anor v ALC & Others [2015] 3 SLR 488), and may only infer that a tribunal has failed to consider an important issue when that inference is clear and virtually inescapable (X YCo v ZCo [2024] HKCFI 695).
In A v B and Others [2024] HKCFI 751, such an inference was found to be clear and virtually inescapable. Here, Hong Kong’s Court of First Instance refused to enforce an arbitral award on the grounds that the arbitral procedure was not in accordance with the parties’ agreement, and enforcement would be contrary to Hong Kong’s public policy.
The dispute was between a Maryland franchiser (the applicant, “A”), and the operators of Hong Kong-based education centres (the respondents, “B”, “C” and “D”), operating under license from A. The respondents eventually closed the centres operating under license from A and commenced operation of alternative education centres through a separate company, but from the same physical locations. The arbitration related to three license agreements executed between A and B (who held the license). A’s claims against C and D were on the basis that they had guaranteed the liabilities of B under the license.
It was not disputed in the Court proceeding that the central issues raised for determination in the arbitration were:
i) whether C and D had personally guaranteed the liabilities of B;
ii) the enforcement of a restrictive covenant under the Agreements; and
iii) the liability and amount of damages payable by C and D.
The arbitral award had been favourable to A on all issues.
Before the Court, C and D claimed that the sole arbitrator had failed to give reasons for her decisions and had simply made findings and conclusions without any analysis of the guarantee, non-compete covenant and breach issues. Chan J found in favour of C and D, holding that:
“…objectively read and in the context of the issues raised and submissions and arguments made before the tribunal, the arbitrator failed to adequately explain in the Award the reasons for her conclusions made on the key issues raised in the Arbitration, of the applicable governing law of the Agreements, on the effective date of termination of the Agreements, and on the enforceability or the reasonableness of the Non‑Compete Covenant, all of which were disputed by the parties.”
At a minimum, Chan J held that “a party reading the award should understand why a central issue in the arbitration was decided against him. In this case, it cannot be said that the respondents would so understand”. In this respect, the award was found lacking: it did not contain any analysis, explanation or mention as to how the arbitrator reached her conclusions on the central issues of the case. The arbitrator had not stated how she considered the party’s arguments or even whether she accepted the submissions made by A on the issues. Instead, the arbitrator merely set out the relevant applicable provisions of the Agreement and then stated the orders made.
A v B is a somewhat extreme example, exhibiting a profound scarcity of reasoning. The case did not involve typical elements arising in the context of such challenges, e.g., whether certain points were in issue and, if so, whether the end result might have been different, or the extent to which the issues may have been implicitly dealt with in the award. As such, the case offers limited guidance as to where the courts in Hong Kong draw the line with respect to the adequacy of reasoning.
By way of contrast, the Hong Kong and Singapore courts have recently declined other challenges made on similar grounds:
• CNG v G&G [2024] HKCFI 575: The claimant similarly alleged that an arbitral tribunal failed to deal with issues before it during arbitration and failed to provide adequate reasons for its decision. The Court found that “the tribunal clearly set out its findings on the key issues for determination, and adequately explained the decisions reached”. Chan J provided the following guidance:
“… the tribunal does not have to set out each step by which it reaches its conclusion, and a failure to deal with an argument or a submission made on or relating to an issue is not equivalent to a failure to deal with an issue. The tribunal is not required to deal with each issue seriatim, as it can deal with a number of issues in the composite disposal of them. A tribunal does not fail to deal with an issue if it does not answer every question that qualifies as an issue. It can deal with an issue where that issue does not arise in view of the tribunal’s decision on the facts or its legal conclusions. A tribunal may deal with an issue by so deciding a logically anterior point such that the other issue does not arise. If the tribunal decides all those issues put to it that were essential to be dealt with for the tribunal to come fairly to its decision on the dispute, it will have dealt with all the issues.”
Her Honour also emphasised that courts are not concerned with whether the tribunal has come to the right decision, or whether there was evidence to support the tribunal’s finding.
• CVV and others v CWB [2023] SGCA(I) 9: In a dispute about the payment of fees under advisor agreements, the appellants sought to set aside the award on the grounds that the tribunal failed to apply its mind and/or give reasons for its decision on essential issues in the award. The Court found that within the context of the submissions and evidence, it was clear that the tribunal did apply its mind to the issues the appellants had raised in the arbitration and it was not necessary for the tribunal to expressly address each of the points made in their submissions individually in the award. The Court noted that as with many similar challenges, the alleged breach of justice was in essence a challenge based on the merits of the award which is not permitted.
BZW v BZV: Incoherent reasons grounds for setting aside in Singapore
As with Hong Kong, the threshold for intervention on natural justice grounds in Singapore is high.
The recent Singapore Court of Appeal decision of BZW and another v BZV [2022] SGCA 1 clarified the procedural requirements for challenging an arbitral award on the grounds of breach of the fair hearing rule pursuant to s 24(b) of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“the Act”).
Background
The decision in BZW v BZV arose out of a ship-building dispute conducted in the Singapore International Arbitration Centre. The respondent to the appeal, BZV, had entered into a contract with the two appellants to the appeal (BZW and another) for the construction and delivery of a vessel. A dispute arose over delay in construction and quality of the vessel’s generator.
In the arbitration, the respondent advanced two claims against the appellants: a claim for liquidated damages arising from the delay in delivery of the vessel (the Delay Claim) and a claim for damages for the installation of contractually inadequate generators (the Rating Claim). The appellants counterclaimed, seeking extra payment for additional work performed, and also raised several defences, including the prevention principle, waiver, and penalty clause. In the arbitration award, a tribunal of three arbitrators dismissed both the respondent’s claims and the appellants’ counterclaim.
The award was first challenged in the Singapore High Court, where the respondent claimed there were breaches of natural justice with regard to both the Delay Claim and the Rating Claim. Most significantly, the respondent alleged that there was no nexus between the tribunal’s chain of reasoning and the parties’ cases on the head of the Delay and Rating Claims.
The High Court found in the respondent’s favour that there were breaches of natural justice which were “causally connected to the making of the award”, and that these breaches prejudiced the respondent (i.e., because respondent’s claims might have otherwise succeeded).
Court of Appeal
On appeal, the appellant raised two main arguments.
1. The first was that the Judge in the High Court proceedings had “pored over thousands of pages of facts and submissions in order to come up with a detailed summary of background facts and the parties’ arguments”, and that going to such great lengths indicated that any breach of the natural justice rule was not “demonstrably clear on the face of the record” (referencing TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972). The Court of Appeal accepted that “generally speaking an assertion of a breach of the fair hearing rule does not require the degree of study of the Award and the record that the Judge undertook in this case…”. However, the Court went on to find that allegations raised in the lower court necessitated the exercise that the Judge undertook, in order to make sense of the award and ascertain whether an important point was overlooked.
Additionally, the Court in BZW v BZV stressed that the fair hearing principle requires a tribunal to pay attention to what is put before it and give a reasoned decision on the arguments and evidence presented. As such, a breach of the fair hearing rule may include where a decision is “manifestly incoherent”, which “shows that the tribunal has not understood or dealt with the case at all and… that would mean that parties have not been accorded a fair hearing”. The Court in BZW v BZV also noted that breaches of natural justice should also be “demonstrably clear on the face of the record” (quoting TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972). An application to set aside an award must not be treated as an opportunity for an unsuccessful party to arbitration to appeal on the merits.
2. The second argument raised on appeal was that the High Court’s enquiry as to whether the tribunal’s chain of reasoning was sufficiently connected with the issues should not have considered whether the tribunal’s reasoning was cogent or correct. On this, the Court of Appeal stated:
“To the extent that the second argument propounds the well-known principle that a setting aside application is not an appeal and therefore, the court will not interfere even if it considers that, in reaching its decision, the tribunal has made mistakes of facts or law or both, we of course accept it. But that is not what is in issue in this case. The appellants’ argument went far beyond that principle and it was, in fact, quite shocking that the appellants supported the right of a tribunal to be manifestly incoherent in making its decision. The fair hearing principle requires that a tribunal pays attention to what is put before it and gives its reasoned decision on the arguments and evidence presented. If its decision is manifestly incoherent, this requirement would not be met.” (Emphasis added)
The Court of Appeal then reviewed the basis of the High Court’s finding on each of the essential elements. It reaffirmed that, under s 24(b) of the Act, to set aside an Award on the grounds of a breach of natural justice, the following three elements must be established (as originally set out in John Holland Pty Ltd (formerly known as John Holland Construction & Engineering Pty Ltd) v Toyo Engineering Corp (Japan) [2001] 1 SLR(R) 443):
First, a specific rule of natural justice must be breached. The specific rule of natural justice in question here was the fair hearing rule. There were two aspects of the fair hearing rule which were relevant: (1) a failure by the tribunal to apply its mind to the essential issues in the party’s arguments; and (2) the failure by the tribunal to give reasonable notice of its chain of reasoning or for the reasoning to have a sufficient nexus to the parties’ arguments. To set aside an award on the first of these grounds, there must be a “clear and virtually inescapable inference from the award” that the tribunal failed to apply its mind to an essential issue. As regards the second ground, it would be necessary to show that the defect in the chain of reasoning was the product of the tribunal conducting itself “irrationally or capriciously”, such that “a reasonable litigant in his shoes could not have foreseen the possibility of reasoning of the type revealed in the award” (adopting Soh Beng Tee & Co Ptd Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86 at [65(d)]). The Court of Appeal was satisfied that the lower court had correctly identified the tribunal’s failings in respect of both aspects:
• Delay claim: the tribunal had failed to turn its mind to the essential issues. For example, on the issue of whether there was a contractual mechanism for the appellants to claim an extension of time arising from an act of prevention, the tribunal blithely stated that it “[did] not need to deal with the issue of extension of time”. On the question of whether the act of prevention actually caused the delay, the tribunal did not apply its mind at all.
• Rating Claim: the tribunal adopted a chain of reasoning that had no nexus with the parties submissions. For example, on the issue of whether the generators conformed to the correct technical standard, the tribunal found that the pleadings and evidence pointed towards the conclusion that the higher technical standards were to apply. Then, in an unexplained plot-twist, the tribunal proceeded to make the express finding that, by supplying generators in conformance with the lower standard, the appellants were not in breach because “the [respondent] itself had also confirmed that IP23 [i.e. the lower standard] was fit for purpose”. Not only were the findings inconsistent, the appellant had not even contended that the respondent had offered any such confirmation. The Court of Appeal also observed that, “even if the generators were fit for purpose, such a finding would simply have no nexus whatsoever to the issue before the tribunal as to whether the installation of generators with IP23 rating was in breach of a contractual obligation to deliver generators with IP44 rating.”
Second, the breach was connected with making an Award. The Court of Appeal was also satisfied that this element was fulfilled. Put simply, whichever of the appellant’s defences the tribunal adopted, it failed to apply its mind to the essential issues. Either way, the tribunal arrived at its decision to dismiss the respondent’s claims though the breaches described above.
Third, the breach prejudiced the party’s rights. It was noted that a breach of natural justice causes a party to suffer prejudice if complying with the rules of natural justice could reasonably have made a difference to the outcome of the arbitration (following L W Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd and another appeal [2013] 1 SLR 125). In this case, it was found that, had the tribunal applied its mind to the parties’ cases and essential issues, “it could have found in favour of the respondent on both the Delay Claim and the Rating Claim”. It was not necessary for the Court to consider whether those claims would have been successful.
CONCLUSION
While the impugned arbitral award in BZW v BZV was markedly different to that in A v B, both cases through their unusual facts reaffirm the high bar for challenges based on the inadequacy of a tribunal’s reasoning. BZW v BZV featured an award lacking any logical connection between the findings and the claims and defences alleged (as described by the Singapore Court of Appeal, a “failure to connect the proverbial dots”), even though the award itself was 78 pages long with no less than 34 pages devoted to analysis. On the other hand, A v B featured an award so flawed that it lacked any analysis whatsoever, where the arbitrator merely set out the provisions of the Agreements which were applicable, then stated the orders made.
