Hong Kong SAR court considers setting aside settlement agreements and termination orders

In the case L v R, parties to an arbitration agreement governed by the Hong Kong International Arbitration Centre’s rules entered into a settlement agreement during the arbitration proceedings, dismissing all claims and defences in the arbitration and stating that neither party was liable to the other in any way.

The settlement agreement gave exclusive jurisdiction to the Hong Kong SAR courts and was governed by Hong Kong SAR law. The parties asked the arbitral tribunal to issue an order recording the settlement agreement. The plaintiff then alerted the arbitral tribunal that the representative who had signed the settlement did not have authority. The tribunal issued an order terminating the arbitration but did not record the settlement agreement, stating that it was making no determination about the validity of the agreement and no determination on the merits of any claims or counterclaims in the arbitration.

The plaintiff brought a summons to set aside the settlement agreement, alleging that the signatory of the agreement from the plaintiff’s company had no authority, and the agreement went against a scheme of arrangement which had been validated by the Supreme Court of the Seychelles. The plaintiff also sought to set aside the termination order on the grounds that this was a final decision of the arbitral tribunal and went against public policy – as it was based on an unauthorised settlement agreement - and that the plaintiff did not have the opportunity to present its case about the lack of authority of its director.

The central issue was whether the settlement agreement and the termination order could be considered arbitral awards under section 81 and 86 of Hong Kong SAR’s Arbitration Ordinance or as procedural orders under section 61. If they could be considered as arbitral awards, the issue at hand was whether the grounds for setting aside the settlement agreement and termination order would be the same as those provided under section 86 for arbitral awards.

The decision related to an interlocutory procedure relative to the plaintiff’s application to serve a summons on the defendant in the West Indies, which the defendant contested. In this case, the Hong Kong Court of First Instance did not have to rule on the merits of the plaintiff’s setting aside procedure but look at whether there was a “serious question to be tried”.

The Court’s decision

The Court addressed the termination order and the settlement agreement in turn.

First, the Court confirmed its interpretation of section 61 and 81 of the Ordinance in the recent case G v N, stating that if the order is classified as a procedural order and not as an arbitral award, the grounds for setting aside an arbitral award under section 81 do not apply because “section 61 sets out its own regime for enforcement of interim orders and directions of the tribunal”.

In this case, the termination order was not an interim order as in G v N but an order terminating the arbitration proceedings under HKIAC rule 37(a). There is no definition of “arbitral awards” under the Arbitration Ordinance or the Model Law. The Court of First Instance referred to the 2019 UK case between ZCCM Investments Holdings and Kansanshi Holdings as the leading authority to determine whether the settlement agreement could qualify as an arbitral award as argued by the plaintiff. In particular, the Court considered the nature of the issues dealt with in the termination order, the tribunal’s own description of its decision - noting that it was relevant but inconclusive - and the finality of the tribunal’s decision.

The Court found that the termination order rendered the arbitrator ‘functus officio’, with nothing remaining for the tribunal to decide. It concluded that there was a serious question to be tried about whether the termination order should be treated as an award – that is, final and binding and therefore susceptible to being set aside under section 81 of the Ordinance.

On the settlement agreement, the Court confirmed that without a consent award recording the terms of the settlement agreement, Article 66(2) of the Ordinance would come into play, and the settlement agreement should be treated as a final award.

The Court added that there was a serious question to be tried as to whether the grounds for challenging the arbitral awards under section 81 of the Ordinance would apply to a settlement agreement.

Practical considerations for future disputes

In this case, the Hong Kong Court of First Instance was faced with an unusual situation where a party sought to set aside a settlement agreement that had discharged all parties of their liabilities and a termination order that had terminated the arbitration proceedings.

In recent cases, Hong Kong SAR courts have clarified that interim orders were not to be classified as arbitral awards and would not be subject to the grounds for setting aside arbitral awards under section 86 of the Ordinance, effectively minimising the court’s interference with arbitral proceedings.

Despite not delving into the merits, this case offers a few practical takeaways. It confirms the court’s position in G v N that an arbitral procedural order will generally not be subject to setting aside proceedings.

It also shows that, without a legal definition of ‘arbitral award’, the court will look at the factors set out in the English court ruling in ZCCM Investments Holdings to decide whether a procedural order qualifies as an arbitral award. In particular, a decision is more likely to be an award if it finally disposes of the matters submitted to arbitration to render the tribunal ‘functus officio’ - either entirely or in relation to that issue or claim - and the tribunal’s own description of the decision is relevant but not conclusive.

In addition, parties should note that - under section 66(2) of the Ordinance - a settlement agreement will be treated as an arbitral award.

This case must be watched closely as the court’s ultimate decision on the merits of the plaintiff’s setting aside procedure will provide useful guidance on the classification of a termination order as an arbitral award or a procedural order. It will also provide guidance on the grounds for setting aside a settlement agreement and termination order, and the level of scrutiny that can apply.

Co-written by Johanne Brocas of Pinsent Masons.