Jul 5, 2023

The rise of virtual hearings in arbitrations: embracing flexibility or challenging tradition?

A recent decision by the Court of First Instance in Hong Kong highlights the growing use of virtual hearings in international arbitrations in a post-pandemic era and provides a helpful reminder of the tribunal’s wide case management powers in resolving matters not agreed between the parties.

The dispute in Sky Power Construction Engineering Ltd v Iraero Airlines JSC [2023] HKCFI 1558 arose when the respondent sought to have an enforcement order set aside on the basis that the tribunal had made a serious procedural error in directing the hearing to be held on a fully virtual basis contrary to the parties’ prior agreement.

Semi or fully virtual hearing?

The hearing of the arbitration was originally scheduled for December 2021, but was re-scheduled to February 2022 when the sole arbitrator contracted COVID-19. The parties had initially agreed in a procedural order that the hearing would be held on a semi-virtual basis, with the tribunal sitting in London and the parties and witnesses convening in Moscow. Things changed in January 2022, when the applicant’s only factual witness was unable to attend in person due to travel restrictions and safety concerns, and the applicant proposed a fully virtual hearing. The respondent objected and requested a further adjournment to enable the applicant’s witness to attend in person later.

Arbitrator’s decision in favour of a fully virtual hearing

The sole arbitrator considered the uncertainty of travel restrictions and her duty to adopt suitable procedures in the circumstances. To avoid unnecessary delay and expense, the sole arbitrator ordered that the hearing would proceed on a fully virtual basis with the parties, their legal representatives, the witnesses and the sole arbitrator all attending remotely. In her direction to the parties, the sole arbitrator explained that in determining which alternative to adopt she was required “to balance both the need for the proceedings to be concluded expeditiously and for the conduct of the proceedings to be fair to the Parties” and referred expressly to Article 14 of the LCIA Rules (the “Rules”), which mirrors section 33 of the 1996 Arbitration Act (the “Act”).

Respondent’s late application

Following the fully virtual hearing of the arbitration, the arbitrator issued an award in favour of the applicant who then applied for leave to enforce the award as a judgment of the Court. The respondent failed to challenge the enforcement order within the 14-day period granted and accordingly made an application for an extension of time. The respondent indicated that if the extension was granted, its only ground for resisting enforcement would be the sole arbitrator’s direction that the hearing be fully virtual. The respondent argued that there had been a “serious procedural error” by the sole arbitrator in that her direction was contrary to the parties’ prior agreement and impeded on the respondent’s ability to present its case “adequately”.

The Court’s decision

The Court rejected the respondent’s argument and dismissed the application to set aside the enforcement order, emphasising that the sole arbitrator had given due consideration to the challenges posed by the global pandemic, the urgency for a swift resolution, and the evolving health regulations and travel restrictions, when making her decision.

The Court referred to section 34(1) of the Act, which states that it shall be for the tribunal to decide all procedural and evidential matters, only subject to “the right of the parties to agree any matter” and emphasised that the parties had been in agreement on the semi-virtual procedure set out in the procedural order up until January 2022, when the applicant requested a fully virtual hearing and the respondent objected. In the light of that difference of opinion, it was then up to the sole arbitrator to decide on the procedure. Indeed, the Court pointed out that it was not just the tribunal’s right to take into account the surrounding circumstances but its duty under section 33(1) of the Act and Articles 14.1 and 14.2 of the Rules. This was what the sole arbitrator had done, and it was not for the Court to question or to interfere in the tribunal’s exercise of its discretionary and case management powers regarding the flexibility of the arbitral process.

Key takeaways: balancing flexibility and agreement

One of the great benefits of arbitration is its procedural flexibility in so far as the parties have autonomy, subject to applicable arbitration rules, to shape the procedure as they see fit. Sky Power is a useful reminder that such autonomy is conditional upon mutual agreement, and where mutual agreement falls away, tribunals can and will step in to exercise their discretion. Further, where tribunals can justify the exercise of discretion, courts will be slow to intervene. This applies equally where the parties have previously agreed a position in a procedural order, and one party later changes its mind. As Sky Power demonstrates, procedural orders are not immutable.

It remains to be seen whether, in similar circumstances, parties could agree wording in a procedural order that would curtail the tribunal’s ability to intervene in the event of disagreement. In Sky Power, for example, would the outcome have been different had the parties agreed in the procedural order that the hearing would be on a semi-virtual basis unless agreed otherwise strictly by mutual agreement?

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