Sky Power v IrAero: Remote Arbitration Hearings May Create Difficulties for the Parties, But are Unlikely to Cause Prejudice

A recent decision of a Hong Kong court suggests that fully virtual arbitration hearings are becoming standard practice even as the COVID-19 pandemic (the “Pandemic”) has ebbed, and that courts may be reluctant to find that such a hearing in and of itself causes prejudice to one of the parties.

In Sky Power Construction Engineering Limited v IrAero Airlines JSC (“Sky Power v IrAero”),[1] Hong Kong’s Court of First Instance found that the respondent had not been prejudiced by the fact that an arbitrator had conducted a fully virtual – rather than semi-virtual – hearing over the respondent’s objections. The Court would therefore not entertain a request by the respondent to apply to set aside the Court’s earlier order to enforce the arbitrator’s award.

Background

Hong Kong-based Sky Power Construction Engineering Limited (“Sky Power”) obtained an award against Russia-based IrAero Airlines JSC (“IrAero”) at the London Court of International Arbitration (“LCIA”) in an arbitration conducted by remote hearing in February 2022 before a single arbitrator.

The hearing had originally been scheduled for December 2021, but was postponed to February 2022 because the arbitrator contracted COVID-19. Roughly a month prior to the hearing, in January 2022, the arbitrator issued Procedural Order Number 3 (“PO #3”), which set out procedural parameters for a semi-virtual hearing. Counsel and the parties’ own fact witnesses were to convene at one location in Moscow, while other fact and expert witnesses could participate remotely via video-conferencing. The arbitrator would sit in London, and conduct the hearing remotely. PO #3 appears to have reflected such an agreement between the parties.

However, shortly after the issuance of PO #3, Sky Power indicated that its only fact witness was not available to travel to Moscow “due to the inconvenience and disruptions to his business, and the safety concerns of exposure to the risk of becoming infected with Covid”.[2] Sky Power proposed a fully virtual hearing. IrAero objected, given that the parties’ agreement to hold a semi-virtual hearing had been memorialized in PO #3 earlier the same month.

The arbitrator decided that the hearing would proceed on a fully virtual basis rather than be postponed until such time as the witness could attend in Moscow. She explained that it was necessary for her “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”,[3] and referred to Article 14 of the LCIA Arbitration Rules (the “LCIA Rules”),[4] which imposes the following duties on an arbitral tribunal (which readers will recognize are broadly consistent standard international rules of procedure):

(i)   a duty to act fairly and impartially as between all parties, giving each a reasonable opportunity of putting its case and dealing with that of its opponent(s); and

(ii)   a duty to adopt procedures suitable to the circumstances of the arbitration, avoiding unnecessary delay and expense, so as to provide a fair, efficient and expeditious means for the final resolution of the parties’ dispute.[5]

Given the continuing impact of the Pandemic, the continued regulatory uncertainty it engendered, and the nature of the case, the arbitrator concluded that it was more appropriate to conduct the hearing on a fully virtual basis than to wait indefinitely in the hopes of rescheduling the semi-virtual hearing.

Ultimately, Sky Power obtained an award in its favour, and subsequently obtained an enforcement order in Hong Kong against IrAero, which IrAero sought to challenge after the statutory deadline for bringing such a challenge. IrAero therefore required leave from the Court to file an affirmation (equivalent to an affidavit) and to apply to set aside the enforcement order. In deciding whether to grant leave, the Court considered the merits of IrAero’s application to set aside the order.

The Court declined to grant leave on the basis effectively that IrAero’s application would fail on the merits, as discussed below.

Position of the Respondent (IrAero) on the Merits

In trying to resist enforcement of the arbitrator’s award, IrAero argued on the merits essentially that the arbitrator lacked jurisdiction to alter PO #3 over IrAero’s objections, and that IrAero was prejudiced by the fully virtual nature of the hearing.

With respect to jurisdiction, Article 14 of the LCIA Rules states in addition to the foregoing:

14.2   The Arbitral Tribunal shall have the widest discretion to discharge these general duties, subject to the mandatory provisions of any applicable law or any rules of law the Arbitral Tribunal may decide to be applicable; and at all times the parties shall do everything necessary in good faith for the fair, efficient and expeditious conduct of the arbitration, including the Arbitral Tribunal’s discharge of its general duty.[6] [emphasis added]

IrAero took the position that the arbitrator’s decision to proceed conflicted with applicable law, because the UK’s Arbitration Act 1996 (the “Act”)[7] provides at section 34 that a tribunal’s power to decide procedural and evidential matters is “subject to the right of the parties to agree any matter.”[8] In IrAero’s view, the arbitrator (i.e., the tribunal in this case) impermissibly overruled PO #3, which reflected the parties’ agreement to hold a semi-virtual hearing.

With respect to prejudice, IrAero argued that it was hindered from “adequately viewing the demeanour” of Sky Power’s sole fact witness because he attended remotely, and from vetting the “genuineness and the authenticity” of his oral evidence.[9] Further, IrAero claimed it was unable to present its case adequately. As well, IrAero’s director-general claimed he would have preferred to testify in person, and that, because Sky Power’s witnesses ended up testifying remotely from Irkutsk, rather than from Moscow, the time difference with London (eight hours versus three) put IrAero at a disadvantage (for reasons that are not explained).[10]

The Court’s Decision on the Merits

As noted above, Sky Power v IrAero involved a request for leave to apply to set aside an order to enforce an arbitration award. The Court considered the merits of the application. On the merits, the Court rejected both of the respondent’s arguments.

First, the Court found that there was no longer an agreement between the parties once Sky Power requested a fully virtual hearing. Therefore, the arbitrator did not exceed her jurisdiction in deciding which procedure to follow.

The Court made note of the considerable deference that is owed to arbitrators in determining procedure:

Whether it is appropriate in any particular case to permit the factual witnesses to give evidence at the hearing remotely, whether the effectiveness of cross-examination can be or was undermined, whether appropriate measures are required or were put in place to ensure the security of the process, are all matters for the consideration and final decision of the tribunal in the case.[11]

Second, the Court found no prejudice to IrAero, based on two grounds:

• first, any inconvenience that arose as a result of the virtual hearing would have been suffered by both parties, such that “each party was subjected to the same risks and difficulties”[12]; and
• second, the arbitrator made the final award based on contractual and contemporaneous documents, the construction of the documents, and the legal issues raised, rather than on the basis of witness evidence. As noted by the Court, the arbitrator specifically observed that she preferred the evidence of contemporaneous documents where witness evidence was not consistent with those documents. Therefore, findings of credibility regarding Sky Power’s sole fact witness were not determinative of the outcome.

Indeed, as stated by the Court, “On the materials available, I cannot see any real injustice or prejudice to the Respondent, in the sense that the outcome of the Arbitration could have been different, if the hearing had not been conducted on [a] fully virtual basis.”[13]

Commentary

Although Sky Power v IrAero is a Hong Kong case, and while the arbitration at issue involved special circumstances – namely, it occurred during the height of the Omicron wave of the Pandemic – it nevertheless suggests that a party to an arbitration may face an uphill battle when arguing that a virtual hearing caused it prejudice, even in a post-Pandemic context.

This is not to suggest that there are no tradeoffs involved in opting for a remote hearing. While remote hearings generally result in substantial cost savings when parties, counsel, witnesses and/or the tribunal are in different locations, there can also be technical difficulties, time zone differences, and challenges to examining witnesses.

However, as noted by the Court, both parties will generally face the same difficulties and risks in a remote hearing, the implication being that they will be able to make their respective cases in an equal manner. On the other hand, however, this potentially understates the significance of a scenario where one party calls several witnesses while the other party calls very few (particularly if the tribunal has ordered equal time-limits for the parties’ presentation of their cases). Arguably, in circumstances where one party relies much more heavily on oral testimony, their counterparty’s argument of prejudice may be more persuasive. In any event, the foregoing strengthens the proposition that, in the construction context, contemporaneous project documents are generally considered preferable over witness testimony delivered months or years after the fact.

In this case, it may be that IrAero felt genuinely misled by Sky Power, given that Sky Power had agreed to a semi-virtual hearing before requesting a fully virtual hearing. IrAero may also have found it more challenging to impeach the credibility of Sky Power’s fact witness, and IrAero’s director-general may indeed have struggled giving testimony remotely. Even so, IrAero’s arguments were decidedly unpersuasive to the Court – which serves to highlight how difficult it may be for a dissatisfied party to find a meaningful basis to obtain redress after the fact.

First, while there may be instances in which a tribunal will hold a party to a prior agreement on procedure that the party had made with the opposing party, the question of whether to do so is generally within the jurisdiction of the tribunal. In this case, once the party’s position changed, there was a disagreement to be resolved by the arbitrator, which she did by balancing the various factors at play, including uncertainty surrounding the Pandemic.

In other instances, a tribunal may insist that a prior agreement stand, and may even do so summarily, i.e., without entertaining formal submissions on the question (although declining to hear submissions on such an issue may result in allegations of parties being deprived of sufficient opportunity to present their case). Ultimately, the power of a tribunal to resolve a disagreement over procedure generally cannot be preempted simply by denying that the disagreement exists.

Conversely, it would seem that IrAero’s argument was not without some merit, insofar as it raises an interesting question as to the relationship between the parties’ arbitration agreement and the chosen procedural rules. Given that the parties were in agreement as to the content of PO #3 – that is, it was issued on consent – it may be arguable that PO #3 formed part of the parties’ arbitration agreement and accordingly, it would follow that the arbitrator could not deviate from the parties’ agreement to proceed on a semi-virtual basis.

That being said, it is standard practice for an arbitration agreement and/or Procedural Order #1 to provide the tribunal with full latitude to establish and vary rules of procedure, in which case an interpretive issue would arise as to whether the provision endowing the tribunal with procedural powers can override a different, subsequent provision that dictates a specific method of procedure. Ultimately, the answer would likely depend on the specific wording of the procedural order(s) in issue. In any event, it would appear wise for a tribunal to include in its procedural orders a provision permitting the tribunal to vary the order if necessary and appropriate.

Second, IrAero struggled to convince the Court of any real prejudice under the circumstances. For instance, IrAero could not persuade the Court that the trier of fact – i.e., the arbitrator herself – was unable to assess the demeanour of Sky Power’s sole fact witness, because even under PO #3, the arbitrator would have conducted the hearing remotely from London. Instead, IrAero could only argue that it could not assess the witness’s credibility. The corollary of the foregoing is that, if the arbitrator could assess the witness’s credibility remotely, it would be difficult for IrAero to argue that it could not.

Similarly, it is unclear from the decision why IrAero would be at a disadvantage due to the time difference between Irkutsk and London, as opposed to Moscow and London, when it was Sky Power’s witnesses that were in Irkutsk, rather than IrAero’s. If anything, it would seem that Sky Power was at a disadvantage.

That being said, it is conceivable that a different Court or judge might have decided this point differently. Over the course of the Pandemic, disputes lawyers and judges have expressed varying opinions as to the importance of being able to examine witnesses in person, with many taking the position that in-person examination is indispensable – and indeed fundamental – to interrogating a witness’s credibility and reliability. With that in mind, a likeminded judge might very well have ruled differently.

In any event, in the post-Pandemic landscape, it would appear difficult for one party to argue that it was prejudiced by the use of a remote hearing. While it is impossible to categorically dismiss the possibility of such a finding if a case were to have the right set of facts, Sky Power v IrAero suggests a high threshold for any such argument.

[1] Sky Power Construction Engineering Limited v IrAero Airlines JSC, [2023] HKCFI 1558 [Sky Power v IrAero].

[2] Sky Power v IrAero at para 12.

[3] Sky Power v IrAero at para 30.

[4] LCIA Arbitration Rules, effective October 1, 2020, available at https://www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2020.aspx [The LCIA Rules].

[5] The LCIA Rules, art 14.1.

[6] The LCIA Rules, art 14.2.

[7] UK Arbitration Act 1996, 1996 c. 23 [The Act].

[8] The Act, s 34(1).

[9] Sky Power v IrAero at para 7.

[10] Given that IrAero is based in Irkutsk, and Sky Power is registered in Hong Kong, there may be a typographical error in the decision regarding which party testified from Irkutsk.

[11] Sky Power v IrAero at para 39.

[12] Sky Power v IrAero at para 37.

[13] Sky Power v IrAero at para 41.

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