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Authored by: KK Cheung
In C v D, CACV 387/2021 HKCA 729, the principal issue to be determined on appeal was whether an arbitral tribunal’s determination that a pre-arbitration procedural requirement in an arbitration agreement (that the parties should first attempt to resolve their dispute by negotiation) had been fulfilled, is subject to recourse to the court under Article 34(2)(a)(iii) or (iv) of the UNCITRAL Model Law. The Court of Appeal, upholding the decision of the court below, held that it is not. This judgment is important, as multi-tiered dispute resolution clauses are not uncommon, and the question of the proper approach to an application to set aside an arbitral award on the ground that certain prior requisite steps envisaged by such clause have not been undertaken and that the arbitral tribunal consequently lacks jurisdiction, is a subject matter of some general significance to arbitration law in Hong Kong.
The Plaintiff (C) is a Hong Kong company, carrying on business as an owner and operator of satellites. The Defendant (D) is a Thai company, carrying on business as a satellite operator in the Asia Pacific region.
The dispute resolution clause
C and D entered into an Agreement which contained, the following dispute resolution provision:
“[14.1] Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of Hong Kong, without regard to the principles of conflicts of law of any jurisdiction.
[14.2] Dispute Resolution. The Parties agree that if any controversy, dispute or claim arises between the Parties out of or in relation to this Agreement, or the breach, interpretation or validity thereof, the Parties shall attempt in good faith promptly to resolve such dispute by negotiation. Either Party may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution. The Chief Executive Officers (or their authorized representatives) shall meet at a mutually acceptable time and place within ten (10) Business Days of the date of such request in writing, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute through negotiation.
[14.3] Arbitration. If any dispute cannot be resolved amicably within sixty (60) Business days of the date of a Party’s request in writing for such negotiation, or such other time period as may be agreed, then such dispute shall be referred by either Party for settlement exclusively and finally by arbitration in Hong Kong at the Hong Kong International Arbitration Centre … in accordance with the UNCITRAL Arbitration Rules in force at the time of commencement of the arbitration …
(e) Any award made by the arbitration tribunal shall be final and binding on each of the Parties that were parties to the dispute. To the extent permissible under the relevant laws, the Parties agree to waive any right of appeal against the arbitration award.”
D’s CEO issued a letter to C’s Chairman referring to breach of the Agreement (December Letter), a copy of which was passed on to C’s CEO. There was no further correspondence from D and neither party referred the dispute to their respective CEOs with a view to resolving the dispute through negotiation. D issued a notice referring the dispute to arbitration. In response, C claimed that the arbitral tribunal did not have jurisdiction to entertain the dispute as there had been no request for negotiation.
An arbitral tribunal was formed, which decided to deal with C’s objection on jurisdiction and the issue of liability together, leaving the issue of quantum to be addressed, if necessary, at a later stage. After a hearing, the Tribunal issued a Partial Award, finding in D’s favour. In relation to the issue of jurisdiction, the Tribunal held that the first sentence in Clause 14.2 mandatorily required the parties to attempt in good faith to resolve any dispute by negotiation, but the referral of the dispute to the respective CEOs mentioned in the second sentence of Clause 14.2, was optional. The Tribunal further held that the condition in Clause 14.3, i.e. the dispute could not be resolved within 60 business days of a party’s request in writing for such negotiation, referred to a request for negotiation under the first sentence of Clause 14.2, and that condition had been fulfilled by D by the December Letter. The Tribunal accordingly rejected C’s objection on jurisdiction, and proceeded to find that C was in breach of the Agreement and liable to pay damages to D in an amount to be assessed.
C issued an originating summons seeking a declaration that the Partial Award was made without jurisdiction and was not binding on C, and an order that the Partial Award be set aside under s.81 of the Arbitration Ordinance (which refers to Article 34 of the UNCITRAL Model Law). Under Article 34, a court can set aside an arbitral award if it deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration (Article 34(2)(a)(iii)) or the composition of the arbitration tribunal or the arbitral procedure was not in accordance with the parties’ agreement (Article 34(2)(a)(iv)).
The judge identified two questions which arose for consideration, namely: (i) The primary question: is the question whether D complied with the dispute resolution procedure set out in Clause 14.2 of the Agreement a question of the admissibility of the claim, or a question of the tribunal’s jurisdiction, and does that question fall within s.81(1); (ii) The secondary question (only if the primary question is answered in C’s favour): what is the condition precedent to arbitration on the proper construction of the Agreement, and was the condition fulfilled by the December Letter?
The judge held; (i) the court may review the Tribunal’s decision on the standard of “correctness” and decide the question de novo if the question of whether D complied with the dispute resolution procedure set out in Clause 14.2 is a true question of “jurisdiction” properly falling within Article 34; (ii) the distinction between “jurisdiction” and “admissibility” is recognized both in court decisions in the United Kingdom, Singapore and United States, as well as in various academic works; (iii) although the Arbitration Ordinance does not in terms draw a distinction between jurisdiction and admissibility, it may properly be relied upon to inform the construction and application of s.81;(iv) C’s objection in the present case was one going to the admissibility of the claim, rather than the jurisdiction of the arbitral tribunal, and as such, the objection did not fall under Article 34(2)(a)(iii);(v) neither was Article 34(2)(a)(iv) applicable to C’s objection, because that provision concerns the way in which the arbitration was conducted, but not contractual procedures preceding the arbitration, or pre-arbitration dispute resolution procedures, such as those provided in the Agreement. Having reached the conclusion that C’s objection did not fall within either Article 34(2)(a)(iii) or (iv), it became unnecessary to deal with the secondary question.
Court of Appeal decision
The Court of Appeal upheld the decision of the court below. It referred to the substantial body of judicial and academic jurisprudence which supports the drawing of a distinction between jurisdiction and admissibility for the purpose of determining whether an arbitral award is subject to de novo review by the court under Article 34(2)(a)(iii), and the view that “non-compliance with procedural pre-arbitration conditions, such as a requirement to engage in prior negotiations, goes to admissibility of the claim rather than the tribunal’s jurisdiction”.
The court said there is much to be said for recognising the distinction between admissibility and jurisdiction for the purpose of Article 34(2)(a)(iii). Such an approach would (i) likely give effect to the agreement of the parties who, “as rational businessmen, are likely to have intended any dispute arising out of their relationship … to be decided by the same tribunal”, (ii) be in line with the general trend of minimizing the permissible scope of judicial interference in arbitral procedures and awards, (iii) further the object of the Arbitration Ordinance i.e. “to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expenses”, and (iv) ensure that Hong Kong does not fall out of line with major international arbitration centres like London or Singapore.
The court said that while the distinction between jurisdiction and admissibility cannot be written directly into Article 34(2)(a)(iii), it can be given proper recognition through the route of statutory construction, namely, that a dispute which goes to the admissibility of a claim rather than the jurisdiction of the tribunal should be regarded as a dispute “falling within the terms of the submissions to arbitration” under Article 34(2)(a)(iii). It added that it is important to emphasise that the distinction between admissibility and jurisdiction is ultimately controlled by the agreement of the parties, because arbitration is consensual and it is the parties’ agreement which determines the true scope of the disputes which may be submitted to arbitration.
Accordingly, the Partial Award was not open to review by the court and the appeal was dismissed. C’s subsequent application for leave to appeal to the Court of Final Appeal was also dismissed.
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