CFA holds that whether parties have complied with a pre-arbitration mechanism in a contract is a matter for the arbitral tribunal and not the court

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Authored by: KK Cheung

In C v D [2023] HKCFA 16, the Court of Final Appeal (CFA) decided that the question of whether parties have complied with a pre-arbitration mechanism in a contract is a question of admissibility, rather than jurisdiction, and therefore is a matter for the arbitral tribunal to decide on and not the court.  The CFA also held that there is a presumption, that a challenge based on non-fulfilment of a pre-arbitration condition, is non-jurisdictional.  Although the Court said that parties can expressly agree that compliance with such a condition is amenable to review by the court, clear, unequivocal words to that effect would be required because it would be contrary to all normal expectations to find that such was the parties’ intention.  In the present case, the CFA found that there was nothing in the operative clauses of the parties’ contract that suggested an intention to confer jurisdictional status on the pre-arbitration conditions in question.

Background

A contractual dispute arose between the Appellant (A) and Respondent (R).  The Contract contained a dispute resolution clause providing for a pre-arbitration mechanism (Clause 14.2), namely that 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.”  It went on to state that if the dispute could not be resolved within 60 business days from the date of the written request for negotiation, then either party may refer the matter to arbitration at the HKIAC, in accordance with the UNCITRAL Arbitration Rules then in force.

R referred the dispute to arbitration at the HKIAC and A objected on the ground that the pre-arbitration procedures in the Contract had not been complied with.  In a partial arbitral award, the tribunal found that those procedures had been complied with and held A in breach of the Contract, reserving the question of damages for the next phase.

A applied to the Court of First Instance (CFI) to set aside the tribunal’s partial award, contending that the arbitrators were wrong to decide that the pre-arbitration requirements had been complied with.  The CFI dismissed the application and its decision was upheld by the Court of Appeal (CA). 

In holding that the court lacked power to set aside the tribunal’s award in the present case, both the CFI and CA applied the distinction between “jurisdiction” and admissibility”, as an aid to construing the Arbitration Ordinance s.81(1), (which incorporates Article 34(2)(a)(iii) of the UNCITRAL Model Law), holding that the objections raised by A related to “admissibility” and not “jurisdiction”, since that  is an approach widely adopted by academic writers and in the recent case law of courts in other jurisdictions which are, like Hong Kong, leading centres for arbitration.

For further details of the decisions of the CFI and CA, please see our previous article.

Question for determination by the CFA

A was granted leave to appeal to the CFA on the question whether, if an arbitration agreement stipulated a pre-arbitration condition that the parties should first attempt to resolve their dispute by a specified mechanism, an arbitral tribunal’s determination on the fulfilment of that condition is subject to recourse to the court, pursuant to Article 34(2)(a)(iii) of the UNCITRAL Model Law.

Article 34(2)(a)(iii) provides that an arbitral award may be set aside by the court only if the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration.  The appeal was therefore concerned with the reviewability of a pre-arbitration condition.  Such clauses are commonly found in arbitration agreements, stipulating that conditions such as negotiations, mediation, conciliation or the passage of a stated period of time have to be satisfied before commencing the arbitration.  They are sometimes referred to as multi-tiered or cascading dispute resolution clauses.

CFA’s decision

The CFA unanimously dismissed the appeal, holding:

• On their true construction, both the dispute as to whether the pre-arbitration condition had been complied with and the main contractual dispute as to whether A was in material default of the Contract were intended to be dealt with exclusively and finally by the tribunal i.e. the disputes came within the parties’ contemplation and intended submission to arbitration, so that the AO s.81(1), ML 34(2)(a)(iii) did not provide a basis for judicial intervention to set aside the arbitral award.

• (By majority) The conceptual distinction between a challenge to an arbitral tribunal’s “jurisdiction” and a challenge to the “admissibility” of a particular claim, does serve  as a helpful aid to construction, when deciding whether, in a particular case, judicial intervention in an arbitral process is permissible.  The principle is that the court may review a tribunal’s ruling on the former, but not on the latter category of challenge.

• When considering an objection relating to a pre-arbitration condition, it is necessary first to construe the arbitration agreement.  It is open to the parties expressly to agree that compliance with such a condition is amenable to review by the court.  However, the court will require unequivocally clear language to arrive at that conclusion because it would be contrary to all normal expectations to find that such was the parties’ intention.  They have opted to submit their disputes to an arbitral tribunal rather than a court for resolution and it would be surprising to discover that they intended to have a court involved and to undergo two rounds of decision-making to determine whether a pre-arbitration condition had been met.

• A presumption that pre-arbitration conditions should be regarded as non-jurisdictional is consistent with the consensual basis of the tribunal’s jurisdiction: in the absence of unequivocal language to the contrary, an objection to how the tribunal has resolved an issue concerning a pre-arbitration condition does not challenge the tribunal’s authority to arbitrate conferred by the parties’ consent.

• In the present case, there was nothing in the operative clauses of the parties’ contract that suggested an intention to confer jurisdictional status on the pre-arbitration conditions in question.  On the contrary, those clauses lent themselves to a construction that the relevant conditions are merely procedural and intended to be exclusively decided by the tribunal.

Comment

In this judgment, the Court of Final Appeal also clarified that if the challenge is against the admissibility of a claim before the arbitral tribunal, it is not reviewable by the court pursuant to article 16 of the Model Law, given effect by section 34 of the Arbitration Ordinance. Before applying to the court for review of the tribunal’s decision, an applicant must be very clear that the nature of its application is one concerning jurisdiction e.g. whether the arbitration agreement exists or is valid or whether the claim is within the scope of the submission to arbitration.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427