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Disputes as to proper parties to arbitration agreement may be reviewed by the court   

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Authored by: KK Cheung

In R v A, B and C [2023] HKCFI 2034, the court held that an arbitral award finding that C was the true party to an agreement and therefore in effect finding that she was a party to the arbitration clause in the agreement, was a decision on the arbitral tribunal’s jurisdiction over C and the parties to the arbitration. The award was therefore amenable to review under s.34 of the Arbitration Ordinance. The court, having reviewed the matter de novo, found that C had failed to discharge the burden of proving that she was the true party to the agreement. Accordingly, the tribunal had no jurisdiction over her claims in the arbitration and the award as between C and R was set aside by the court.

Background

R and A had entered into a limited partnership agreement (2nd Amended LPA).  C was never a signatory, nor was she named in the agreement.  On C’s case, R was her agent and nominee in making investments, so as to mitigate the expense and delays from Mainland foreign exchange controls and overseas direct investment restrictions. According to C, the 2nd Amended LPA was signed by R as agent for and on her behalf, and she was the principal and beneficiary entitled to all rights under and to enforce the 2nd LPA.  C claimed that she had reimbursed R for the funding for the investment in question (RMB 300 million).

Arbitration clause

The 2nd Amended LPA contained an arbitration clause. Arbitration was initiated by R against A and B, claiming their breach of the 2nd Amended LPA. When C learned of the arbitration, she made a request to be joined to it and sought declarations that she was R’s true principal in relation to the investment and beneficial owner of it.  R challenged the right of C to be joined in the arbitration.  C was granted the provisional right to intervene in the arbitration, the HKIAC having notified the parties that the decision to grant C’s joinder request on a preliminary basis would not prejudice R’s right, as Claimant, to challenge the tribunal’s jurisdiction over C, once the tribunal had been fully constituted.

The tribunal then went on to determine as a Preliminary Question whether R or C was the true principal and/or party to the 2nd Amended LPA and whether the tribunal therefore had jurisdiction over C or R.

Tribunal’s partial final award on jurisdiction

The tribunal issued a “Partial Final Award on Jurisdiction” (Award), finding that C, and not R, was the true principal and party to the 2nd Amended LPA, based on its finding that the RMB300 million was a payment in respect of the investment and that C was therefore the beneficial owner of the investment.

Application to set aside award

R applied to court to set aside the Award under s.34 of the Arbitration Ordinance.  The first question before the court was whether the tribunal’s ruling in the Award was a decision on its jurisdiction.  C, A and B contended that no decision had in fact been made by the tribunal on its jurisdiction, so the decision was not open to review by the court under s.34 of the Arbitration Ordinance.  According to them, the Award was a decision on the merits, but C was not applying to set the award aside under s.81 of the Ordinance, and the time for doing that had expired.

Was the Tribunal’s decision one on jurisdiction?

Having considered the history of the arbitration leading up to the Award, the parties’ formulation of the Preliminary Question, and form as well as substance of the Award, the court held that the Award, and ruling made in it, was a decision on the tribunal’s jurisdiction over C and the parties to the arbitration.

The court said that in concluding and making the declaration that C was the true principal and party to the 2nd Amended LPA, the tribunal was in effect and substance deciding that she was the party to the arbitration agreement contained in the 2nd Amended LPA, was entitled to enforce the rights and obligations conferred under the 2nd Amended LPA, including the arbitration agreement, and that as C was the true party to the agreement, the tribunal had the jurisdiction to decide the dispute between R and C, which arose out of or in connection with the 2nd Amended LPA, its existence, and breach as alleged.

The court added that, even if the tribunal’s ruling and decision as contained in the Award was wider in scope than a decision on jurisdiction only, in that the tribunal had decided on at least part, if not the entirety, of the merits of the claims made by R and C, including questions relating to how payment of the investment was made and reimbursed, that did not by itself mean that there was no award on jurisdiction.  The key, the court said, was to ascertain whether the Award had dealt with and decided the question of whether the tribunal had jurisdiction over the claims made by R and C respectively in the arbitration.

The court concluded that there was no basis to characterize the Award and ruling made in it as anything other than one on a true question of jurisdiction.  It was a finding on the existence of a valid and binding arbitration agreement as contained in the 2nd Amended LPA, to which C was a true party and principal. The identities of the parties to a contract are fundamental and go to the root of the question of whether a contract exists and in this case whether there was an agreement to arbitrate.  A tribunal only has jurisdiction over parties to the arbitration agreement, and it is only with the consent of those parties to the arbitration agreement that the power to join non-parties can be exercised.  It could not be disputed, the court said, that a difference or disagreement over the proper parties to an arbitration agreement is a true matter of jurisdiction.

Accordingly, the court held that the Award was one on the jurisdiction of the tribunal and as to the existence of an arbitration agreement between R and C.  As such, it was open to review by the Court under s.34 of the Ordinance and Article 16 of the Model Law.  

Was the Tribunal’s decision that C was a party to the agreement correct?

The court went on to consider whether the tribunal was correct in its decision that there was an arbitration agreement between R and C who was found to be the principal and true party to the 2nd Amended LPA. The court referred to its approach in this regard, namely that in deciding this question, it could consider afresh the evidence adduced before the court and the tribunal’s own view of its jurisdiction had no legal or evidential value to the court, irrespective of how full the evidence was before the tribunal, and no matter how carefully deliberated the tribunal’s conclusion. The hearing before the court is de novo, and if necessary, witnesses can be called and the parties are entitled to put forward new arguments on the question of jurisdiction which the court is entitled to consider.  The rationale for this is that the court should not be in a worse position to make an assessment on an issue of fact, and is therefore able to examine the evidence and the witnesses in the usual way.

On the court’s review, it could receive evidence which is relevant and admissible, regardless of whether it had been adduced, or could have been adduced, before the tribunal.  The court is not bound by or limited to either the findings made by the tribunal in the award, or the evidence adduced before the tribunal.  The court is to make its own decision on the evidence before the court.  It does not simply review the tribunal’s decision, but makes its own decision on the evidence before it, but as is often the case, the court said, after considering the award and tribunal’s findings, it may agree with the tribunal’s conclusions.  This is partly due to the fact that whilst the evidence before the court is not confined to what was adduced before the tribunal, it will include such evidence which had been adduced, had been considered by the tribunal and is referred to in the award, including the testimony of the witnesses who had been cross-examined before the tribunal and whose credibility had been assessed by the tribunal.

On the entirety and state of the evidence before the court, it concluded that it could not be satisfied that C had made reimbursement of the payment made by R for the investment and C had not discharged her burden of proving herself to be the beneficial owner of the investment and the true principal and party to the 2nd Amended LPA.  Accordingly, as she was not the party to the arbitration agreement contained in the 2nd Amended LPA, the tribunal had no jurisdiction over her claims purportedly made in the arbitration, and therefore the Award had to be set aside as between R and C.

This judgment confirms that disagreements as to who are the parties to an arbitration agreement are matters of jurisdiction and that decisions made about such by an arbitral tribunal are reviewable by the courts, which can consider the matter afresh.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427

Related Services and Sectors:

International Arbitration

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