Hong Kong court confirms that pre-arbitral conditions under multi-tier dispute clause are an issue of admissibility for tribunal to decide

On 15 December 2011, C and D entered into a co-operation agreement for the development and building of satellite A, which had certain transponders, ie the equipment used to transmit broadcasts to, and receive broadcasts from, Earth. Half of the transponders belonged to C, and the other half belonged to D. The agreement was to continue in force for the operating life of Satellite A unless terminated earlier.

Section 8.2 of the agreement provided for provisions relating to material default by either party, the terms of which were:

‘In the event that either Party believes that the other party is in material default of its obligations under this Agreement, such Party shall give a written notice to the defaulting Party in writing requiring remedy of the default.  If defaulting Party fails to remedy the default within thirty (30) Business Days of receipt of the Default Notice, the Parties shall resolve the dispute by referring to the procedure set forth at Section 14.2.’

Section 14 of the agreement provided for Hong Kong law as the applicable law (section 14.1) and stipulated in section 14.2 that if any dispute arose between the parties, they should ‘attempt in good faith promptly to resolve such depute by negotiation’. In addition, either of the parties ‘may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution’. However, as per section 14.3, if the dispute could not be resolved amicably within 60 business days of the date of a party’s request in writing for negotiation, then the ‘dispute shall be referred by either Party for settlement exclusively and finally by arbitration in Hong Kong at [HKIAC] in accordance with [UNCITRAL Rules]’.

On 24 December 2018, D’s CEO issued a letter to C’s chairman of the board of directors, copied to C’s other directors including C’s CEO. In that letter, D’s CEO made a reference to alleged serious breach of the agreement by C and required C’s chairman’s urgent attention, and then stated to raise ‘its concerns directly with the Company C board in a final effort to resolve this issue and avoid further legal proceedings’.  He further said that it was ‘clear from the correspondence that a relevant dispute now exists for the purpose of Section 14 of [the agreement]’.

On 7 January 2019, C’s lawyers wrote to D’s lawyers, stating that the procedure in sections 8.2 and 14 of the agreement and the potential engagement of the respective CEOs did not concern C’s directors, and that D’s direct communication with them was neither appropriate nor productive. C’s lawyers requested that all further correspondence on this matter be directed to them or, if pursuant to section 14.2, be addressed to C’s CEO. However, there was no further correspondence between C and D.

On 18 April 2019, D issued a notice referring the dispute to arbitration under section 14.3 of the agreement. In its response, C claimed, among other things, that the arbitral tribunal did not have jurisdiction because of the absence of a request for negotiations under section 14.  Meanwhile, the parties negotiated on a without prejudice basis throughout the arbitration, including a meeting of, among others, the parties’ CEOs in Singapore in June 2019.

A tribunal of three arbitrators was formed and they decided to deal with C’s objection to jurisdiction and the issue of liability together, with quantum to be addressed, if necessary, in the second phase. The tribunal held that section 14.2 of the agreement mandatorily required the parties to attempt in good faith to resolve any disputes by negotiation, but the reference of disputes to the respective CEOs was only optional. It held that the condition in section 14.3 that 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 section 14.3, and that the condition had been fulfilled by D’s letter of 24 December 2018. The tribunal therefore rejected C’s objection, and proceeded to find that C had breached the agreement and had to pay damages in an amount to be determined later.

C subsequently sought a declaration from the Hong Kong High Court on 21 May 2020 that the award was made without jurisdiction and an order for it to be set aside under section 81 of the Hong Kong Arbitration Ordinance, which incorporated article 34 of the Model Law.

The law

G Lam J heard the parties’ submissions and dismissed C’s application.

The judge noted that it was common ground that the first sentence in section 14.3 meant that it was a condition precedent to any reference to arbitration that there should have been a request in writing for negotiation and that the dispute nevertheless could not be resolved amicably within 60 business days. However, the parties disagreed on what the condition meant. C contended that the condition referred to the giving of a written notice to have the dispute referred to the CEOs for resolution. D, in contrast, contended that the condition was satisfied by a written request to negotiate in good faith, as requisite request by its letter of 24 December 2018. C disputed that that letter did not amount to such request even on D’s own construction of section 14.

As an overarching objection, D contended that the question of whether the condition precedent had been fulfilled was a question of ‘admissibility’ rather than ‘jurisdiction’, and as such the court should not interfere with the arbitral tribunals’ decision on that question.  Section 81(2)(a)(iii) provided that an arbitral award may be set aside if ‘the award deals with a dispute not contemplated by or falling within the terms of the submission to arbitration’. Section 81(2)(a)(iv) provided that an award could be set aside where ‘the arbitral procedural was not in accordance with the agreement of the parties’.

Upon review of a number of academic works and previous authorities from other jurisdictions including US, UK, Singapore, the judge recognised that the distinction between jurisdiction and admissibility was not one only to be drawn on the specific wording of the written law of a particular jurisdiction, but was a concept rooted in the nature of arbitration itself. In particular, the judge referred to a very recent English case of The republic of Sierra Leone -v- SL Mining Ltd [2021] EWHC 286 (Comm), in which the contract in question required the parties to endeavour in good faith to reach an amicable settlement of their disputes and stipulated that if they were unable to settle within three months from a written notice by one party to the other specifying the dispute and seeking an amicable settlement, either party might submit the matter for arbitration. A notice of dispute was served on 14 July 2019, and a request for arbitration was served on 30 August 2019. The English High Court, upon heard the challenge under section 67 of the UK Arbitration Act 1996, declined to set aside the award on the basis that the issue there was not whether the claim was arbitral, or whether there was another forum rather than arbitration in which it should be decided, but whether it had been presented too early, which was best decided by the arbitrators. In other words, this was ultimately a question of admissibility, not jurisdiction.

The judge took the view that these authorities also pointed out the policy reasons that justify different legal treatment of jurisdictional challenges and admissibility challenges. Whether this distinction had significance in Hong Kong for the setting aside of arbitral awards depended on the application of section 81 of the Ordinance to the facts of the actual case. Although the Ordinance did not in terms draw a distinction between jurisdiction and admissibility, it may properly be relied upon to inform the construction and application of section 81. As established by the Hong Kong court in X -v- Jemmy Chen [2020] HKCFI 286, per Mimmie Chan J at para.6, in approaching applications to set aside arbitral awards, the court must confine itself to true questions of jurisdiction.

In reaching the above conclusion, the judge also rejected the two cases relied on by C. One was an English case of Emirates Trading Agency LLC -v- Prime Mineral Exports Pte Ltd [2015] 1 WLR 1145, where a contractual requirement for friendly discussions in good faith before the dispute might be referred to arbitration was treated as a matter going to jurisdiction.  The other one was a Hong Kong case of HZ Capital International Ltd -v- China Vocational Education Co Ltd [2019] HKCFI 2705, although the judge accepted that a contractual requirement for mutual consultation among the parties was a condition precedent to arbitration, such requirement had been waived by the relevant parties. In any event, the judge noted that neither of these two cases really argued the distinction between admissibility and jurisdiction, and therefore could not provide any support for C’s argument.

From the judge’s point of view, the fact that a condition was regarded as going to admissibility rather than jurisdiction did not mean it was unimportant. What it did mean was that the arbitral tribunal has jurisdiction and may deal with the question as it saw fit. If it came to the view that the earlier stages in a multi-tier dispute resolution clause had not been fulfilled, it could give effect to the contractual requirement by, for example, ordering a stay of the arbitral proceedings in whole or in part pending compliance with the clause, imposing costs sanctions, or even dismissing the claim outright as inadmissible. This approach had considerable advantages, for these clauses could be complex in their operation and the arbitral tribunal chosen by the parties’ agreed mechanism would usually be well-placed to consider and determine what needs to be done having regard to commercial realities and practicalities including whether it would be futile to compel the parties to go through the motions.

The judge noted that the approach espoused in the international materials as referred to be entirely consistent with the policy in Hong Kong law which respected the parties’ autonomy in choosing arbitration as the means to resolve their disputes with its incident of speed and finality as well as privacy. Under section 3 of the Ordinance, one of the objects was to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense. Multi-tiered dispute resolution mechanisms were not uncommon. It would not be conducive to swift dispute resolution if controversies regarding procedural conditions such as that in the present case were regarded as jurisdictional questions, opening the way for duplicated arguments in court proceedings.

In conclusion, the judge held that the objection in the present case was to be one going to admissibility of the claim. There was no dispute about the existence, scope and validity of the arbitration agreement. There was no dispute that D’s claim arose from or was in relation to the agreement and fell within the scope of the arbitration agreement. The issue was not whether there was ‘initial consent’ to the submission of the dispute to arbitration and to the tribunal’s determination. The parties’ commitment to arbitrate was not in doubt. There was no indication in sections 14.2 or 14.3 of the agreement that the parties’ intended compliance with these provisions to be a matter of jurisdiction.

Comments

Hong Kong is a jurisdiction adopting UNCITRAL Model Law. Thus, this is a very significant decision, as it appears to be one of very few cases directly dealing with the so-called ‘multi-tier dispute resolution clause’, or also known as ‘escalation clause’, ie requiring parties to take certain steps normally including good faith negotiations between the parties for certain period prior to commencing arbitration proceedings. The judge unequivocally decided that that such contractual pre-conditions to arbitration only constitute an issue of admissibility rather than jurisdiction, which therefore cannot be challenged before the court at a later stage. Thus, if parties to contract are intent on making the pre-conditions as a jurisdictional issue, they should explicitly state in the clause that failure to comply with the pre-arbitral requirements will prevent valid commencement of arbitration.

The other significance of the decision is that the judge also provided guidance to the arbitral tribunals on dealing with the multi-tier dispute resolution clause. As the judge recognised, the pre-arbitral conditions are important. Therefore, if the tribunal finds that the pre-arbitral conditions have not been fulfilled, the tribunal may choose to order a stay of the arbitral proceedings in whole or in part pending compliance with the clause, or impose costs sanctions, or even dismiss the claim outright as inadmissible.