Reed Smith Client Alerts

The Hong Kong Court of Final Appeal (CFA) has delivered an important decision on the status of stepped arbitration clauses.

These clauses, also known as “escalation” clauses, require contracting parties, prior to the commencement of proceedings, to attempt to settle their disputes by negotiation or other stipulated forms of alternative dispute resolution. However, disputes can arise as to whether parties have complied with these provisions prior to commencing arbitration.

In this regard, while Hong Kong law allows tribunals to decide on their own jurisdiction (the so-called kompetenz-kompetenz principle), sections 34 and 81 of the Hong Kong Arbitration Ordinance (Cap 609) (AO) allow for these decisions to be challenged before the Hong Kong courts.

This has in turn given rise to a conceptual distinction between tribunal decisions going to distinguishing between a party’s challenge to the tribunal’s “jurisdiction” and a challenge to the “admissibility” of a particular claim. The principle is that the court may review a tribunal’s ruling on the former, but not on the latter, category of challenge.


A contractual dispute arose between the appellant (a Hong Kong company) and the respondent (a Thai company) regarding the operation of a jointly-owned broadcasting satellite. The contract, which was made subject to Hong Kong law, contained a stepped dispute resolution clause stipulating certain pre-arbitration procedures which included an attempt to resolve the dispute through good faith negotiations. If the dispute could not be resolved amicably within 60 days of the request for negotiation, the dispute should be referred to Hong Kong-seated arbitration.

A dispute arose and the respondent commenced an arbitration. A tribunal was constituted and an award rendered against the appellant. The appellant, for its part, denied that the pre-arbitration procedures had been properly observed, and brought proceedings before the Hong Kong Court of First Instance (CFI).

The appellant relied upon the grounds in section 34(2)(a)(iii) of the AO, namely that: “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”.