Background
SYL, LBL v. GIF [2024] HKCFI 1324 was concerned with three agreements (the “Three Contracts”), namely:
- A Loan Agreement entered into between the 1st Plaintiff (“P1”) and the 2nd Plaintiff (“P2”) (together “Ps”) with the Defendant (“D”), with D as the “Lender” and Ps as the “Borrowers” (“Loan Agreement”);
- A Security Deed entered into between D as the “Mortgagee”, P2 as the “Mortgagor” and P1 and P2 as the “Obligors” (“January Deed”); and
- A Security Deed entered into between D as the “Mortgagee” and P1 together with two other companies (“Other Mortgagors”) as the “Mortgagors” (“July Deed”).
Each of the Three Contracts contains a dispute resolution clause:-
- Clause 7.1 of the Loan Agreement provides that:-
“…Each of the parties hereto irrevocably…agrees that any dispute or controversy arising out of, relating to, or concerning any interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration to be held in Hong Kong which shall be administered by the Hong Kong International Arbitration Centre (“HKIAC”) in accordance with the Hong Kong International Arbitration Centre Administered Arbitration Rules…There shall be three (3) arbitrators, with one arbitrator to be appointed by the Borrowers and one arbitrator to be appointed by the Lender. If the aforesaid two arbitrators fail to agree on the third arbitrator, the HKIAC Council shall select the third arbitrator, who shall be qualified to practice law in Hong Kong…”
- Clause 19.2 of each of the January Deed and the July Deed provides that:-
“The dispute resolution provision in the Loan Agreement applies mutatis mutandis to this Deed.”
D commenced arbitration against Ps under the Three Contracts (the “Arbitration”). D requested a single arbitration under multiple contracts pursuant to Article 29 of the HKIAC Rules 2018, which provides that:-
“Claims arising out of or in connection with more than one contract may be made in a single arbitration, provided that:
- a common question of law or fact arises under each arbitration agreement giving rise to the arbitration; and
- the rights to relief claimed are in respect of, or arise out of, the same transaction or a series of related transactions; and
- the arbitration agreements under which those claims are made are compatible.”
Ps objected to having a single arbitration under multiple contracts. The HKIAC decided that the Arbitration was, prima facie, validly commenced under Article 29.
The HKIAC invited Ps to jointly designate an arbitrator with the Other Mortgagors. Ps nominated an arbitrator, but the Other Mortgagors did not make any nomination. The HKIAC noted the absence of joint designation of the arbitrator by Ps and the Other Mortgagors. The HKIAC therefore appointed another arbitrator instead.
Ps challenged the jurisdiction of the arbitral tribunal (the “Tribunal”), but the challenge was dismissed by the Tribunal by an interim award (the “Interim Award”). Ps then applied to the court to set aside the Interim Award based on the following two grounds:-
- The arbitration agreements in the Three Contracts (the “Arbitration Agreements”) were incompatible with each other. Hence, the Arbitration should not have been commenced as a single arbitration under multiple contracts (the “Compatibility Ground”); and
- The Tribunal was not constituted in accordance with the parties’ agreement under the Three Contracts (the “Constitution Ground”).
Decision
In relation to the Compatibility Ground, Deputy High Court Judge Norman Nip SC ruled that since the Three Contracts designated different parties to appoint arbitrators for arbitration, the Arbitration Agreements were incompatible with each other. Hence, the Tribunal cannot hear the disputes as a single arbitration under multiple contracts.
The court began by construing the meaning of “mutatis mutandis” in the January Deed and the July Deed:
- In relation to the January Deed, the court found that the January Deed was entered into between D, P1 and P2 only. Therefore, in any event, Ps have the right to designate an arbitrator without the agreement of any other party. This position is the same as that in the Loan Agreement.
- In relation to the July Deed, the court ruled that “mutatis mutandis” most naturally meant that P1 had to designate an arbitrator jointly with the Other Mortgagors, because the Other Mortgagors were parties to the July Deed and so should logically be given a right to designate an arbitrator.
- Accordingly, there is a conflict of arbitrator appointment procedures between the Loan Agreement and the January Deed on the one hand, and the July Deed on the other hand.
The court then explained the meaning of the word “compatible”. According to the Oxford English Dictionary, “compatible” means an ability to exist or be used together without causing problems. The court also referred to A Guide to the HKIAC Arbitration Rules and Arbitration Rules of the Singapore International Arbitration Centre, and noted the following factors as relevant to the determination of compatibility:
- Any preconditions to the commencement of arbitration.
- Any required qualifications of the arbitrators (eg that an arbitrator be qualified in a particular law or discipline, or speak a particular language).
- The procedure for appointing arbitrators.
- The language of the arbitrations.
- The governing law of the arbitration agreements.
- The method for determining the fees and expenses of the tribunal.
The court went on to rule that the Arbitration Agreements were not compatible with each other for the following three reasons:-
- When the Arbitration Agreements adopted different appointment procedures, it infringed party autonomy to impose a single arbitration. Ps had contracted for the right to designate an arbitrator in the event of a dispute. A single arbitration requiring Ps to jointly appoint an arbitrator with the Other Mortgagors infringed upon Ps’ right;
- A single arbitration infringed the parties’ contractual rights. Ps had bargained for and obtained a right to designate an arbitrator under any intended arbitration arising from the Loan Agreement and the January Deed. A unilateral decision by a counterparty (such as D) to commence a single arbitration based on multiple contracts could not curtail the right to designate an arbitrator; and
- D might gain an unfair advantage in the Arbitration by refusing Ps' rights to designate an arbitrator of Ps’ choice. D was entitled to designate an arbitrator to the exclusion of other parties under any of the Three Contracts. However, by commencing a single arbitration, D would be able to deprive P of the right to designate an arbitrator to the exclusion of other parties, such that the parties were no longer treated equally. This impeached the integrity of the Arbitration.
Following its decision on the Compatibility Ground, the court ruled that the Constitution Ground must also succeed.
The Tribunal was constituted in the context of a single Arbitration, and hence was not composed in accordance with the parties’ agreement. Even if the Other Mortgagors’ consent were not required for the appointment of Ps’ designated arbitrator, the Tribunal would still have been composed against the parties’ agreement, since the Tribunal was composed on the ground that the Other Mortgagors did not jointly designate an arbitrator with Ps.
Therefore, the court set aside the Interim Award.
Concluding remarks
This decision reminds parties who wish to commence arbitration arising out of more than one contract to review the arbitration clauses in different agreements before commencing a single arbitration under Article 29 of the HKIAC Rules 2018. The fact that the dispute arises out of the same transaction and that the arbitration agreements make similar provisions as to arbitration procedures does not automatically make the different arbitration agreements compatible with each other. One is advised to thoroughly understand the effect of each arbitration agreement on each party in order to determine whether a single arbitration based on multiple contracts is allowed. If a party’s rights are likely affected due to the commencement of a single arbitration, and such rights would not have been affected had separate arbitrations been commenced, then a single arbitration would likely be inappropriate. Parties should instead consider commencing separate arbitrations.
This decision also serves as a good reminder to draft arbitration agreements carefully. If parties intend to handle disputes in relation to multiple contracts through a single arbitration, they are advised to think twice before drafting, to ensure that the contracts are drafted in a way that are compatible with each other.
Client Alert 2024-129
