Decision of Court of Appeal
In its decision, CA considered (a) whether the arbitrator did have jurisdiction to make the Declaration and (b) whether the impugned parts of the Award were contrary to public policy. In particular, CA noted that it was entitled to consider the question of the jurisdiction of the arbitrator afresh.
Settled principles regarding meaning of “disputes”
Before addressing the question of the arbitrator’s jurisdiction, CA considered the definition of “disputes”. In doing so, CA summarised the settled principles and concluded that “disputes” should be construed inclusively and not overly legalistically. It held that a dispute does not necessarily require the existence of a legal claim or cause of action. A dispute can exist if one party asserts or adopts a position that is rejected or not accepted by the other, or there is a difference of opinion on the central issues. Silence in response to a claim does not constitute a dispute; a rebuttal or denial is necessary. A dispute may also arise and continue to exist if there is no clear and unequivocal admission of liability and quantum.
Moreover, CA considered that the time for determining the existence of a dispute is at the commencement of arbitration, when the arbitrator’s jurisdiction is invoked.
Jurisdiction of arbitrator
CA found that the arbitrator had “conflated” the question of whether he had jurisdiction with the question of whether Fund and Cattle had a “legitimate interest” in the negative Declaration. The arbitrator erred in holding that as no claim had been made against Fund and Cattle, there could be no objection to the Declaration on their liability. The correct position was that since CMB did not assert any liability against Fund and Cattle, there were no disputes between them and CMB that could ground the arbitrator’s jurisdiction.
CA was also of the view that Fund and Cattle’s act in seeking a declaration of non-liability tended to suggest that the dispute was artificial and would have “set alarm bells ringing” as to whether there was an attempt to engineer a dispute to bring into the arbitral process matters which ought to have been decided by the court.
In reaching the conclusion that there were no disputes between CMB on the one hand and Fund and Cattle on the other, CA also took into account the following factual circumstances of this case:
- The Court Action initiated by CMB against L, X and management (none of which were parties to the arbitration agreement concerned) did not name either Fund or Cattle as defendant.
- CMB did not seek to challenge the existence of the Agreement, nor did it seek to impugn any of the Agreement’s terms.
- CMB did not assert any form of liability on the part of Fund or Cattle in relation to the Agreement.
- CMB’s assertions of fraud against L, X and Management in the Court Action were not asserted against Fund or Cattle.
- CMB asserted that Cattle was a co-victim of the fraud concerned.
Public policy
CA was also of the view that the Award conflicted with the public policy of Hong Kong which would lead to the setting aside of the impugned parts of the Award.
In this regard, CA found that the Arbitration (and hence the Award) was a clear abuse of process for the following reasons:
- After being sued in the Court Action, L, X and Management commenced the arbitration in their own names (acting as controllers of Fund and Cattle), despite not being parties to the Agreement. Their clear purpose was to seek to have the issues raised in the Court Action dealt with in the Arbitration.
- After failing to obtain interim anti-suit injunction orders, L, X and Management applied for a stay in the Court Action but subsequently abandoned it, opting instead to submit to the Court’s jurisdiction in respect of the issues raised in the Court Action. Nevertheless, they continued to maintain and pursue their claims in the Arbitration to trial, seeking final anti-suit injunctions and determination of the substantive issues in the Court Action.
- Such pursuit had no legitimate purpose as the Court had exclusive jurisdiction over the issues raised in the Court Action, and any findings made in the Arbitration would be irrelevant and were incapable of affecting the Court’s determinations.
Concluding remarks
The jurisdiction of an arbitral tribunal is derived from the arbitration agreement. The question of the existence of a legitimate interest is separate from the jurisdiction of the arbitral tribunal and ought not be conflated. In the absence of any dispute, the jurisdiction of the arbitral tribunal is not engaged. That said, the CA has left open the possibility that there can be a dispute between parties to a contract when non-contractual claims and assertions are made against a third party who was a stranger to the arbitration agreement, on the basis that there is an assertion “arising out of or related to” the contract.
Client Alert 2024-170
