Summary of facts
The dispute arose from the alleged breach of a co-operation agreement between Company C (P) and Company D (D) (Agreement). P applied to the Hong Kong court for a declaration that the Award made in the arbitration between P and D was made without jurisdiction and not binding on P, and for an order that the Award be set aside.
The main complaint of P was that D had not complied with the multi-tiered dispute resolution clause in the Agreement, the key provisions of which read as follows:
Clause 14.2 – Dispute Resolution
“The Parties agree that if any controversy, dispute or claim arises …, the Parties shall attempt in good faith promptly to resolve such dispute by negotiation. Either Party may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution …” (emphasis added)
Clause 14.3 – Arbitration
“If any dispute cannot be resolved amicably within sixty (60) business days of the date of a Party’s request in writing for such negotiation, or such other time period as may be agreed, then such dispute shall be referred by either Party for settlement exclusively and finally by arbitration in Hong Kong at the Hong Kong International Arbitration Centre (‘HKIAC’) in accordance with the UNCITRAL Arbitration Rules in force at the time of commencement of the arbitration (the ‘Rules’) …” (emphasis added)
It was common ground between the parties that the first sentence in clause 14.3 provided a condition precedent to any reference to arbitration that there should have been a request in writing for negotiation and that the dispute could not be resolved within 60 business days. The parties, however, disagreed on how the condition could be fulfilleor determination:
- Was compliance with the dispute resolution procedure a question of the admissibility of the claim or of the tribunal’s jurisdiction?
- If the latter, what was the precise condition precedent and was the condition fulfilled on the facts of the case?
Decision of the tribunal
In the arbitration, the tribunal decided the question of jurisdiction in favour of D. The tribunal held that the requirement to attempt in good faith to resolve disputes by negotiation (as provided for in the first sentence of clause 14.2) was mandatory, but that the reference to the “Chief Executive Officers” (in the second sentence of clause 14.2) was optional. The condition in clause 14.3 referred to a request for negotiation under the first sentence of clause 14.2. The tribunal therefore held that the condition was fulfilled on the facts of the case. The tribunal also decided in favour of D as to the merits of the case.
Decision of the Hong Kong court
The Hong Kong court also decided the matter in favour of D, albeit on the different ground that the issue raised was one of admissibility, not jurisdiction. As such, there was no valid basis to challenge the jurisdiction of the tribunal. The reasoning of the court can be summarised as follows:
(a) The requirement for negotiation or mediation before arbitration inherently involved aspects of the arbitral procedure and often required interpretation and application of institutional arbitration rules or procedural provisions in the arbitration agreement. Such procedural issues were best suited for resolution by the tribunal, subject to minimal judicial review. By designating arbitration as the dispute resolution mechanism, the parties intended arbitrators, not courts, to decide disputes about the meaning and application of particular procedural pre-conditions to arbitration.
(b) Fragmenting resolution of procedural issues between courts and the tribunal would lead to the risk of multiple proceedings, inconsistent decisions, delays and expenses. One of the objects of the Arbitration Ordinance (Cap. 609) was to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense. It would not be conducive to swift dispute resolution if disputes regarding procedural conditions were regarded as jurisdictional questions, thereby opening the way for duplicated arguments to be made in court proceedings.
(c) Treating a procedural condition precedent as a matter of admissibility of the claim rather than the tribunal’s jurisdiction would not deny the condition precedent’s contractual force. The tribunal had jurisdiction and could deal with the question as it saw fit. For instance, the tribunal could order a stay of the arbitral proceedings pending compliance with the pre-conditions to arbitration, impose costs sanctions, or even dismiss the claim as inadmissible.
Given the court’s ruling that the issue of compliance with the pre-conditions to arbitration was not a question of jurisdiction, it was not necessary for the court to consider the construction of the dispute resolution clauses and the issue of whether the pre-conditions to arbitration had been met on the facts of the case.
The court therefore dismissed P’s application to set aside the Award, with indemnity costs.
The decision provides much needed clarity as to whether the issue of compliance with the pre-conditions to arbitration, typically in the context of a multi-tiered dispute resolution clause, should be regarded as a question of admissibility of the claim or of the tribunal’s jurisdiction. In light of this decision, future challenges against arbitral awards or a tribunal’s jurisdiction on the sole basis of non-compliance with the pre-conditions to arbitration would likely fail. This decision is welcomed as it further facilitates the swift and efficient resolution of disputes between parties through arbitration without unnecessary expense.
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Client Alert 2021-177