Arbitration requires party consent. Parties usually do so by entering into an agreement to refer to arbitration any dispute arising “out of or in relation to” their wider contract(s). This in turn means that the right to arbitrate does not arise unless and until there is a qualifying dispute between the parties in question.
Summary of facts
CMB, Fund and Cattle entered into a co-investment agreement (Agreement) whereby CMB agreed to invest in a company. Fund and Cattle were respectively represented by L and X in their dealings with CMB. The Agreement was governed by Hong Kong law and contained an ICC arbitration clause. L and X were not parties to the Agreement.
On 5 June 2020, CMB commenced a Hong Kong court action (Court Action) against L, X and an advisor to the manager of Fund (Management, collectively the Defendants), but CMB did not name either Fund or Cattle as defendant. CMB’s claims were, inter alia, that the Defendants had made fraudulent misrepresentations to CMB and that they had conspired by unlawful means to defraud CMB.
On 3 July 2020, Fund, Cattle, Management, L and X (Claimants) commenced Hong Kong-seated ICC arbitration proceedings against CMB (Arbitration). The Claimants sought, inter alia, anti‑suit injunctions requiring CMB to discontinue or withdraw the Court Action and declarations that CMB’s initiation of the Court Action was in breach of the arbitration agreement contained in the Agreement, and that the Claimants were not liable to CMB in respect of the claims advanced in the Court Action.
In response, CMB challenged the jurisdiction of the arbitrator pointing out that Management, L and X had no arbitration agreement with CMB and, importantly, that CMB had no actual dispute with Fund and Cattle.
On 10 March 2022, the arbitrator issued the Award, holding that as L, X and Management were not parties to the Agreement, he had no jurisdiction to grant the anti-suit injunction at their request to restrain the Court Action, and that the Court Action was not a breach by CMB of the arbitration agreement.
The Arbitrator also found that he had jurisdiction in relation to Fund and Cattle “in so far as they seek declarations of non-liability as regards their own position” and therefore made a declaration that Fund and Cattle had no liability to CMB regarding the allegations arising out of the Agreement that were the subject matter of the Court Action, and that all such allegations in so far as they were made against Fund and Cattle were false (Declaration).
CMB applied to set aside the parts of the Award containing the Declaration.
The Honourable Madam Justice Mimmie Chan (Judge) held that the arbitrator had no jurisdiction to make the Declaration. In this regard, the Judge made the following observations:
- There must be a dispute between parties to an arbitration agreement in order for the right to refer to arbitration to arise. The Court Action was commenced by CMB against non-parties to the Agreement, and it was clear before the hearing of the Arbitration that there was no dispute between CMB, Fund and Cattle in relation to the Agreement. Accordingly, there was no subject matter in dispute that could be considered by the arbitrator for granting any relief to Fund and Cattle.
- The reason the arbitrator gave for being able to make the Declaration was that “Fund and Cattle appeared to have a legitimate interest in the declaratory relief sought.” The Judge noted that the decision on whether Fund and Cattle had a legitimate interest was a determination on whether the arbitrator should grant the relief sought by Fund and Cattle. Before considering that question, the arbitrator first needed to consider the question of whether a dispute existed between CMB, Fund and Cattle in order to confer jurisdiction on him.
- CMB’s refusal or failure to sign a draft consent award prepared by lawyers acting for Fund and Cattle did not evidence the existence of a dispute between them. Before such refusal, CMB had already challenged the arbitrator’s jurisdiction, arguing that the rights under the arbitration agreement had not been invoked to confer any jurisdiction on the arbitrator. CMB was therefore entitled to refuse to admit that the arbitrator was in a position to make any award regarding the Agreement.
- No matter how wide the arbitration clause was drafted, it could only cover disputes between the parties to the Agreement (i.e., CMB, Fund and Cattle) and not claims made by CMB against third parties (e.g., Management, L and X).
This case serves as a reminder that before arbitration proceedings are commenced, it is important to first consider whether there exists a dispute between parties to the arbitration agreement in order to confer jurisdiction on the arbitral tribunal. As pointed out by the Judge, the essential difference between the court and the arbitral tribunal is that, while the court has unlimited and inherent jurisdiction, the jurisdiction of the arbitral tribunal is derived from the existence and scope of the arbitration agreement in question. The mere fact that there is a legitimate interest in seeking relief is insufficient to invoke the jurisdiction of the arbitral tribunal. Notwithstanding the Hong Kong court’s pro-arbitration approach, in the event that the arbitral tribunal is found not to have jurisdiction to make an award, the award will likely be set aside by the Hong Kong court.
Client Alert 2023-089