Reed Smith Client Alerts

Key takeaways

  • Pursuant to Article 29 of the HKIAC Administered Arbitration Rules 2018 (the “HKIAC Rules 2018”), claims arising out of multiple contracts may be made in a single arbitration only if the arbitration agreements are compatible
  • In SYL, LBL v. GIF [2024] HKCFI 699, the Hong Kong court held that if arbitration agreements provide for different appointment procedures and the rights of the parties to designate an arbitrator would therefore be infringed by a single arbitration, the arbitration agreements are not compatible with each other

Background

SYL, LBL v. GIF [2024] HKCFI 699 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”).