OLN

Arbitration

Reconciling Conflicting Arbitration Clauses: Try to Make the Worst Seem Better

by

(This article was published in the November 2024 Issue of the Hong Kong Lawyer)

International commercial and financial transactions are becoming increasingly complex with the formation of series of inter-related contracts. Regrettably, parties often attach little importance and give little thoughts to the design of dispute resolution clauses in various related contracts, resulting in inconsistency. Reconciling such inconsistent dispute resolution clauses,to the extent possible, is key to avoiding increased costs, inconvenience and delay in separate, satellite litigations and arbitrations, and more importantly conflicting rulings that breed injustice.

In AAA, BBB and CCC v DDD [2024] HKCFI 513, the Hong Kong Court of First Instance attempted to reconcile such inconsistent arbitration clauses by resorting to the“centre of gravity” approach (the “COG Approach”) in AmTrust Europe Ltd v Trust Risk Group SpA [2015] EWCA 437. Unfortunately the inconsistent arbitration clauses in AAA could not be reconciled, leaving an undesirable risk of contradictory outcomes.

This article aims to examine the COG Approach. It will be argued that the COG Approach is inapt to reconcile conflicting arbitration clauses. A brightline party-based approach, drawing from the one-stop shop presumption in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40, will be proposed to determine a single forum for the resolution of issues inter related in a series of contracts. It will be further argued that where conflicting arbitration clauses in the same series of contracts are of equal force and effect, they shall be held as invalid arbitration clauses insofar as overlapping issues are concerned for failing to give binding rulings.

AAA, BBB and CCC v DDD [2024] HKCFI 513

In AAA, the Lender, the Borrower and the Guarantors entered into a Loan Agreement subject to HKIAC arbitration with a three-arbitrator Tribunal. As security for the loan, the Borrower issued a Promissory Note signed by the Borrower and Guarantors to the Lender, which Promissory Note was also subject to HKIAC arbitration but without specifying the number of arbitrators. The Loan Agreement was subsequently amended by the Amendment Agreement which incorporates the arbitration clause of the Loan Agreement.

As it usually happens, the Borrower failed to repay the loan, and hence the Lender commenced arbitration under the Loan Agreement against the Borrower and the Guarantors. The Lender proposed inclusion of relief based on the Promissory Note, which sparked this whole battle on whether the Tribunal formed under the Loan Agreement had jurisdiction over the Promissory Note.

The Court first noted that there are significant differences between the two arbitration clauses (e.g. the (non-)specification of the number of arbitrators) and that the Tribunal was constituted under the arbitration clause in the Loan Agreement and not the Promissory Note.

Whilst acknowledging the ideal of a one-stop shop for the resolution of the parties’ related disputes as stated in Fiona Trust, the Court opined that the ideal may not be achieved in “generalized paradigm” situations where the conflicting dispute resolution clauses in multiple related contracts indicate the parties’ contrary intention not to have a one-stop shop.

Adopting and applying the COG Approach in AmTrust, the Court considered which arbitration clause has a “closer connection” with the dispute over the Promissory Note. Rather naturally, in the end the Court held that the Tribunal had no jurisdiction over claims under the Promissory Note. The Court helpfully provided further guidance on applicable mechanisms to minimise risks of conflicting outcomes, including appointing the same Tribunal for or consolidating all related arbitrations, which should always be attempted first to avoid the thorny scenario of conflicting arbitration clauses.

The “Centre of Gravity” Approach Inapplicable to Conflicting Arbitration Clauses

The Court’s attempt to salvage a disaster is certainly admirable. Parties should be ultimately responsible for the messy situation they knowingly and voluntarily put themselves in. After all, salvage is not supposed to be a perfect remedy for disasters. Similarly the COG Approach is not without its problems.

Firstly and obviously, as fairly accepted by the Court, the COG Approach may be a vague concept, and the determination of an issue’s “centre of gravity” or“closeness” to a dispute resolution clause may be convoluted, especially because the contracts are inter-related and the issues are intertwined. Indeed, different judges and arbitrators may give different weight to different factors and hence the determination exercise will likely give rise to uncertainty, unpredictability and unnecessary disputes between the parties.

Secondly, the irony of the COG Approach is that, although the Court recognises that there are multiple applicable arbitration clauses and that there is a need to construe the parties’ intentions to determine which arbitration clause(s)to apply, the “close connection” test has no apparent connection with the parties’ intentions.

More importantly, the application of the COG Approach appears not to sit well with the well-established principle that Article 8 of the UNCITRAL Model Law does not permit withholding arbitration on the basis of forum non conveniens (Kaverit Steel and Crane Ltd v Kone Corp. (1992)87 DLR (4th) 129). The “close connection” test in the COG Approach essentially resembles the forum non conveniens test. To be a meaningful exercise, the COG Approach must involve some sort of “displacement” or “invalidation” of an otherwise valid and binding arbitration clause (even though the substantive effect was downplayed to “take precedence over” the arbitration clause only), but this is essentially impermissible under the UNCITRAL Model Law.

Jurisdiction clauses may be “taken precedence over” such that court proceedings may be stayed, nevertheless the same may not apply to arbitration clauses. Indeed, in AmTrust, when the English Court of Appeal devised the COG Approach, it considered whether the arbitration clause in the subsequent Framework Agreement was supposed to capture disputes under the earlier Terms of Business Agreement which contained an English jurisdiction clause. Similarly, in X v Y [2021] 2 HKC 68, the COG Approach in AmTrust was applied to determine whether the arbitration clause in the Mandate covered a dispute under the Pledge which contained a Singapore jurisdiction clause. In H v G [2022] HKCFI 1327, the COG Approach in AmTrust was applied to determine whether the arbitration clause in the Building Contract covered a dispute under the Warranty which contained a non-exclusive Hong Kong jurisdiction clause. The COG Approach appears not to be intended, and it is slippery to extend the COG Approach, to deal with the scenario of conflicting arbitration clauses.

The Brightline Party-Based Approach

In AmTrust, the English Court of Appeal took the view that the one-stop shop presumption in Fiona Trust has limited application to conflicting dispute resolution clauses scenario because as Rix J held in Credit Suisse First Boston (Europe)Ltd v MLC (Bermuda) Ltd [1999] CLC 579 at 590, “where different agreements are entered into for different aspects of an overall relationship, and those different agreements contain different terms as to jurisdiction, it would seem to be applying too broad and indiscriminate a brush simply to ignore the parties’ careful selection of palette.” However, with respect, the two propositions are not necessarily mutually exclusive, if the parties’ choices of arbitration clauses are generally respected except that the overlapping aspect of related contracts is presumed to be dealt with by one of the parties’ chosen arbitration clauses. he question is – how to determine that one arbitration clause for the overlapping aspect.

The following brightline party-based approach is respectfully proposed to determine which arbitration clause applies in the multiple conflicting arbitration clauses scenario:

  1. Since the parties have express arbitration clauses in multiple related contracts, the starting point is that the parties’ express choice of forum should be respected, except for such overlapping issues between inter-related contracts.
  2. Where there are overlapping issues between inter-related contracts, those issues should be presumed to be governed by the last arbitration clause agreed to by all the relevant parties (i.e. the last common will).

To illustrate, consider the following example. Suppose there are three related contracts in the following sequence:

(a) Contract (arbitration clause) 1: Parties A and B
(b) Contract (arbitration clause) 2: Parties A, B and C
(c) Contract (arbitration clause) 3: Parties B and C

Regarding overlapping issues common to three contracts, in line with the one-stop shop presumption in Fiona Trust, the arbitration clause 2 should be presumed to invalidate the other competing arbitration clauses. There should be a common “oh of course” kind of implied term in the arbitration clause 2 (being the last arbitration clause between all relevant parties) that in relation to overlapping issues: arbitration clause 1 should be presumed to be superseded(Monde Petroleum SA v WesternZagros Ltd [2015] EWHC 67, [38]); parties B and C should be presumed to be bound not to enter into the arbitration clause 3 to have outcomes that contradict those of the arbitration clause 2.

Mutual Invalidation of Arbitration Clauses?

Needless to say, whilst the party-based approach is objective, certain and in line with the Fiona Trust presumption, it would not cover at least the following three scenarios:

(i) There is no one single arbitration clause in the multiple related contracts that captures all relevant parties.
(ii) There are more than one arbitration clauses that capture all relevant parties but they are entered into simultaneously.
(iii) The parties deliberately intend to have conflicting arbitration clauses leading to contradictory outcomes.

Regardless of the reasons, in these scenarios there are multiple arbitration clauses applicable to overlapping issues in multiple related contracts. Arguably these arbitration clauses fail to give any binding decision. After all, no one can possibly be “bound” by two completely opposite decisions on the same factual matrix. In these circumstances, instead of forcing an imaginary intention upon the parties, it appears fair that all such arbitration clauses should be invalidated for failing to result in a binding decision enforceable by legal process (IS Prime Ltd v TF Global Markets (UK) Ltd & Ors. [2020]EWHC 3375 (Comm), [43] – [50]).

Mutual invalidation of arbitration clauses may appear to be a radical measure to take. But one should bear in mind that the parties are always free to agree to a workable dispute resolution mechanism to avoid the radical measure. If the parties insist to have conflicting and unworkable arbitration clauses, it is unclear why the public policy should facilitate such multiple satellite proceedings with difficulties, increased costs and delay that ultimately produce contradictory outcomes giving rise to injustice, contrary to the object of the whole arbitration regime to have fair and speedy resolution of disputes by arbitration without unnecessary expense.

Conclusion

Conflicting dispute resolution clauses applicable to multiple related contracts are problematic. Leaving aside the fragmentation of the dispute resolution process with the increased costs and time involved, what is unacceptable is the risk of contradictory rulings causing injustice. The problem is even more acute when conflicting arbitration clauses are involved, not only because the circumstances to invalidate arbitration clauses are narrow, but also because enforcements of contradictory arbitral awards are extremely messy. When disaster hits, no salvage is perfect.

Prevention is always better than cure. It is hoped that parties to complex multi-contract transactions think through how they wish their disputes under related contracts to be resolved, consistently and efficiently.

Oldham, Li & Nie to Host “Arbitration and Justice: the Compromise on Insolvency, Illegality and Conflicting Arbitration Clauses?” Panel During the 2024 Hong Kong Arbitration Week

by

Oldham, Li & Nie (OLN) is pleased to announce its participation in the 2024 Hong Kong Arbitration Week, organised by the Hong Kong International Arbitration Centre (HKIAC), taking place on 21-25 October 2024.

The firm will host a panel session titled “Arbitration and Justice: the Compromise on Insolvency, Illegality and Conflicting Arbitration Clauses?” on 22 October 2024 from 5:00 to 6:30 pm.

This debate session will critically examine the compatibility between arbitration and substantive/procedural justice in light of the latest case authorities, including:

  1. Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16, Re Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299, and Arjowiggins HKK 2 Limited v Shandong Chenming Paper Holdings Limited [2024] HKCA 352: The availability of bankruptcy / winding-up tools for arbitration-governed debts
  2. AAA v DDD [2024] HKCFI 513: The complication of incompatible arbitration clauses in multi-contract transactions
  3. G v N [2023] HKCFI 3366: The interplay between arbitration and illegality

The session promises to deliver a thorough examination of these critical issues from various expert perspectives.

The distinguished panel will feature:

  • Prof. Anselmo Reyes, International Judge at Singapore International Commercial Court (SICC)
  • William Wong SC, Barrister at Des Voeux Chambers
  • Frances Lok SC, Barrister at Des Voeux Chambers
  • Sarah Thomas, Associate General Counsel of McKinsey & Company

They will be joined by OLN’s lawyers, Partners Dantes Leung and Jonathan Lam, with Associate Davis Hui serving as the moderator. Each panelist will offer unique insights, contributing to a robust and enlightening debate.

For more information about the 2024 Hong Kong Arbitration Week, please visit https://hkaweek.hkiac.org/event/f3e694d2-39ac-451c-aa66-cb9d9af52bc2/summary. 

To register, please visit https://hkaweek.hkiac.org/event/f3e694d2-39ac-451c-aa66-cb9d9af52bc2/regProcessStep1.

Winding-up Without a Debt: Should the Hong Kong Courts Run Around in Circles with The Privy Council?

by

(This article was published in the August 2024 Issue of the Hong Kong Lawyer)

In Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16, Ltd the Privy Council made a U-turn on the interplay between arbitration and insolvency by re-affirming the “Traditional Approach” as a matter of law of the British Virgin Islands: notwithstanding any arbitration agreement that governs a winding-up petition debt, the petition should only be stayed or dismissed if the company demonstrates that there is a bona fide dispute on substantial grounds. The Privy Council considered it serious enough to kill two more birds with the same stone by (1) overruling as a matter of English law Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 that where an unadmitted underlying debt of a winding-up petition is subject to an arbitration agreement, a winding-up petition shall be dismissed or stayed save in wholly exceptional circumstances (“Salford Estates Approach”), and (2) adopting the same underlying policy in relation to arbitration clauses and exclusive foreign jurisdiction clauses.

Sian no doubt came as a bolt from the blue, leaving the common law arbitration community in complete shock, not only because for nearly a decade the Salford Estates Approach has not received any major negative treatment by English courts, but also because the Salford Estates Approach has been essentially adopted (albeit with modifications) by the highest courts in other common law jurisdictions, such as Singapore Court of Appeal in AnAn Group (Singapore) PTE Ltd v VTB Bank [2020] SGCA 33 and the Hong Kong Court of Final Appeal in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9 (“Guy Lam CFA”)(delivered by French NPJ, the former Chief Justice of Australia). Now that the English courts have made a sharp turn, should Hong Kong courts follow suit?

This article seeks to critically examine the reasoning in Sian. With respect, it will be argued that the Privy Council merely defeated a straw man but failed to answer the fundamental question – whether there is a qualifying debt to trigger the winding-up regime for the court to exercise any discretion in the first place. It will be respectfully submitted that the court does not have any final say when the petition debt is governed by an arbitration clause (at least insofar as any factual dispute is concerned) or an exclusive foreign jurisdiction clause, and
so the court cannot determine whether there is indeed a qualifying debt. As a sequel of our article “Lasmos and Beyond: Have the Cake and Eat It Too?” in the May 2020 issue, it is suggested that the Salford Estates Approach is the only irresistible logical approach for the Hong Kong courts to adopt.

Extremity of Sian: Hard Facts Make Bad Law?

Sian was a typical loan recovery case where the respondent applied for liquidation of the appellant for the appellant’s failure to repay the facility, whereas the appellant claimed that it
had a cross-claim against the respondent.

At the outset, it must be pointed out that Sian is extremely extraordinary in the sense that the appellant accepted that the petition debt was not disputed on genuine or substantial grounds given that the appellant did not appeal against such facet of the first instance decision. It was on that basis that the Privy Council took the practical view that to require the creditor to go through an arbitration in that case may just add delay, trouble and expense for no good purpose (Sian, [92]).

In practice, this kind of open acknowledgment of no genuine or substantial dispute on the debt is extremely rare. The more common scenario is that the debtor raises certain disputes
on the debt which the court deems non-genuine and non-substantial. If the petition debt is governed by an arbitration clause, could the court be so confident that any arbitral tribunal
must necessarily reach the very same conclusion as the court would, such that there must be a qualifying debt to trigger the winding-up regime?

Winding-up Without a Debt?

Clearly the courts have no power to wind up companies at their whim. In the insolvency statutes around the common law jurisdictions, there are specific gateways under which a company may be wound up. For example, under section 177 of the Hong Kong Companies
(Winding-up and Miscellaneous Provisions) Ordinance (“HK Winding-up Ordinance”), a company in Hong Kong may be wound up for being unable to pay debts. If a creditor wishes to prove the inability to pay a particular debt, he may either rely on the deeming provision
under section 178 of the HK Winding-up Ordinance by a statutory demand of a liquidated debt of HK$10,000 or more, or fall back on strict proof of the debt (Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114). Therefore, if the ground to wind up a company is solely on its inability to pay the petition debt, then logically the making of a winding-up order must necessarily involve the determination of the existence of the “debt”.

Hence in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2022] 4 HKLRD 793 (“Guy Lam CA”), the Hong Kong Court of Appeal held that firstly, there is indeed judicial determination of a company’s indebtedness in the bankruptcy proceedings ([68]); secondly, until the creditor is established as “a creditor”, he simply has no locus standi present any petition ([77]). In the same vein, in Guy Lam CFA, French NPJ did not rule out the possibility of a mandatory stay of the bankruptcy proceedings in favour of arbitration ([91]).

The Privy Council attempted to dispel this clear logic by explaining that to make a winding-up order is “only a provisional assumption that the company is insolvent, which may turn out to be untrue, without that invalidating the liquidation process”. With all due respect, such a contention is only a straw man – when the winding- up petition is concerned with the petition debt in particular, the real question is not whether the company is or is not “insolvent” overall (which position may fluctuate until all assets are realised), but whether there is or is not a qualifying debt that triggers the winding-up regime. The “most spectacular recent example” of the substantial net surplus of the Lehman Brothers International Europe Ltd is neither here nor there. The Privy Council did not cite any case authority whatsoever to support the proposition that the non-existence of the petition debt does not invalidate the liquidation process. Likewise, none of the pre- Salford case authorities cited by the Privy Council actually supports that illogical proposition.

In Re Vitoria [1894] 2 QB 387, the English Court of Appeal was concerned with whether a creditor can petition to bankruptcy on the strength of a judgment debt again if its first petition on the very same judgment debt had been dismissed on procedural grounds. Obviously the first bankruptcy petition proceedings should not be conflated as an appeal of the underlying judgment debt, so it was on that basis that the English CA granted the bankruptcy order on the second occasion. What the English CA did not say, however, is that the court has power to bankrupt someone even if there is no qualifying debt at all; on the very contrary, there was a clear unreversed judgment debt in that case to justify the bankruptcy order.

In Tanning Research Laboratories Inc v O’Brien [1990] HCA 8, the High Court of Australia held that any disputed debt by the liquidator may be referred to the court or to arbitration. That is uncontroversial. However, that case did not concern a petition debt governed by an arbitration clause. In any event, the High Court of Australia also did not suggest that the non-existence of a petition debt would not invalidate the liquidation process.

In Re Menastar Finance Ltd [2003] BCC 404, the English High Court considered a challenge by one creditor against the liquidator’s acceptance of the proof of a judgment debt upon which the winding up petition was originally based. Since the challenge was dismissed in the end, that case certainly does not support in any way the proposition that a company may be wound up without a qualifying debt. Whilst it is true that the liquidator and ultimately the Companies Court may look behind a judgment debt, they may do so only if there is evidence of fraud or collusion or miscarriage of justice. Thus, investigating a judgment debt is the exception rather than the general rule. More importantly, there is no reason why the application of the principle “fraud unravels all” should stop at the judgment debt without invalidating the liquidation process.

Which Institution Has the Final Say?

One might ask: if the court may wind up a company without a judgment where the court has jurisdiction over the petition debt, why could it not do so where the petition debt is governed by an arbitration clause or an exclusive foreign jurisdiction clause? Obviously, where the court has jurisdiction over the petition debt, and holds that the debtor has no genuine or substantial dispute over the debt, one can safely presume that the court would be consistent in reaching exactly the same conclusion that there is indeed a debt even if disputed by the liquidator in the end, save in wholly exceptional circumstances as set out in Re Menastar.
This presumption is not safe anymore in the case of an arbitration clause or an exclusive foreign jurisdiction clause.

It is respectfully submitted that the ultimate test to determine whether the court may make a winding-up order without a judgment or an arbitral award is this: Which institution – the local court, the arbitral tribunal, or the foreign court – has the final say on the substantive merits of the petition debt? Whilst the Privy Council appears to equate arbitration clauses with exclusive foreign jurisdiction clauses on this issue, in which case the arbitral tribunal or the foreign court would have exclusive jurisdiction (Sian, [66]), it is respectfully suggested that there is one critical nuance.

In the arbitration statutes around the common law jurisdictions, a substantive appeal mechanism is usually preserved under limited circumstances unless the parties agree otherwise. For example, under paragraphs 5 and 6 of Schedule 2 to the HK Arbitration Ordinance, a party to a Hong Kong arbitration may appeal to the court against an arbitral award on a point of law where the award is “obviously wrong”. Therefore, if the existence of the petition debt involves a pure question of law, arguably the court has the final say, for the court could take the extreme view that any contradictory arbitral award would be “obviously wrong” on the pure question of law. However, this appeal mechanism does not apply to questions of fact, and in any event, does not exist for foreign judgments, in which cases the court has no final say on the existence of the petition debt.

Where the court has no final say on the substantive merits of the petition debt, it follows that the court cannot determine the existence of the petition debt, the pre-requisite for granting a winding-up order on the basis of the petition debt. No wonder no English court has yet found circumstances so “exceptional” to justify a winding-up order (Shaun Matos, “Arbitration Agreements and the Winding-Up Process: Reconciling Competing Values” (2023) 72 ICLQ 309, 313), even though the Salford Estates Approach reserves that mere possibility.

Balancing Public Policies

The Privy Council took pains to stress that to require the creditor to go through an arbitration where there is no genuine or substantial dispute on the debt just adds delay, trouble and expense for no good purpose (Sian, [92]). Yet, it begs the question as to which institution – the local court, the arbitral tribunal or the foreign court – shall have the final say as to whether there is a genuine or substantial dispute, or not. Although liquidation is an important statutory process to bring about an efficient realisation of the company’s assets and their fair distribution among all its stakeholders (Sian, [32]), it is also a draconian process that causes serious disruptions to the business and irreversible damage to the company. Balancing against the legitimate interest of the company and its effect on the economy as a whole, the liquidation class remedy should not be lightly invoked except under clear and uncontroversial circumstances that fall squarely within the black letter law.

Even if one is not entirely convinced that the mandatory stay provision in the arbitration statutes (e.g. section 20 of the HK Arbitration Ordinance) is engaged, it would constitute a “denying the antecedent” fallacy (i.e. If A then B; not A therefore not B.) to say that the court may not or should not adopt a default position to stay or dismiss a winding- up petition when the debt is governed by an arbitration clause or an exclusive foreign jurisdiction clause (Sian, [75]). With respect, the proper question is not whether the court’s exercise of discretion is “fettered” (Sian, [82], citing Re Asia Master Logistics Ltd [2020] 2 HKLRD 423) or “curtailed” (Sian, [83], citing But Ka Chon v Interactive Brokers LLC [2019] HKCA 873), but whether it makes sense for the court to adopt such a default position, having regard the company’s ability to pay its “debts”. In our respectful submission, it does make perfect logical sense for the court to adopt a default position to stay or dismiss the petition when it cannot possibly have the final say on the existence of the petition debt, so as to achieve consistency and to balance the legitimate business interest of the company and the interest of the economy as a whole.

Hong Kong Approach: For Better or Worse?

The Salford Estates Approach could be said to be first “localised” in Hong Kong in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos Approach”), albeit with modifications. One major difference between the two approaches is that the Lasmos Approach adds an additional requirement that the debtor company takes steps to commence the contractually mandated dispute resolution process. So far the Lasmos Approach has not been officially endorsed, whether in Guy Lam CA or Guy Lam CFA or otherwise. In Re Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299, the Court of Appeal took the view that the additional requirement in the Lasmos Approach is not onerous for the debtor to demonstrate that there is a genuine intention to arbitrate.

As argued in our previous article, it is difficult to justify the additional requirement in the Lasmos Approach. The lack of onerousness plainly does not justify the imposition of a legal requirement. Besides the concerns already raised, whether the debtor company has or has not taken the contractually agreed steps does not change the fact that the local court has no final say on the substantive merits of the petition debt if it is governed by an arbitration clause or an exclusive foreign jurisdiction clause. Similar concerns are shared by, for example, Shaun Matos, who exposed the absurdity in attaching deference to the arbitral tribunal instead of the arbitration agreement (“Reconciling Competing Values”, 330).

In Guy Lam CFA, the top court in Hong Kong adopted the “multi-factorial” approach, attempting to balance the “strong cause” of arbitration clause or exclusive foreign jurisdiction clause in favour of a stay or dismissal of a petition against other “countervailing factors” such as disputes bordering on the frivolous or abuse of process. With respect, such a formulation is dangerous and open to manipulation and should be avoided, for it breeds a tendency to be seen as “old wine in a new bottle” – see Sun Entertainment Culture Limited v Inversion Productions Limited [2023] HKCFI 2400 for example, where DHCJ Le Pichon ordered the winding-up on the basis of the “frivolous nature of the defence”, thereby judging the substantive merits of the defence though Her Ladyship may not have the final say due to the applicable arbitration clause.

Conclusion

Undoubtedly this issue of interplay between arbitration and insolvency is a vital one. As the Privy Council acknowledged, the overwhelming majority of winding-up petitions concern debts (Sian, [27]). It is unfortunate that the Privy Council ran away from the logical Salford Estates Approach and returned to the Traditional Approach, in total disregard of the statutory requirement of a qualifying debt before any possible winding-up, when the court does not and cannot have any final say on the substantive merits of the petition debt. It is understandable that the court wishes to preserve the winding-up regime for debts governed by an arbitration clause (Sian, [93]), yet let us not forget that there are other gateways in the insolvency statutes that the court can wind up a company in a more natural and logical way, for example, by reference to balance sheet insolvency, or justice and equity. The court need not twist the logic to do the impossible. It is hoped that the English courts will turn around again in time, and the HK courts will make logical contribution to the development of this area of the common law.

Making Sense of Jurisdiction-Admissibility Distinction: When Day Becomes Night

by

(This article was published in the April 2023 Issue of the Hong Kong Lawyer)

Introduction

Multi-tiered arbitration agreements, which typically require contract parties to go through good faith negotiation or mediation before commencing arbitration, are not uncommon. Whilst parties may perhaps reasonably expect no arbitration at all unless and until such pre-arbitral requirements (PAR) are complied with, the reality may actually surprise everyone.

In C v D [2021] 3 HKLRD 1 (HKCFI); [2022] 3 HKLRD 116 (HKCA), the Hong Kong Courts considered the issue whether a challenge on the basis of non-compliance with PAR constituted a jurisdictional challenge to an arbitral tribunal. Both the HKCFI and the HKCA drew on the distinction between the concepts of jurisdiction of a tribunal and admissibility of a claim, and held that non-compliance with PAR went to “admissibility rather than jurisdiction” unless the parties expressly stated otherwise. Since the challenge was held non-jurisdictional in nature, the Courts cannot review the correctness of the decision. Hence, as in C v D, regardless of compliance with PAR, the tribunal still has jurisdiction and arbitration can actually be proceeded with, apparently contradicting the reasonable expectation of the parties.

This article will critically examine the distinction between jurisdiction and admissibility, and the reasoning in C v D. For the purpose of this article, it will be assumed that there is no difference between “no arbitration shall be brought unless X” and “in the event of X the parties may arbitrate” (Republic of Sierra Leone v SL Mining Ltd [2021] EWHC 286 (Comm)). It will be argued that the ultimate question is whether the challenge at issue goes to jurisdiction or not. It is respectfully submitted that a challenge on the basis of non-compliance with PAR should be properly characterised as jurisdictional in nature.

C v D

In C v D, C commenced proceedings against D to set aside a partial award obtained allegedly without complying with the PAR in the arbitration clause which required the parties to attempt good faith negotiation for 60 business days before referring any unresolved dispute to arbitration in Hong Kong.

The HKCFI held, and the HKCA subsequently upheld, that the objection went to admissibility of the claim rather than jurisdiction of the tribunal and hence the Courts will not review the correctness of the award in question, on the following reasoning:

  1. There was a distinction between jurisdiction of the tribunal and admissibility of the claim.
  2. As explained by the SGCA in BBA v BAZ [2020] SGCA 53 (concerning an objection based on time bar) and BTN v BTP [2020] SGCA 105 (concerning an objection based on res judicata), the test of distinction is essentially the “tribunal versus claim” test, which asks whether the challenge is targeted at the tribunal (in the sense that the claim should not be arbitrated due to a defect in or omission to consent to arbitration) or at the claim (in that the claim itself is defective and should not be raised at all). In both cases, the SGCA held that the objections based on time bar and res judicata were directed at the claim only and are not jurisdictional in nature.
  3. The distinction between jurisdiction and admissibility may be blurry, and on occasion it may be difficult to know where one ends and the other begins, yet that is no different from being able to know when day becomes night. There is always going to be a twilight twixt the two (Robert Merkin and Louis Flannery, Merkin and Flannery on the Arbitration Act 1996 (6th edn, Rotledge 2019), [30.3]).
  4. There was no indication in the arbitration agreement that the parties intended compliance with PAR to be a matter of jurisdiction, and it seems unlikely that the parties intended to re-open their case in litigation after a full hearing before and a decision by the arbitral tribunal.
Jurisdiction and Admissibility: Distinction or Dichotomy?

As a preliminary observation, when considering whether the challenge was a jurisdictional one, both HKCFI and HKCA held that non-compliance with PAR went to “admissibility rather than jurisdiction”. With respect, the use of such a phrase is unfortunate as it suggests that there is a dichotomy between admissibility and jurisdiction.

Although there may be a distinction between admissibility and jurisdiction, the two concepts may not necessarily be mutually exclusive, such that a single event may indeed give rise to a challenge on both admissibility and jurisdiction. This point may be illustrated by reference to an example given by the House of Lords in Fiona Trust and Holding Corporation v Privalov [2007] UKHL 40, [17]: if the main agreement and the arbitration agreement are contained in the same document and one of the parties claims that he never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the main agreement and the arbitration agreement.

Therefore, it is respectfully submitted that, in considering whether a challenge is jurisdictional in nature, it is less helpful to make reference to the concept of admissibility. The ultimate question should be to ask whether the challenge is jurisdictional (i.e. directed against the tribunal).

Challenge on the Basis of PAR Jurisdictional in Nature

The starting point is that PAR have been characterised as jurisdictional, an issue of admissibility, or procedural in different case authorities (Gary Born, International Commercial Arbitration (3rd edn, Kluwer Law International 2021), 988-989, 997-999). It is fair to say that there is no uniform approach among different legal systems.

In light of the diverse opinions, it has been argued that the intention of the parties should be taken into account in interpreting PAR, as the HKCFI and HKCA claimed to have done in C v D. Regrettably, instead of examining the underlying facts to ascertain the parties’ true intention, the Courts did no more than pronouncing the judicial policy on arbitration (e.g. speed, finality, etc) and the corresponding legal presumption on parties’ intention – that the parties are presumed to have intended PAR to go to admissibility which shall be dealt with exclusively by the arbitral tribunal. Such application of judicial policy and legal presumption is apparently circular: the jurisdictional challenge mechanism is well within the arbitration regime, and it cannot be argued that by submitting to arbitration, the parties somehow intend to regard an otherwise properly characterised jurisdictional challenge as non-jurisdictional for the sake of speed and finality. The Courts’ approach begs the question of the proper characterisation of PAR.

It should be noted that issues of time bar (as in BBA v BAZ) and res judicata (as in BTN v BTP) are classic examples of issues of admissibility. They attack “the claim” (a particular claim in question but not any other potential claims) and are not directed at the tribunal in any way. In other words, leaving aside the challenge, the tribunal has general jurisdiction to rule on any other claims not subject to time bar or res judicata.

Yet non-compliance with PAR raises challenge of a very different nature. PAR do not attack “the claim” in the same way as issues of time bar or res judicata – indeed PAR do not attack “the claim” in particular but generally apply to any and all claims within the scope of the arbitration agreement, such that apart from those claims subject to PAR, there can be nothing at all for the tribunal to rule on. This, in our respectful submission, crosses the fine line of the distinction to demonstrate that the tribunal actually has no general jurisdiction whatsoever. To further the day-and-night analogy in Merkin and Flannery at [30.3], day does not become night if one light ray is removed, but it is definitively night when there is no light ray at all. In any case, PAR as a jurisdictional issue is also consistent with parties’ intention, since it provides double safeguard (i.e. at the tribunal level and at the court level) to the intention to have no arbitration at all before compliance with PAR.

The Real Concern

It appears that the Courts’ real concern was that if arbitration is contingent upon certain pre-arbitral steps, a party’s failure to take them would allow the other party to withdraw from its commitment to arbitrate (Alexander Jolles, “Consequences of Multi-tier Arbitration Clauses: Issues of Enforcement” (2006) 72 Arbitration: The International Journal of Arbitration, Mediation and Dispute Management 329, 335). This concern is misconceived.

The failure to comply with PAR does not automatically entitle the innocent party to withdraw from the arbitration agreement (Hugh Beale, Chitty on Contracts (1st supp, 34th edn, Sweet & Maxwell 2022), [4-197] – [4-203]). The defaulting party may still comply with PAR later in order to commence arbitration. Since the arbitration agreement is still valid, operative or capable of being performed, section 20 of the Arbitration Ordinance (Cap. 609) applies to prevent litigation in the interim, pending compliance with PAR.

Of course the multi-tiered arbitration agreement may be repudiated on the defaulting party’s unequivocal statement of non-performance of PAR constituting anticipatory breach. In that case, it is up to the innocent party to accept the repudiation, or not if it still prefers arbitration. If the innocent party decides the former, the dispute shall be resolved by court litigation and the defaulting party must take the consequence of its own repudiation.

Some might argue that “this hardly corresponds with the parties’ intention” (Jolles, “Consequences of Multi-tier Arbitration Clauses”, 335), but it must be borne in mind that as a matter of law, the default dispute resolution mechanism is court litigation. As an exception to default court litigation, the parties may by consent agree to arbitration within certain parameters. Nevertheless, where arbitration for whatever reason cannot be held within all fours of the parameters set by the parties originally, the inescapable reversion back to court litigation is by operation of law and parties’ intention in that regard is irrelevant.

The Proper Approach

Arbitration is a consensual dispute resolution process. Parties’ consent to arbitration can be found in the arbitration agreement. It is respectfully submitted that the proper approach to determine whether a challenge is jurisdictional is to consider (a) whether the challenge attacks the arbitration agreement which forms the basis of the jurisdiction of the tribunal, and (b) whether there could be any claim (other than those subject to the challenge) that the tribunal could rule on.

Applying this approach, the challenge in C v D was plainly jurisdictional in nature: the challenge attacked the arbitration agreement in the sense that the PAR in the arbitration agreement were allegedly not complied with; there could be no claims whatsoever that the tribunal could rule on apart from those subject to the challenge.

Conclusion

Given the significance of arbitration as a popular dispute resolution mechanism, and the prevalence of multi-tiered arbitration agreements, it is without doubt a question of general importance whether a challenge on non-compliance with PAR is jurisdictional in nature and subject to review by the court. C v D is currently subject to appeal to the HKCFA. It is hoped that the top court of Hong Kong will give ultimate guidance to arbitration parties on the proper characterisation of PAR.