(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.