香港中环雪厂街二号圣佐治大厦五楼503室
+852 2868 0696
Reconciling Conflicting Arbitration Clauses: Try to Make the Worst Seem Better
(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:
- 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.
- 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.
作者
最新文章
