C v D – Hong Kong court rules on compliance with pre-arbitration procedural requirements

Background

In C v D [2021] HKCFI 1474, disputes arose from a cooperation agreement entered into between Company C and Company D for the development and building of a satellite.

The dispute resolution clause of the agreement was unremarkable and provided, inter alia, that:

• "14.2 Dispute Resolution. The Parties agree that if any controversy, dispute or claim arises between the Parties out of or in relation to this Agreement, or the breach, interpretation or validity thereof, the Parties shall attempt in good faith promptly to resolve such dispute by negotiation. Either Party may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution. The Chief Executive Officers (or their authorized representatives) shall meet at a mutually acceptable time and place within ten (10) Business Days of the date of such request in writing, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute through negotiation."

• "14.3 Arbitration. If any dispute cannot be resolved amicably within sixty (60) Business days of the date of a Party's request in writing for such negotiation, or such other time period as may be agreed, then such dispute shall be referred by either Party for settlement exclusively and finally by arbitration in Hong Kong at the Hong Kong International Arbitration Centre ('HKIAC') in accordance with the UNCITRAL Arbitration Rules in force at the time of commencement of the arbitration (the 'Rules')."

"Tiered" dispute resolution clauses of this nature can give rise to disputes as to extent of the obligations involved and whether there has been compliance. This was one such case.

On 24 December 2018, the CEO of Company D issued a letter to the chairman of the board of directors of Company C, copied to other directors of Company C, serving as a "written request" for negotiation under Clause 14.2. On 18 April 2019, Company D issued a notice referring the dispute to arbitration.

Company C claimed that the arbitral tribunal did not have jurisdiction because the notice was addressed to Company D's directors but not the CEO, thus not fulfilling the condition in Clause 14.2. The tribunal dismissed Company C's jurisdictional objection and held that Clause 14.2 of the agreement only made it mandatory that the parties should attempt in good faith to resolve any disputes by negotiation, but the reference of disputes to the respective CEOs was optional.

Company C then sought to set aside the tribunal's Partial Award on Jurisdiction and Liability made in Company D's favor on the ground that it was made without jurisdiction, pursuant to Section 81 of the Arbitration Ordinance, which gives effect to Article 34 of the UNCITRAL Model Law on International Commercial Arbitration.

Decision

It was common ground that the request in writing for negotiation under Clause 14.2 was a condition precedent to any reference to arbitration. However, the parties disagreed on what the condition meant and whether it was fulfilled. The primary issue that the court had to decide was whether compliance with Clause 14.2 was a question of the tribunal's jurisdiction or merely a question of admissibility of the claim. This matters because only issues of jurisdiction are susceptible to an application to the courts to set aside the award.

After considering leading academic works and cases of the English, Singapore, and U.S. courts, the court observed that the "generally held view of international tribunals and national courts is that non-compliance with procedural pre-arbitration conditions such as a requirement to engage in prior negotiations goes to admissibility of the claim rather than the tribunal's jurisdiction."

The court also recognized that the distinction between jurisdiction and admissibility is a concept rooted in the nature of arbitration itself, and the differential treatment of them is justified by policy reasons including the following:

• Pre-arbitration conditions such as cooling off, negotiation, or mediation inherently involve aspects of the arbitral procedure and often require interpretation and application of institutional arbitration rules and resolving procedural issues in arbitration, which are best suited for resolution by the arbitral tribunal.
• Parties to an arbitration agreement are presumed to have intended for a single, neutral arbitral tribunal to resolve disputes, including all questions regarding the procedural requirements and conduct of the parties' dispute resolution mechanism. Fragmenting the resolution of procedural issues between national courts and the arbitral tribunal would produce a risk of multiple proceedings, delay, and inconsistent decisions.

As to the position in Hong Kong, the court noted that the Honorable Madam Justice Mimmie Chan in X v Jemmy Chen [2020] HKCFI 286 held that the court must confine itself to true questions of jurisdiction in approaching applications to set aside arbitral awards. As such, the distinction between jurisdiction and admissibility, although not explicitly drawn in the Arbitration Ordinance (Cap. 609), should be relied upon to inform the construction and application of Section 81 of the Arbitration Ordinance.

The court concluded that compliance with pre-arbitration conditions is a question of admissibility rather than jurisdiction, with the following reasoning:

• Such an approach has considerable advantages as the arbitral tribunal chosen by the parties will usually be well-placed to consider and determine what needs to be done having regard to commercial realities and practicalities.
• This is entirely consistent with the policy in Hong Kong law, which represents the "parties' autonomy in choosing arbitration as the means to resolve their dispute with its incident of speed and finality as well as privacy."
• The fact that a condition is regarded as going to admissibility rather than jurisdiction does not deny contractual force to that condition, nor does it mean the condition is unimportant. It merely means that it would be for the arbitral tribunal to decide what the condition means and whether it has been satisfied on the facts.

The court also noted that the same approach as to how to determine whether an issue is a question of admissibility or jurisdiction has been adopted by the Singapore Court of Appeal in BBA & others v BAZ [2020] SGCA 53. A similar approach was also adopted in Swissbourgh Diamond Mines (Pty) Ltd and others v Kingdom of Lesotho [2018] SGCA 81. Singapore's arbitration legislation is also Model Law-based. The court did not follow English cases to the contrary where the distinction between admissibility and jurisdiction had not been argued.

For completeness, International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and another [2013] SGCA 55 is still good law for the proposition that Singapore courts will enforce pre-arbitration conditions. Singapore courts have not specifically considered whether compliance with pre-arbitration conditions is a jurisdictional or admissibility issue. However, the natural corollary of the "tribunal versus claim" approach set out in the two Court of Appeal decisions is that Singapore courts are likely to reach a similar conclusion as the Hong Kong court did in C v D.

Accordingly the Hong Kong Court of First Instance held that Company C's objection was one of admissibility rather than jurisdictional and dismissed Company C's application with indemnity costs.

Conclusion

Arguments about whether there has been compliance with the pre-conditions to arbitration contained in an escalation clause are common and likely to become more so as – for better or for worse – many standard forms and other contracts contain increasingly elaborate pre-arbitration processes. There can be scope for debate as to the utility of such clauses in avoiding escalation of disputes, but C v D does not signal any change in the position on their enforceability.

Instead its significance is to confirm that questions as to compliance with an escalation clause do not go to the jurisdiction of the arbitral tribunal. Compliance with such conditions prior to commencing arbitration is, therefore, a matter left to be decided by the arbitral tribunal and cannot be challenged before the court. In practical terms, rather than dismissing cases of non-compliance on grounds of jurisdiction, tribunals may be more likely to be prepared to stay cases or make other appropriate orders to allow for compliance.

C v D also means the positions in Singapore and Hong Kong are aligned. This has significance beyond these leadings seats in Asia given that Article 34 of the Model Law is part of the arbitration legislation of many countries. As the judgment in C v D demonstrates, the courts are increasingly willing to draw on jurisprudence from other jurisdictions on Model Law-related questions.

Authored by Kent Phillips, Benson Lim, and Jessie Wong.