Multi-tiered dispute resolution clauses – what happens if you don’t comply?

Jul 2021

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We often see pre-arbitration steps in an arbitration clause.  Typically, parties agree first to try to resolve the dispute by negotiation or mediation, failing which arbitration will follow – a standard “multi-tiered dispute resolution” clause.  But what happens if the arbitration has taken place, and one side says that the negotiation / mediation requirement has not been satisfied?  Is the arbitration still valid?  More importantly, who should decide if the arbitration is valid – the supervising Court or the Tribunal?  The Hong Kong, English and Singaporean courts have all recently considered the differences between matters which go to admissibility and those which go to jurisdiction.   This post deals with decisions from those three jurisdictions.

Hong Kong

In Hong Kong, this issue came up in C v D [2021] HKCFI 1474. The dispute resolution clause contained the following steps:

  • The parties shall attempt in good faith promptly to resolve the dispute by negotiation.  Either party may, by written notice to the other, have such dispute referred to the CEO of the parties for resolution;
  • If the dispute cannot be resolved within 60 business days of the date of a party’s request in writing for such negotiation, then the dispute shall be referred to the HKIAC.

On 24 December 2018, D’s CEO wrote to C’s Chairman of the Board of Directors (without copying the same to C’s CEO, but who received a copy from the Chairman), alleging that C was in serious breach of the Agreement.  The matter remained unresolved.  On 18 April 2019, D referred the dispute to the HKIAC.  C argued that the arbitral tribunal did not have jurisdiction because the stipulated mechanism of negotiation between the CEOs had not been complied with.

The Tribunal construed the dispute resolution clause and held that the negotiation condition had been fulfilled by D through its letter of 24 December 2018.  C’s objection to the tribunal’s jurisdiction was rejected.  The Tribunal went on to find that C had breached the Agreement and had to pay damages accordingly.  Dissatisfied with the award, C sought to set aside the award before the Court for lack of jurisdiction.

After reviewing a number of overseas cases (including Sierra Leone and BBA, both discussed below) and prominent writings, the Court set out a distinction between admissibility and jurisdiction – jurisdiction refers to the power of the tribunal to hear a case; admissibility refers to whether it is appropriate for the Tribunal to hear it.  The Court (Godfrey Lam J) held that it was for the arbitral tribunal to decide whether the dispute resolution procedure has been complied with as satisfaction of pre-arbitral steps is a matter of admissibility of the claim (for which the tribunal’s finding is final), not a matter of the Tribunal’s jurisdiction (which can be reviewed by the court).

This approach places emphasis on the parties’ autonomy in choosing arbitration as their one-stop-shop for resolution of their disputes. It would otherwise be counter-conducive to the aim of fair and speedy resolution of disputes if procedural conditions such as pre-arbitration negotiation are regarded as jurisdictional questions to be decided by the Court.

As there was no dispute that D’s claim (i.e. C’s alleged breach of the Agreement) fell within the scope of the arbitration agreement and the parties’ commitment to arbitrate was not in doubt, C was not objecting the claim being arbitrated, but only that the Tribunal should reject the reference to arbitrate as premature.  C’s challenge was one of admissibility rather than jurisdiction, and as such the Court cannot interfere.   The Court accordingly dismissed the setting aside challenge.

England

The English High Court had earlier dealt with a factually similar issue in Republic of Sierra Leone v SL Mining Ltd [2021] EWHC 286 (Comm), in which Sierra Leone accused SL Mining of non-compliance with a multi-tiered dispute resolution provision and sought to set aside the arbitral award.  The English High Court rejected Sierra Leone’s set aside application.

The underlying dispute arose out of Sierra Leone’ cancellation of a 25-year-term mining license agreement granted to SL Mining in 2017.  The dispute resolution clause in the agreement provided that:

  • The parties shall in good faith endeavour to reach an amicable settlement of the disputes;
  • In the event that the parties shall be unable to reach an amicable settlement within 3 months from a written notice by one party to the other specifying the dispute, either party may submit the matter to arbitration under ICC rules.

SL Mining issued a formal notice of dispute on 14 July 2019.  The Request for Arbitration was filed by SL Mining on 30 August 2019, when there were still approximately 6 weeks to go before the 3-month negotiation period would expire in October.  The ICC tribunal found in SL Mining’s favour.

Sierra Leone sought to set aside the award before the English court, relying on sections 67 and 30 of the English Arbitration Act 1996, arguing that the tribunal had gone beyond its “substantive jurisdiction” to arbitrate on matters that had not been “submitted to arbitration in accordance with the arbitration agreement”, since the arbitration could not be commenced prior to the expiry of the contractual negotiation period.

Sir Michael Burton J found that the issue there was not whether the claim was arbitrable, or whether there was another forum in which it should be decided (which questions went to jurisdiction), but whether it had been presented too early, a matter which he found went to admissibility, not jurisdiction.  He held that this was a question best decided by the Tribunal, and accordingly dismissed the setting aside application.

Singapore

In BBA and others v BAZ and another appeal [2020] SGCA 53, the Singapore Court of Appeal (“SGCA”) on a different issue (relating to time bars) also discussed admissibility and jurisdiction.

In late 2007, BAZ (as buyer) entered into a sale and purchase agreement concerning the shares of C (an Indian pharmaceutical company) with a number of sellers, including BBA. BAZ later discovered that back in September 2004, C was involved in data falsification for the purpose of obtaining regulatory approval for its drugs. As a result, BAZ commenced arbitration against the sellers on 14 November 2012 for misrepresentation and concealment of facts.

The arbitration was seated in Singapore under the ICC rules. The Tribunal decided in BAZ’s favour by a majority. In particular, the Tribunal held that BAZ’s claim was made in time and not time-barred under the Indian Limitation Act 1963. BAZ subsequently obtained an enforcement order before the Singaporean courts.

One argument that BBA relied on to try and set aside the enforcement order was that time-barred claims fell outside the scope of the parties’ submission to arbitration.  At issue was whether the time bar was a jurisdictional matter or an admissibility matter.  The Singaporean High Court said admissibility, and the SGCA agreed.

The SGCA adopted the “tribunal versus claim” test which asks whether the objection is targeted at the tribunal or its jurisdiction (ie the claim should not be arbitrated due to a defect in or omission to consent to arbitration), or at the claim or its admissibility (ie the claim itself is defective and should not be raised at all).  The Court found that a plea of statutory time bar goes to admissibility as it attacks the claim.  As a result, the SGCA refused to undertake a de novo review as to whether BAZ’s fraud claim is time-barred. Despite the difference in factual context, the “tribunal versus claim” test was cited with approval by Lam J in C v D.

Practical implications

  • When drafting multi-tiered dispute resolution clauses, precision is paramount.  In C v D, the parties spent a great deal of time (and therefore, money!) in deciphering the meaning of the relevant dispute resolution clause.  A clearly drafted clause avoids this problem completely.
  • When a dispute arises, comply with requirements to the tee.  If the clause is clear and its requirements are complied with, situations like C v D do not arise.  Non-compliance or unclear compliance can result in sanctions throughout the course of the arbitration, such as a stay or a finding that a claim is inadmissible, or non-enforcement of the award.
  • Parties can now expect a higher level of certainty that disputes, including disputes about pre-arbitration procedural conditions, arising out of the contract will be decisively heard by the Tribunal.  As such, choosing your arbitrators is even more important, as there is no recourse to Court in this respect.

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