Multi-tiered dispute resolution clauses – what happens if you don’t comply? A sequel in the “admissibility or jurisdiction” debate in the Hong Kong Court of Appeal

“Whether procedural requirement[s]…ha[ve] been fulfilled is a question intrinsically suitable for determination by an arbitral tribunal, and is best decided by an arbitral tribunal in order to give effect to the parties’ presumed intention to achieve a quick, efficient and private adjudication of their dispute by arbitrators chosen by them on account of their neutrality and expertise.”[1]

In our earlier blog post, we analysed the case C v D [2021] HKCFI 1474 where Justice Godfrey Lam at first instance held that non-compliance with a multi-tiered dispute resolution clause is a matter of admissibility for which the arbitral tribunal’s finding is final.  It is not a matter of the tribunal’s jurisdiction which can be reviewed by the court.

That judgment was then appealed against.  In a decision to uphold the first instance judgment, the Court of Appeal delivered the latest word in [2022] HKCA 729 on Tuesday, and is now the highest authority on this topic in Hong Kong.  The Court of Appeal’s decision will serve to instil confidence in commercial parties that their disputes will (in the vast majority of cases) be conclusively decided by arbitration, even if there are complaints about non-compliance with procedural pre-conditions to arbitration, as such complaints will be heard and determined by the arbitrator.

Background

The dispute resolution clause in the case laid out the following steps to be taken:

• Resolve the dispute in good faith by negotiation;
• Either party may refer the dispute to the CEOs of the parties for resolution;
• If no resolution, refer the dispute to arbitration.

The complaint about non-compliance was that D failed to refer the dispute to C’s CEO, but instead referred it to C’s Chairman of the Board of Directors.  When D commenced arbitration, C argued that the arbitral tribunal had no jurisdiction to hear the case because of the non-compliance.  The arbitration went ahead nevertheless, the Tribunal concluded that the pre-conditions had been complied with and awarded D damages for C’s breach of contract.

Dissatisfied with the award, C sought to set aside the award before court.

C’s arguments on appeal

Having lost at the first instance, C mounted three grounds of appeal:

• The Judge erred in holding that C had failed to show the arbitral award dealt with a dispute “not contemplated by or not falling within the terms of the submission of the arbitration” (Article 34(2)(a)(iii) of UNCITRAL Model Law). C argued:
  • The distinction between “admissibility” and “jurisdiction” ought not be adopted because it is not found in the Article.
  • Even if the distinction applies, C’s complaint is jurisdictional in nature. As a matter of contract law, before the occurrence of a condition precedent, there is no duty on either party to render the principal performance promised by them. Applying this to an arbitration agreement context, where there is no compliance with a condition precedent, there is no duty to arbitrate. An arbitration commenced as a result of non-compliance with a condition precedent is thus liable to be set aside for want of jurisdiction, and the court is entitled to conduct a fresh review of the correctness of the arbitral decision.
• The Judge erred in holding that Article 34(2)(a)(iv) of UNCITRAL Model Law does not extend to contractual procedures preceding arbitration. C argued that, according to the Article, the court may set aside an arbitral award if “the arbitral procedure was not in accordance with the agreement of the parties”.  “Arbitral procedure” under Article 34(2)(a)(iv) should encompass pre-arbitration condition precedent.  Failure to satisfy the condition precedent is a bar to arbitration and the resulting arbitral award may be set aside.
• The last ground of appeal concerned the Judge’s decision that he did not need to consider the true construction of the multi-tiered dispute resolution clause at issue and whether the relevant precedent was fulfilled.

Court of Appeal’s decision

The Court of Appeal rejected all three grounds:

• The distinction between “admissibility” and “jurisdiction” has been well recognised in both case law worldwide (the UK, Singapore, New South Wales and the US) and academic writings. The Court of Appeal concluded that such distinction is a concept “rooted in the nature of arbitration”, and informs the construction and application of Article 34 even though it does not explicitly refer to “admissibility” and “jurisdiction” by name.
• Recognition of this distinction is significant because it would:
  • likely give effect to the agreement of businessmen who likely intend to resolve disputes by the same tribunal;
  • be in line with the general trend of minimising judicial interference in arbitral procedures and awards;
  • facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense (in line with section 3 of the Arbitration Ordinance); and
  • ensure Hong Kong is in line with other major international arbitration centres.
• C’s condition precedent argument is an “over-simplification”. The correct question is whether the parties intend to have issues of fulfilment of the condition precedent to be determined by the arbitral tribunal.  If the parties so intend, then those issues would fall “within the terms of submission to arbitration” under Article 34(2)(a)(iii). The answer depends ultimately on the parties’ intention.  It is important to highlight that C’s objection is not that the claim could never be referred to arbitration, but only that the reference was premature. Viewed in this light, C’s objection was targeted at the “claim” (admissibility) instead of the “tribunal” (jurisdiction).
• Even if C is correct that the term “arbitral procedure” should be interpreted to cover pre-arbitration requirements, the parties intended the question of compliance to be determined by arbitration. Therefore, non-satisfaction of the pre-arbitration requirements would not bar arbitration altogether.

Having reached the above conclusions, the Court of Appeal felt it unnecessary to consider the true construction of the dispute resolution clause and whether the condition precedent was in fact fulfilled.

Practical takeaways

1. When it comes to multi-tiered dispute resolution clause, clear drafting and compliance are key. The dispute in C v D originates from parties’ different understandings about what the clause requires. The costly and time-consuming journey through courts might well have been avoided by clearer drafting and meticulous compliance.
2. Non-compliance with pre-arbitration requirements does not move the dispute resolution venue from arbitration to court. In many situations, parties should flesh out their grievances, both substantive and procedural, before the arbitrator.
3. The fact that the court is deferential on matters of pre-arbitration procedural compliance does not mean it is unimportant. It simply means that the tribunal can deal with the question as it thinks fit.  For example, the tribunal may order a stay of the arbitral proceedings pending compliance, impose costs sanctions or decline to hear the case.  The key is that this is a matter for the tribunal to decide.
4. In the (unrecommended, though possible) circumstance that parties absolutely desire the court’s intervention on issues of pre-arbitration compliance, then their intention should be reflected in the clause.

 

[1] C v D [2022] HKCA 729 at [63]