Jesse Tizard and Jenny Fok discuss a recent Hong Kong case in which it was determined that unless and until there is a crystallised “dispute”, there is nothing to refer to arbitration. While that may seem obvious, this is the key lesson from the recent (and somewhat unusual) case of CMB v Fund and others [2023] HKCFI 760 in the Hong Kong High Court. In that case, an arbitrator found that the defendants had a “legitimate interest” in seeking declaratory relief, even where no claim was made against them in the impugned proceedings. That award was eventually set aside by the Court, serving as a reminder to arbitrators and parties that arbitral tribunals have no jurisdiction for pre-emptive claims.
The “Dispute”
The parties’ dealings and the background to their dispute are central to the Court’s ruling. We outline the facts briefly below:
- CMB was the plaintiff in High Court Action 905/2020, “HCA”.
- In 2014, CMB entered into a co-investment agreement (“Agreement”) to invest US$10m for a minority stake in a company referred to as “HC”.
- The other parties to the Agreement were “Fund” and “Cattle”. In dealings with CMB, Fund was represented by Mr Li Lei (“L”) and Cattle was represented by Mr Xiong Fei (“X”).
- The disputes arose when CMB wrote to Fund and Cattle in December 2019 complaining that they had “failed to properly manage CMB’s Investment, and had acted in breach of their duties owed to CMB as trustees” (“December Letter”). The December Letter concluded by stating that legal proceedings would be commenced in the absence of a satisfactory response.
- In June 2020, CMB commenced the HCA against L, X, along with “C” (a controlling shareholder and director of HC), and a related entity called “Management”. It was claimed that they had made fraudulent misrepresentations which induced CMB to enter into the Agreement with Fund and Cattle. Notably, Fund and Cattle themselves were not defendants in the HCA.
The Agreement was governed by Hong Kong law, and contained an ICC arbitration clause, which provided for all disputes between the parties arising out of or related to the Agreement to be settled by arbitration.
A diagram of the background to the HCA is set out below:
Shortly after CMB commenced the HCA, Fund, Cattle, L, X and Management commenced ICC arbitration against CMB to seek anti-suit injunctions and certain declarations from the tribunal. In the arbitration, CMB unsurprisingly raised a jurisdictional challenge, arguing: (1) X, L and Management had no arbitration agreement with CMB, since they were not parties to the Agreement; and (2) CMB had no dispute with either Fund or Cattle, and hence they could not validly commence arbitration.
Arbitrator’s Award
The arbitrator found, firstly, that L, X and Management were not parties to the Agreement and therefore he had no jurisdiction to grant the anti-suit injunction at their request to restrain the HCA.
He found, further, that in commencing the HCA, CMB was not in breach of the Agreement, and that no damages for breach should be awarded.
However, he considered that he had jurisdiction in respect of Fund and Cattle “in so far as they seek declarations of non-liability as regards their own position”. He made the following declaration, which ultimately became the subject of CMB’s challenge in the High Court:
“(Fund and Cattle) have no liability to (CMB) with respect to the allegations arising out of the (Agreement) that are the subject matter of the (HCA), and that all such allegations in so far as they are made against (Fund and Cattle) are false.”
In support of the award, the arbitrator referred to the case Koo Ming Kwon v Rev Mr Mok Kong Ting & Ors [2018] HKCFI 967, in which the Court held that it has jurisdiction to grant declaratory relief if:
- the applicant has a real interest in the subject matter of the declaration;
- the applicant has a real interest in obtaining a declaration against the adverse party; and
- the adverse party is a proper contradictor.
The arbitrator concluded that Fund and Cattle had a real interest in the subject matter since they instigated and were a party to the Agreement. They also had a real interest in obtaining the declaration against CMB as the counterparty to the Agreement, given the allegations made by CMB in the HCA. These findings, and the consequent award were challenged by CMB in the High Court.
High Court’s Decision
After reviewing the arbitrator’s decision, Mimmie Chan J disagreed that the arbitrator had jurisdiction to make the award. To begin with, she pointed out that the arbitrator had apparently confused the question of jurisdiction with the question of whether he should exercise his power to grant the remedies sought (i.e., the “legitimate interest” issue), explaining,
“… for there to be a valid arbitration process and a valid award, there has to be a formulated dispute, and the right of the parties to put an arbitration agreement into effect does not arise until and unless there is a dispute between the parties to the agreement.”
In the present case, there was no dispute between CMB, Fund and Cattle, because no claims had been made by CMB against Fund and Cattle in the HCA. That being so, there was no subject matter in respect of which any remedy or relief could be considered by the arbitrator for granting to Fund and Cattle.
Fund and Cattle relied on the Koo Ming Kwon case and s. 70 of the Arbitration Ordinance (“AO”), which provides,
“… an arbitral tribunal may, in deciding a dispute, award any remedy or relief that could have been ordered by the Court if the dispute had been the subject of civil proceedings in the Court.”
Although AO s. 70 may confer on the arbitrator the power to grant remedies on relief, it does not confer jurisdiction where none exists. The judge highlighted the essential difference between the Court and the arbitral tribunal – the former has unlimited inherent jurisdiction, whereas the tribunal has to rely on the existence and scope of the arbitration agreement to exercise its jurisdiction and powers.
As a result, the fact that there was a legitimate interest for Fund and Cattle to seek the declaration could not by itself invoke the jurisdiction of the arbitrator when there was no dispute.
The threat of proceedings in the December Letter did not assist Fund or Cattle, since the claims in that letter related to alleged breaches of trustee’s duties and lack of care on the part of fund and cattle. These allegations were entirely different to those made against L, X, C and Management in the HCA, which concerned fraudulent misrepresentation.
Ultimately, the Court set aside the impugned parts of the arbitral award and ordered costs to be paid by the defendants on indemnity basis.
Practical Takeaways
The decision serves as a salient reminder that there is no jurisdiction for pre-emptive arbitration. Arbitration should only be commenced when it can be said that there is an actual dispute between the parties to the arbitration agreement. Without a dispute, the arbitral tribunal has no jurisdiction to grant relief, including declarations of the sort issued here.
Moreover, however broad an arbitration clause may be, it can still only bind the parties to the agreement. If parties wish the clause to cover claims against third parties such as their affiliates, this must be clearly defined in the agreement.
This decision is particularly relevant in the private equity space where contractual relationships of the sort discussed here are commonplace.