Hong Kong Court of Final Appeal Confirms that Arbitrators, Not Courts, Have Final Say on Whether a Party Has Complied with a Multi-tiered Dispute Resolution Clause

Other Author      Beatrice Tsang, Trainee Solicitor

In C v. D [2023] HKCFA 16, the Hong Kong Court of Final Appeal put an end to the debate over whether non-compliance with a multi-tiered dispute resolution clause (MDR clause) would deprive an arbitral tribunal of jurisdiction to hear the dispute. The Court of Final Appeal decided that, absent clear language to the contrary, the question of compliance with an MDR clause is an admissibility question and is thus a matter for tribunals to decide, and is not subject to judicial review.

Key Takeaways

• This decision in Hong Kong is to be welcomed. It limits challenges to the tribunal’s jurisdiction on the basis of compliance with an MDR clause (a clause containing pre-arbitration steps, such as requiring negotiations or mediations or both, before commencing arbitration).
• The decision also limits the need for judicial intervention in the arbitral process. The Court of Final Appeal has made it clear that, absent unequivocal language to the contrary, it will not interfere with an arbitral award on the basis of the tribunal’s decision on compliance with an MDR clause.
• In this decision, the Court of Final Appeal affirmed the distinction between “jurisdiction” and “admissibility”. Generally, “inadmissible” claims are those which fall within the tribunal’s jurisdiction but which are not appropriate for the tribunal to decide on the merits. They are to be contrasted with claims over which the tribunal does not have jurisdiction, i.e. claims in respect of which the tribunal has no power to decide at all. A decision by the tribunal on admissibility has important practical consequences for the parties. Parties cannot ask the supervisory court to review, and potentially set aside, an arbitral award on the basis of the tribunal’s decision on admissibility issues. On the other hand, if the issue is jurisdictional in nature, then judges would normally exercise some scrutiny over the tribunal’s award and could potentially set it aside.
• Parties should now be well aware of this distinction, and not simply assume that pre-arbitral steps are jurisdictional and subject to judicial review.
• Importantly, this decision does not mean that parties are unable to make compliance with pre-arbitral steps a jurisdictional issue. If they wish to do so, parties are free to expressly state that the specific steps are pre-conditions to jurisdiction.

Background

The cooperation agreement between the parties contained an MDR clause which required the parties to conduct good faith negotiations for a period of 60 business days, before escalating the dispute to arbitration. The MDR clause also provided that “either Party may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution”.

In the arbitration proceedings, C argued that the tribunal lacked jurisdiction as D’s written notice for negotiations was not addressed to C’s CEO but to its board of directors. Thus, C said, the pre-condition to arbitration had not been fulfilled.

The tribunal dismissed C’s argument and ruled that the pre-condition had been met, since the parties were only obliged to negotiate under the MDR clause but involving their CEOs was optional. The tribunal then issued a Partial Award on Jurisdiction and Liability in favour of D (the “Partial Award”).

The Decision of the Hong Kong Court of Final Appeal

C sought to set aside the Partial Award on the basis of the tribunal’s decision with respect to compliance with the MDR clause.

After C lost its set aside application at the Court of First Instance and the Court of Appeal, it was granted permission to appeal before the Court of Final Appeal, as the first case in Hong Kong to consider this specific issue on MDR clauses.

The Court of Final Appeal once again dismissed C’s appeal from its unsuccessful set aside application.

The specific question before the Court of Final Appeal was whether an arbitral tribunal’s determination on the fulfilment of a pre-arbitration condition was subject to recourse to the court, pursuant to Article 34(2)(a)(iii) of UNCITRAL Model Law (the “Model Law”) (as implemented by section 81(1) of the Arbitration Ordinance). Article 34(2)(a)(iii) of the Model Law provides that the court may set aside an arbitral award if “the award deals with a dispute not contemplated by or falling within the terms of the submission to arbitration.”

C argued that referring the dispute to the CEOs was a condition precedent to arbitration. Thus, there was no valid reference to arbitration, which is a ground to set aside the Partial Award under Article 34(2)(a)(iii) of the Model Law.

The Court of Final Appeal rejected this argument, finding that C’s challenge did not fall within the scope of Article 34(2)(a)(iii) of the Model Law. This was because, on proper construction of the parties’ cooperation agreement, the dispute over the fulfilment of the pre-arbitration conditions under the cooperation agreement fell within the parties’ contemplation and intended submission to arbitration.

With reference to recent case law in Singapore, England and New South Wales, a majority of the Court of Final Appeal also upheld the distinction between admissibility and jurisdiction.

The majority further adopted a presumption that pre-arbitration conditions should be regarded as matters of admissibility, and not jurisdiction, in the absence of unequivocal language to the contrary. Thus, they would not be subject to judicial review.

Commentary

In recent years, the distinction between jurisdiction and admissibility is this arbitral context has become well-recognised by the courts of England, New South Wales of Australia and Singapore.

For example, the Singapore case BBA & others v. BAZ [2020] SGCA 53 sets out clearly the “tribunal versus claim” test for distinguishing whether an issue goes towards jurisdiction or admissibility. The test “asks whether the objection is targeted at the tribunal (in the sense that the claim should not be arbitrated due to a defect in or omission to consent to arbitration), or at the claim (in that the claim itself is defective and should not be raised at all)”.

Referring to the BBA case, the English High Court in The Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm) held that the issue of whether an arbitral claim could be brought before the expiry of the stipulated period for amicable settlement was an admissibility issue, and not jurisdiction.

Similarly, in The Nuance Group (Australia) Pty Ltd v. Shape Australia Pty Ltd [2021] NSWSC 1498, the Supreme Court of New South Wales also adopted the test in BBA and took the view that a challenge to a claim that was time-barred did not affect the tribunal’s jurisdiction.

Nevertheless, the distinction between admissibility and jurisdiction is not without its critics. Some commentators have supported moving away from the concept of admissibility, calling it an invention of investment treaty tribunals that is confusing and redundant and should have no place in commercial arbitration. These critics have argued that the focus of arbitral and judicial enquiry should be on jurisdiction alone.

However, most commentators and courts now appear to agree that the concept of admissibility provides a useful analytical framework that has helped sharpen analysis, and has provided more certainty and clarity around the scope of consent to arbitration in relation to specific issues, at least in many jurisdictions where the Model Law is adopted.