HK Court of Appeal finds failure to fulfil pre-arbitration ADR procedures is a question of admissibility

Background

The relevant, Hong-Kong law governed contract contained a multi-tiered dispute resolution clause (the “DR Clause”), which provided that (i) the parties were to first seek to negotiate their dispute in good faith; (ii) either party may, with written notice, refer the dispute to the Chief Executive Officers of the parties (the “CEOs”) for resolution; and (iii) if a dispute could not be resolved amicably within 60 business days, the dispute may be referred to Hong Kong seated arbitration.

A dispute arose, and the parties held discussions with a view to amicably resolve the dispute. The discussions did not resolve the dispute, and there were further communications between the parties, including from their respective lawyers. In particular D’s CEO issued a letter to the Chairman of C, copying C’s other directors in relation to the dispute, expressing D’s willingness to refer the dispute to the parties’ CEOs pursuant to the DR Clause. C’s lawyer responded on the inappropriateness of this communication to C’s board, and neither party referred the dispute to their respective CEOs.

D referred the dispute to arbitration, and the tribunal chose to consider liability and C’s objection on jurisdiction (on the basis that negotiation between CEOs pursuant to the DR clause had not taken place) together.

The tribunal issued a partial award (the “Partial Award”) finding in favour of D.  On jurisdiction, the tribunal found that the DR Clause required the parties to attempt to resolve any dispute by negotiation in good faith, but it was not mandatory to refer the dispute to the respective CEOs. The tribunal therefore rejected C’s objection on jurisdiction.

Application to set aside the Partial Award

The Hong Kong Court of First Instance (the “CFI”) made an order to set aside the Partial Award under s 81 of the Arbitration Ordinance (Cap 609) (which incorporates Article 34 UNICTRAL Model Law on grounds for setting aside an award). In particular, C argued that the non-compliance with the ADR condition rendered the award liable to be set aside as, first, this meant the tribunal had exceeded its jurisdiction (Article 34(2)(a)(iii) UNICTRAL Model Law) and, second, it meant the tribunal had not decided the dispute in accordance with the parties’ agreed upon procedure (Article 34(2)(a)(iv) UNICTRAL Model Law).

The CFI held that C’s objection was a question of admissibility of the claim, rather than the tribunal’s jurisdiction ([53] CFI judgment). The CFI therefore dismissed C’s argument based on Article 34(2)(a)(iii) of the UNICTRAL Model Law; this was not a situation which involved a dispute falling outside the parties’ submission to arbitration ([54] CFI judgment). Furthermore,C’s reliance on Article 34(2)(a)(iv) of the UNCITRAL Model Law was “strange”, as that provision relates to the arbitral procedure itself, rather than pre-arbitration ADR procedures ([55] CFI judgment), and therefore was not relevant here either.

Appeal to the Court of Appeal

C was granted leave to appeal the CFI decision, on the basis that multi-tiered dispute resolution clauses are not uncommon, and that the proper approach to an application to set aside an arbitral award on the ground of non-fulfilment of ADR procedures had general significance to arbitration law in Hong Kong ([23] Court of Appeal judgment (“CA judgment”)).

The Court of Appeal (the “Court”) held that, subject to any agreement to the contrary, whether the fulfilment of pre-arbitration procedures falls within the terms of the parties’ submission to arbitration is a question of admissibility of the claim, rather than the jurisdiction of the tribunal ([60] CA judgment). The Court also observed that the tribunal is best placed to determine whether pre-arbitration procedural requirements have been fulfilled ([63] CA judgment).

On C’s reliance of Article 34(2)(a)(iv) of the UNCITRAL Model Law, the Court did not decide whether “arbitral procedure” in that section also encompasses pre-arbitral procedures, on the basis that, consistent with the Court’s conclusion on admissibility, the parties in the present case in any event intended the question of fulfilment of pre-arbitration procedures to be determined by the tribunal ([68] CA judgment).

Comment

This decision follows an English High Court decision which found that, without clear indications to the contrary, a failure to comply with a pre-arbitral step goes to the admissibility of the dispute before the tribunal and so cannot be challenged on the basis that it is a question of its jurisdiction (see our blog post here).

The Court’s commentary that the tribunal is best placed to determine the question of fulfilment of pre-arbitration procedures highlights the Hong Kong judiciary’s support for arbitration and minimising judicial interference in arbitration “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” ([63] CA judgment). Parties would therefore still have to prove (or disprove) to the constituted tribunal that the pre-arbitration procedures have been fulfilled, and take care to avoid any adverse tribunal ruling on the admissibility of the dispute, or other sanctions such as imposing a stay of the arbitral proceedings or costs sanctions.

Click here for the CFI judgment and here for the CA judgment.