Introduction

In C v D [2021] HKCFI 1474, the Hong Kong Court of First Instance (“CFI”) confirmed that the issue of compliance with a pre-arbitration procedural requirement is a question of admissibility, not jurisdiction, and therefore is an issue to be decided by the arbitral tribunal (“Tribunal”) instead of the Court.

The facts

The claimant company C and defendant company D entered into a cooperation agreement (“Agreement”) for the development and building of a satellite. Before setting out the main contention of the case, it is useful to lay down the dispute resolution clause of the Agreement, which provided, inter alia, that:

“14.2 Dispute Resolution. The Parties agree that if any controversy, dispute or claim arises between the Parties out of or in relation to this Agreement, or the breach, interpretation or validity thereof, the Parties shall attempt in good faith promptly to resolve such dispute by negotiation. Either Party may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution. The Chief Executive Officers (or their authorized representatives) shall meet at a mutually acceptable time and place within ten (10) Business Days of the date of such request in writing, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute through negotiation.

14.3 Arbitration. If any dispute cannot be resolved amicably within sixty (60) Business days of the date of a Party’s request in writing for such negotiation, or such other time period as may be agreed, then such dispute shall be referred by either Party for settlement exclusively and finally by arbitration in Hong Kong at the Hong Kong International Arbitration Centre (‘HKIAC’) in accordance with the UNCITRAL Arbitration Rules in force at the time of commencement of the arbitration (the ‘Rules’).”

Imbedded in clause 14.2 was a condition precedent, which imposed a procedural requirement that the parties shall attempt to resolve the dispute by “negotiation in good faith” before the commencement of arbitration. Either party may have such dispute referred to the Chief Executive Officers (“CEO”) of the parties for resolution by a written notice, and if the parties could not resolve the dispute amicably within 60 business days from the request in writing for such negotiation, they could refer the matter to arbitration.

Disputes arose between the parties from the Agreement. The CEO of Company D issued a letter to the chairman of the board of directors of Company C “in a final effort to resolve this issue and avoid further legal proceedings”. Company D subsequently issued a notice referring the dispute to arbitration.

The Tribunal decision

Company C challenged the Tribunal’s jurisdiction on the basis that a request for negotiations under clauses 14.2 and 14.3 of the Agreement is absent. The Tribunal rejected Company C’s contention and held that the wording of clause 14.2 only requires parties to attempt in good faith to resolve any disputes by negotiation, but the requirement to have the notice referred to the CEO is optional. The Tribunal then proceeded to make an arbitral award in favour of Company D.

Company C made an application to the CFI under section 81 of the Arbitration Ordinance to set aside the arbitral award on the basis that it was made without jurisdiction (“Application”).

The CFI decision

The matter before the CFI was whether compliance with clause 14.2 is a question of the Tribunal’s jurisdiction which is susceptible to an application to the Court to set aside the arbitral award, or a question of admissibility of the claim that was within the Tribunal’s jurisdiction to decide.

In deciding whether an issue goes towards jurisdiction or admissibility, the CFI made reference to the “tribunal versus claim” test undertaken by the Singaporean Court, which asks:

1.       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

2.       whether the objection is targeted at the claim (in that the claim itself is defective and should not be raised at all). 

In the former case, the objection goes towards jurisdiction, and in the latter case, towards admissibility. After considering the approach adopted by other Model Law jurisdictions (i.e. jurisdictions that adopt UNCITRAL Model Law), the CFI held that compliance with pre-arbitration procedural requirements is a matter of admissibility rather than jurisdiction, such that non-compliance of the same is not a bar for the parties to seek recourse from the Tribunal.

With regard to Company C’s argument that its constitutional right of access enshrined in Article 35 of the Basic Law was unjustifiably curtailed, the CFI opined that the present approach is proportionate for, among others, the following reasons:

1.       the question of compatibility with the Basic Law should not be assessed with regard to specific rules in arbitration law, but the entire scheme of judicial scrutiny of arbitration awards;

2.       one of the underlying principles of the Arbitration Ordinance is to restrict court’s interference in arbitration; and

3.       the approach facilitates the fair and speedy resolution of disputes by arbitration without unnecessary expense.

Takeaway

It has become increasingly common for the parties to insert a “multi-tier dispute resolution clause”, i.e. a clause requiring parties to take certain steps prior to commencing arbitration proceedings, in their agreement. This case is significant since it confirms that contractual pre-conditions to arbitration such as good faith negotiations between the parties only constitute an issue of admissibility rather than jurisdiction, which therefore cannot be challenged before the Court at a later stage. Accordingly, if the contracting parties intend to make the pre-conditions as a jurisdictional issue, they should explicitly state that failure to so comply will invalidate the arbitration clause.