HK Court Confirms Obligation to Negotiate Goes to Admissibility Not Jurisdiction

In C v D [2021] HKCFI 1474, the Hong Kong High Court considered, in the context of a dispute in relation to a cooperation agreement, an application to set aside a partial award on jurisdiction on a ground that commonly arises in arbitration proceedings – whether an obligation to negotiate prior to commencement of proceedings goes to the admissibility of a claim or to the jurisdiction on the tribunal. Not surprisingly, and consistent with jurisprudence in many other common law jurisdictions, the Court found that the the obligation to negotiate goes to admissibility, not jurisdiction.

The relevant provisions

The relevant clauses in the agreement giving rise to dispute are commonly found in commercial contracts.

Cl.14.2 of the agreement concerned the obligation to negotiate:

“The Parties agree thatif 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 depute 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.”

Clause 14.3 of the agreement concerned the commencement of proceedings:

“if any dispute cannot not 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…”

The pre-notice of arbitration correspondence

D issued a letter to C in December 2018, copied to the other directors of C. It stated, inter alia:

“We write with regard to the recent serious breach of the Cooperation Agreement by Company C, which now requires your urgent attention…. Company D, through its lawyers, has already served a notice of material default under the Cooperation Agreement.  It is therefore clear from the correspondence that a relevant dispute now exists for the purpose of Section 14 of the Cooperation Agreement…. Company D is willing to refer the dispute to the parties’ respective senior management teams in accordance with Section 14.2 of the Cooperation Agreement if necessary.  Unless the dispute can be resolved swiftly and amicably, however, Company D will take all relevant steps to safeguard its rights.”

In January 2019, C’s counsel wrote to D’s counsel, stating that the procedures in the agreement, including under cl.14 did not concern Company C’s directors, and that Company D’s direct communication with them was neither appropriate nor productive. There was no further communication between C and D. In April 2019, D issued a notice of arbitration – C’s response was that the arbitral tribunal did not have jurisdiction because of the absence of a request for negotiations under clauses 14.2 and 14.3. 

The Tribunal

The tribunal decided to deal with Company C’s objection to jurisdiction and the issue of liability together, with quantum to be addressed, if necessary, in the second phase.  After the exchange of pleadings and evidence, a two‑day hearing of the first phase of the arbitration was held in Hong Kong in January 2020; the award was issued in April 2020.

The Tribunal:

  • held that the first sentence in clause 14.2 of the Agreement mandatorily requires the parties to attempt in good faith to resolve any disputes by negotiation, but the reference of disputes to the respective CEOs mentioned in the second sentence of clause 14.2 is optional.
  • held that the condition in clause 14.3 that the dispute cannot be resolved within 60 business days of a party’s request in writing for such negotiation refers to a request for negotiation under the first sentence of clause 14.2, and that the condition had been fulfilled by D’s letter of 24 December 2018.
  • rejected C’s objection, finding that C had breached the Agreement and had to pay damages in an amount to be determined in the second phase of the arbitration.

C therefore sought a declaration that the Partial Award was made without jurisdiction and an order for it to be set aside.

The High Court

The issues before the Court were:

  • was the question whether D complied with the dispute resolution procedure set out in the Agreement a question of the admissibility of the claim, or a question of the tribunal’s jurisdiction, and did that question fall within section 81 of the Ordinance?
  • Only if the primary question is answered in C’s favour do the following two questions arise: What is the condition precedent to arbitration on the proper construction of the Agreement?  And was the condition fulfilled by Company D’s letter of 24 December 2018?

D argued that C’s objection went to the admissibility of the claim rather than the jurisdiction of the arbitral tribunal.  Such a question was therefore one for the tribunal, and its ruling is not subject to review by the court under section 81.  D relied upon court decisions from the United Kingdom, Singapore and the United States as well as academic works.  Perhaps surprisingly, C did not deal with this argument in its skeleton submissions but lodged a supplemental list of authorities and made oral submissions disputing D’s contentions.

The court referred to a number of authorities and academic works dealing with the admissibility/jurisdiction argument, including:

  • Born, International Commercial Arbitration (3rd ed 2021), where the author states: “In interpreting the parties’ arbitration agreement, the better approach is to presume, absent contrary evidence, that pre‑arbitration procedural requirements are not ‘jurisdictional.”
  • Merkin and Flannery on the Arbitration Act 1996 (6th ed 2019) at §30.3: “ … we regard issues that concern compliance with pre‑arbitral procedures as non-jurisdictional, even if the condition in question is certain enough to be binding …  The preferable analysis is to treat such matters as conditioning the admissibility of the claim, rather than the tribunal’s jurisdiction.”
  • International Arbitration Practice Guideline on Jurisdictional Challenges issued by the Chartered Institute of Arbitrators: “When considering challenges, arbitrators should take care to distinguish between challenges to the arbitrators’ jurisdiction and challenges to the admissibility of claims.  For example, a challenge on the basis that a claim, or part of a claim, is time‑barred or prohibited until some precondition has been fulfilled, is a challenge to the admissibility of that claim at that time, i.e. whether the arbitrators can hear the claim because it may be defective and/or procedurally inadmissible.  It is not a challenge to the arbitrators’ jurisdiction to decide the claim itself.”
  • BBA & others v BAZ [2020] SGCA 53, a decision of the Singapore Court of Appeal, which considered that the “tribunal versus claim” test underpinned by a consent‑based analysis should apply for purposes of distinguishing whether an issue goes towards jurisdiction or admissibility.  This 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)”.  The court concluded that a plea of statutory time‑bar goes towards admissibility as it attacks the claim (see §§73-80). 
  • BTN & another v BTP & another [2020] SGCA 105, where it was held, following BBA, that an arbitral decision on an objection based on the doctrine of res judicata should likewise be treated as a decision on admissibility, not jurisdiction (see §§68‑71).

The Court summarised the authorities and academic works as follows [@43]:

“These academic works and international authorities demonstrate that the distinction between jurisdiction and admissibility is not one only to be drawn on the specific wording of the written law of a particular jurisdiction, but is a concept rooted in the nature of arbitration itself.  They also point out the policy reasons that justify different legal treatment of jurisdictional challenges and admissibility challenges.  In Hong Kong, the governing provision on recourse against arbitral awards is section 81 of the Ordinance, which gives effect to Art 34 of the Model Law.  Whether this distinction has significance in Hong Kong for the setting aside of arbitral awards depends on the application of section 81 to the facts of the actual case.  Although the Ordinance does not in terms draw a distinction between jurisdiction and admissibility, it may in my view properly be relied upon to inform the construction and application of section 81.  As Mimmie Chan J stated in X v Jemmy Chen at §6, in approaching applications to set aside arbitral awards, the court must confine itself to true questions of jurisdiction.”

Noting [@49]:

“The fact that a condition is regarded as going to admissibility rather than jurisdiction does not mean it is unimportant.  What it does mean is that the arbitral tribunal has jurisdiction and may deal with the question as it sees fit.  If it comes to the view that the earlier stages in a multi‑tier dispute resolution clause have not been fulfilled, it can give effect to the contractual requirement by, for example, ordering a stay of the arbitral proceedings in whole or in part pending compliance with the clause, imposing costs sanctions, or even dismissing the claim outright as inadmissible.  This approach has considerable advantages, for these clauses can be complex in their operation and the arbitral tribunal chosen by the parties’ agreed mechanism will usually be well‑placed to consider and determine what needs to be done having regard to commercial realities and practicalities including whether it would be futile to compel the parties to go through the motions.”

And [@51]:

“One of the objects of the Ordinance is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense: section 3(1).  Multi‑tiered dispute resolution mechanisms are not uncommon.  It would not be conducive to swift dispute resolution if controversies regarding procedural conditions such as that in the present case are regarded as jurisdictional questions, opening the way for duplicated arguments in court proceedings.”

The Court also noted that this approach was consistent with party autonomy [@52(5)]:

“The approach also respects the parties’ autonomy: as stated above, they are not prevented from agreeing that pre-arbitral procedural requirements should go to the tribunal’s jurisdiction, but such agreement requires clear and unequivocal language.  An example is given by Born in International Commercial Arbitration at p 999, where the arbitration agreement states that it shall not take effect, and no arbitral tribunal shall have any authority or jurisdiction, until specified pre‑arbitration procedural requirements have been satisfied.  In BBA, the court also gave an example of an arbitration clause that provides “the tribunal shall have no jurisdiction to hear claims that are time-barred under statute” (see §80).  Seen in this light, there is no absolute exclusion of the court’s involvement in this type of question.  The extent of available access to the court is a matter of the parties’ bargain: see China International Fund, §§31-34.”

Concluding [@53]:

“The objection in the present case seems to me to be one going to admissibility of the claim.  There is no dispute about the existence, scope and validity of the arbitration agreement.  There is no dispute that Company D’s claim, as far as its subject matter is concerned, “arises out of or in relation to” the Agreement and falls within the scope of the arbitration agreement.  The issue is not whether there was “initial consent” to the submission of the dispute to arbitration and to the tribunal’s determination: (S Co v B Co, §35).  The parties’ commitment to arbitrate is not in doubt; they intend the arbitral award to be final and binding.  Company C’s objection is that the particular reference to arbitration was invalid because the stipulated mechanism of negotiation between the CEOs had not been gone through.  The objection is not that such a claim should not be arbitrated at all, but that the tribunal should reject the reference as premature.  There is no indication in clauses 14.2 or 14.3 of the Agreement that the parties intended compliance with these provisions to be a matter of jurisdiction.  It seems unlikely to be the parties’ intention that despite a full hearing before and a decision by a tribunal of their choice the same issue should be re‑opened in litigation in the courts.  In my view the challenge is one of admissibility rather than jurisdictional.”

In result, the Court dismissed C’s application and ordered that it pay costs on an indemnity basis.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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