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On 30 June 2023, the Hong Kong Court of Final Appeal (CFA) issued judgment in the case of C v. D [2023] HKCFA 16, confirming that disputes over stepped arbitration clauses (also known as escalation clauses) can generally be resolved by the relevant designated arbitral tribunal instead of the courts, unless otherwise agreed between the parties.
Case History
In the case of C v. D, the Appellant (C) and the Respondent (D), each a satellite operator, entered into a written agreement in relation to the operation of a jointly-owned broadcasting satellite. A contractual dispute arose as to whether the Appellant was in material default of the agreement. Invoking an arbitration clause in the agreement, the Respondent referred the dispute to arbitration at the Hong Kong International Arbitration Centre.
Before the arbitral tribunal, the Appellant objected to the arbitration going ahead on the ground that the Respondent had not complied with certain pre-arbitration conditions stipulated in the agreement. In a partial arbitral award, the tribunal rejected this objection, holding that the Respondent had duly complied with all pre-arbitration conditions, and proceeded to rule that the Appellant was in breach of the agreement.
The Appellant applied to the Court of First Instance (CFI) to set aside the partial arbitral award, pursuant to Article 34(2)(a)(iii) of the UNCITRAL Model Law (Model Law) on International Commercial Arbitration (which is incorporated into Hong Kong law by Section 81 of the Arbitration Ordinance).
Article 34(2)(a)(iii) of the Model Law provided that:
An arbitral award “may be set aside by the court … only if” the award “deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration”.
On 24 May 2021, the CFI issued a decision and dismissed the Appellant’s originating summons.
Dissatisfied with the CFI decision, the Appellant appealed to the Court of Appeal (CA). The CA issued a decision dismissing the appeal and upholding the CFI decision on 7 June 2022. In this decision, the CA cited the cases under English and Singaporean law in this regard, to conclude that, absent evidence of the contrary intention, non-compliance with pre-conditions to arbitration is generally a matter of admissibility, rather than jurisdiction, and better determined by the arbitrators.
The Appellant then appealed to the CFA. As mentioned at the beginning of this article, regarding the issue whether, if an arbitration agreement stipulated a pre-arbitration condition that the parties should first attempt to resolve their dispute by a specified mechanism, an arbitral tribunal’s determination on the fulfilment of that condition was subject to recourse to the court, the CFA unanimously dismissed the appeal on the basis that, upon the proper construction of the agreement, both the main contractual dispute and the dispute as to the fulfilment of the pre-arbitration conditions under the agreement fell within the parties’ contemplation and intended submission to arbitration, such that the Appellant could not rely on Article 34(2)(a)(iii) of the Model Law to set aside the arbitral award.
Further, notwithstanding the agreed disposal of the appeal, the CFA differed as to whether the conceptual distinction between a challenge to an arbitral tribunal’s “jurisdiction” and a challenge to the “admissibility” of a particular claim, should be adopted in aid of the construction and application of the Ordinance. Majority judges considered that the distinction between “jurisdiction” and “admissibility” should be adopted as a helpful aid to construction when deciding whether, in a particular case, judicial intervention in an arbitral process was permissible, while individual judge differed in such judicial reasoning and regarded the distinction between “jurisdiction” and “admissibility” as an unnecessary distraction and presenting a task of supererogation.
Comments
This decision will have a significant impact internationally in other Model Law jurisdictions. Further, this case reminds legal counsel that we should be more careful when drafting a stepped arbitration clause, considering improper stepped arbitration clauses can have problematic consequences for parties to an agreement.
Case History
In the case of C v. D, the Appellant (C) and the Respondent (D), each a satellite operator, entered into a written agreement in relation to the operation of a jointly-owned broadcasting satellite. A contractual dispute arose as to whether the Appellant was in material default of the agreement. Invoking an arbitration clause in the agreement, the Respondent referred the dispute to arbitration at the Hong Kong International Arbitration Centre.
Before the arbitral tribunal, the Appellant objected to the arbitration going ahead on the ground that the Respondent had not complied with certain pre-arbitration conditions stipulated in the agreement. In a partial arbitral award, the tribunal rejected this objection, holding that the Respondent had duly complied with all pre-arbitration conditions, and proceeded to rule that the Appellant was in breach of the agreement.
The Appellant applied to the Court of First Instance (CFI) to set aside the partial arbitral award, pursuant to Article 34(2)(a)(iii) of the UNCITRAL Model Law (Model Law) on International Commercial Arbitration (which is incorporated into Hong Kong law by Section 81 of the Arbitration Ordinance).
Article 34(2)(a)(iii) of the Model Law provided that:
An arbitral award “may be set aside by the court … only if” the award “deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration”.
On 24 May 2021, the CFI issued a decision and dismissed the Appellant’s originating summons.
Dissatisfied with the CFI decision, the Appellant appealed to the Court of Appeal (CA). The CA issued a decision dismissing the appeal and upholding the CFI decision on 7 June 2022. In this decision, the CA cited the cases under English and Singaporean law in this regard, to conclude that, absent evidence of the contrary intention, non-compliance with pre-conditions to arbitration is generally a matter of admissibility, rather than jurisdiction, and better determined by the arbitrators.
The Appellant then appealed to the CFA. As mentioned at the beginning of this article, regarding the issue whether, if an arbitration agreement stipulated a pre-arbitration condition that the parties should first attempt to resolve their dispute by a specified mechanism, an arbitral tribunal’s determination on the fulfilment of that condition was subject to recourse to the court, the CFA unanimously dismissed the appeal on the basis that, upon the proper construction of the agreement, both the main contractual dispute and the dispute as to the fulfilment of the pre-arbitration conditions under the agreement fell within the parties’ contemplation and intended submission to arbitration, such that the Appellant could not rely on Article 34(2)(a)(iii) of the Model Law to set aside the arbitral award.
Further, notwithstanding the agreed disposal of the appeal, the CFA differed as to whether the conceptual distinction between a challenge to an arbitral tribunal’s “jurisdiction” and a challenge to the “admissibility” of a particular claim, should be adopted in aid of the construction and application of the Ordinance. Majority judges considered that the distinction between “jurisdiction” and “admissibility” should be adopted as a helpful aid to construction when deciding whether, in a particular case, judicial intervention in an arbitral process was permissible, while individual judge differed in such judicial reasoning and regarded the distinction between “jurisdiction” and “admissibility” as an unnecessary distraction and presenting a task of supererogation.
Comments
This decision will have a significant impact internationally in other Model Law jurisdictions. Further, this case reminds legal counsel that we should be more careful when drafting a stepped arbitration clause, considering improper stepped arbitration clauses can have problematic consequences for parties to an agreement.