Multi-tiered Dispute Resolution: Are Pre-conditions Matters within the Tribunal’s Jurisdiction?

Key Contact:
Jocelyn Lim

In C v D [2021] HKCFI 1474, Company C applied to set aside the arbitral award dated 21 April 2020 (“Award”) on the grounds that the tribunal did not have jurisdiction to hear the claim because parties have not met the contractual pre-arbitration conditions. 
The Hong Kong High Court dismissed Company C’s application. Justice Godfrey Lam held that, unless agreed otherwise, the issue on whether pre-conditions to arbitration has been fulfilled is one of admissibility of the claim rather than jurisdictional.
Brief Facts
On 15 December 2011, Company C and Company D entered into a Cooperation Agreement for the development and building of a satellite (“Agreement”).
Clause 8.2 of the Agreement, which is the material default notice clause, provides that either party may issue a written notice to the defaulting party requiring remedy of the default, and if the defaulting party fails to remedy the default within 30 business days from the receipt of the default notice, the parties shall resolve the dispute as provided in Clause 14.2 of the Agreement.
Clauses 14.2 and 14.3 of the Agreement provides that:
14.2 Dispute Resolution. The Parties agree that if any controversy arises 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
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’).
On 24 December 2018, the CEO of Company D issued a letter to the chairman of the Board of Directors of Company C, copying the other directors of Company C. Company C’s CEO also received a copy from its chairman. The letter alleged a serious breach of the Agreement by Company C and ended the letter by stating that:
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.
Company D reserves all of its legal rights accordingly.
Apart from communication between the parties’ legal representatives, there was no further correspondence from Company D nor did Company C refer the dispute to the CEOs.
On 18 April 2019, Company D issued a notice referring the dispute to arbitration under Clause 14.3 of the Agreement. In response, Company C claimed that the arbitral tribunal did not have jurisdiction due to the absence of a request for negotiations under Clauses 14.2 and 14.3 of the Agreement. Meanwhile, the parties negotiated on a without prejudice basis throughout the arbitration including a meeting of the parties’ CEO in Singapore in June 2019.
A tribunal of three arbitrators was formed. Hearing took place on 2 and 3 January 2020. On 21 April 2020, the tribunal issued the Award.
Tribunal’s Award
The tribunal rejected Company C’s jurisdictional objection and found that Company C had breached the Agreement.
On the jurisdictional objection, the tribunal held that 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.
They further 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 Company D’s letter of 24 December 2018.
On 21 May 2020, Company C sought from the Hong Kong High Court a declaration that the Award was made without jurisdiction and an order for the Award be set aside under Section 81 of the Hong Kong Arbitration Ordinance, which incorporated Article 34 of the UNCITRAL Model Law. 
The issues that arose were:
  1. Is the question whether Company 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 does that question fall within Section 81 of the Hong Kong Arbitration Ordinance ?
  1. If the above issue is answered in Company C’s favour, the following two questions arise:
  1. What is the condition precedent to arbitration on the proper construction of the Agreement; and
  1. Was the condition fulfilled by Company D’s letter of 24 December 2018.
Hong Kong High Court’s Decision
After considering the legal positions in various jurisdiction and several academic authorities, Justice Godfrey Lam dismissed Company C’s application and held that issues relating to contractual procedures preceding the arbitration merely go to the admissibility of the claim, not the tribunal’s jurisdiction. It does not however mean that the conditions are not important, what it means is that the tribunal has jurisdiction and may deal with issues regarding fulfilment of pre-arbitration conditions as the tribunal sees fit.
Interestingly, Justice Lam took note that parties 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.
As the decision on the first issue was in favour of Company D, there was no requirement for the court to consider the second issue.
In the words of Justice Godfrey Lam, the approach taken in C v Dhas considerable advantages, for these [multi-tiered dispute resolution] 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 motion. 
As Justice Lam observed:
“…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 decision in C v D can be seen as the Hong Kong courts aligning itself with other Model Law jurisdictions, such as the United Kingdom which once regarded fulfilment of pre-arbitration conditions as matters affecting the tribunal’s jurisdiction (Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd [2015] 1 WLR 1145) but has subsequently found such matters to be matters of admissibility of claim (The Republic of Sierra Leone v SL Mining Ltd [2021] EWHC 286 (Comm)), and Singapore which now recognises that tribunals’ decisions on objections regarding pre-conditions to arbitration are matters of admissibility (BTN v BTP [2020] SGCA 105).
It remains to be seen if the approach taken in C v D will be adopted by the Malaysian courts if a similar challenge is mounted under Section 37 of the Malaysian Arbitration Act 2005, which as in the case of Section 81 of the Hong Kong Arbitration Ordinance, is largely modelled on the UNCITRAL Model Law.
It is to be noted, however, that the Malaysian High Court in Usahasama SPNB-LTAT Sdn Bhd v Abi Construction Sdn Bhd [2016] 7 CLJ 275 held that until and unless the contractually agreed pre-conditions or conditions precedent to arbitration were fulfilled, the arbitrator cannot assume jurisdiction. However, this decision arose from an appeal under Section 18(8) of our Arbitration Act 2005 against an arbitral tribunal’s ruling that it has jurisdiction rather that Section 37 of our Arbitration Act 2005. In any event, the issue relating to admissibility was not raised in this case.
Case commentary by Jocelyn Lim (Partner) of the Construction Litigation, Arbitration and Adjudication Practice of Skrine.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.