Introduction
In arbitration agreements, parties often envisage that in the event a dispute arises between them, it is desirable for them to try consider whether they can settle it by themselves, before referring the matter to arbitration. This encourages parties to attempt to resolve disputes with a clear road map and avoid generating further legal costs without having first gone through a dispute resolution procedure mutually agreed upon. Dispute resolution clauses providing for such mechanism are also known as "multi-tiered" or "cascading" dispute resolution clauses. In these clauses, parties specify certain steps to be taken prior to commencing arbitration and agree that these steps may constitute a condition precedent, in which case they must be complied with.
In the much-anticipated judgment of C v D [2023] HKCFA 16, the Hong Kong Court of Final Appeal ("CFA") laid down authoritatively the proper approach to understanding the nature of and interpreting multi-tiered dispute resolution clauses. This article examines the implication of the reasoning of the majority (in particular, Ribeiro PJ, who delivered one of the leading judgments) on the understanding of multi-tiered dispute resolution clauses and drafting implications for practitioners.
The Salient Facts and the Question before the Court of Final Appeal
A contractual dispute arose between C and D regarding the operation of a jointly-owned broadcasting satellite. Under their arbitration agreement, C and D should first "attempt in good faith promptly" to resolve disputes arising out of the contract by negotiation and a mechanism outlining how specified personnel of each party are to negotiate. If any dispute could not be resolved amicably within 60 days of the request for negotiation, the dispute should be referred "by either [p]arty 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".
After D referred the dispute to the HKIAC, C objected to the arbitration going ahead on the basis that pre-arbitration procedures had not been complied with. The arbitral tribunal found that the pre-arbitration procedures had been duly observed and issued a partial award on liability in favour of D.
C sought to set aside the award on the basis that the arbitrators were wrong to decide that the pre-arbitration requirements had been complied with. The issue before the CFA was whether the tribunal’s determination on whether a pre-arbitration condition precedent in an arbitration agreement is fulfilled is subject to recourse to courts under Article 34(2)(a)(ii) of the UNCITRAL Model Law ("Model Law"). The article provides that an arbitral award may be set aside 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 submission to arbitration".
The CFA unanimously concluded that the court did not have power to review the tribunal’s decision as Article 34(2)(a)(iii) of the Model Law was not engaged. The majority (Cheung CJ, Ribeiro, Fok and Lam PJJ) and minority (Gummow NPJ), however, differed as to the reasoning. This article focuses on that of the majority’s approach, which favoured the distinction between "admissibility" and "jurisdiction" as helpful in understanding an arbitral tribunal’s powers.
Admissibility vs Jurisdictional Disputes
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In simplest terms, the distinction is one between a challenge to the tribunal (a question of jurisdiction) and a challenge to the claim (a question admissibility). An objection against the tribunal itself is a question going to jurisdiction, while an objection against the claim in question goes to admissibility. Ribeiro PJ held that the distinction between "jurisdiction" and "admissibility" is helpful in construing the nature of a multi-tiered dispute resolution clause, as it distils a unifying principle applicable to various instances justifying judicial intervention expressly provided for in accordance with section 3(2)(b) of the Arbitration Ordinance (Cap.609) ("AO").
His Lordship then proceed to hold that the present case does not involve a challenge which rests upon an objection that the arbitral reference or content of the award went beyond what was agreed to be referred to arbitration. C’s objection was only that the claim had been prematurely referred to arbitration, but not an objection refusing to give consent to the tribunal’s authority to decide and render an award upon the matter. A proper construction of the pre-arbitration clauses in question (clauses 8.2, 14.2 and 14.3) shows that both the dispute as to whether negotiation procedures had bene complied with and the contractual dispute as to whether C was in material default were intended to be dealt with exclusively and finally by the arbitral tribunal. The parties were held to have intended they have contemplated and intended the disputes to be submitted to arbitration, such that article 34(2)(a)(ii) of the Model Law does not provide a basis for judicial intervention.
What remains paramount, however, is parties’ intention. This finds root, as the Chief Justice and Ribeiro and Lam PJJ sought to emphasise, in Lord Hoffmann’s well-established approach in Fiona Trust & Holding v Privalov [2007] UKHL 40. In respect of the relationship between the distinction between admissibility/jurisdictional disputes in the context of multi-tiered clauses on one hand and the inability for curial intervention to take place based on article 34(2)(a)(iii) of the Model Law on the other, Ribeiro PJ observed that parties are nevertheless able to allow for curial intervention to take place by way of express agreement. This is particularly so given party autonomy on deciding how disputes should be resolved is declared by section 3(2)(a) of the AO to be a basic principle. In adopting this approach, the coherency of the pro-arbitration regime of the AO is preserved. His Lordship did pause to note, however, that such an elevation of a non-jurisdictional matter into one permitting curial intervention may be "contrary to all normal commercial expectations".
Unique Features of Commercial Arbitration
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In support of its argument that the multi-tiered clauses in question are jurisdictional in nature, C also cited several decisions of the International Court of Justice and tribunals of the International Centre for Settlement of Investment Disputes ("ICSID") involving sovereign states. They were all distinguished on the basis that waiver to sovereign immunity and consequential submissions of a dispute to an international court or tribunal for determination are presumptively jurisdictional. Unless such conditions are met, the state does not (and, in any event, unlikely to) consent to the tribunal’s authority.
Of particular interest is the seminal decision of Daimler Financial Services AG v Argentine Republic ICSID ARB/05/1 (22 August 2012), where the tribunal emphasised that the sovereign state’s voluntary restraint on sovereignty immunity (and hence submission to ICSID arbitration) is entirely different from that relating to domestic arbitral tribunals. In the domestic context, admissibility requirements are "judicially construed rules designed to preserve the efficiency and integrity of court proceedings." On the other hand, clauses similar to multi-tiered clauses in ICSID arbitration reflect the sovereign agreement of two States, instead of the administrative creation of arbitrators.
The approach in Daimler was followed in subsequent decisions also cited by C. Characterising the matter in offer and acceptance terms, Ribeiro PJ pithily observed that "unless and until the investor accepted the unilateral offer made by the state in accordance with the conditions stipulated, no arbitration agreement came into existence between the State and the investor". This stands in stark contrast to the relationship between commercial parties in arbitration, where the terms of an arbitration agreement are underpinned by their mutual consent to arbitrate. In agreeing so, their mutually desired method of dispute resolution is also set out for arbitral tribunals or courts to implement.
Practical Implications 1: Interpretation of Multi-Tiered Clauses
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First and foremost, C v D resoundingly lays down what multi-tiered clauses are expected to be: presumptively non-jurisdictional. This rests upon well-established approaches to the ascertainment of commercial parties’ intention when construing what they have agreed to submit to arbitration. In particular, the emphasis on "commercial" parties is important: it hints that courts ascribe considerable weight to this identity when seeking to understand the meaning of the agreement entered into. As Ribeiro PJ’s convincing distinguishment between the ICSID cases and domestic/commercial arbitration shows, it is necessary to understand critically the reasons for which an agreement was entered into. This shows, again, that the matter goes back to ascertaining parties’ intention.
More interesting, however, are Ribeiro PJ’s observations on what would normally be expected of commercial parties. They shed light on how courts expect arbitration agreements to be drafted. In Best Field Inc v Triangular Force Construction Engineering Ltd [2022] HKCFI 1641, Recorder Maurellet SC affirmed that the modern approach to the construction of arbitration agreements, namely "the presumption in favour of arbitrability and the ‘one-stop’ adjudication approach", is "at least ... a useful starting point". If parties choose to refer an admissibility/jurisdiction dispute to court, parties may expect a court to commence its construction exercise upon two premises. First, that parties are rational businessmen seeking to resolve their disputes as efficiently as possible. Second, parties are likely to have intended any dispute arising out of their relationship to be decided by
the same tribunal.
All the matters aforesaid, as emphasised in the Hong Kong judgments discussed above, the premises upon which parties’ intention are construed are nevertheless presumptions. As Recorder Maurellet SC explained in Best Field Inc (supra): "... the presumptions may be rebutted and would not be applicable in particular cases, eg where the parties have entered into different interlinked agreements, relating to different aspects of an overall and often complex commercial transaction, and where they are differently expressed choices of jurisdiction and/or law in different agreements providing for different manner of resolution of disputes." Therefore, drafters of arbitration agreements may find it worthy to more painstakingly deliberate how each of the words adopted, or the words employed read as a whole, may be viewed from an objective lens free of parties’ personal preferences.
Practical Implications 2: Drafting
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The CFA’s emphasis on ascertaining parties’ objective intention expressed in an arbitration agreement also illustrates the importance of thoughtful choice of words. This should strike a balance between (i) most defensibly expressing a party’s intention and (ii) reaching a compromise between the parties. In particular, drafters may wish to pay particular attention to the latter half of the balance, as C v D demonstrates that in arbitration-related proceedings, courts have been and are prepared to view parties’ actions from the lens of rational businessmen who wishes to resolve disputes as efficiently as possible. Drafters may find it more helpful to also take into account the kaleidoscopic range of commercial considerations rational businessman would have taken into account in making commercial judgments.
At the same time, the words chosen should not be open to much room for speculation. Characteristics of multi-tiered clauses which may be seen as unenforceable include those which are too nebulous or equivocal, or contains no guidance as to the quality or nature of the attempts to be made to resolve a dispute (Redfern and Hunter on International Arbitration (7th edn), §§2.98–3.00). As such, although the need to reflect parties’ intention is paramount, it should not be done at the expense of the clarity of the dispute resolution clause. As the court expects commercial parties to be rational businessmen and accordingly considers them so in interpreting arbitration conditions, any conditions which may be deemed as contrary to these expectations, whether due to the parties’ own preferences or otherwise, should be expressed in the most unequivocal language.
Conclusion
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C v D has helpfully clarified any lingering doubts as to the proper identification of the nature of a multi-tiered dispute resolution clause. It rests upon well-established principles of interpretation of arbitral agreements and, more importantly, the sanctity of parties’ intention in shaping how an arbitral process should commence and proceed (if at all). It is a welcomed entry to Hong Kong’s pro-arbitration jurisprudence and contributes well to Hong Kong’s firmly-established reputation as a user-friendly and accessible international dispute resolution hub.