Hong Kong – Award Set Aside Due To Incompatible Appointment Procedures In Multi-Contract Dispute.
In SYL v GIF [2024] HKCFI 1324, the court considered an application by the Plaintiffs to set aside an interim arbitral award made in an arbitration administered by the HKIAC. The arbitration had been dealt with, at the Defendant’s request, as a single arbitration under multiple contracts, pursuant to Article 29 of the HKIAC Rules. Article 29 allows claims arising out of or in connection with more than one contract to be made in a single arbitration, provided that (a) a common question of law or fact arises under each arbitration agreement giving rise to the arbitration; and (b) the rights to relief claimed are in respect of, or arise out of, the same transaction or series of related transactions; and (c) the arbitration agreements under which those claims are made are compatible. Upon interpretating the arbitration agreements in the three contracts in question, the court found that there was a clash in the appointment procedure in two of the contracts on the one hand and one of the contracts on the other hand, since they provided for different appointment procedures. Accordingly, the arbitration agreements which contained differences as to a fundamental aspect of how the arbitration should be conducted, were not “compatible” within the meaning of Article 29. As one of the threshold requirements under Article 29 had not been satisfied, the court held that the Defendant was not entitled to commence the arbitration in the present form as a single arbitrationunder multiple contracts and on that basis, the Interim Award was set aside.
The Arbitration
The subject dispute arose out of three contracts, namely a Loan Agreement and two security deeds (January Deed and July Deed). Each contract contained an arbitration clause referring disputes to arbitration administered by the HKIAC (Arbitration Agreements). Relying on the Arbitration Agreements, the Defendant commenced arbitration proceedings against the Plaintiffs under the auspices of the HKIAC, pursuant to the HKIAC Administered Arbitration Rules 2018 (HKIAC Rules). Under the Notice of Arbitration, the Defendant requested a single arbitration under multiple contracts, pursuant to Article 29 of the HKIAC Rules. The Defendant also indicated that it would nominate its arbitrator (whose nomination was eventually approved). The Plaintiffs objected to having a single arbitration under multiple contracts, but despite their objections, the HKIAC proceeded with the arbitration, leading to the appointment of arbitrators and the interim award being issued.
Plaintiffs’ grounds for setting aside award
In gist, the Plaintiffs advanced two grounds of complaint (which were made before the Tribunal): (i) The Arbitration Agreements were incompatible with one another. Hence, the Plaintiffs say that the arbitration should not have been commenced under Article 29 of the HKIAC Rules as a single arbitration under multiple contracts (Compatibility Ground). (ii) The composition of the Tribunal was defective, since it was not done in accordance with the parties’ agreement under the three contracts (Agreement Ground).
The 3 Arbitration Agreements
The court considered the wording of the three Arbitration Agreements and found that there was a clash in the appointment procedure in the Loan Agreement and January Deed on the one hand, and the July Deed on the other hand. Under the Loan Agreement and January Deed, the Plaintiffs would have the right to designate an arbitrator. The Other Mortgagors had no say. However, under the July Deed, it was the 1st Plaintiff and Other Mortgagors who would have the right to designate an arbitrator. The 2nd Plaintiff had no say.
Article 29 of the HKIAC Rules
The court said that the question then, was whether this would render the Arbitration Agreements “incompatible”, such that Article 29 of the HKIAC Rules could not be engaged.
Regarding the meaning of “compatibility”, Article 29 of the HKIAC Rules provides that: “Claims arising out of or in connection with more than one contract may be made in a single arbitration, provided that: (a) a common question of law or fact arises under each arbitration agreement giving rise to the arbitration; and (b)the rights to relief claimed are in respect of, or arise out of, the same transaction or a series of related transactions; and (c) the arbitration agreements under which those claims are made are compatible.”
The court said that reading Article 29 as a whole, it is apparent that “compatibility” is an independent and separate requirement i.e., all three limbs under sub-paragraphs (a), (b) and (c) need to be satisfied before Article 29 is engaged.
Meaning of “compatibility”
As regards what is meant by “compatible”, the court said that essentially, it means an ability to exist or be used together without causing problems. The court referred to “A Guide to the HKIAC Arbitration Rules, 2nd ed, §10.125”, where the authors explain the meaning of “compatibility” as follows: “The arbitration agreements need not be identical in order to meet this criterion. They must, however, be substantively compatible. Any differences must be surmountable by the parties, the tribunal, and HKIAC. Consolidation will be ordered when it will make no practical difference if the consolidated case proceeds on the basis of one or the other underlying arbitration agreements. Where, for example, two arbitration clauses provide for different rules, different seats, or a different number of arbitrators, it will be difficult in practice to consolidate the arbitrations without significantly changing those aspects in one of the cases. In these circumstances, HKIAC will typically find the agreements to be incompatible, unless the parties can agree an acceptable compromise.” The authors then set out factors relevant to the determination of compatibility: (a) Any preconditions to the commencement of arbitration. (b) Any required qualifications of the arbitrators (e.g. that an arbitrator be qualified in a particular law or discipline, or speak a particular language). (c) The procedure for appointing arbitrators. (d) The language of the arbitrations. (e) The governing law of the arbitration agreements. (f) The method for determining the fees and expenses of the tribunal.
The court concluded that since the Loan Agreement and January Deed on the one hand and the July Deed on the other hand provided for different appointment procedures, the Arbitration Agreements were not compatible with each other:
(1) First, it infringed party autonomy to impose on the parties a single arbitration when the underlying Arbitration Agreements adopted different appointment procedures. This offended the cornerstone of modern international arbitration, namely, the primacy of consent as enshrined in s.3(2) of the Arbitration Ordinance. In the present case, the court said: (i) Under the Loan Agreement and January Deed, the Plaintiffs had contracted for the right to designate an arbitrator should any dispute arise between the parties. (ii) Had the Defendant chosen to commence an arbitration under the Loan Agreement and January Deed only, the Plaintiffs could have designated the Plaintiffs’ Nominated Arbitrator. (iii) The Plaintiffs’ willingness to arbitrate was only premised upon the Plaintiffs having a right to designate an arbitrator of their choice. Without such a right, the Plaintiffs could not be said to have consented to arbitrate.
(2) Second, the court said, it also infringed the parties’ contractual rights: (i) The Arbitration Agreements are contracts in their own right. The parties have negotiated for and obtained such rights as they considered would best fit their commercial interests. Having so bargained and agreed, they must be bound by their choices, whether they eventually liked it or not. (ii) The Plaintiffs have bargained for and obtained a right to designate an arbitrator under any intended arbitration arising from the Loan Agreement and January Deed. The Plaintiffs’ right is not a right shared with the Other Mortgagors, as would be the case under the July Deed. (iii) As a matter of principle, the right to designate an arbitrator cannot be curtailed by a unilateral decision on the part of a counterparty (such as the Defendant) to commence a single arbitration based on multiple contracts. (iv) The deprivation of the Plaintiffs’ contractual right is in and of itself prejudice, which is a serious issue impacting upon the integrity and sanctity of the arbitration.
(3) Third, there are valid concerns over whether the Defendant may gain an unfair advantage in the arbitration by refusing the Plaintiffs a right to designate an arbitrator of the Plaintiffs’ choice: (i) In this arbitration, it was not disputed that the Defendant successfully retained the arbitrator of its own choice. (ii) Again, in the counterfactual scenario where separate arbitrations were commenced, the Plaintiffs could have designated the Plaintiffs’ Nominated Arbitrator. In such circumstance, the Plaintiffs would have been given the same right, and hence an equal opportunity, to influence the constitution of the Tribunal. (iii) However, when the Defendant chose to commence a multiple contract arbitration, it also deprived the Plaintiffs’ right to designate an arbitrator of the Plaintiffs’ choice. In this sense, the parties were no longer treated equally. (iv) This gave rise to justifiable concerns over whether this would give the Defendant an unfair advantage. This impeached the integrity of the arbitration.
Accordingly, the Arbitration Agreements, which contained differences as to a fundamental aspect of how the arbitration should be conducted, were not “compatible” within the meaning of Article 29. As one of the threshold requirements under Article 29 had not been satisfied, the Defendant was not entitled to commence the arbitration in the present form as a single arbitration based on multiple contracts. On this basis, the Interim Award was liable to be set aside.
The court said that following from the above ruling on the Compatibility Ground, the Agreement Ground must also succeed. The composition of the Tribunal was defective. The Defendant should not have commenced a single arbitration on the basis of multiple contracts in the first place. The Tribunal purportedly constituted under Article 29 was therefore not composed in accordance with the parties’ agreement.
Comments
In drafting dispute resolution clauses for a transaction consisting of various contracts, it is important to make sure that they are compatible with each other if the parties intended that all disputes arising out of the transaction under different contracts are to be resolved in the same arbitration. Inconsistency may arise when the draftsman of the contract documents uses templates from different transactions.
AAA & Ors v DDD (see below) is another example of the decision of the arbitral tribunal being successfully challenged in court due to conflicting arbitration clauses in different contracts between the same parties.
For further information, please contact:
Kwok Kit (KK) Cheung, Partner, Deacons
K.K.Cheung@deacons.com
