Arbitrator lacked jurisdiction to grant declaration of non-liability where no liability alleged; award contrary to public policy due to improper comments on issues subject to exclusive jurisdiction of Hong Kong courts
The Hong Kong Court of Appeal has upheld a first instance decision to set aside parts of an ICC award because there was no dispute and therefore no jurisdiction on the part of the arbitrator (CMBICDHAW Investments Ltd v. CDH Fund V Ltd Partnership and Others [2024] HKCA 516).
The arbitrator had granted declarations of non-liability for fraud and conspiracy in favour of two of the arbitration claimants against whom no such liability had ever been alleged by the arbitration respondent. The court held that there was therefore no dispute between those parties, such that the jurisdiction of the arbitrator was not engaged.
The court also held that the award was contrary to public policy because, (i) in a “clear abuse of process”, various non-parties to the arbitration agreement had commenced the arbitration with the clear purpose of having issues determined by the arbitrator which were the subject of proceedings before, and fell within the exclusive jurisdiction of, the Hong Kong courts, and (ii) despite accepting that he had no jurisdiction in relation to the non-parties, the arbitrator had made unnecessary and improper observations on those issues in the award.
Background
The party challenging the award (CMB) had entered into a Co-Investment Agreement (Agreement) with CDH Fund V Limited (Fund) and CDH Grand Cattle Holdings Limited (Cattle). Under the Agreement, CMB agreed to invest US$10 million for a minority equity stake in a company (HC) which specialised in the production, processing and sales of beef and other meat products in the Mainland PRC. The Agreement was negotiated for Fund and Cattle by a Mr Li (L) and a Mr Xiong (X), the Managing Director and an employee of HC respectively (who were not themselves party to the Agreement).
Letter to Fund and Cattle
Five years after the Agreement was concluded, CMB sent a letter through its solicitors to Fund and Cattle, complaining that they had failed to properly manage CMB’s investment and had acted in breach of their duties as trustees. The letter also threatened legal proceedings in the absence of a satisfactory response. Ultimately, no such proceedings were pursued.
Court proceedings
Subsequently, CMB commenced Hong Kong court proceedings (Litigation) against L, X, the controlling shareholder and director of HC (C) and CDH Investments Management (Hong Kong) Limited (Management). CMB claimed that the defendants in the action had made fraudulent misrepresentations which induced it to enter into the Agreement, and that they had conspired by unlawful means to defraud CMB.
Arbitration
Shortly afterwards, Fund and Cattle (which were party to the Agreement and not party to the Litigation), together with Management, L and X (Non-Contracting Parties) (which were party to the Litigation and not party to the Agreement), commenced ICC arbitration against CMB.
In the Statement of Claim, the arbitration claimants sought (among other things) a declaration that “Fund and Cattle, whether directly or on behalf of their agents and representatives ([the Non-Contracting Parties]), and each of [the Non-Contracting Parties] has no liability to CMB with respect to its allegations [advanced in the Litigation] of (i) fraud; (ii) conspiracy and (iii) breach of trustee duties)“.
CMB challenged the arbitrator’s jurisdiction, arguing that (i) there was no “dispute” to be decided by the arbitrator in relation to the claim advanced by Fund and Cattle, and (ii) the Non-Contracting Parties were not parties to the Agreement (and hence the arbitration agreement).
In the award, the arbitrator
- Found that he did have jurisdiction in respect of Fund and Cattle insofar as they sought declarations of non-liability, and granted a declaration (in terms different from those originally sought) that “[Fund and Cattle] have no liability to [CMB] with respect to the allegations arising out of the [Agreement] that are the subject matter of the [Litigation], and that all such allegations in so far as they are made against [Fund and Cattle] are false”.
- Agreed that he had no jurisdiction to grant relief requested by the Non-Contracting Parties because they were not parties to the Agreement, but nevertheless made a number of observations in relation to the claims against them in the Litigation “in the hope that these comments may provide some assistance in the [Litigation] and although it is not necessary to decide these points”. These included the observation that “[t]he allegations made in the [Litigation] are on their face improbable”.
First instance set-aside decision
CMB applied to the Court of First Instance under section 81 of the Hong Kong Arbitration Ordinance to set aside the declaration of non-liability in favour of Fund and Cattle and the arbitrator’s observations in relation to the claims against the Non-Contracting Parties in the Litigation, arguing that the relevant parts of the award were made without jurisdiction and/or were contrary to public policy. Mimmie Chan J agreed that the arbitrator had no jurisdiction as there was no “dispute” and, on that basis, did not decide the public policy point.
Leave was granted for Fund and Cattle to appeal to the Court of Appeal, which dismissed the appeal.
Decision on jurisdiction
Legal principles as to existence of “dispute”
The Court of Appeal noted at the outset that “[i]t is well settled that it takes two to tango”, and framed the central question as being “whether it also takes two to create a ‘dispute’, capable of giving jurisdiction to an arbitrator”.
In addressing this issue, the Court of Appeal pointed out that, while it is the policy of the Hong Kong courts to uphold arbitration agreements and construe them widely, a party is only bound to its chosen dispute resolution forum against its proper contracting counterpart, and it would be artificial for an arbitration to be commenced in order to compel a party to admit the lack of merit in a claim never made by him.
The Court of Appeal also noted the following “settled principles” (amongst others) in relation to the existence of a dispute:
- In the arbitration context, the term “dispute” should be construed inclusively and not overly legalistically.
- It is unnecessary for there to be a “claim” in the sense of a legal claim or legal cause of action asserted by one party against the other.
- Various phrases have been adopted in the authorities to determine whether a “dispute” exists, such as “[the] assertion or adoption of a position by one party which is expressly or by implication rejected or at least not accepted by the other” and “a difference of opinion about the central issues”.
- There must therefore be something in the nature of an assertion by one party, and a situation in which the parties neither agree nor disagree about the true position is not one in which there is a dispute.
- Further, some cases indicated that silence in the face of a claim or assertion does not raise a dispute, as what is required is a rebuttal or denial of the claim or assertion.
- The time for determining whether a “dispute” has arisen is as at the time of the commencement of the arbitration, when the arbitrator’s jurisdiction is invoked, because it is the existence of the dispute which engages that jurisdiction.
No jurisdiction due to absence of dispute
Applying these principles, the Court of Appeal upheld the first instance decision of Mimmie Chan J, taking the view that there was no “dispute” between CMB on the one hand and Fund and Cattle on the other.
In the characterisation of the Court of Appeal:
- “[I]t is clear that [Fund, Cattle and the Non-Contracting Parties] were seeking to have determined in the Arbitration the issues raised in [the Litigation] against [the Non-Contracting Parties] (but not raised against Fund and Cattle)”.
- “Fund and Cattle were seeking a declaration of non-liability in respect of something for which CMB had never asserted they were liable, arising out of allegations CMB had never made against them”.
Amongst other things, CMB had never included either Fund or Cattle as defendants in the Litigation. Nor had CMB ever made any assertion in the Litigation or anywhere else that either Fund or Cattle was somehow liable in respect of the allegations in the Litigation. The allegations against Fund and Cattle in the letter mentioned above were irrelevant because no steps had been taken by CMB in relation to them.
Against that backdrop, it was difficult to see that any dispute falling within the terms of the arbitration agreement had come into existence between CMB on the one hand and Fund and Cattle on the other. The arbitrator had therefore been wrong to proceed on the basis that he had jurisdiction.
In explaining that conclusion, the Court of Appeal stated (amongst other things) that:
- The arbitrator had erred in conflating the questions of (i) whether he had jurisdiction and (ii) whether Fund and Cattle had a “legitimate interest” in seeking a negative declaration, as found by Mimmie Chan J at first instance.
- The arbitrator’s statement that the negative declaration “serve[s] a useful purpose and would serve the interest of justice” had “turn[ed] the proper reasoning on its head”. The arbitrator had held that because no claim to any liability had been made against Fund or Cattle, there could be no objection to a negative declaration of liability. The correct position was that, where CMB had not asserted, and had expressly confirmed that it was not asserting, any such claim to liability, there was no relevant dispute between CMB and Fund and Cattle on which to found jurisdiction.
- It was difficult to follow why Fund and Cattle might need, let alone be entitled to, an award of negative liability in respect of frauds and breaches of contract which had not been asserted against them.
- The presence of the Non-Contracting Parties in the arbitration (along with Fund and Cattle) had clouded the issue of jurisdiction, and had the arbitrator been faced with a claim brought only by Fund and Cattle, he might more readily have seen that there was no dispute which could found his jurisdiction. The allegations against the Non-Contracting Parties had no place in an arbitration and could only be resolved before the court. Once the Non-Contracting Parties were analytically ignored, the lack of any dispute between Fund and Cattle on the one hand and CMB on the other was “rendered stark”.
- The pursuit of a negative declaration of liability by Fund and Cattle was “an attempt to clothe an arbitrator with jurisdiction by engineering a dispute which has not in fact ever arisen”.
- The artificiality of the alleged dispute was underlined (on the facts of this case) by the fact that Fund and Cattle were seeking a negative declaration, which “should have set alarm bells ringing” as to whether there was an attempt to engineer a dispute.
The Court of Appeal also expressed some sympathy for CMB’s contention that Fund and Cattle were in reality pursuing a proxy claim on behalf of the Non-Contracting Parties (which was relevant to the public policy issue addressed below).
Finally, the Court of Appeal did not rule out the possibility that there can be a dispute between parties to a contract when non-contractual claims and assertions are made against a third party who was a stranger to the arbitration agreement, on the basis that there is an assertion “arising out of or related to” the contract. It emphasised, however, that each case must turn on its own facts, and that this was not such a case.
Decision on public policy
The Court of Appeal also held that the relevant parts of the award were in conflict with the public policy of Hong Kong and should be set aside.
The starting point for this conclusion was that there had been a “clear abuse of process”:
- The Non-Contracting Parties had commenced the arbitration in their own names and as the controllers or directing minds of Fund and Cattle, and notwithstanding that they were not parties to the arbitration agreement, with a clear purpose to have the issues raised in the Litigation dealt with in the arbitration.
- The Non-Contracting Parties had subsequently submitted to the jurisdiction of the court to determine the issues in the Litigation, but nevertheless maintained their claims in the arbitration and pursued them to trial.
- Those claims (which included the determination of the substantive factual and legal issues in the Litigation) could have no legitimate purpose where the court had exclusive jurisdiction over the issues in the Litigation, and any findings by the arbitrator would be incapable of determining the issues and would be of no weight or relevance to the court’s consideration of the issues.
In those circumstances, it was “unfortunate” that the arbitrator, even after having recognised that he need not decide anything on the evidence, nevertheless went on to give a declaration that the allegations made in the Litigation were false, and further offered his “notes” to provide assistance in the Litigation. This risked giving the impression that the arbitrator was seeking to “poison the well”, and put the relevant parts of the award in conflict with the public policy of Hong Kong.
Comment
The decision is a reminder that (in the words of the Court of Appeal) the “foundational jurisdictions for arbitration and litigation are different”, and there must be a “dispute” falling within the scope of the arbitration agreement in order for an arbitrator to have jurisdiction. In general, this will require an assertion or allegation made by one party which is denied or rebutted by another party. Potential arbitration claimants should therefore satisfy themselves that a crystallised dispute exists before commencing arbitration. Particular care should be taken to ensure that any negative declarations requested can be tied back to specific matters in dispute.
