Arbitration is an alternative to litigation to resolve disputes. When two parties have an arbitration agreement and a dispute arises therefrom, they can refer the “dispute” to arbitration as long as the dispute falls within the scope of the arbitration agreement. Such “reference” gives rise to the jurisdiction of the arbitrator to be appointed, since the arbitrator is appointed to “resolve” such dispute. If no such dispute has arisen when the arbitration is commenced, then there is no “dispute” that can be referred to arbitration, and the arbitrator has no “dispute” to resolve. These are the core issues addressed by the Court of Appeal (CA) of Hong Kong in CMBICDHAW Investments Limited v CDH Fund V Limited Partnership & Ors [2024] HKCA 516.
Background
CMB, Fund and Cattle are parties to a Co-Investment Agreement with an arbitration clause, by which CMB agreed to invest in a company (HC). At the time, it was L (HC’s managing director) and X (HC’s employee) who negotiated the Agreement for Fund and Cattle.
CMB subsequently commenced proceedings (HCA) against L, X, C (controlling shareholder and a director of HC) and Management (part of an investment group) in the High Court of Hong Kong (CFI), claiming that they had made fraudulent misrepresentations to CMB, which induced CMB to enter into the Agreement with Fund and Cattle and conspired by unlawful means to defraud CMB. However, Fund and Cattle were not added as parties to the HCA and no claim was made against them.
ICC Arbitration
Fund, Cattle, L, X and Management (collectively Claimants) then commenced ICC arbitration against CMB (Arbitration), seeking an anti-suit injunction and a declaration of non-liability to CMB, which, in effect, sought to have CMB’s claims in the HCA moved to and determined in the Arbitration.
CMB challenged the Arbitrator’s jurisdiction on the grounds that (a) there was no “dispute” between CMB and Fund and/or Cattle to be resolved and (b) L, X and Management were not parties to the arbitration agreement, and requested the Arbitrator to rule on his jurisdiction as a preliminary question.
The Arbitrator refused to do so and only dealt with it in his final arbitral award (Award), in which the Arbitrator decided that whilst there was no jurisdiction over the claim asserted by L, X and Management (as they were not parties to the arbitration agreement), there was jurisdiction over the claim made by Fund and Cattle and he granted a declaration of non-liability (with some fundamental changes to the wording of the declarations sought).
However, on the first day of the hearing of the Arbitration, CMB had confirmed that it had no claim, contractual or non-contractual, against Fund or Cattle, which evidenced the absence of any dispute or assertion made as to the liability of Fund and Cattle.
CMB’s application to CFI to set aside the Award
CMB applied to the CFI to set aside that part of the Award and some paragraphs of it on the basis that it was made without jurisdiction and/or was contrary to public policy.
The CFI considered the application on a de novo basis and found in its decision (Decision), amongst other things, that there was no dispute between CMB and Fund/Cattle, the Arbitrator did not have jurisdiction and had conflated whether there was a dispute with whether there was a legitimate interest in seeking relief in the form of a negative declaration. As the Arbitrator was held to have no jurisdiction to make the impugned parts of the Award, those parts of the Award were set aside.
The CFI emphasised that “no matter how wide an arbitration clause, it can only cover disputed claims between the parties to the Agreement, namely claims and disputes between CMB and Fund and Cattle “.
The CFI also held that “either (a) allegations have been made which were denied, for a dispute to arise conferring jurisdiction on the tribunal, or (b) no allegations had been made, which can only lead to the result that there was no dispute, the arbitration agreement was not triggered, and no jurisdiction was conferred. There can be no half-way house.”
In the circumstances, the CFI found it unnecessary to address CMB’s arguments as to whether the Award was against public policy for ousting or usurping the Court’s jurisdiction.
Appeal lodged by Fund and Cattle
Fund and Cattle sought to appeal against the CFI’s Decision. The question before the Court of Appeal (CA) was whether there was or was not the relevant jurisdiction, which question turned on the narrow point as to whether there was a “dispute” between CMB and Fund and Cattle – either at the time of the commencement of the arbitration and/or at the time the Arbitrator came to write his Award.
The CA, dismissing the appeal, held as follows:
1. For a “dispute” to exist, 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, but there must 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. 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.
2. In the arbitration context, the term “dispute” should be construed inclusively and not overly legalistically. The phrase “arising out of or relating to” is to be given a broad construction, and “relating to” has a wide meaning intended to convey some connection between two subject matters.
3. 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. It must be possible to formulate the “dispute” which is said to engage the jurisdiction. A “dispute” may arise and continue to exist, unless there is a clear and unequivocal admission of both liability and quantum.
4. “The very fact that Fund and Cattle were seeking a negative declaration – a declaration of non-liability – tends (at least on the facts of this case) to point to the artificiality of the suggestion that there was a dispute. In the factual context, … this form of relief sought should have set alarm bells ringing as to whether there was an attempt to engineer the existence of a dispute, so as to bring into the arbitral process for determination those matters which already arose for determination in the HCA involving persons not themselves parties to, or able to take the benefit of, the Arbitration Agreement.”
5. “CMB has never asserted any liability on the part of Fund or Cattle arising from the matters comprising the allegations made against L, X and Management. Hence, the pursuit by Fund and Cattle of the negative declaration of non-liability can be seen even more clearly to be an attempt to clothe an arbitrator with jurisdiction by engineering a dispute which has not in fact ever arisen, because no assertions have ever in fact been made as could give rise to that dispute.”
6. On the public policy ground, the CA found that there had been conflict within the Award with the public policy of Hong Kong which would lead to the setting aside of parts of the Award set aside by the CFI – there being a clear abuse of process:
Observations
The CA’s Judgment illustrates that:
(a) Before referring a dispute to arbitration, a party should check whether its counterparty has rebutted or denied its assertion / claim giving rise to a dispute between them, falling within the scope of the arbitration agreement.
(b) An arbitrator should consider whether such dispute has so arisen between the parties to the arbitration agreement. Even though an arbitrator is entitled to decline to rule on jurisdiction as a preliminary question under Article 16(3) of the Model Law (which has effect by virtue of section 34(1) of the Arbitration Ordinance), “it did give rise to potential problems arising if the Arbitrator were later to decide … that he had no jurisdiction to decide the merits of the dispute between CMB and the non-contracting parties L, X and Management” – if the arbitrator had ruled on jurisdiction as a preliminary question (that he had jurisdiction), this ruling could have been challenged much earlier at the Court level and all the time and legal costs spent on the false assumption that the arbitrator had jurisdiction would have been saved. The impugned part of the award made by the arbitrator against CMB (including the award on costs) was set aside. One might query who should bear the costs arising out of the arbitrator’s refusal to rule on jurisdiction as a preliminary question.
(c) If an arbitrator recognises that he need not make any findings on the evidence, it may not be appropriate for him to make a declaration that the allegations made in another forum (Court) were false and offer his notes as potentially providing “some assistance” to that forum on matters he himself thought not necessary for him to decide. Such “notes”, as the CA remarked, at least risked giving the impression that the arbitrator was seeking to “poison the well”.
(d) After a party has submitted to the jurisdiction of the Court, there may be an issue of abuse of process if he continues to pursue essentially the same relief from an arbitration for substantially the same relief and/or determination as the factual and legal issues in the Court.
