The Hong Kong Court of First Instance has set aside an HKIAC award on jurisdiction at the request of the claimant, overturning the tribunal’s ruling that a party seeking to be joined to the arbitration and substituted in the claimant’s place was the true principal to the contract (R v. A, B and C  HKCFI 2034).
The decision of Mimmie Chan J confirms that a dispute as to the proper parties to an arbitration agreement is a true matter of jurisdiction which can be reviewed and decided by the Hong Kong courts. It also provides helpful guidance on the relevant legal principles governing the approach of the courts to jurisdictional questions, including the approach to new evidence and arguments which were not placed before the tribunal.
R entered into a limited partnership agreement with A in relation to an investment for which R provided funding of US$ 36.75 million. R subsequently commenced arbitration against A and B (a special purpose fund of which A was the General Partner) in respect of their failure to make certain distributions in kind in respect of the Investment.
C (a PRC resident) learned of the proceedings and applied to join the arbitration. C claimed that the agreement was signed by R as her agent, and that she was the principal and beneficiary entitled to all rights under the agreement. The HKIAC granted C’s joinder request on a provisional basis, without prejudice to the right of R to challenge the jurisdiction of the tribunal once the tribunal had been constituted. R did so and the parties agreed that the challenge should be dealt with as a preliminary issue. The hearing of R’s challenge to the tribunal’s jurisdiction over C took place on a fully remote basis over a period of 5 days, with various witnesses being called.
The central issue related to the US dollar funding provided by R for the investment. C argued that she and her family had reimbursed R for this funding through a payment of RMB 300 million to a “Madam Z”, who was a nominee of one of the controlling shareholders of R. Having paid for the investment, C claimed that she was therefore the beneficial owner and true party to the agreement. R argued, in contrast, that it had provided the US dollar funding for the investment on its own account. On R’s case, the RMB 300 million reimbursement was unrelated to the investment and its sole purpose was to assist C’s parents in a share manipulation scheme to acquire shares in a listed company controlled by C’s family.
The tribunal issued a “Partial Final Award on Jurisdiction” three months after the hearing, finding that C, and not R, was the true principal and party to the agreement. The tribunal’s decision was based on the conclusion that the RMB 300 million reimbursement was a payment in respect of the investment and that C was therefore the beneficial owner of the investment. The tribunal found that no credible alternative explanation for the RMB 300 million reimbursement had been provided by R.
R applied to set aside the award pursuant to section 34 of the Hong Kong Arbitration Ordinance (Cap. 609), which gives effect to Article 16 of the UNCITRAL Model Law. R asserted that fresh evidence conclusively demonstrated that there was no agency relationship and that the RMB 300 million reimbursement was made for the sole purpose of the market manipulation scheme.
Threshold question: was there an award on jurisdiction?
C asserted that the award did not involve any true question of jurisdiction which was open to the Court’s review under section 34 of the Arbitration Ordinance. In particular, C argued that the award only addressed the question of whether R or A was the true principal and/or party to the agreement, and did not address (or need to address) the question of whether the tribunal had jurisdiction over R or A.
The Court rejected C’s argument on the basis that:
- In declaring that C was the true principal and party to the agreement, the tribunal was in effect and substance deciding that she was the party to the arbitration agreement contained in the agreement and that it had jurisdiction to decide the dispute between C and R.
- The description of the award on its face as one on jurisdiction was not simply a label but reflected the nature of the tribunal’s decision.
- It could not be disputed that a difference or disagreement over the proper parties to an arbitration agreement was a true matter of jurisdiction.
- The issue of joinder in this case did not go simply to an exercise by the tribunal of its procedural authority which should be afforded substantial deference by the Court. Where the existence of an arbitration agreement was disputed, the issue of joinder was a question of jurisdiction which could be reviewed by the Court.
Accordingly, the award was one on the jurisdiction of the tribunal and as to the existence of an arbitration agreement between R and C. As such, it was open to review by the Court.
Legal framework for Court’s decision on jurisdiction
Turning to the “more difficult question” of whether the Tribunal was correct in its decision on jurisdiction, the Court summarised the relevant legal principles. In particular:
- Standard of review. The Court does not simply review the decision of the tribunal on jurisdiction, but makes its own de novo decision on the evidence before it (which can include witness evidence).
- New arguments. The parties are entitled to advance new arguments on jurisdiction not made before the tribunal.
- New evidence. Evidence which is relevant and admissible can be received by the Court, regardless of whether it was adduced, or could have been adduced, before the tribunal. If evidence was available at the time of the arbitration but withheld from the tribunal, this would go to weight, not admissibility. In the absence of good reasons for a failure to place evidence before the tribunal, the Court might take the view that the source of the evidence was dubious or that the evidence was not reliable.
- Relevance of tribunal’s findings on jurisdiction. The Court is not bound by or limited to the findings made by the Tribunal in the award. As held by the UK Supreme Court in the Dallah case, the tribunal’s own view of its jurisdiction has no legal or evidential value to the Court, irrespective of how full the evidence was before the tribunal, and no matter how carefully deliberated the conclusion of the tribunal.
- Burden of proof. The onus of proof is upon the person seeking to show that beneficial ownership is different from legal ownership of property, and in a case of sole ownership of property, it is for the non-owner to show that he has any interest in the property at all. The burden of proof was therefore on C, as the party applying to be joined in the arbitration, to prove her case and establish her alleged beneficial ownership of the investment.
Decision on jurisdiction
The starting point for the Court’s analysis was that compelling evidence was required to displace the assumption that the party to the agreement was R (the party named on the face of the agreement). The Court could not find that this was established by clear and cogent evidence.
The Court acknowledged that it had not heard the oral evidence of any of the witnesses for the purposes of assessing their credibility, the evidence given on behalf of R in the arbitration may not have been forthright in all aspects (indeed, the tribunal had found the evidence of one R’s witnesses to have been “manifestly false”), and it would be unreliable to accept R’s evidence in its entirety and without reservations.
However, the Court concluded that various aspects of the witness evidence advanced on behalf of C in the arbitration, and relied upon by the tribunal, had been untrue, misleading and unreliable, and had been contradicted by the new evidence.
Amongst other things, the Court noted that numerous previous transfers had been made for the purposes of the market manipulation scheme (in respect of which C’s parents and their assistant had been convicted and sentenced by the PRC courts), and although the state of the evidence on the purpose of the RMB 300 million transfer was “unclear”, it was more probable than not that it was one of those regular transfers rather than for any other specific purpose such as the private investment of C. It was also relevant that the US dollar equivalent of the payment of RMB 300 million, namely US$47.31 million, did not tally with the payment made by R in respect of the investment (and the Court did not accept the explanations provided by C for this discrepancy).
The Court therefore held that C had failed to discharge her burden of proving herself to be the beneficial owner of the investment and the true principal and party to the agreement. As she was not party to the arbitration agreement contained in the agreement, the tribunal had no jurisdiction over her claims in the arbitration and the award must be set aside as between R and C.
Indemnity costs were awarded not only against C but also against A and B, because they had appeared at the hearing and made submissions to contest the setting aside of the award.
The facts of this case are unusual in a number of respects. The challenge to jurisdiction was advanced by the claimant and the decision of the tribunal finding that it had jurisdiction was made in favour of a putative claimant who voluntarily sought to be added as a party to the arbitration, the reverse of the usual scenario. C did not simply claim to be a party to the arbitration agreement, moreover, but rather claimed to be the true principal to the agreement, in place of the existing claimant (R). The issue was not as to the tribunal’s jurisdiction over the subject matter of the dispute, therefore, but rather as to the proper parties to the arbitration agreement.
The decision provides helpful confirmation that such a dispute is a true matter of jurisdiction which can be reviewed by the Hong Kong courts, and emphasises the fact that, where a party is joined by the HKIAC on a provisional basis prior to the constitution of the tribunal, the party contending for joinder will still (in the event of a jurisdictional challenge) need to satisfy the tribunal, and potentially also the Court, that it is party to the arbitration agreement.
The decision also provides useful guidance on the judicial treatment of new evidence and arguments on jurisdiction which were not placed before the tribunal, illustrating the readiness of the Hong Kong courts to overturn tribunal decisions on jurisdiction where relevant new facts come to light.
Finally, the case is a reminder of the important role of the burden and standard of proof in finely balanced cases where the evidence does not point decisively in one direction or the other. Ultimately, the party with the burden of proof (C) failed to satisfy the Court that her version of events was more likely than the alternative, and this was sufficient for (and required) the Court to reverse the tribunal’s decision on jurisdiction. The Court reached this decision without having heard oral evidence from the relevant witnesses, underlining the heavy reliance which will generally be placed on documentary evidence in arbitration-related cases before the Hong Kong courts (particularly where significant conflicts and inconsistencies are identified in prior witness evidence).
For further information, please contact:
Kathryn Sanger, Partner, Herbert Smith Freehills