Hong Kong – Did Arbitral Tribunal Lack Jurisdiction Due To Non-fulfilment Of Condition Precedent To Negotiate?

13 February, 2020

 

In the recent case, HZ Capital International Ltd v China Vocational Education Ltd & Ors, HCCT 48/2016, four of the Respondents sought to set aside an Order by which the Applicant had been granted leave to enforce as a judgment an arbitration award made in Hong Kong (Enforcement Order). At the hearing, Counsel for the Applicant informed the Court that the Applicant would no longer advance any argument to oppose the Summons, but had no instructions to consent to the order sought. It was therefore necessary for the Respondents to satisfy the Court that the Order ought to be set aside.

 

The underlying dispute related to a share transfer agreement (C2 Agreement). An arbitration award was made under which the Respondents were ordered to pay the Applicant US$6 million plus US$7.7 million interest and arbitration costs of HK$2.1 million, upon lawful rescission of the C2 Agreement occasioned by breaches of it by the Respondents (Award). None of the Respondents had taken any step to apply to set aside the award, but the Court accepted that they had a “choice of remedies” and were not precluded from applying to set aside the Enforcement Order by the mere fact that they had not applied to set aside the Award in the first place. Further, the Court accepted that the determination of the Court as to jurisdiction of the arbitral tribunal is a decision de novo.   

 

Grounds of Application

 

The Respondents sought to set aside the Enforcement Order on the following grounds:

 

• Pursuant to sections 86(1)(b) and/or 86(2)(c) of the Arbitration Ordinance, Cap ‍609 (Ordinance) in that the Tribunal had no jurisdiction to hear the dispute, as the condition precedent with respect to mandatory negotiation prescribed by Clause ‍13.1.1 of the C2 ‍Agreement had not been fulfilled (Jurisdiction Issue).
• Pursuant to sections 86(2)(b), 86(2)(c) and/or section ‍4(2) of Schedule ‍2 of the Ordinance in that by the refusal of the Tribunal to admit evidence (particularly two electronic mails) with respect to the Jurisdiction Issue, there were serious irregularities causing substantial prejudice to the Respondents.

 

Jurisdiction issue (non-fulfillment of condition precedent)

 

The C2 Agreement contained a clause stating that  in the event of any dispute arising out of or relating to the agreement or the interpretation, breach, termination or validity thereof, the partiesshall first attempt to resolve the dispute  by consultation among the parties and such consultation shall begin within 7 days after one party has delivered to the other party a written request for such consultation and that if within 30 days following such request the dispute cannot be resolved, it shall be submitted to arbitration upon the request of a party to the other parties. The Applicant therefore argued that a condition precedent pertinent to a mandatory alternative dispute resolution procedure by way of “negotiation” (Mandatory Negotiation Tier), as prescribed by the C2 Agreement, had not been fulfilled and hence the Tribunal lacked jurisdiction.

 

The Court held that although the “consultation” prescribed by the C2 Agreement was not described as a “condition precedent”, it was couched in sufficiently certain and objective terms to be enforced as such. The Court therefore went on to decide “de novo” whether the condition precedent was fulfilled before the Applicant served its Notice of Arbitration.

 

The Court said that it was remarkable that in the First Answer to the Notice of Arbitration, the Respondents raised two other grounds to challenge jurisdiction, namely that the C2 Agreement was not signed by the Respondents and that it involved investment by way of VIE, which contravened PRC laws and regulations thereby rendering the arbitration clause unenforceable and remarkable that they did not raise issue as to the “condition precedent” prescribed by  the C2 Agreement until service of their Defence. Further, the plea in the Defence (that prior to receiving the Notice of Arbitration the Respondents had not received any Request for Negotiation) was different to what was being argued now (that there had been retrospective signing of the Request Letter).

 

A close examination of the series of emails between the parties showed that they were bargaining at arm’s length with the assistance of their respective lawyers in settling the terms of the Request Letter and Refusal Letter, which were intended to be backdated in order to “abridge time” for commencement of arbitration. The Court found that the Respondents had unequivocally waived the right to insist upon strict compliance with the condition precedent pertinent to the Mandatory Negotiation Tier. Alternatively, the series of emails, the Court said, afforded compelling evidence in writing as to a variation of the arbitration provision as between the Applicant and the Respondents. In this connection, a clause in the C2 Agreement provided that any term of the agreement may be amended and observance of any term waived with written consent. It also provided that provisions of the Agreement shall be deemed to be severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions of it.

 

The Court said that the arbitration provision in the C2 Agreement was to be considered as a separate agreement. By virtue of the severability of the C2 Agreement, the variation of the relevant clause as between the Applicant and the Respondents, which was evidenced in the series of emails, was binding on the Respondents and it followed that they could not be heard to insist upon the condition precedent or the Mandatory Negotiation Tier.

 

Accordingly, the Respondents could not be heard to challenge jurisdiction of the Tribunal on the ground of the condition precedent. That was sufficient to dispose of the application, but the Court went on to consider the other ground of the application.

 

Serious irregularities causing substantial prejudice  

 

This ground was premised upon the Tribunal’s ruling disallowing the Respondents to rely on the series of emails in cross-examination. Primarily, the ruling of the Tribunal was made on the ground that (a) ‍the emails were not disclosed notwithstanding that leave had been granted for the parties to supplement documentary evidence; (b) ‍the non-disclosure appeared to be a tactical decision on the Respondents’ part. The Court said that no valid explanation was proffered by the Respondents before the Tribunal for the non-disclosure and/or late introduction of the emails and in light of the procedural history, the Tribunal’s ruling could not be faulted. It said it was not possible or necessary, for the Court to second- guess what findings the Tribunal would have made if it had the benefit of the series of emails. However, on the face of the evidence before the Tribunal, the findings did not amount to “serious irregularities causing substantial prejudice”. The Respondents only had themselves to blame for not making disclosure of the series of emails in good time despite the ample opportunities afforded by the Tribunal. In so far as the non-disclosure was ‍caused by inexperience of the Respondents’ counsel, the remedy lay elsewhere.

 

Comments

 

The outcome of this case is unsurprising, especially when the Applicant’s Counsel did not advance any argument in opposition. The judgment seems to suggest that when an arbitration clause is severable from the rest of the agreement either by express provision or by law (e.g. by virtue of the principle of severability of arbitration agreement), the requirement of varying an agreement only by written consent shall not be applicable to that arbitration clause. If the parties intend otherwise, they should suitably amend the wording of the requirement for variation of their agreement.