Hong Kong – Whether A Pre-Arbitration Procedural Requirement Is Fulfilled Is A Question For The Arbitral Tribunal, Not The Courts.

It is not uncommon to have a multi-tiered dispute resolution clause in construction and commercial contracts, setting out the agreed mechanism in the event that a dispute arises between the parties. For example, parties may be required under such clause to first attempt settlement by negotiating in good faith, before going on to mediation if the negotiation fails, and finally proceeding to arbitration if mediation also fails. The idea is to promote amicable and swift resolution of disputes through alternative means, and only going to arbitration as a last resort.
 

These multi-tiered pre-arbitration procedural requirements may be complex, often involving strict notice requirements and fixed deadlines. It is not difficult to foresee that this may lead to uncertainties as to whether the pre-arbitration procedural requirements have been properly satisfied, which in turn raises the question of whether the arbitration proceedings were commenced properly.
 

In C v D (HCCT 24/2020), G Lam J (as G Lam JA then was)clarified that whether there was any non-compliance with pre-arbitration procedural requirements is a matter for the arbitral tribunal to decide. What this means is that unless otherwise agreed, it is not open for a party to then try to set aside the arbitral award at the court level by invoking section 81 of the Arbitration Ordinance (Cap. 609) (Ordinance) (which incorporates Article 34 of the UNCITRAL Model Law) on the basis that the pre-arbitration procedural requirements have not been fulfilled and challenging the arbitral tribunal’s decision on such matter.
 

This is a much welcomed reminder to pay extra attention to multi-tiered dispute resolution clauses. Parties should ensure that the pre-arbitration procedures are strictly complied with to avoid complications and to minimise the risk of the arbitral award being challenged by the disgruntled party.
 

Background
 

C v D concerned an agreed pre-arbitration procedural mechanism under the dispute resolution clause contained in a cooperation agreement between Company C and Company D. The mechanism provided that in the event of any dispute, parties “shall attempt in good faith promptly to resolve such dispute by negotiation. Either Party may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution.”  The mechanism went on to say that if the dispute cannot be resolved within 60 business days from the date of the written request for negotiation, then either party may refer the matter for settlement by arbitration at the Hong Kong International Arbitration Centre.
 

An issue then arose about whether a certain letter sent from Company D to Company C qualified as the written notice referred to in the clause, and whether upon proper construction of the clause, giving such written notice is a mandatory pre-arbitration requirement. The arbitral tribunal interpreted the first part of the clause, relating to an attempt in good faith to resolve disputes by negotiation, to be mandatory, but the second part about giving written notice to refer the disputes to the CEO as only optional. On that basis, the arbitral tribunal was satisfied that the pre-arbitration procedures were fulfilled and proceeded to make an award in favour of Company D (Award).
 

Company C then sought a declaration from the Court to set aside the Award under section 81 of the Ordinance on the basis that it was made without jurisdiction.
 

Compliance with pre-arbitration procedures is a question for the arbitral tribunal
 

After a detailed consideration of relevant academic works and international authorities, G Lam J (as he then was) held that the compliance with procedural pre-arbitration requirements is a question that should be left to be decided by the arbitral tribunal. It is a question that goes towards the admissibility of the claim, rather than the arbitral tribunal’s jurisdiction. In other words, the court has no power under section 81 of the Ordinance to re-assess the arbitral tribunal’s decision on this matter and to set aside the Award. The court clarified that in approaching applications to set aside arbitral awards, the court must confine itself to true questions of jurisdiction.
 

The court fully recognised that multi-tiered dispute resolution clauses can be complex in their operation and considered that the arbitral tribunal will usually be well-placed to determine these issues, taking into account the flexibility of the arbitral tribunal in handling such technical non-compliance, having regard to the commercial realities and practicalities. This approach also respects the parties’ autonomy to choose arbitration as their agreed means to resolve their disputes and also promotes the objectives of the Ordinance to facilitate fair and speedy resolution of disputes by arbitration.
 

Comment
 

Section 34 of the Ordinance provides that the tribunal may rule on its own jurisdiction and if it rules as a preliminary question that it has jurisdiction, any party may request the Court to decide the matter afresh. The distinction between jurisdiction of the arbitral tribunal and admissibility of the claim as held in this judgment means that failure to comply with the pre-arbitration procedure is outside the scope of section 34, leaving the losing party with no avenue for reviewing the tribunal’s decision in that respect.