Competence queried – Hong Kong court sets aside tribunal ruling on jurisdiction

In AAA v DDD [2024] HKCFI 513, Deputy High Court Judge Reyes SC considered the situation where there is a set of related contracts and two or more of the contracts have different dispute resolution clauses. The issue was whether the arbitration clause in a loan agreement (and a later amendment agreement) conferred jurisdiction on the tribunal formed under it, to determine related disputes arising out of a promissory note which contained its own arbitration agreement.

The lender wired monies to company X pursuant to a loan agreement and the borrower issued a promissory note signed by the borrower and the guarantors to the lender. The borrower undertook to repay the principal at a specified interest rate and the guarantors jointly and severally guaranteed the borrower’s payment obligation under the promissory note.

The loan agreement was governed by Hong Kong law and contained an HKIAC arbitration clause providing for three arbitrators. The promissory note contained a dispute resolution clause according to which, if the parties were unable to settle any dispute by negotiations arising out of the note within 30 days of notification, the dispute would be submitted to the HKIAC and settled by arbitration in Hong Kong. The number of arbitrators were not stated.  There were also various share charge agreements governed by foreign law.

The borrower failed to repay the principal amount upon demand by the lender. The lender as claimant then commenced an HKIAC arbitration against the borrower and the guarantors. The respondents complained that the tribunal lacked jurisdiction over the lender’s claims against the guarantors based on the promissory note.

The tribunal took the view that, by exhibiting a copy of the promissory note to the notice of arbitration, the lender must have been taken to have impliedly invoked the dispute resolution clause in the promissory note as well. The tribunal therefore dismissed the respondents’ jurisdictional challenge.

Competence-competence

Under the principle of competence-competence, an arbitral tribunal has the competence to rule on whether it has jurisdiction (competence) to hear a dispute. As Reyes DHCJ observed, an arbitral tribunal’s decision on jurisdiction is not final and may be challenged de novo by an aggrieved party within 30 days from the date of notice of the ruling under section 34(1) of the Arbitration Ordinance, which incorporates Article 16(3) of the UNCITRAL Model Law.

Ryes J said he doubted “that the mere reference to a document and the exhibition of the same to a request for arbitration, would be sufficient to bring home to any one’s mind that the arbitration agreement in the document was being invoked as the basis for arbitration”. He said that clear words were needed to indicate that a dispute is being brought to arbitration “under a specific provision in a particular contract”. Nothing was stated in the notice of arbitration about the dispute resolution clause in the promissory note and therefore, on its face, the notice of arbitration “was only invoking the arbitration clause in the Loan and Amendment Agreements.”

Reyes J said his real difficulty with the tribunal’s position on its implicit appointment under the promissory note was that HKIAC’s correspondence with the tribunal and the parties only acknowledged the tribunal’s appointment under the arbitration clause in the loan agreements with no reference to the tribunal also being appointed under the dispute resolution clause in the promissory note.

There were significant differences between the dispute resolution clauses in the loan agreement and the promissory note. The latter imposed a 30-day negotiation period before arbitration, but this was missing in the former. Although both clauses stipulated HKIAC arbitration, the former specified there should be three arbitrators whilst in the latter, the number was not specified. As such, the clauses could not “be treated in a broad-brush manner as essentially the same”. In deciding that it did have jurisdiction, “the Tribunal in effect deprived the parties of a potential benefit of the dispute resolution clause that they had bargained for in the Promissory Note”.

Conflicting clauses

The court found that the English Court of Appeal decision in AmTrust Europe Ltd v Trust Risk Group SpA [2015] EWCA 437 offered a pragmatic way forward in unpicking issues arising from competing forum choices in arbitration agreements where there are several different contracts.

There can be no initial presumption that the parties intended all their disputes to be resolved in a single forum, if there are several contracts in play with different dispute resolution clauses. Instead, one must construe each contract to map out which disputes must have been intended to be covered by the dispute resolution clause of any given contract. In deciding whether a particular forum has jurisdiction to deal with an intertwined issue or dispute between the parties, one must locate the “centre of gravity” or the issue or dispute, assessing which resolution clause is “closer” to the issue or dispute.

A possible test for determining whether an intertwined or overlapping issue falls within or outside the jurisdiction would be to look at the “ultimate relief” sought in connection with the issue. If granting the ultimate relief being sought fell within the scope of the arbitration agreement under which a tribunal was appointed, the issue could be fairly regarded as coming within the tribunal’s jurisdiction “as one which reasonably had to be answered by the tribunal as a stepping stone as to whether the relief sought should be granted.”

Here, the question of whether the guarantors were liable under the promissory note fell within the “centre of gravity” of the dispute resolution clause in the promissory note and was therefore outside the tribunal’s jurisdiction.

The court made an order quashing the tribunal’s decision on jurisdiction and declaring the tribunal lacked jurisdiction to decide claims for payment under the promissory note.

Takeaway

Parties in transaction documents should endeavour to have consistent dispute resolution clauses in order to save time and costs of having all disputes arising out of the same transaction to be resolved in a single forum.  This also avoids having inconsistent decisions.   In this case, Reyes DHCJ observed that in an arbitration under the promissory note, a party might invoke issue estoppel arising from the tribunal's findings of fact on the guarantors' liability under the loan agreement.

If arbitration is desired as the method of dispute resolution, the arbitration agreements should be compatible so as to allow for a single arbitration arising under multiple contracts and/or consolidation of the two arbitrations. 

Under most institutional rules (e.g. Articles 28(c) and 29 of the HKIAC Administered Arbitration Rules), claims arising out of or in connection with more than one contract may be made in a single arbitration and two or more arbitrations may be consolidated, provided that: (a) a common question of law or fact arises under each arbitration agreement giving rise to the arbitration; and (b) the rights to relief claimed are in respect of, or arise out of, the same transaction or a series of related transactions; and (c) the arbitration agreements under which those claims are made are compatible.

If two arbitration agreements contain differences in the appointment of the tribunal in a multi-party context, then it is unlikely that the arbitration agreements are compatible. 

If there are different dispute resolution clauses in the transaction documents, as the decision makes clear, a usual starting point on the approach to conflicting forum clauses can be found in Lord Hoffman’s observations in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40. This should “start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal”.

However, that is only a presumption which is difficult to apply where there are multiple different, but related, contracts, which all have clauses providing for different forums to decide disputes arising out of them. As Reyes DHCJ commented, in such a scenario, it would seem artificial to maintain the parties intended there to be a single forum to decide all disputes. A deeper analysis is required which is where the “centre of gravity” concept may be helpful.

Authored by James Kwan, Nigel Sharman.