Introduction
In the dispute resolution clause of an agreement, parties often contemplate negotiation or other amicable forms of settlement of the dispute as a precondition for referring the dispute to arbitration. In case of failure to comply with these preconditions, an important question of law arises as to whether such non-compliance is an issue of jurisdiction or one of admissibility. Though the two may seem similar, their distinction has relevant implications. In various jurisdictions like England, Switzerland, United States and as also enunciated in UNCITRAL Model Law, while a challenge to jurisdiction forms a ground for appeal, the decision of the arbitral tribunal on the question of admissibility is decisive and is not a ground for appeal. Recently, in C v D, the Hong Kong Court of First Instance (HKCFI) gave a ruling on the said issue.
In this article, the authors attempt to accentuate the judgment of the court; highlight the distinction between the question of jurisdiction and admissibility by relying on judicial decisions from different jurisdictions; and lastly, discern the nascent jurisprudence in India.
Brief Facts
Company C (“Plaintiff”) and Company D (“Defendant”) entered into an agreement to build and develop a satellite that was to continue till the lifetime of the satellite or until repudiation in accordance with the agreement. Whilst the laws of Hong Kong were the governing law, the parties also agreed to certain pre-conditions prior to making a reference to arbitration.
The dispute resolution clause (Clause 14.2) stated that in the event of any dispute “the Parties shall attempt in good faith promptly to resolve such disputes 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 arbitration clause (Clause 14.3) further stated that “If any dispute cannot be resolved amicably within sixty (60) Business days of the date of a Party’s request in writing for such negotiation, or such other time period as may be agreed, then such dispute shall be referred by either Party for settlement exclusively and finally by arbitration in Hong Kong…”
A dispute arose between the parties and on December 24, 2018, the CEO of the defendant issued a letter to the Chairman of the Board of Directors (and not the CEO) of the plaintiff expressing material breach on part of the plaintiff, and that it is issuing the letter in a final effort to solve the dispute and further avoid any legal proceedings. There was no further correspondence.
Thereafter, the matter was referred to arbitration. The arbitral tribunal rejected the objection raised by the plaintiff on the issue of jurisdiction and held that while it was mandatory for the parties to attempt to resolve the dispute in good faith, referring the dispute to the CEO was optional. Consequently, the arbitral tribunal held that the defendant had fulfilled the pre-condition in Clause 14.3 of requesting in writing for negotiation and is entitled to damages. Pertinently, it was against this interpretation by the arbitral tribunal that Company C had preferred an appeal contending that the partial award was made without jurisdiction and is liable to be set aside under Article 34(2)(a)(i) and (iv) of UNCITRAL Model Law.
The court was faced with two important questions: first, whether non-compliance with the prerequisites in the dispute resolution clause constitutes an issue of admissibility of a claim or an issue of jurisdiction of the tribunal; and second, whether that the question of non-compliance falls within the purview of Section 81 of the Arbitration Ordinance, the law governing arbitration in Hong Kong. Section 81 prescribes the grounds on which application for setting aside an arbitral award can be made. It is only when the first question was answered as a question of jurisdiction will the court interpret the agreement and decide on its compliance.
The Court’s Judgment
Article 34 of the UNCITRAL Model Law which is incorporated as Section 81 of the Arbitration Ordinance sets out the grounds on which an arbitral award may be set aside. The objective is to limit the interference in the award by the courts. An award may be set aside under Article 34(2)(a)(i) of the model law when the award deals with issues not submitted to arbitration and under Article 34(2)(a)(iv) when the arbitration procedure was not in accordance with the arbitration agreement.
The court relied on foreign cases and prominent academic work to reach its decision. There was an overwhelming consensus among the academic scholars that the non-fulfillment of precondition to arbitration is an issue of admissibility and not of jurisdiction. The issue of admissibility concerns whether the arbitral tribunal should exercise its power to judge the claim on merits. However, if the tribunal lacks jurisdiction, it cannot proceed with issuing an award on merits. The challenge to jurisdiction is concerned with the power of the tribunal to decide and the challenge to admissibility interrogates “whether this is a claim which can be properly brought” before the tribunal.
Gary Born, in his International Commercial Arbitration, stated a better approach would be to presume that the pre-arbitration procedural requirement is an issue of admissibility unless the parties have otherwise agreed. The test to ascertain whether the issue pertains to jurisdiction or admissibility would be the inquiry where if the reason for the challenge is that “the claim could not be brought to the particular forum seized, the issue is ordinarily one of jurisdiction”, however, if the issue is that “the claim should not be heard at all (or at least not yet), the issue is ordinarily one of admissibility.”
Plaintiff relied on Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd (Emirates Case) and HZ Capital International Ltd v China Vocational Education Co Ltd (HZ Capital Case) to contend that non-fulfillment of a precondition to arbitration is an issue of jurisdiction. The court distinguished these cases and observed that the distinction of admissibility and jurisdiction was not raised or debated upon by the parties in the Emirates case and HZ Capital case, and hence, the judgments did not buttress the argument of the Plaintiff.
The court opined that the case of Plaintiff was not related to the lack of consent to arbitration, rather only limited to claiming that prerequisites to arbitration were not followed. Therefore, the court concluded that complying with the dispute resolution clause is an issue of admissibility and not jurisdiction. Accordingly, it was held that the said question does not fall under Article 34(2)(a)(i) or (iv) of UNCITRAL Model Law, subsequently, failing to fall under Section 81 of the Arbitration Ordinance.
Birds Eye View of Other Jurisdictions
The view of the HKCFI in C v D was affirmed in Kinli Civil Engineering v Geotech Engineering wherein the HKCFI was concerned with the usage of ‘may’ as opposed to ‘shall’ or ‘must’ in the arbitration agreement. Kinli had challenged the application for stay in litigation proceeding in favour of arbitration on the ground that firstly, use of “may” in dispute resolution clause show that arbitration was not mandatory and secondly, the precondition in the dispute resolution clause to the effect that arbitration cannot be commenced til the contract is executed has not been met. The court held that in absence of clear wording, the presumption is in favour of arbitration being mandatory. Further, granting a stay on litigation proceedings, the court held that a matter pertaining to the stage at which an arbitration can be commenced is for the tribunal to decide and the court cannot interdict when the prima facie existence of an arbitration agreement is established.
In BG Group v Republic of Argentina, the investment treaty between the United Kingdom and Argentina provided that to resolve the dispute, the party has to refer the dispute to the local court of another party and can thereafter prefer arbitration when the court has not decided within 18 months of reference of the dispute to it. As against the actions taken by Argentina during the economic collapse in 2001, BG Group initiated an arbitration proceeding seated in Washington DC. After the arbitral tribunal gave an award, the Republic of Argentina sought to set aside the award by arguing that the arbitral tribunal lacked jurisdiction as BG Group has not complied with the requirement of instituting litigation under the treaty. Settling the position, the United States Supreme Court ruled that the said issue is of admissibility and not of jurisdiction since the question is “when the contractual duty to arbitrate arises, not whether there is a contractual duty to arbitrate at all”.
The Singapore Court of Appeal (SGCA) distinguished between admissibility and jurisdiction in BBA v BZA by applying the ‘tribunal v. claim’ test. The test asks at whom the challenge is targeted. When the objection is essentially at tribunal due to some defect in consent to arbitrate, it is a jurisdictional challenge. However, when the objection is that the claim should not be raised or is defective, the challenge is of admissibility. The SGCA held that the issue of whether the claim is time-barred or not is an issue of admissibility and not jurisdiction since it questions raising the said claim rather than questioning the consent to arbitrate. In BTN v BTP, the court ruled that the issue, whether the tribunal should arbitrate on a claim as it is res judicata, is an admissibility issue that the court cannot review on merit.
A similar approach has been adopted by the England and Wales High Court (Commercial Court) in the Republic of Sierra Leone v SL Mining Ltd, wherein the court, while refusing to set aside an arbitral award, held that failure to comply with certain pre-arbitration conditions is an issue of admissibility rather than of jurisdiction.
Nascent Jurisprudence in India
The two-judge bench of the Supreme Court of India in BSNL v Nortel Networks India Private Limited, relying upon BBA v BZA held that the question of limitation is one of admissibility, which must be decided by the arbitral tribunal, and not of jurisdiction. The court applied the ‘tribunal v. claim’ test which says that if the objection is aimed at the tribunal, the issue is of jurisdiction, but, if the objection is aimed at the claim, the issue is of admissibility. However, since the judgment was not directly concerned with the distinction between a jurisdictional or admissibility challenge, it is an indicator of the inadequate Indian jurisprudence on the subject matter. Given this inadequacy and the position of law in other jurisdictions, it is hoped that the Supreme Court will mirror the approach adopted in other jurisdictions and not take two steps backward.
Conclusion
With parties prescribing preconditions to arbitration in dispute settlement or escalation clause of the agreement, the question of admissibility and jurisdiction is becoming increasingly pertinent. The Chartered Institute of Arbitrators, one of the leading arbitration institutions in the world, has also, in the Preamble, §6 of its International Arbitration Practice Guideline on Jurisdictional Challenges, cautioned arbitrators to distinguish between a challenge to jurisdiction and admissibility. The Guidelines lay down the best practices for international commercial arbitration. To this issue, the ‘tribunal v. claim’ test offers a useful guide. The test asks the judge to ascertain the target of the objection to determine whether the issue is of admissibility or of jurisdiction and subsequently, determine whether an application to set aside the award can be allowed on the raised grounds.
A clear inclination of courts towards considering the question of compliance with preconditions set out in dispute settlement clause as that of admissibility rather than of jurisdiction, by applying ‘tribunal v. claim’, across various jurisdictions, is visible. The decision of the tribunal on the issue of admissibility is considered final. Therefore, by delimiting the grounds for challenge, this trend furthers the principle of least judicial intervention which suggests courts of law to intervene with the arbitral award to the minimum extent possible. Perceiving the arbitration law in India, an existing lacuna on the said issue can be found. However, given the judgments in above-discussed jurisdictions and that in BSNL v Nortel Networks India Pvt Ltd, it is hoped that when the said issue is brought before the Supreme Court of India, it will decide the question of non-compliance as one of admissibility and not jurisdiction. Such ruling would be in consonance with pro-arbitration approach and “overarching” principle of least intervention which is enunciated in Arbitration and Conciliation Act, 1996.