Hong Kong court upholds jurisdiction challenge due to incompatible arbitration agreements

The Hong Kong Court of First Instance has set aside a jurisdictional award in an HKIAC arbitration under multiple contracts because the arbitration agreements provided for different appointment procedures and the rights of the parties challenging jurisdiction to designate an arbitrator had therefore been infringed (SYL and LBL v. GIF [2024] HKCFI 1324).

This is a topical decision because the recently announced 2024 HKIAC Rules (effective from 1 June 2024) include new language providing for the waiver of rights to designate an arbitrator in single arbitrations commenced under multiple contracts, although it does not appear that this would have changed the result in this case (as discussed further below).

Background

The dispute arose out of a loan agreement between a lender and two borrowers, a security deed between the lender and the borrowers (first security deed) and a security deed between the lender, one of the borrowers and two additional security providers (second security deed).

The lender commenced a single arbitration under multiple contracts pursuant to Article 29 of the 2018 HKIAC Rules and nominated an arbitrator whose appointment was ultimately approved by the HKIAC.

The HKIAC invited the borrowers to jointly designate an arbitrator with the additional security providers.  The borrowers (who objected to having a single arbitration under multiple contracts and reserved the right to challenge the tribunal's jurisdiction) designated a second arbitrator, while the additional security providers did not respond to the notice of arbitration or designate an arbitrator. 

Because there was no joint designation of an arbitrator by the borrowers and the additional security providers, the HKIAC decided not to appoint the borrowers' designated arbitrator and proceeded to appoint someone else as the second arbitrator.   

The borrowers challenged the jurisdiction of the tribunal shortly after its constitution.  The tribunal determined the challenge as a preliminary question and dismissed it in an interim award on jurisdiction.

The borrowers applied to the court to set aside the award for lack of jurisdiction under section 81 of the Hong Kong Arbitration Ordinance (giving effect to Article 34 of the UNCITRAL Model Law), on the basis that the arbitration agreements were incompatible and the composition of the tribunal was defective.

Compatibility issue

Article 29 of the HKIAC Rules provides that a single arbitration may be commenced under multiple contracts only if (i) a single question of law or fact arises under each arbitration agreement, (ii) the rights to relief claimed are in respect of the same transaction or a series of related transactions, and (iii) the arbitration agreements under which the claims are made are compatible (these requirements are cumulative). 

The loan agreement contained an HKIAC arbitration clause which provided for one arbitrator to be appointed by the borrowers and one arbitrator to be appointed by the lender.  This provision was stated to apply "mutatis mutandis" to both the first security deed (between the lender and the borrowers) and the second security deed (between the lender, one of the borrowers and the additional security providers).  In the case of each of the security deeds, the meaning of "mutatis mutandis" in relation to the appointment of arbitrators had several possible permutations.

The key question for the court to determine was whether the arbitration agreements in the first security deed and the second security deed were compatible with that in the loan agreement from the perspective of the appointment of arbitrators.

Decision

The court considered the position in relation to the first security deed to be "relatively more straightforward".  This was because, on any of the available interpretations of the arbitration agreement in the first security deed, the borrowers (or at least one of the borrowers, whose views on the choice of an arbitrator were the same as the other borrower) would have the right to designate an arbitrator without the need for consultation with or consent by any other parties. 

Under the second security deed, however, there were "significant differences and repercussions" arising from the various possible interpretations of the meaning of "mutatis mutandis" with regard to appointment of arbitrators.  The court considered the "more likely and commercially sensible" and "most natural" interpretation to be that the parties given the right to designate an arbitrator were the borrower which was party to the second security deed and the additional security providers, to the exclusion of the other borrower (which was not party to the second security deed). 

This meant there was a clash in the appointment procedures in (i) the loan agreement and the first security deed (under which the borrowers would have the right to designate an arbitrator and the additional security providers would have no say) and (ii) the second security deed (under which one of the borrowers and the additional security providers would have the right to designate an arbitrator, and the other borrower would have no say). 

The court considered this discrepancy to render the arbitration agreements incompatible because:

• It would infringe party autonomy to impose on the parties a single arbitration when the underlying arbitration agreements adopted different appointment procedures, because this "offends the cornerstone of modern international arbitration, namely, the primacy of consent";

• It would also infringe the parties' contractual rights, since the borrowers had bargained for and obtained a right to designate an arbitrator in any arbitration under the loan agreement and the first security deed which was not shared with the additional security providers, as would be the case under the second security deed.  The right to designate an arbitrator "cannot be curtailed by a unilateral decision on the part of a counterparty… to commence a single arbitration based on multiple contracts."  The deprivation of the borrowers' contractual right was in and of itself prejudice and "a serious issue impacting upon the integrity and sanctity" of the arbitration; and

• There were valid concerns as to whether the lender might gain an unfair advantage in the arbitration by refusing the borrowers a right to designate an arbitrator of their choice.

The court rejected arguments by the lenders that:

• The borrowers did not enjoy an absolute right of appointment under the HKIAC Rules.  Whilst true as a matter of principle, this did not mean that the borrowers' express right to designate an arbitrator could be ignored;

• The borrowers had agreed to HKIAC arbitration and the HKIAC had acted within its powers under the HKIAC Rules.  This begged the question of whether the arbitration agreements were compatible in the first place.  It was only if they were that a single arbitration under multiple contracts could proceed;

• The three contracts were interrelated, such that the parties could be taken to expect that disputes would be resolved by the same dispute resolution mechanism.  The risk of fragmentation of proceedings and inconsistent awards could not override a party's contractual rights in relation to appointment, the existence of three separate arbitration agreements suggested the parties did not agree to a "one stop shop", and the fact the contracts related to the same transaction did not necessarily render the arbitration agreements compatible; 

• Article 8.2(a) of the HKIAC Rules provided that, in multi-party scenarios, a group of respondents would designate an arbitrator.  The lender's reliance on this provision was "misplaced" because the core question was whether the threshold requirement of compatibility under Article 29 had been satisfied (which it had not); and

• The borrowers should be taken to have waived their right to designate their arbitrator in light of Article 28.8 of the HKIAC Rules, under which all parties to consolidated arbitrations are deemed to have waived their rights to designate an arbitrator.  This provision related to consolidation, not a single arbitration under multiple contracts, and in any event, the waiver argument did not provide a valid answer to the threshold requirement as to whether the arbitration agreements were compatible. 

Because the arbitration agreements "contain[ed] differences as to a fundamental aspect of how the [arbitration] should be conducted", therefore, they were not compatible within the meaning of Article 29 of the HKIAC Rules.  It followed that the composition of the tribunal was also defective, because the tribunal purportedly constituted under Article 29 was not composed in accordance with the parties' agreement.

Comment

This decision comes only a few weeks after the HKIAC introduced a new provision which seeks to avoid unequal outcomes in the designation and appointment of arbitrators in single arbitrations commenced under multiple contracts (as we reported here).

Article 29.2 of the 2024 HKIAC Rules provides that, where the HKIAC determines that a single arbitration under multiple contracts has been properly commenced, the parties will be deemed to have waived their rights to designate an arbitrator, and the HKIAC will appoint the tribunal with or without regard to any party's designation (Article 29.2).  This provision ensures consistency with the rules on consolidation of arbitrations, which (as mentioned in the decision) already included such language (see Article 28.8).

It is clear from the court's reasoning that the new Article 29.2 would not have changed the result in the present case (even if it had applied), because the compatibility of the arbitration agreements is a threshold issue which must be satisfied in order for a single arbitration under multiple contracts to have been validly commenced in the first place. 

This case nevertheless provides a good example of the scope for jurisdictional and due process disputes where arbitration agreements have not been carefully drafted with single arbitrations under multiple contracts in mind.  It therefore vindicates the adoption by the HKIAC of the new Article 29.2 language seeking to minimise such disputes, and serves as a reminder of the importance of anticipating and addressing such issues at the drafting stage.