HKIAC publishes guidance on multi-party, multi-contract issues

The HKIAC has published a new practice note addressing multi-party, multi-contract issues under the 2018 and 2024 HKIAC Administered Arbitration Rules (HKIAC Rules).

The practice note primarily addresses the circumstances in which arbitration agreements will (and will not) be deemed "compatible" for the purposes of commencing a single arbitration under multiple contracts or consolidating multiple arbitrations.  Guidance on the general approach of the HKIAC in assessing compatibility is provided, along with six real-life examples of compatible and incompatible arbitration agreements (as determined by the HKIAC), plus drafting recommendations.

The approach of the HKIAC to arbitrator appointments where a single arbitration has been validly commenced under multiple contracts, or the HKIAC has granted consolidation of multiple arbitrations, is also addressed.

The new practice note complements the HKIAC's existing practice notes on consolidation of arbitrations (published in 2016) and appointment of arbitrators (published in 2021), and provides helpful guidance to parties and lawyers after two recent cases in which the Hong Kong courts found that HKIAC tribunals did not have jurisdiction because of incompatible arbitration agreements (discussed further below).

When does compatibility of arbitration agreements come into play?

Where disputes arise in multi-party, multi-contract scenarios, the HKIAC Rules allow parties to (i) commence a single arbitration under multiple contracts (Article 29) or (ii) commence multiple arbitrations and apply for them to be consolidated (Article 28), provided that certain requirements are met.

One of the requirements (with limited exceptions in the case of consolidation) is that the relevant arbitration agreements be compatible (it is also necessary for there to be a common question of law or fact, and the rights to relief claimed must be in respect of, or arise out of, the same transaction or a series of related transactions).

Consolidation is also possible where the parties agree or all of the claims in the arbitrations are made under the same arbitration agreement, without the need for compatible arbitration agreements or the other requirements mentioned above.  Such cases are less common in practice, however, and compatible arbitration agreements (plus the other requirements mentioned above) will therefore need to be demonstrated in most consolidation applications (and all single arbitrations commenced under multiple contracts).

Who decides on compatibility?

The HKIAC is responsible for deciding (i) whether a single arbitration under multiple contracts has been validly commenced under Article 29, such that the arbitration may proceed (which it will do on a prima facie basis, pursuant to Article 19.5), and (ii) whether consolidation of multiple arbitrations should be permitted under Article 28. 

In both cases, therefore, the HKIAC will assess the compatibility of the relevant arbitration agreements in the first instance.  This assessment will be carried out by the Proceedings Committee of the HKIAC (of which Herbert Smith Freehills partner Helen Tang has been a member since 2024).

Compatibility may also fall to be assessed at a later stage by the tribunal or relevant courts in determining questions relating to the tribunal's jurisdiction (as happened in the recent Hong Kong court decisions discussed further below).

How is compatibility assessed by the HKIAC?

The practice note explains that arbitration agreements "need not be identical" in order to be compatible.  Any differences, however, "must be surmountable by the parties, the tribunal and/or HKIAC".  In assessing this, the HKIAC will adopt a "pragmatic approach", considering "all relevant factors" and recognising that the parties have generally agreed to the possibility of consolidation or a single arbitration under multiple contracts by adopting the HKIAC Rules.

Taking account of the differences in the arbitration agreements, the HKIAC will consider (for example) whether permitting a single set of proceedings would: (i) be "practically feasible and procedurally efficient"; (ii) undermine the consent of the parties to the possibility of a single set of proceedings; or (iii) leave the award open to challenge in the future.

In what situations has the HKIAC found arbitration agreements to be compatible?

The HKIAC has found non-identical arbitration agreements to be compatible despite differences in the:

• Governing law of the arbitration agreements.  In one case where the governing law of the arbitration agreements was English law and Hong Kong law, the two systems of law were deemed to be "sufficiently aligned" to make a single arbitration practical. 
• Power to designate the second co-arbitrator.  In two cases where the arbitration agreements provided different respondents with the power to designate the second co-arbitrator, compatibility was established on the basis that (i) in the first case, all the respondents jointly designated the same co-arbitrator, and (ii) in the second case, the respondents (who were not participating in the proceedings) were aligned and there was a high likelihood that they would have designated the same co-arbitrator if they had been participating.  The key factor in both cases therefore appears to have been the effective alignment between the respondents, and the result could presumably have been different in a scenario where the respondents were not aligned.

In what situations has the HKIAC found arbitration agreements to be incompatible?

The HKIAC has found arbitration agreements to be incompatible due to differences as to the:

• Number of arbitrators.  Where one contract provided for a sole arbitrator and the other two provided for three arbitrators, the arbitration agreements were "clearly incompatible".
• Language of the arbitration.  Contracts providing for Chinese and English to be the languages of the arbitration respectively could potentially be reconciled by running a single proceeding bilingually, but the increased cost and the reduction in the pool of qualified arbitrators which this would entail meant the agreements were incompatible.
• Selection of the presiding arbitrator.  Where the presiding arbitrator would be selected by the HKIAC under two contracts and by the co-arbitrators pursuant to the third contract, the agreements were incompatible because a single proceeding might have been contrary to the agreed mechanism for the selection of the presiding arbitrator in one or more of the contracts.

How can the prospects of compatibility be maximised?

Where a transaction involves more than one contract and the parties wish to maximise the prospects of the arbitration agreements being determined to be compatible, the practice note advises parties to:

• Provide for the same seat, number of arbitrators, law governing the arbitration agreement and language of arbitration in each agreement.
• Avoid stating in the contract that specific parties shall have rights to designate arbitrators (which may give rise to disputes about compatibility), and instead apply the appointment mechanism under the HKIAC Rules.

The practice note encourages parties to adopt the HKIAC's model arbitration clause for these purposes.

What is the HKIAC's approach to arbitrator appointments in multi-contract scenarios?

If the HKIAC permits a single arbitration under multiple contracts to proceed, or decides to consolidate multiple arbitrations, it has the power to appoint the tribunal "with or without regard to any party's designation" of an arbitrator (Articles 28.8 and 29.2).

In exercising this power, the practice note indicates that the HKIAC will adopt the following approach:

• Observing "the primacy of party autonomy", the HKIAC will appoint the arbitrators designated by the parties, unless "justifiable exceptions" are required to ensure the integrity of the proceedings and equal treatment of the parties. 
• Where the parties to the multiple arbitrations or contracts (as appropriate) are identical, the HKIAC's default approach is to appoint the arbitrator or arbitrators designated by the parties (assuming, in the case of consolidation, that arbitrators have already been designated and the parties wish to maintain their designations).
• Where the parties to the multiple arbitrations or contracts (as appropriate) are not identical but parties on the same side all agree on the same arbitrator, the HKIAC's default approach is to appoint that arbitrator.
• Where the parties to the multiple arbitrations or contracts (as appropriate) are not identical and parties on the same side do not agree on the same arbitrator, the HKIAC will appoint another candidate, taking account of the parties' views and proposed criteria for the appointment.
• If there are non-participating parties, the HKIAC will invite the claimant(s) and the respondent(s) respectively to designate an arbitrator.  Where a joint designation is made, the HKIAC's default approach is to appoint that arbitrator.  If one side fails to make a joint designation (due to non-participation or any other reason), the HKIAC will make the appointment, taking account of the parties' views and proposed criteria for the appointment.  In most cases, this will result in the appointment of the candidate designated by the participating parties.

What are the lessons from the recent Hong Kong court decisions?

The publication of the new practice note follows two Hong Kong court decisions handed down in 2024 which illustrate some of the risks (including to the enforceability of awards) in relation to incompatible arbitration agreements:

• In SYL and LBL v. GIF [2024] HKCFI 1324 (reported here), the Hong Kong Court of First Instance set aside a jurisdictional award in an HKIAC arbitration commenced under multiple contracts because there was a clash between the arbitrator appointment procedures which had deprived certain respondents of their contractually agreed appointment rights, rendering the arbitration agreements incompatible.
• In AAA, BBB, CCC v. DDD [2024] HKCFI 513 (reported here), the court reversed the decision of an HKIAC tribunal constituted under a loan agreement that it had jurisdiction over disputes under a related promissory note.  Although the decision did not refer expressly to the concept of compatibility, one of the reasons for the court's ruling was that the arbitration agreements had "significant" differences (the promissory note imposed a 30-day negotiation period prior to arbitration, whereas the loan agreement did not; and the promissory note did not specify the number of arbitrators, whereas the loan agreement specified that there should be three arbitrators) and constituted distinct, non-fungible regimes for the resolution of disputes.  Accordingly, the appointment and confirmation of the tribunal under one agreement could not be treated as tantamount to appointment and confirmation under the other agreement, merely because both specified HKIAC arbitration. 

Both decisions underscore the HKIAC's recommendation that differences in the number of arbitrators and appointment of arbitrators should be avoided (and may be difficult to surmount) if parties wish to maintain the possibility of a single set of proceedings under multiple contracts. They also highlight the need for tribunals to adopt a careful and rigorous approach to the determination of their jurisdiction in multi-contract disputes in order to minimise the risk of subsequent challenges.