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Jurisdictional Challenges in Multi-Contract Arbitration: Lessons from a Hong Kong Court Decision
In this article, we discuss a recent decision of the Hong Kong Court of First Instance (the Court) that set aside an arbitral tribunal's ruling on its jurisdiction over a multi-contract dispute involving conflicting dispute resolution clauses. The case is AAA and Others v DDD [2024] HKCFI 513.
The facts
The dispute arose from a finance transaction between a lender (the Lender) and a borrower (the Borrower), who wished to acquire option shares in a company (Company X) held by another party (Guarantor 1). The Lender provided a loan to the Borrower for the acquisition of the option shares and the parties entered into a Loan Agreement, which was later amended by an Amendment Agreement. The Loan Agreement and the Amendment Agreement contained identical arbitration clauses, providing for arbitration in Hong Kong under the rules of the Hong Kong International Arbitration Centre (HKIAC) with three arbitrators.
The Borrower also issued a Promissory Note in favour of the Lender, with the payment obligation thereunder being jointly and severally guaranteed by Guarantor 1 and a fourth party (Guarantor 2 and, together, the Guarantors). The Promissory Note contained a different arbitration clause, providing for arbitration in Hong Kong under the HKIAC rules, but without specifying the number of arbitrators. The parties also entered into other security agreements, which are not relevant to this article.
The Borrower defaulted on the loan and the Lender commenced arbitration against the Borrower and the Guarantors under the HKIAC's 2018 Administered Arbitration Rules. The Lender issued a Notice of Arbitration (NOA) that invoked the arbitration clause in the Loan Agreement and the Amendment Agreement but did not expressly invoke the arbitration clause in the Promissory Note. However, the NOA attached a copy of the Promissory Note as an exhibit.
The Guarantors challenged the jurisdiction of the tribunal over the Lender's claims against them under the Promissory Note, arguing that they had not agreed to arbitrate those claims under the arbitration clause in the Loan Agreement and the Amendment Agreement. They contended that those claims should be arbitrated separately under the arbitration clause in the Promissory Note
The tribunal dismissed the Guarantors' jurisdictional challenge, holding that it had jurisdiction over both sets of claims. The tribunal reasoned that by exhibiting a copy of the Promissory Note to the NOA, the Lender must have impliedly invoked its arbitration clause as well. The tribunal also found that there was no inconsistency between the two arbitration clauses, as they both provided for arbitration in Hong Kong under the HKIAC rules.
The Guarantors applied to the Court to set aside the tribunal's ruling on jurisdiction under section 34(1) of the Arbitration Ordinance (Cap. 609), which incorporates Article 16(3) of
the UNCITRAL Model Law.
The decision
The Court allowed the Guarantors' application and set aside the tribunal's ruling on jurisdiction. The Court held that:
- The tribunal erred in finding that the Lender had impliedly invoked the arbitration clause in
the Promissory Note by exhibiting a copy of it to the NOA. The Court said that this was not
enough to show an intention to commence arbitration under that clause, especially when
the NOA referred to another arbitration clause in another contract.
- The tribunal also erred in finding that there was no inconsistency between the two
arbitration clauses. The Court said that there was an obvious inconsistency in terms of
the number of arbitrators: three under one clause and unspecified under another. This
meant that there was no clear agreement on how to constitute a valid tribunal for both
sets of claims.
- The tribunal should have applied the "centre of gravity" test to determine which arbitration clause was closer to or more relevant to each set of claims. The Court said that this test, which was endorsed by previous Hong Kong authorities, required an analysis of the nature and subject matter of each claim and the terms and scope of each arbitration clause.
Applying this test, the Court found that:
- The Lender's claim against the Borrower under the Loan Agreement fell within the arbitration clause in the Loan Agreement and the Amendment Agreement, as it related to the principal obligation to repay the loan and the interest thereon.
- The Lender's claim against the Guarantors under the Promissory Note fell within the arbitration clause in the Promissory Note, as it related to the secondary obligation to
guarantee the payment under the note.
- The Lender's claim against the Borrower under the Promissory Note also fell within the
arbitration clause in the Promissory Note, as it was based on the same instrument that
created the obligation to pay under the note.
- The Court concluded that the tribunal had no jurisdiction over the Lender's claims against
the Guarantors under the Promissory Note, as those claims were not covered by the
arbitration clause in the Loan Agreement and the Amendment Agreement. The Court also
concluded that the tribunal had no jurisdiction over the Lender's claim against the Borrower
under the Promissory Note, as that claim was not properly commenced by the NOA.
The implications
This case illustrates the importance of drafting clear and consistent dispute resolution clauses in related contracts, especially involving different parties and obligations. It also highlights the need to carefully draft and serve a notice of arbitration that identifies the arbitration agreement(s) invoked and the claims advanced. Otherwise, parties may face challenges to the jurisdiction of the tribunal and delays in resolving their disputes.
The case also confirms that Hong Kong courts will apply the "centre of gravity" test when faced with conflicting dispute resolution clauses in related contracts. This test requires a careful examination of each claim's nature and subject matter and the terms and scope of each arbitration clause. The test aims to affect the parties' intentions and avoid the fragmentation of disputes.
The case also demonstrates that Hong Kong courts will adopt a de novo review of a tribunal's ruling on jurisdiction, without deference to the tribunal's findings. This means that parties have a full opportunity to challenge or defend a tribunal's jurisdiction before a court, even if they have already done so before the tribunal.
- The Court held it had jurisdiction over both sets of claims.
- The Court also found that the tribunal had no jurisdiction over the Lender's claim against the Borrower under the Promissory Note, as that claim was not properly commenced by the Notice of Arbitration
- The Court set aside the tribunal's ruling on jurisdiction and confirmed that Hong Kong courts will adopt a de novo review of a tribunal's jurisdiction, without deference to the tribunal's findings.
