In the recent decision of CMB v. Fund & others [2023] HKCFI 760, the Court of First Instance (CFI) set aside the impugned parts of an arbitration award on the basis that the Arbitrator had no jurisdiction to make the declaration in question in the absence of a dispute between the parties to the arbitration agreement. The applicant, CMB, relied on the ground for setting aside an arbitral award under section 81(2)(a)(iii) of the Arbitration Ordinance (Cap.609) where the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration.

Background

CMB, entered into a co-investment agreement (the Agreement) with Fund and Cattle, which were represented by two individuals (L and X respectively) throughout the negotiations, to invest US$10 million for a minority equity stake in a company specialising in producing, processing, and selling beef and other meat products in Mainland China. The Agreement was governed by Hong Kong law and contained an ICC arbitration clause providing for all disputes between the parties arising out of or related to the Agreement to be settled by arbitration.

A dispute subsequently arose when CMB alleged that Fund and Cattle had failed to properly manage CMB’s investment. CMB further alleged that Fund and Cattle had acted in breach of their duties owed to CMB as trustees.

On 5 June 2020, CMB commenced a High Court action in Hong Kong (HCA) against L, X, and the managers (Management). CMB claimed that the defendants had made fraudulent misrepresentations to CMB which induced CMB to enter into the Agreement with Fund and Cattle and that they had conspired by unlawful means to defraud CMB.

On 3 July 2020, Fund, Cattle, Management, L and X (the Claimants) commenced ICC arbitration proceedings against CMB (the Arbitration). The Claimants sought, among other things, anti-suit injunctions requiring CMB to discontinue or withdraw the HCA. The Claimants also sought declarations that, among other things, CMB’s initiation of HCA was in breach of the arbitration agreement and that the Claimants were not liable to CMB with respect to the claims made in the HCA.

On 10 March 2022, the Arbitrator handed down his award (the Award), in which he held that he had no jurisdiction to grant an anti-suit injunction to restrain the HCA as L, X and Management were not parties to the Agreement and that the HCA did not constitute a breach by CMB of the arbitration agreement. However, the Arbitrator found that he had jurisdiction in respect of Fund and Cattle “in so far as they seek declarations of non-liability as regards their own position”, and made a declaration that “(Fund and Cattle) have no liability to (CMB) with respect to the allegations arising out of the (Agreement) that are the subject matter of the (HCA), and that all such allegations in so far as they are made against (Fund and Cattle) are false” (the Declaration). In doing so, the Arbitrator made a number of observations about CMB’s allegations in HCA and the quality of the evidence provided by CMB. He opined that CMB had not made out a “positive case supported by witness evidence to sustain the very wide-ranging allegations of fraud” and that CMB’s allegations were “improbable”.

CMB then initiated proceedings in the High Court to set aside the part of the Award containing the Declaration.

The CFI decision

Mimmie Chan J held that the Arbitrator did not have jurisdiction to make the Award, for the following reasons.

Firstly, for there to be a valid arbitration process and award, there must be a real dispute between the parties to the agreement. This condition was not met in the instant case. The HCA was commenced by CMB against L, X and Management, none of whom were parties to the Agreement. No claims were made directly against Fund and Cattle in the HCA. While CMB had threatened in a prior letter to initiate proceedings against Fund and Cattle, the claims made in that letter related to an alleged breach of trustees’ duties and not claims of fraud and conspiracy.

Secondly, the Arbitrator had confused the question of whether he had jurisdiction in the Arbitration to deal with the claims made in the Arbitration with the question of whether he should exercise his power to grant the remedies sought in the Arbitration. In finding that he had jurisdiction to make the Declaration, the Arbitrator relied on the finding that Fund or Cattle had a legitimate interest in the declaratory relief sought. However, the decision on the question of legitimate interest was a determination on whether the Arbitrator should grant the relief sought by Fund and Cattle in the Arbitration. Before considering the relief, the Arbitrator must first consider the essential question of whether a dispute existed between CMB, Fund and Cattle in the HCA, in order to invoke the rights under the arbitration agreement to confer jurisdiction on the Arbitrator.

Thirdly, the fact that CMB had refused to agree to a draft consent award prepared by Fund and Cattle, affirming that Fund and Cattle had no liability to CMB in connection with the Agreement, did not evidence a dispute between them. Before this refusal, CMB had already lodged a jurisdictional challenge in the Arbitration, affirming that it had not made any claim against Fund and Cattle.

Fourthly, the Claimants’ submission in the Arbitration that the arbitration agreement was broad in scope, covering all disputes arising out of or related to the Agreement, did not mean that the Arbitrator had jurisdiction to make the Declaration. No matter how wide the scope of the arbitration agreement, it could only cover disputes between the parties to the Agreement, i.e. CMB, Fund and Cattle.

In determining whether there was a dispute, the CFI referred to the analysis in Mustill & Boyd Commercial Arbitration 2nd edition (at page 128), that there must be something in the nature of an assertion by one party even if a claim is not essential for a dispute, and a situation in which the parties neither agree nor disagree about the true position is not one in which there is a dispute. Silence in the face of a claim does not raise a dispute, as what is required is a rebuttal or denial of the claim.

The CFI therefore set aside the relevant parts of the Award and ordered Fund, Cattle and Management to pay the costs of the set aside application to CMB on an indemnity basis.

Commentary

This decision confirms the principle that, for there to be a valid arbitration process and a valid award, there has to be a formulated dispute, and the right of the parties to put an arbitration agreement into effect does not arise until and unless there is a dispute between the parties to the agreement.

This case is a helpful reminder to parties considering commencing arbitration, particularly when there are multiple (and potentially inconsistent) jurisdiction clauses involved in an underlying transaction or potential claims made by or against entities/individuals that are not parties to an arbitration agreement. It is important to ensure that arbitration is commenced only when there is a dispute between the parties to the arbitration agreement which falls within the ambit of the arbitration agreement in question. It is not sufficient if the parties initiating the arbitration are closely related to the parties to the arbitration agreement or have legitimate interest in seeking reliefs in respect of the underlying transaction in the absence of any dispute between the parties to the arbitration agreement. Despite the Hong Kong courts’ general pro-arbitration stance, any award made without conferring jurisdiction on the arbitrator(s) will be liable to be set aside with adverse costs consequences under the well-established statutory ground in Hong Kong.

An litigation team trainee, Julian Ng is one of the authors.