It is not uncommon to see escalation clauses (aka multi-tiered dispute resolution agreements) in commercial contracts stipulating pre-arbitration conditions, typically requiring contracting parties first to negotiate in good faith to attempt amicable settlement before commencing arbitration. When there is a dispute as to whether an escalation clause has been complied with, and the tribunal makes a decision in respect of the same, does the court have power to review and potentially set aside that decision?

On 30 June 2023, Hong Kong’s Court of Final Appeal (CFA) handed down its decision in C v. D [2023] HKCFA 16, confirming that disputes over escalation clauses should generally be resolved by the arbitral tribunal instead of the courts, unless the parties agree otherwise in a sufficiently clear and unequivocal manner. Accordingly, an arbitral tribunal’s finding on compliance with pre-arbitration conditions is not liable to be set aside by the court on the ground that it exceeded the scope of the submission to arbitration under the Arbitration Ordinance. This aligns with the approach widely adopted by other jurisdictions such as Singapore, England and New South Wales.

Factual and procedural background

The appellant and the respondents entered into an agreement for the development, building and deployment of a broadcasting satellite. The respondent referred the dispute to arbitration at the HKIAC claiming that the appellant was in material default of the agreement by preventing transmission of some broadcasts. The appellant objected to the arbitration going ahead by alleging that the respondent had not complied with certain pre-arbitration conditions stipulated in the agreement, including an attempt to resolve the dispute first through good faith negotiations. The tribunal held in a partial award that the respondent had duly complied with all pre-arbitration conditions and rejected the appellant’s objection to jurisdiction. The tribunal proceeded to rule that the appellant was in breach of the agreement.

The appellant applied to the Court of First Instance (CFI) to set aside the partial award based on Article 34(2)(a)(iii) of the Model Law (which is incorporated in Section 81(2)(a)(iii) of the Arbitration Ordinance (Cap. 609)), contending that the arbitrators were wrong to decide that the pre-arbitration requirements had been complied with. Section 34(2)(a)(iii) of the Model Law provides that an arbitral award may be set aside by the court if the party making the application furnishes proof that “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”.

The CFI dismissed the application and awarded indemnity costs against the unsuccessful party¹. The appellant then appealed to the Court of Appeal (CA). The CA dismissed the appeal and upheld the lower court’s decision that the question of fulfilment of a condition precedent to a reference to arbitration was to be determined by the arbitral tribunal². Both courts held that the appellant’s objection went to the admissibility of the claim rather than the jurisdiction of the tribunal. Therefore, the partial award was not subject to review by the court under Article 34(2)(a)(iii) of the Model Law.

The appellant then appealed to the CFA.

The CFA’s decision and differing views on the admissibility/jurisdiction distinction

The CFA unanimously dismissed the appeal. It held that both the main contractual dispute and the dispute as to the fulfilment of the pre-arbitration conditions under the agreement in question fell within the parties’ contemplation and intended submission to arbitration, and thus Article 34(2)(iii) of the Model Law did not provide a basis for judicial intervention by way of setting aside the partial arbitral award.

While the CFA judges came to the same conclusion that the appeal should be dismissed, they differed as to whether the “admissibility/jurisdiction” distinction should be applied to Article 34(2)(a)(iii) of the Model Law in the context of the setting aside of arbitral awards.

The majority (Chief Justice Cheung, Mr Justice Ribeiro PJ, Mr Justice Fok PJ and Mr Justice Lam PJ) held that the distinction between “admissibility” and “jurisdiction” should be adopted as a helpful presumptive aid to the construction of whether judicial intervention in an arbitral process is permissible. The question of admissibility targets the claim, i.e. whether the claim is defective and should not be raised. The question of jurisdiction targets the tribunal, i.e. whether consent to the tribunal’s authority is denied, which involves grounds impugning the existence, validity or viability of the arbitration agreement. The former is not reviewable by the court under Article 34(2)(a)(iii) of the Model Law but the latter is.

The CFA emphasised that arbitration is consensual and it is the parties’ agreement which determines the true scope of the disputes which may be submitted to arbitration. Accordingly, given party autonomy, the scope of “jurisdiction” of a tribunal ultimately depends on the parties’ agreement. If parties so desire, they may agree by clear language that certain matters, which would otherwise be classified as going to admissibility, are matters which go to “jurisdiction” affecting fundamentally their consent to arbitrate. The “jurisdiction” of the tribunal may therefore be circumscribed according to the sufficiently clearly worded and unequivocally expressed agreement of the parties.

Mr Justice Gummow NPJ dissented on the reasoning and considered that the admissibility/jurisdiction distinction is unnecessary and presents a task of supererogation, and held that the inquiry is simply whether the dispute as to the fulfilment of a pre-arbitration procedural requirement falls within the ambit of the submission to arbitration, which is one of the grounds on which Article 34 of the Model Law permits recourse to a court to set aside an arbitral award.

Implications and significance of the CFA decision

This is an important and welcome decision which affirms the pro-arbitration stance of the Hong Kong courts in respecting the parties’ autonomy in deciding how their disputes should be resolved. It clarifies the limits of judicial intervention in the arbitral process and provides certainty that compliance with pre-arbitration conditions in escalation clauses is a question of admissibility instead of jurisdiction unless otherwise agreed between the parties. In relation to matters going to admissibility, the arbitral tribunal may deal with the question as it sees fit and its decision is not subject to judicial intervention.

However, this does not mean non-compliance with escalation clauses does not have consequences. If the tribunal considers that binding pre-arbitration conditions are not fulfilled, it may, for example, impose costs sanctions against the non-compliant party for failing to comply with the escalation clause, stay the arbitration proceedings to allow time for compliance with the escalation clause, or even dismiss the claim as inadmissible.

As a side note, apart from applying the admissibility/jurisdiction distinction in relation to the satisfaction of pre-arbitration conditions, a number of overseas authorities have also adopted the distinction in the contexts of time bar and res judicata issues (as recognised in the CFA decision). These are all questions of admissibility targeting the claim rather than questions of jurisdiction targeting the tribunal, which are not reviewable by the court under Article 34(2)(a)(iii) of the Model Law. It is therefore crucial to identify whether an issue is in fact jurisdictional before asking the court to decide whether jurisdiction was correctly assumed. As things stand, pre-arbitration conditions, time bar and res judicata are presumptively non-jurisdictional.

This case will have a significant impact internationally in view of Hong Kong’s adoption of the UNCITRAL Model Law in its arbitration legislation similar to a number of other jurisdictions³. This is the first case decided by the final appellate court in a Model Law jurisdiction which considers whether an arbitral tribunal’s determination on whether a pre-arbitration condition precedent in an arbitration agreement has been fulfilled should be subject to recourse to the court under Article 34(2)(iii) of the Model Law. It will have persuasive value in other jurisdictions which adopt the Model Law, in light of the aim of the Model Law to facilitate international arbitration by harmonising the arbitral regimes of different jurisdictions.

1. C v. D [2021] 3 HKLRD 1↩
2. C v. D [ 2022] 3 HKLRD 116↩
3. See the current list of jurisdictions adopting the Model Law↩