SYL AND ANOTHER v. GIF

HCCT 54/2023

[2024] HKCFI 1324

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 54 OF 2023

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JUDGMENT

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A.  INTRODUCTION

1.  Before me is an Originating Summons dated 11 August 2023 (“Originating Summons”)issued by the 1^st Plaintiff (“P1”) and the 2^nd Plaintiff (“P2”) (together “Ps”) against the Defendant (“D”).

2.  By the Originating Summons, Ps apply to set aside an interim arbitral award dated 6 July 2023 (“Interim Award”) made by the arbitral tribunal (“Tribunal”) in an arbitration administered by the Hong Kong International Arbitration Centre (“Arbitration”). 

3.  The Interim Award arose out of Ps’ jurisdiction challenge, which Ps unsuccessfully made before the Tribunal.  Dissatisfied with the Interim Award, Ps made this application pursuant to Sections 34 and 81 of the Arbitration Ordinance (Cap 609). 

4.  Unsurprisingly, D, who successfully persuaded the Tribunal to conclude that it had jurisdiction, opposes Ps’ application.

B.  BRIEF PROCEDURAL HISTORY

5.  The subject dispute arises out of the following three agreements (collectively the “Three Contracts”):

(1)  A Loan Agreement dated 1 January 2020(as amended and restated on 1 June 2020, and further supplemented on 6 July 2020 by way of a Side Agreement) entered into between D as the “Lender” and Ps as the “Borrowers” (“Loan Agreement”).

(2)  A Security Deed dated 1 January 2020 entered into between D as the “Mortgagee”, P2 as the “Mortgagor”, and P1 and P2 as the “Obligors” (“January Deed”).

(3)  A Security Deed dated 6 July 2020 entered into between D as the “Mortgagee” and P1 together with two other companies (“Other Mortgagors”) as the “Mortgagors” (“July Deed”).

6.  Each of the Three Contracts contains a dispute resolution clause:

(1)  Clause 7.1 of the Loan Agreement provides that:

“ …Each of the parties hereto irrevocably…agrees that any dispute or controversy arising out of, relating to, or concerning any interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration to be held in Hong Kong which shall be administered by the Hong Kong International Arbitration Centre (“HKIAC”) in accordance with the Hong Kong International Arbitration Centre Administered Arbitration Rules…There shall be three (3) arbitrators, with one arbitrator to be appointed by the Borrowers and one arbitrator to be appointed by the Lender. If the aforesaid two arbitrators fails to agree on the third arbitrator, the HKIAC Council shall select the third arbitrator, who shall be qualified to practice law in Hong Kong…” (emphasis added).

(2)  Clause 19.2 of the January Deed and the July Deed are identical.  They both provide that:-

“ The dispute resolution provision in the Loan Agreement applies mutatis mutandis to this Deed.”

(collectively referred to as the “Arbitration Agreements”)

7.  Relying on the Arbitration Agreements, by a Notice of Arbitration dated 15 October 2021 (“NOA”), D commenced the Arbitration against Ps under the auspices of the HKIAC pursuant to the HKIAC Administered Arbitration Rules 2018 (“HKIAC Rules”).

8.  Under the NOA, D asked for a single arbitration under multiple contracts pursuant to Article 29 of the HKIAC Rules.  D also indicated that it would nominate its arbitrator (whose nomination was eventually approved). 

9.  Ps objected to having a single arbitration under multiple contracts.  Ps wrote to the HKIAC, informing the HKIAC that it did not agree to have the Three Contracts resolved in a single Arbitration. 

10.  Further correspondence ensued between Ps, D and the HKIAC.

11.  On 10 January 2022, the HKIAC decided that the Arbitration was, prima facie, validly commenced under Article 29.  The HKIAC also indicated that any jurisdiction challenge would be dealt with after the Tribunal was constituted.  The HKIAC invited Ps to jointly designate an arbitrator with the Other Mortgagors.

12.  On 9 February 2022, Ps filed an Answer to the NOA.  Ps expressly reserved the right to challenge jurisdiction.  Ps also nominated a second arbitrator (“Ps’ Nominated Arbitrator”).

13.  The Other Mortgagors did not file any Answer to the NOA.  There was therefore no nomination from the Other Mortgagors.

14.  After further rounds of correspondence, the HKIAC decided not to appoint Ps’ Nominated Arbitrator.  By a letter dated 16 February 2022, the HKIAC noted that there was an absence of joint designation of arbitrator by Ps and the Other Mortgagors.  The HKIAC further represented that in view of the above, it would proceed to appoint a second arbitrator.

15.  Eventually, on 30 May 2022, the HKIAC appointed the second arbitrator, who was not Ps’ Nominated Arbitrator.

16.  On 25 July 2022, the HKIAC wrote to the parties and indicated that the two wing arbitrators had jointly nominated the presiding arbitrator.

17.  On 2 August 2022, the HKIAC wrote to the parties and confirmed the constitution of the Tribunal.

18.  On 31 October 2022, Ps issued an application to challenge the jurisdiction of the Tribunal.  Ps also asked for bifurcation of the proceedings between jurisdiction and merits.

19.  On 11 April 2023, the Tribunal directed that the jurisdiction challenge would be dealt with by way of a preliminary question.

20.  This led to the Interim Award dated 6 July 2023, by which the Tribunal dismissed the jurisdiction challenge.

21.  Dissatisfied with the results, Ps filed the Originating Summons on 11 August 2023.  Ps applied for an order or declaration that the Interim Award be set aside and that the Tribunal does not have jurisdiction in the Arbitration. 

22.  In gist, Ps advance two grounds of complaint (which were made before the Tribunal):

(1)  First, Ps contend that the Arbitration Agreements are incompatible with one another.  Hence, Ps say that the Arbitration should not have been commenced under Article 29 of the HKIAC Rules as a single arbitration under multiple contracts (“Compatibility Ground”).

(2)  Second, Ps contend that the composition of the Tribunal was defective since it was not done in accordance with parties’ agreement under the Three Contracts (“Agreement Ground”).

23.  D does not disagree that this Court has jurisdiction to entertain challenges concerning the constitution and composition of the Tribunal.  D also fairly accepts that the Court deals with such a challenge de novo and is not bound by the findings of the Tribunal.  The Court will review the evidence and make its own decision as to whether the Tribunal has jurisdiction.  D, however, submits that the grounds of challenge have not been made out.

C.  THE COMPATIBILITY GROUND

C1.  The Agreements in Question

24.  To fully understand Ps’ Compatibility Ground, it is necessary to consider the Three Agreements in further detail. 

25.  In the present case, the parties to the Loan Agreement are Ps as the “Borrowers” and D as the “Lender”.  As noted in paragraph 6(1) above, Clause 7.1 of the Loan Agreement expressly provides that the “Borrowers” (ie Ps) can designate a wing arbitrator in the event of dispute.  It is hence rather clear that had an arbitration been commenced solely based on the Loan Agreement, Ps could have designated one of the arbitrators in the Arbitration.  Ps needed not consult any other parties for such purposes. 

26.  The appointment procedures under the January Deed and July Deed are less straightforward.  As noted in paragraph 6(2) above, the January Deed and July Deed contain identical provisions.  On the face, the identical Clause 19.2 seeks to apply, “mutatis mutandis”, the dispute resolution provision in the Loan Agreement to the January Deed and July Deed.

27.  In English terms, “mutatis mutandis” mean all necessary changes having been made or with the necessary changes.  But what are the “necessary” changes to be effected to the January Deed and July Deed?

28.  In relation to the January Deed, the results are relatively more straightforward:

(1)  The January Deed was entered into by the same parties as in the Loan Agreement, with D as the “Mortgagee” and P2 as the “Mortgagor”.  Ps were also defined together as the “Obligors”.

(2)  Ps suggest that read in context, “mutatis mutandis” could mean three things:-

(a)  First, it could mean that there is no change at all, and the right is still vested in the “Borrowers”.

(b)  Second, it could mean that the word “Borrowers” is replaced by the word “Obligors”.

(c)  Third, it could also mean that the word “Borrowers” is replaced by the word “Mortgagor”.

(3)  For present purposes, it is not necessary for me to resolve this apparent conflict because:-

(a)  If Ps’ first suggestion is correct, the “Borrowers”, ie Ps, would have the right to designate an arbitrator.

(b)  If Ps’ second suggestion is correct, the “Obligors” would have the right to designate an arbitrator.  As Ps were defined as the “Obligors”, there would be no change in substance to the right of designation.

(c)  If Ps’ third suggestion is correct, it would be the “Mortgagor” who would have such a right.  This means that P2 would have the right to designate an arbitrator.

(4)  Thus, on any of these readings, Ps (or at least P2, whose view on the choice of arbitrator does not differ from P1’s for present purposes) would have the right to designate an arbitrator, without the need to consult, or to obtain consent from, any other parties.

29.  However, the same cannot be said for the July Deed:

(1)  Under the July Deed, the “Mortgagee” is D.  The “Mortgagors” are P1 and the Other Mortgagors.  The “Obligors” are also P1 and the Other Mortgagors.

(2)  P2 is not a party to the July Deed.

(3)  Applying the same analysis as set out above, there are, once again, three ways in which “mutatis mutandis” can be interpreted:

(a)  First, it could mean that there is no change at all, and the right remains vested in the “Borrowers”.

(b)  Second, it could mean that the word “Borrowers” is replaced by the word “Obligors”.

(c)  Third, it could mean that the word “Borrowers” is replaced by the word “Mortgagors”.

(4)  However, unlike the situation in respect of the January Deed, there will be some significant differences and repercussions arising from the three interpretations:

(a)  First, if there is no change in the appointment procedure, the “Borrowers”, ie Ps, would remain to be the ones vested with the right to designate an arbitrator under the July Deed.   

(b)  Second, if the reference to the “Borrowers” in the Loan Agreement is to be replaced by a reference to the “Obligors”, it would mean that it is P1 and the Other Mortgagors who have a right to designate an arbitrator.

(c)  Likewise, on the third possibility, if the reference to the “Borrowers” in the Loan Agreement is replaced by the “Mortgagors”, it would also be P1 and the Other Mortgagors who have a right to designate an arbitrator.

(5)  In my view, the more likely and commercially sensible interpretation of the July Deed is the second and third interpretations, ie that the parties given the right to designate an arbitrator are P1 and the Other Mortgagors, and they could do so to the exclusion of P2.

(6)  In coming to this view, I have regard to the following:

(a)  This is the most natural interpretation.  It sits well with the nature and purpose of the July Deed. 

(b)  Particularly, P1 and the Other Mortgagors are the counterparties of the July Deed.  It would be commercially sensible to suppose that the Other Mortgagors would have wanted some rights to designate an arbitrator, should a dispute eventually arise between the parties. 

(c)  On the other hand, there is no reason why the parties to the July Deed would vest the right to designate an arbitrator with P2, who is not a party to the July Deed.

(d)  Likewise, there is also little reason to believe that the Other Mortgagors who are parties to the July Deed would have been given no right to designate an arbitrator.

(7)  In the circumstances, I reject the first interpretation, which suggests that there is no change in the appointment procedure, whereupon the “Borrowers” or Ps retain the right to designate an arbitrator.

(8)  For completeness, I should add that it is unnecessary for me to resolve the conflict between the second and third interpretations.  In both cases, P1 and the Other Mortgagors would have a joint right of designation.

30.  I accordingly hold that the Arbitration Agreements should be given the meanings as stated in paragraphs 25, 28(4) and 29(5) above.

31.  Thus viewed, there is a clash in the appointment procedure in the Loan Agreement and the January Deed on the one hand, and the July Deed on the other hand:

(1)  Under the Loan Agreement and the January Deed, Ps would have the right to designate an arbitrator.  The Other Mortgagors have no say.

(2)  However, under the July Deed, it is P1 and the Other Mortgagors who would have the right to designate an arbitrator.  P2 has no say. 

32.  The question then is whether this would render the Arbitration Agreements “incompatible” such that Article 29 cannot be engaged.  This is the most contentious issue before me, and I shall address this in what follows.

C2.  The Meaning of Compatibility

33.  Article 29 of the HKIAC Rules provides that:

“Claims arising out of or in connection with more than one contract may be made in a single arbitration, provided that:

(a) a common question of law or fact arises under each arbitration agreement giving rise to the arbitration; and

(b) the rights to relief claimed are in respect of, or arise out of, the same transaction or a series of related transactions; and

(c) the arbitration agreements under which those claims are made are compatible.” (emphasis added)

34.  Reading Article 29 as a whole, it is apparent that “compatibility” is an independent and separate requirement.  In other words, all three limbs under sub-paragraphs (a), (b) and (c) need to be satisfied before Article 29 is engaged. 

35.  As to what is meant by “compatible”:

(1)  I have been referred to the meaning of the word “compatible”in the Oxford Advanced Learner’s Dictionary, 6^th ed.  Essentially, it means an ability to exist or be used together without causing problems.

(2)  In A Guide to the HKIAC Arbitration Rules, 2^nd ed, §10.125, the learned authors explain the meaning of “compatibility” as follows:

“ The arbitration agreements need not be identical in order to meet this criterion. They must, however, be substantively compatible. Any differences must be surmountable by the parties, the tribunal, and HKIAC. Consolidation will be ordered when it will make no practical difference if the consolidated case proceeds on the basis of one or the other underlying arbitration agreements. Where, for example, two arbitration clauses provide for different rules, different seats, or a different number of arbitrators, it will be difficult in practice to consolidate the arbitrations without significantly changing those aspects in one of the cases. In these circumstances, HKIAC will typically find the agreements to be incompatible, unless the parties can agree an acceptable compromise.”

(3)  The learned authors then set out in §10.126 a number of factors relevant to the determination of compatibility:

(a)  Any preconditions to the commencement of arbitration.

(b)  Any required qualifications of the arbitrators (eg that an arbitrator be qualified in a particular law or discipline, or speak a particular language).

(c)  The procedure for appointing arbitrators.

(d)  The language of the arbitrations.

(e)  The governing law of the arbitration agreements.

(f)  The method for determining the fees and expenses of the tribunal.

(4)  Counsel for Ps have also referred me to Article 8.1(c) of the Arbitration Rules of the Singapore International Arbitration Centre, which contains a similar requirement of “compatibility”.  According to Arbitration in Singapore(2^nd Ed, 2018) at §7.150:

“ Parties should however, bear in mind that arbitration agreements across a suite of related contracts should be “compatible” in order to maximise the chances of effective joinder and/or consolidation (where this is desired).  Clauses will be considered incompatible if the difference relates to a fundamental element of the arbitration agreement: the institutional or ad hoc nature of the arbitration, the seat, the number of arbitrators, or the appointment procedure.  If, on the other hand, the difference relates to a secondary element (law applicable to the merits, steps to be taken before the commencement of the procedure, etc.), the clauses will generally be considered compatible.”

C3.  Are the Arbitration Agreements Compatible?

36.  Applying these observations to the present case, my view is that since the Loan Agreement and the January Deed on the one hand and the July Deed on the other hand provide for different appointment procedures, the Arbitration Agreements are not compatible with each other.

37.  My view is based on the following.

38.  First, it infringes party autonomy to impose on the parties a single arbitration when the underlying Arbitration Agreements adopt different appointment procedures.  This offends the cornerstone of modern international arbitration, namely, the primacy of consent as enshrined in section 3(2) of the Arbitration Ordinance.  In the present case, as I have found:

(1)  Under the Loan Agreement and the January Deed, Ps have contracted for the right to designate an arbitrator should any dispute arise between the parties. 

(2)  Had D chose to commence an arbitration under the Loan Agreement and the January Deed only, Ps could have designated Ps’ Nominated Arbitrator. 

(3)  In my view, Ps’ willingness to arbitrate was only premised upon Ps having a right to designate an arbitrator of their choice.  Without such a right, Ps could not be said to have consented to arbitrate.

39.  Second, it also infringes the parties’ contractual rights:

(1)  After all, the Arbitration Agreements are contracts of their own right.  The parties have negotiated for and obtained such rights as they considered that would best fit their commercial interests.  Having so bargained and agreed, they must be bound by their choices, whether they eventually liked it or not.

(2)  In the present case, Ps have bargained for and obtained a right to designate an arbitrator under any intended arbitration arising from the Loan Agreement and the January Deed.  Ps’ right is not a right shared with the Other Mortgagors, as would be the case under the July Deed.

(3)  As a matter of principle, the right to designate an arbitrator cannot be curtailed by a unilateral decision on the part of a counterparty (such as D) to commence a single arbitration based on multiple contracts. 

(4)  The deprivation of Ps’ contractual right is in and of itself prejudice, which is a serious issue impacting upon the integrity and sanctity of the Arbitration.

40.  Third, there are valid concerns over whether D may gain an unfair advantage in the Arbitration by refusing Ps a right to designate an arbitrator of Ps’ choice:

(1)  In this Arbitration, it is not disputed that D successfully retained the arbitrator of its own choice.

(2)  Again, in the counterfactual scenario where separate arbitrations were commenced, Ps could have designated Ps’ Nominated Arbitrator.  In such circumstance, Ps would have been given the same right, and hence an equal opportunity, to influence the constitution of the Tribunal.

(3)  However, when D chose to commence a multiple contract arbitration, it also deprived Ps’ right to designate an arbitrator of Ps’ choice.  In this sense, the parties are no longer treated equally.

(4)  In my view, this gives rise to justifiable concerns over whether this would give D an unfair advantage.  This impeaches the integrity of the Arbitration.

41.  In the course of arguments, D has raised a number of points against Ps’ case on the incompatibility of the Arbitration Agreements.  For reasons given below, I am not convinced by these points and they do not alter my views as expressed above. 

42.  First, D contends that Ps do not in fact enjoy an absolute right of appointment under the HKIAC Rules.  They merely had a right to designate an arbitrator, and this was always subject to the confirmation of the HKIAC.  Whilst I agree that as a matter of general rule, parties do not have an absolute right to have their nominated arbitrator appointed, it does not mean that their express right to designate an arbitrator can be ignored, particularly in circumstances where the situation was caused by the counterparty choosing to commence a single arbitration based on multiple contracts.

43.  Second, it is said that Ps did not simply agree to an ad hoc arbitration.  Instead, Ps agreed to an institutional arbitration to be conducted in accordance with the HKIAC Rules.  D contends that provided that HKIAC has acted within its power under the rules, the parties’ consent have been fully respected.  However:

(1)  This begs the question of whether the arbitration agreements are compatible in the first place.  It is only when the arbitration agreements are compatible with each other that the parties can opt for a single arbitration under multiple contracts. 

(2)  For reasons given above, I consider that the Arbitration Agreements are not compatible with each other. 

(3)  Accordingly, it was not appropriate for D to commence a single Arbitration based on the Three Contracts in the first place.  As the HKIAC Rules have not been fully observed, the parties’ consent have not been fully respected.

44.  Third, D contends that the Three Contracts are interrelated, so that parties can be taken to expect that if there were disputes, they could be resolved by the same set of dispute resolution mechanism. In relation to this:

(1)  Whilst I am well aware of the possible risk of fragmentation of proceedings, and the undesirability of there being inconsistent awards, I do not consider that these case management considerations would constitute sufficient justifications to override what a party has negotiated for by way of contract. 

(2)  Moreover, the fact that the parties have entered into the Three Contracts which contain separate Arbitration Agreements suggests that they did not agree to have a “one stop shop” if disputes arise.  As arbitration is a consensual dispute resolution mechanism, the parties must be bound by their negotiated deals.  Indeed, courts have recognised the paramount importance of private consent in arbitration and warned against overzealous consolidation of arbitrations for the sake of administrative convenience (see for eg Sun Life Assurance Company of Canada & Ors v The Lincoln National Life Insurance Company [2004] EWCA Civ 1660 at §68 per Mance LJ).

(3)  In any event, the fact that the Three Contracts relate to the same transaction does not necessarily mean that the Arbitration Agreements are compatible.  It is trite law that arbitration agreements represent separate agreements from their underlying contracts.  Hence, the fact that the Three Contracts arise from the same factual matrix is neither here nor there.

45.  Fourth, D also seeks to rely on Article 8.2(a) of the HKIAC Rules.  This rule relevantly provides that where there are more than two parties to the arbitration and the dispute is to be referred to three arbitrators, then unless the parties have agreed otherwise, the group of respondents shall designate an arbitrator.  D’s reliance on this rule is misplaced.  The core question here is whether the threshold requirement under Article 29 has been satisfied.  As explained above, it has not.   

46.  Fifth, D argues that Ps should be taken to have waived their right to designate their arbitrator.  In support, D has referred me to Article 28.8 of the HKIAC Rules, which provides that “[w]here HKIAC decides to consolidate two or more arbitrations, the parties to all such arbitrations shall be deemed to have waived their right to designate an arbitrator…”.  However:

(1)  Article 28.8 is a sub-article within Article 28.  Article 28 concerns consolidation of two or more arbitrations.  This is not the scenario here because the Arbitration was commenced under Article 29 as a single arbitration under multiple contracts.

(2)  In any event, the waiver of rights argument does not provide a valid answer to the threshold requirement as to whether Article 29 is satisfied.  Unless the Court is satisfied that the arbitration agreements are “compatible”, Article 29 is not engaged. 

47.  In the circumstances, despite arguments to the contrary by D, I consider that the Arbitration Agreements, which contain differences as to a fundamental aspect of how the Arbitration should be conducted, are not “compatible” within the meaning of Article 29. 

48.  As one of the threshold requirements under Article 29 has not been satisfied, I find that D was not entitled to commence the Arbitration in the present form as a single Arbitration based on multiple contracts.  On this basis, the Interim Award is liable to be set aside.

D.   THE AGREEMENT GROUND

49.  Following from my ruling on the Compatibility Ground above, the Agreement Ground must also succeed. 

50.  In my opinion, the composition of the Tribunal was defective.  D should not have commenced a single Arbitration on the basis of multiple contracts in the first place.  The Tribunal purportedly constituted under Article 29 was hence not composed in accordance with the parties’ agreement.

51.  In view of the above, it is not strictly necessary for me to come to any concluded view as to whether, assuming that the July Deed should be interpreted in accordance with the first interpretation as set out in paragraph 29(4)(a) above, the Arbitration was nonetheless defective.

52.  However, had it been necessary, I would have held that even in this scenario, the Arbitration is still problematic:

(1)  As mentioned above, if the July Deed was not intended to change the appointment procedure, the “Borrowers” or Ps would remain to be the ones vested with the right to designate one arbitrator.

(2)  In this case, consultation with, and consent from, the Other Mortgagors would not have been necessary.  The Other Mortgagors’ silence would hence have been neither here nor there.

(3)  In the present case, the composition of the Tribunal was made on, amongst others, the ground that the Other Mortgagors did not jointly designate an arbitrator with Ps.  Accordingly, the composition of the Tribunal was not conducted in accordance with the parties’ agreement.

E.  DISPOSITION

53.  For the reasons given above, I set aside the Interim Award.

54.  At the end of the hearing, I enquired with Counsel as to the proposed order to be made.  Ps indicated that should they be successful, they would ask for an order in terms of the Originating Summons.  D indicated that it had no comment on the wordings of the orders sought.

55.  In the premises, I make an order in terms of paragraphs 1 and 2 of the Originating Summons.

56.  I also make a costs order nisi that the costs of and incidental to the Originating Summons (including the hearing on 9 January 2024 and all costs reserved) be paid by D to Ps with Certificate for 2 Counsel, such costs to be taxed if not agreed.  The costs order nisi shall become absolute 14 days from the date of handing down of this judgment.

57.  I thank all Counsel for their able assistance.