Multi-party and multi-contract scenarios are commonplace in international arbitration. Many arbitration rules offer regimes seeking to tackle problems that may arise in such complex scenarios. An example is the regime under Article 29 of the 2018 HKIAC Rules. It allows a claimant to commence a single arbitration under multiple contracts where (i) a common question of law or fact arises under each arbitration agreement giving rise to the arbitration, (ii) the rights to relief claimed are in respect of, or arise out of, the same transaction or a series of related transactions, and (iii) the relevant arbitration agreements are compatible. A claimant must meet all three requirements to properly commence such an arbitration.
In SYL and Another v GIF [2024] HKCFI 1324, the Court of First Instance had to consider whether the compatibility requirement under Article 29 was met. The claimant (D) had commenced a single arbitration under three related contracts. The two respondents (Ps) objected and raised a jurisdictional challenge which the tribunal rejected in an interim award on jurisdiction.
Ps applied to the Court to set aside the interim award on the grounds that the arbitration clauses lacked compatibility regarding the appointment process and the tribunal was not constituted in accordance with the parties’ agreement. The Court agreed and set the award aside. The Court also saw justifiable concerns that D may have gained an unfair advantage by commencing a single arbitration which impeached the integrity of the arbitration.
This case serves as a cautionary tale for claimants to consider carefully how to bring claims under multiple contracts with separate arbitration clauses.
Factual Background
The three related contracts that gave rise to the arbitration are:
- A Loan Agreement dated 1 January 2020 between D as “Lender” and Ps as “Borrowers”.
- A Security Deed dated 1 January 2020 between D as “Mortgagee”, P2 as “Mortgagor”, and Ps as “Obligors”.
- A Security Deed dated 6 July 2020 between D as “Mortgagee” and P1 together with two Other Mortgagors as “Mortgagors”.
The Loan Agreement provided that there shall be three arbitrators, “with one arbitrator to be appointed by the Borrowers [i.e. Ps] and one arbitrator to be appointed by the Lender [i.e. D]”. Each of the Deeds simply provided that the dispute resolution provision in the Loan Agreement “applies mutatis mutandis to this Deed”.
D commenced a single arbitration against Ps under all three contracts pursuant to Article 29. D designated the first co-arbitrator whom HKIAC confirmed.
Ps objected to a single arbitration. On 10 January 2022, HKIAC decided that the arbitration was, prima facie, validly commenced under Article 29 and indicated that any jurisdictional challenge would be dealt with by the tribunal. HKIAC then invited Ps to designate the second co-arbitrator jointly with the Other Mortgagors.
On 9 February 2022, Ps filed their Answer to the Notice of Arbitration, designated the second co-arbitrator, and expressly reserved the right to challenge the tribunal’s jurisdiction. The Other Mortgagors did not file any Answer or designate an arbitrator.
Noting that Ps and the Other Mortgagors had failed to jointly designate an arbitrator, HKIAC informed Ps that it would not confirm their designated arbitrator. HKIAC appointed another co-arbitrator on 30 May 2022 and the two co-arbitrators then designated the presiding arbitrator. The tribunal was constituted on 2 August 2022.
On 31 October 2022, Ps made an application to the tribunal challenging its jurisdiction. The tribunal decided on its jurisdiction by way of a preliminary question under Section 34(1) of the Arbitration Ordinance (Cap. 609), which adopts Article 16(3) of the UNCITRAL Model Law. It dismissed Ps’ application in an Interim Award dated 6 July 2023.
On 11 August 2023, Ps applied to the Court under Sections 16(3) and 81(1) of the Arbitration Ordinance (the latter adopts Article 34 of the Model Law), seeking an order or declaration that the Interim Award be set aside and that the tribunal does not have jurisdiction in the arbitration. Ps raised two grounds: (i) D should not have been commenced a single arbitration under Article 29 as the arbitration clauses in the three contracts are incompatible, and (ii) the tribunal was not composed in accordance with the parties’ agreement under the contracts.
The Court’s decision
The Court rendered its judgment on 20 May 2024. It agreed with Ps on both grounds and set aside the Interim Award.
The Court first dealt with the “compatibility ground” and started with an analysis of the parties’ rights to designate an arbitrator under each of the contracts. The Court found that on a proper interpretation, the appointment procedure in the Loan Agreement and January Deed clashed with the procedure in the July Deed. Under the former contracts, Ps have the right to jointly designate an arbitrator without consulting any other party, whereas under the latter, P1 and the Other Mortgagors have the right to jointly designate an arbitrator to the exclusion of P2, who is not a party to the July Deed.
The Court then examined whether the clash rendered the arbitration clauses “incompatible” such that Article 29 could not be engaged.
The Court started with the Oxford Advanced Learner’s Dictionary which defines “compatible” as an ability to exist or be used together without causing problems. The Court then referred to A Guide to the HKIAC Arbitration Rules which notes that arbitration agreements need not be identical, but they have to be substantively compatible, and any differences have to be surmountable by the parties, the tribunal and HKIAC. The appointment procedure is a relevant factor for determining compatibility. The Court also referred to Arbitration in Singapore (which discusses a similar “compatibility” requirement under the SIAC Rules) which notes that arbitration agreements will be considered incompatible if the difference relates to a fundamental element of the arbitration agreement, such as the appointment procedure.
The Court concluded that the arbitration clauses in the Loan Agreement and January Deed were not compatible with the July Deed, as their appointment procedures differed. This was because imposing a single arbitration on the parties when the arbitration clauses adopt different appointment procedures infringes party autonomy and the parties’ contractual rights. Further, there were valid concerns that D may gain an unfair advantage where it successfully retained the arbitrator of its choice, while refusing Ps’ right to designate an arbitrator of its choice which impeached the integrity of the arbitration.
D’s counterarguments did not change the Court’s view. The Court noted that a party’s express right to designate an arbitrator cannot be ignored and that the regime under Article 29 is only engaged if the arbitration clauses are compatible in the first place. The risk of fragmented proceedings and inconsistent awards is not sufficient for overriding what a party has negotiated for, and the fact that the parties entered into interrelated contracts with separate arbitration clauses suggests that they did not agree to have a one-stop shop for disputes.
On the “tribunal composition ground”, the Court found that following its ruling on the compatibility ground, this ground must also succeed. It held that the tribunal composition was defective and not in accordance with the parties’ agreement, as it was constituted under Article 29. But even if the arbitration clause in the July Deed was interpreted generously so that Ps were to jointly designate a co-arbitrator without involving the Other Mortgagors, the tribunal was still not composed in accordance with the parties’ agreement because it was composed on the ground that there was no joint designation of an arbitrator by Ps and the Other Mortgagors.
Comments
- SYL v GIF illustrates the broader risk of “over-engineering” arbitration agreements: the parties adopted provisions which deviated from the HKIAC model clause and rendered the arbitration clauses in their related contracts incompatible, thereby undermining HKIAC’s single arbitration regime under Article 29.
- Unless parties consciously decide against a one-stop shop approach to resolving disputes under related contracts, parties who adopt separate arbitration clauses in each of these contracts should ensure that the clauses are compatible. Parties should generally avoid interfering with the default appointment mechanisms under the chosen rules and only deviate from these mechanisms after careful consideration of the effects.
- Where a claimant commences separate arbitrations under related contracts and then applies to HKIAC to consolidate the arbitrations under Article 28, similar problems as in SYL v GIF can arise because consolidation also requires compatible arbitration clauses. Article 28.8 may be of some help, as it provides that the parties shall be deemed to have waived their right to designate an arbitrator where HKIAC decides to consolidate, and it empowers HKIAC to appoint the tribunal for the consolidated proceedings with or without regard to any party’s designation.
- The 2018 Rules do not contain an equivalent provision for commencing a single arbitration under Article 29. To align the single arbitration and consolidation regimes, a new Article 29.2 has been introduced in the 2024 Rules (effective from 1 June 2024).[1] It provides that where HKIAC decides that the arbitration has been properly commenced under Article 29, the parties shall be deemed to have waived their right to designate an arbitrator and it empowers HKIAC to appoint the tribunal with or without regard to any party’s designation.
- To what extent new Article 29.2 (and Article 28.8) can ultimately resolve problems arising from incompatible appointment procedures will very much depend on the precise terms of the arbitration clauses and the specific circumstances of each case, given the Court’s observation that the Article 29 regime is only engaged if the arbitration clauses are compatible.
[1] Former Article 29 has become Article 29.1 under the 2024 Rules. For an overview of the changes in the 2024 Rules, see our recent blog post.
