Scope of an Arbitral Tribunal’s Jurisdiction: Navigating between Different Dispute Resolution Clauses in Multiple Related Contracts

In the recent judgment of AAA, BBB, CCC v DDD [2024] HKCFI 513, the Court of First Instance (‘CFI’) has handed down important guidance on determining the scope of an arbitral tribunal’s jurisdiction, particularly when disputes have arisen out of multiple related contracts, each containing a distinct dispute resolution clause.

  1. Facts of the Case

The facts are as follows. To help a borrower acquire shares in a company, the lender, borrower and his guarantors entered into a set of interrelated agreements. This included a Loan Agreement and a Promissory Note (which acted as security for the loan).

Upon default of the borrower, the lender commenced arbitration against the borrower and his guarantors pursuant to the arbitration clause contained in the Loan Agreement. In the Notice of Arbitration and the Statement of Claim, the claim and relief for the loan amount was essentially phrased as one under the Loan Agreement. Little reference was made to the Promissory Note at all, although the lender reserved its ‘full rights to add to, expand or modify the claims and relief set out herein’ in the Notice of Arbitration.

The lender later purported to seek relief under the Promissory Note as well, and the tribunal ruled that it has jurisdiction to hear the disputes. By an application made pursuant to section 34 of the Arbitration Ordinance (Cap 609), the CFI is now asked to consider whether the tribunal’s decision regarding its own jurisdiction was correctly determined.

  1. Approaches to Different Conflicting Dispute Resolution Clauses Situations

From the outset, Deputy High Court Judge Reyes SC contemplated three broad paradigms where conflicting dispute resolution clauses can feature (but emphasised that the paradigms are not meant to be exhaustive). In particular, certain presumptions may or may not apply depending on the paradigm the court is dealing with, although the end goal should always be to objectively interpret the parties’ intentions in each case.

B1. The Basic Paradigm (Applying the ‘Fiona Trust Presumption’)

The first situation, known as the ‘Basic Paradigm’, occurs when there is a single contract containing more than one conflicting dispute resolution clauses.

In this situation, unless there is evidence to the contrary, the convenient starting point is to apply the ‘Fiona Trust presumption’ (coined after Lord Hoffmann’s dictum in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40), which provides that ‘parties, as rational businessman, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal‘.

Hence, if one clause of an agreement provides that disputes should be resolved by the courts, but another clause enables parties to refer disputes to arbitration if they wish, if the parties have elected to commence arbitration, the court will presume that all disputes which may subsequently arise would be determined by the same tribunal.

B2. The Intermediate Paradigm (Applying the ‘Extended Fiona Trust Principle’)

The second situation, known as the ‘Intermediate Paradigm’, occurs where there are multiple related contracts, but only one of the contracts contains a dispute resolution clause (while the others are silent on this).

Here, ‘multiple related contracts’ refers to ‘agreements that appear to form a package aimed at achieving some objective‘, which ‘typically will have been executed at about the same time and the parties to the contracts will be the same or nearly the same’.

Unless there is evidence to the contrary, the applicable starting point here is the ‘extended Fiona Trust principle’ (Where the application of the Fiona Trust presumption was stretched in Terre Neuve SARL & Others v Yewdale Limited & others [2020] EWHC 772 (Comm), which provides that a ‘jurisdiction agreement contained in one contract may, on its proper construction, extend to a claim that is made under another contract’.

Hence, where multiple related contracts were entered into but only one of the contracts contains a dispute resolution clause, there would be a common-sense presumption that the parties must have intended for all disputes arising out of their commercial package to be resolved under the same dispute resolution clause.

B3. The Generalised Paradigm (Applying the ‘centre of gravity’ approach)

The current dispute concerns the last situation, known as the ‘Generalised Paradigm’. This involves multiple related contracts, where each of them contained a separate dispute resolution clause.

The distinguishing feature of this paradigm is that it involves multiple and often inconsistent dispute resolution clauses. The difficulty in applying the ‘extended Fiona Trust principle in this paradigm is that it would be difficult to presume (as a matter of ascertaining parties intention) which of the dispute resolution clauses is intended to subsume or take precedent over the others in a given situation. Hence, the ‘extended Fiona Trust principle’ is not applicable here.

Instead, DHCJ Reyes SC applied what is known as the ‘centre of gravity’ approach, which was adopted from an earlier English decision. The exercise is essentially to locate the ‘centre of gravity’ of the particular dispute to assess which of the resolution clauses come ‘closer to that dispute’. It follows that the resolution clause ‘closer’ to the dispute will be the relevant arbitration clause which the tribunal must be convened under, for it to have the requisite jurisdiction.

That said, DHCJ Reyes SC acknowledged that expressions such as ‘centre of gravity’ and ‘closer to an issue or dispute’ are more of an art than science, but went on to opine that a useful test might be to look at the ultimate relief sought in connection with that issue. Hence, if granting the ultimate relief being sought falls within the scope of the arbitration agreement under which a tribunal was appointed, the issue could be regarded as coming within the tribunals jurisdiction.

Applying the ‘centre of gravityapproach to the present case, the court concluded that claims under the Promissory Note would properly fall within the ‘centre of gravity’ of the dispute resolution provision under the Promissory Note. Hence, the tribunal’s decision that it has the requisite jurisdiction was set aside. 

  1. The Problem of Contradictory Outcomes and Fragmentation

The troubling feature of this case is that, the Loan Agreement and the Promissory Note are intertwined documents. Particularly, the Loan Agreement contains important references to the Promissory Note. Hence, when determining issues arising out of the Loan Agreement, the tribunal might touch upon issues that properly concerns the Promissory Note. If any peripheral issues on the Promissory Note arises during the determination of the claim under the Loan Agreement, DHCJ Reyes SC was of the opinion that the Tribunal convened under the Loan Agreement would be competent in deciding such issues as well.

The practical implication is that, following the decision, issues concerning the Promissory Note and the Loan Agreement might now be determined in separate forums, potentially resulting in contradictory outcomes and fragmentation.

To address the problem of contradictory outcomes, practical solutions were suggested by DHCJ Reyes SC moving forward:

  • The parties may consider invoking an issue estoppel arising from findings already determined by the previous arbitration tribunal;
  • The parties might invite the HKIAC to appoint the same tribunal in the two related arbitrations;
  • A party may apply for consolidation of the two arbitrations;
  • A party may apply for stay of proceedings in one of the arbitrations pending the outcome of the other.
  1. Takeaways

The problem of conflicting dispute resolution clauses is not uncommon in the commercial world today. This is particularly relevant to the construction field where multiple contractual documents governing a myriad of parties are often involved, occasionally incorporating inconsistent dispute resolution clauses.

This is exactly what has happened in H v G [2022] HKCFI 1327, where a Building Contract (entered into between the property developer and the main contractor) and the Warranty in respect of a waterproofing system (jointly executed by main contractor and its sub-contractors) contained different dispute resolution clauses, and the arbitral tribunal’s jurisdiction was whereby challenged. In fact, back then the court in H v G has already applied the ‘centre of gravity’ approach propounded by the English authorities in resolving the disputes.

Parties faced with similar situations should therefore be reminded to carefully review all applicable dispute resolution clauses, as well as to consider all practical solutions to minimise the risk of contradictory outcomes and fragmentation, before considering commencing any legal proceedings against the relevant parties.

The full judgment of AAA, BBB, CCC v DDD [2024] HKCFI 513 can be viewed here.

19 April 2024
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