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Hong Kong – S Co V B Co: Confirmation Of Applicable Principles In Challenges To Jurisdiction.

7 November, 2014


Introduction

 
Whilst S Co v B Co (unreported, HCCT 12/2013, 24 July 2014) cannot be described as an earth shattering case, it usefully sets out and confirms (by confirming existing case law) legal principles to be aware of in challenging the jurisdiction of the tribunal in an arbitration seated in Hong Kong.

 
Such principles include that the court’s review of a tribunal’s decision as to its own jurisdiction is an independent review de novo and not bound or restricted by the tribunal’s decision. That said, the grounds for review are limited and narrow.

 
The case is also a good reminder to parties not to keep jurisdictional or even procedural objections up their sleeve and to raise the same promptly, otherwise they may be taken as waived.

 
Facts

 
S Co and B Co entered into a Cooperation Agreement pursuant to which B Co agreed to furnish technical assistance and advice including assisting S Co to perfect proposals to be submitted to the Nigerian Government in respect of electricity generation facilities and to procure the appointment of S Co as the contractor. S Co agreed to pay consultancy fees in accordance with the provisions of the Cooperation Agreement. The Cooperation Agreement contained an arbitration clause providing for disputes arising in the course of performance or execution to be arbitrated in Hong Kong.

 
S Co concluded two contracts with Nigeria’s National Electric Power Authority (“NEPA”) to design and build two gas turbine power plants (each 335 megawatts) described in the judgment as the Phase 1 Project and the Phase 2 Project respectively. Pursuant to the Cooperation Agreement, consultancy fees payable to B Co were fixed at USD 22.50 per kilowatt and S Co issued 3 Letters of Undertaking for payment of consultancy fees for the Phase 1 Project and the Phase 2 Project. The Phase 2 Project was never built.

 
B Co’s case was that thereafter new proposals were made for the construction of another power plant with higher power (754 megawatts) to replace the Phase 2 Project and a contract was concluded between Nigeria’s Federal Ministry of Energy and S III (a subsidiary or affiliated company of S Co) (the “S III Contract”) to design and build a power plant of higher power described in the judgment as the Revised Phase 2 Project. B Co’s case was that the Revised Phase 2 Project had been revised and expanded from the Phase 2 Project through its efforts.

 
B Co claimed that in breach of the Cooperation Agreement, S Co failed to pay consultancy fees due comprising a balance of fees in respect of the Phase 1 Project (“Balance Payment Claim”) and fees in respect of the S III Contract (“S III Contract Claim”). Under its S III Contract Claim, B Co claimed fees calculated on the basis of the higher power of the Revised Phase 2 Project (754 megawatts) multiplied by USD 22.50 per kilowatt, the rate provided for in the Cooperation Agreement.

 
B Co commenced arbitration proceedings in Hong Kong and a tribunal was constituted. S Co challenged the jurisdiction of the tribunal to hear both the Balance Payment Claim and the S III Contract Claim. The tribunal directed that S Co’s jurisdictional challenge be dealt with after the facts had been ascertained and verified, and the evidence heard.

 
The tribunal issued an award on 5 April 2013 (labelled “interim award”) dismissing S Co’s jurisdictional challenge and ordering S Co to pay the consultancy fees claimed under both the Balance Payment Claim and the S III Contract Claim, albeit in respect of the SIII Contract Claim, the tribunal ordered damages calculated not on the basis claimed by B Co, but rather the original consultancy fees payable for the Phase II Contract under the Cooperation Agreement. The tribunal later followed with a costs award.

 
In May 2013, S Co issued two sets of proceedings seeking to set aside the awards pursuant to respectively Articles 16(3) and 34 of the Model Law.

 
Article 16(3) (set out in Section 34 of Hong Kong’s Arbitration Ordinance (Cap. 609)) provides: “The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article [that the arbitral tribunal does not have jurisdiction] either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 [the Court of First Instance of the High Court] to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award.

 
Article 34 (set out in Section 81 of the Arbitration Ordinance) provides for essentially procedural and jurisdictional grounds to set aside an award including the following jurisdictional ground: “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, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside” (Article 34(2)(a)(iii)).

 
S Co challenged jurisdiction, in respect of the Balance Payment Claim, inter alia, on the basis that the same was under the Letters of Undertaking for the Phase 1 Project, which did not contain an arbitration agreement, as opposed to the Cooperation Agreement, and in respect of the SIII Contract Claim, on the basis that B Co claimed liquidated damages whilst the tribunal ordered unliquidated damages.

 

Holding, Key Points And Reasoning

 
The court ultimately declined to set aside the award under Article 34 of the Model Law and further dismissed the challenge made under Article 16. It held that the tribunal did have jurisdiction to determine the Balance Payment Claim under the Cooperation Agreement, which contained an arbitration agreement; the Letters of Undertaking, which contained no arbitration agreement, were not separate and independent from the Cooperation Agreement and there was nothing in the Cooperation Agreement that provided for release of S Co’s liability thereunder for the Balance Payment Claim upon issue of the Letters of Undertaking, the latter not being honoured in any event.

 
The court also held that the tribunal had jurisdiction to determine the S III Contract Claim under the Cooperation Agreement.

 
In arriving at its decision, the court reasoned as follows:

 

  • Article 16(3) provides that a party may request (within the prescribed 30-day limit) that the court decide the matter of the tribunal’s jurisdiction if dissatisfied with the tribunal’s preliminary ruling as to its own jurisdiction. It is noted that only a tribunal’s positive ruling as to jurisdiction, namely, that it does have jurisdiction, may be brought before the court for review (see Brunswick Bowling & Billiards Corp v Shanghai Zhonglu Industrial Co Ltd [2009] 5 HKC 1 at 20-21). The S Co v B Co case confirms that the court, in deciding matters of jurisdiction, must carry out an independent and de novo review (or a review anew) and is not bound or restricted by the tribunal’s preliminary decision on its own jurisdiction. This is important because “otherwise the tribunal would be the final judge of its own powers and cause” (paragraphs 35 and 36 of the judgment).

 

  • A preliminary ruling refers to a ruling made before the tribunal decides the substantive merits of the dispute. The tribunal is free to decide the matter of its own jurisdiction in the form of a preliminary ruling or in its ultimate award, in other words, at the same time as it decides the substantive merits. If the tribunal’s decision as to jurisdiction is contained in its award, a party may nevertheless challenge jurisdiction in an application to set aside the award under Article 34. The S Co v B Co case confirms that the court in deciding a challenge as to jurisdiction whether under Article 16 or Article 34 does so by way of independent de novo review (paragraph 36 of the judgment).

 

  • The court must, in dealing with any challenge to the tribunal’s jurisdiction, limit its review of the issues to real questions of jurisdiction and parties should not use such a challenge as a “guise” for challenging the tribunal’s findings on the merits of the case (paragraph 38 of the judgment).

 

  • The court dismissed S Co’s challenge to jurisdiction under Article 16 and ordered costs on an indemnity basis against it (a basis for assessing the amount of B Co’s costs payable by S Co, which ultimately leads to a higher amount of costs being paid; usually ordered where there has been abuse of the court’s process). The reasoning of the court was that the tribunal had made clear to the parties in an earlier ruling on 13 September 2010 that it would not rule on jurisdiction as a preliminary question, but rather make one award dealing with both jurisdiction and the substantial dispute, as it considered that it first needed to hear all the evidence and ascertain and verify the facts of the case to determine the jurisdictional challenges in question. S Co’s challenge to jurisdiction would therefore proceed and be determined as an application for setting aside the award of 5 April 2013 under Article 34 (paragraphs 48 and 49 of the judgment). This was despite the 5 April award being labelled an interim award.

 

  • In a challenge under Article 34, the phrase “decisions on matters beyond the scope of the submission to arbitration” should be construed narrowly and setting aside considered only where decisions in the award are clearly unrelated to or not reasonably required for the determination of the subject dispute or matters or issues submitted to arbitration. It is noted that underlying Article 34 is the principle of finality and awards are subject to limited appeal on narrow jurisdictional and procedural grounds.The court held (paragraph 65 of the judgment): “…to construe these words otherwise would likely impede arbitration proceedings and increase costs, encouraging parties to segregate satellite or ancillary issues from an arbitration for separate court determination and encourage unwarranted, microscopic and truncated challenges to an arbitral award, all of which are contrary to the objectives of the Arbitration Ordinance, to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense.”

 

  • The fact that the tribunal awarded payment of consultancy fees to B Co under its S III Contract Claim on a legal basis not specifically advocated by B Co is not a ground to set aside its award on the basis that it strayed beyond the scope of its jurisdiction, particularly if the tribunal had not referred to new evidence or facts not known or disclosed to the parties; B Co had pleaded all material facts in support of its claim, and submissions had been made by counsel for both parties on S Co’s liability and damages payable (paragraph 89 of the judgment).

 

  • S Co’s complaint that the Balance Payment Claim was not properly particularised in the Notice of Arbitration had no basis, in particular, such a complaint had not been raised in its notice of challenge to jurisdiction to the tribunal and had thus been waived. Any jurisdictional complaint or complaint of procedural irregularity or non-compliance must be raised promptly so that if possible, it can be dealt with by the tribunal and enable the arbitration to continue in accordance with the parties’ initial agreement to refer the dispute to arbitration. The court held (paragraph 76 of the judgment): “The emphasis is on openness, fair dealing, and good faith, not keeping one’s sleeve a point or matter which a party either know or could have discovered with reasonable diligence.”

 
Conclusion

 
The court’s review of a tribunal’s decision as to its own jurisdiction is on limited and narrow grounds, in particular, a final award will not be set aside for lack of jurisdiction unless decisions in the award are clearly unrelated to or not reasonably required for determination of the subject dispute or matters or issues submitted to arbitration. Further, the case is a good reminder to parties not to keep jurisdictional or even procedural objections up their sleeve and to raise the same promptly, otherwise they may be taken as waived.

 
That said, the court’s review (whether of a preliminary ruling or final award by the tribunal as to jurisdiction) is an independent review de novo and not bound or restricted by the tribunal’s decision.

 
The case is also a reminder to a challenging party to avoid any abuse of the court’s process including carefully consider whether the tribunal’s decision as to jurisdiction is a preliminary ruling or final award and such party should not make two applications pursuant to Article 16 and Article 34 respectively at the same time, otherwise it may be liable for indemnity costs. The challenging party should not rely on the label of the award but should instead focus on the substance of the award; even if an award containing a decision as to jurisdiction is described as an interim award, it may not actually be a preliminary ruling but rather constitute a final award on the merits.

 

This article was supplied by Felicia Cheng, Squire Patton Boggs

 

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