Should tribunals have more power on issues of pre-conditions? Michelle Nelson and Soham Panchamiya of Reed Smith address this perennial issue in arbitral proceedings and review recent developments and decisions.
A perennial concern that has hounded arbitral proceedings and their efficient process has been arguments as to the satisfaction or otherwise of pre-arbitral conditions. A pre-arbitral condition could take many forms. In essence, a pre-arbitral condition prevents a party from commencing arbitration without the satisfaction of the condition in question.
Such conditions often signal the escalation of the dispute to the next, or an intermediate level, such as a requirement for:
- the CEOs or upper management of the parties to engage in good faith negotiations to resolve the dispute; or
- the parties to submit their dispute to a Dispute Adjudication Board or a technical expert for review and determination; or
- the parties to engage in mediation, often times under institutional rules.
Regardless of the condition, it has long been held that if a party was to commence arbitration before satisfying a contractual precondition, the arbitral tribunal would not have jurisdiction to decide the dispute unless and until the pre-arbitral condition had been concluded or satisfied.[1]
In other words, commencement of arbitration without the satisfaction of all the conditions beforehand would make the arbitration defective and thus, any award rendered by the Tribunal in any such proceedings, open to applications for nullification.
It is for this reason that when Party A claimed that Party B had commenced proceedings in violation of pre-arbitral conditions, the Tribunal was obliged to review and decide this matter as an issue of jurisdiction, i.e., up front, before considering the substantive aspects of the claim.
Recent Developments in EnglandIn recent developments in various common law jurisdictions, such as England, Singapore and Hong Kong, the aforementioned position has begun to shift.
Most recently, in the much-discussed decision of the English High Court in NSW v FSY,[2] the court took the view that the issue of satisfying pre-arbitral conditions did not question the jurisdiction of the tribunal, but rather, spoke to the admissibility of the underlying claims.
This position has also been adopted in Singapore[3] and Hong Kong.[4]
Difference between Jurisdiction and AdmissibilityThere is an important difference between jurisdiction and admissibility:
- A challenge as to jurisdiction is a challenge to the Tribunal: an argument that the claim should not be arbitrated due to a defect in or omission to the consent to arbitration, therefore the Tribunal is not allowed, under the contract, to determine the claim.
- A challenge of admissibility is a challenge to the claim itself: an argument that the claim itself is defective and should not be raised at all.
This has been dubbed the “Tribunal versus Claim” test.
An important point here is that if there was a challenge to jurisdiction, the Tribunal would be obliged to consider and decide on whether the challenge had merit upfront and before the substantive aspects of the dispute could be reviewed or determined.
This is because if the Tribunal made a finding that the jurisdictional challenge had merit, it would be unable to consider the claim at all.
Challenges of admissibility, on the other hand, do not have the same level of urgency. Often times, in practice, the Tribunal will note a challenge on the admissibility of the claim and render its decision on the challenge in the final award as part of its decision on all aspects, and importantly, at the end of the proceedings.
Identifying Pre-Arbitral Conditions as Admissibility Challenges is Problematic
These recent developments have now resulted in a situation where a Tribunal could be entitled to decide that the issue as to and consequence of non-compliance with pre-arbitral conditions would be decided in the final award.
This may not be problematic for a dispute involving a singular claim or issue, but often times, a Tribunal is asked to decide on numerous claims between the parties. This is especially common in construction disputes, which can often involve dozens of individual claims.
Practically, this could create a situation where, for example:
- Party A submits 20 claims in an arbitration;
- Party B argues that 15 of these 20 claims are inadmissible due to non-compliance with contractual pre-conditions to arbitration.
- The Tribunal decides to address challenges of admissibility in the final award.
- Both parties proceed to incur the costs of preparing their cases on all 20 claims.
- In the final award, the Tribunal finds in favour of Party B’s challenge on admissibility and dismisses 15 claims.
- While Party B may be pleased by the eventual outcome, both parties would likely agree that a determination of this nature on admissibility would have been better made upfront so that the Parties were saved from having to incur substantial legal and other fees such as experts, witness costs and tribunal fees, etc., in respect of 15 claims that were ultimately inadmissible.
Subject matter arbitrabilityIn a recent decision of the Singapore High Court,[5] the ‘Tribunal versus Claim’ test was further examined. The court here grappled with the question of ‘subject matter arbitrability’, i.e., is the subject matter of a claim arbitrable or not, and whether a challenge on this basis would be a challenge on jurisdiction or admissibility.
While the court recognised that an issue of subject matter arbitrability may, at first glance, be seen as directed at the claim (and hence concerned with a question of admissibility), the court took the view that non-arbitrability in fact involves a defect as to the parties’ consent to arbitration (and hence concerns a question of jurisdiction).
On the issue of pre-arbitral conditions, however, the English High Court in NSW has taken the view that non-compliance with such conditions is a matter of procedure, rather than subject matter. The reason being that challenging a claim based on a party’s non-compliance with a pre-arbitral condition does not challenge the validity of the claim, but rather challenges the right to arbitrate the claim until the condition in question has been satisfied.
ConclusionIt is the author’s view that satisfaction of pre-arbitral conditions is a perennial issue in arbitrations, which only gains more prominence and value in arbitrations involving multiple claims arising from the same underlying contract.
The purpose and indeed, intention of opting for arbitration as opposed to resolution by the courts, among other reasons, is a belief that arbitration would be a more time- and cost-effective method of dispute resolution. Likewise, the purpose of including pre-conditions to arbitration is to try to ensure that only true disputes which have exhausted other means of resolution are ultimately escalated to arbitration.
By classifying challenges of jurisdiction based on non-compliance with pre-arbitral conditions as challenges of admissibility, the courts have multiplied the burden on the parties to the arbitration in some instances cut across the intention of the parties in agreeing to a multi-tiered process for the resolution of disputes. Due to the inability to decide on the issue upfront, parties may now be compelled to argue all the way through the arbitration numerous issues that may be held to be inadmissible ultimately.
The courts in the various decisions cited above have clarified the decision on jurisdiction versus admissibility may vary on a case-by-case basis and would be dependent on the exact language of the contract.
It is therefore incumbent upon parties to ensure that the language of their arbitration clauses are sufficiently clear in terms of the importance (or lack thereof) that is to be placed on pre-arbitral conditions in the hope that the method and means of assessing whether any such requirements have been complied with is fit for the intended purpose.
Footnotes[1] Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd [2015] 1 WLR 1145; and Tang v Grant Thornton International Limited [2013] 1 All ER (Comm) 1226.
[2] NWA v FSY 2021 WL 04691458 (2021).
[3] BBA & others v BAZ [2020] SGCA 53.
[4] C v D [2021] HKCFI 1474.
[5] Westbridge Ventures II Investment Holdings v Anupam Mittal [2021] SGHC 244.