"Starting Afresh" - Hong Kong Court Overturns the Tribunal's Jurisdiction Award on Joinder of Party

In the recent Hong Kong case of R v A, B and C [2023] HKCFI 2034 rendered by Mimmie Chan J, which concerns the interpretation of the High Court’s jurisdiction under Section 34 Arbitration Ordinance (Cap. 609) (AO), a pivotal ruling was rendered that effectively overturned an arbitral tribunal’s (Tribunal) decision allowing the joinder of a party to the arbitration in place of the Claimant as the rightful principal to a contractual agreement and the arbitration agreement therein (Agreement). This is a significant decision as it lays down principles on the Court’s power to conduct a de novo review of the Tribunal’s jurisdictional decisions and confirms the Court’s power to take into account new evidence and argument presented after an arbitral award has been issued in reaching its decision.

 

Rules regulating Joinder of Parties in Hong Kong and in Mainland China

“Joinder” in arbitration proceedings refers to the addition of third parties to an ongoing arbitration. It allows parties who are not initially parties to the arbitration agreement to join the proceedings and become parties to the arbitration. Article 27 of the Hong Kong International Arbitration Centre Rules (HKIAC Rules) allows the Tribunal to approve the joinder of any additional party who is bound by a valid arbitration agreement. This introduces the possibility for additional parties to initiate joinder requests themselves, in addition to existing parties.

Similarly, in mainland China, the 2015 Arbitration Rules of the China International Economic and Trade Arbitration Commission (CIETAC Rules) expanded the traditional requirement of explicit written consent. Article 18 empowers either party seeking to join an additional party to the arbitration to submit a Request for Joinder to CIETAC, provided that the arbitration agreement invoked in the proceedings ostensibly binds the said additional party. Article 31 of the Shanghai International Arbitration Centre 2015 Arbitration Rules (SHIAC Rules) allows the same, subject to the consent of third parties and the Tribunal’s discretion.

 

Case facts

In the case of R v A, B and C, the dispute arises out of  a limited partnership agreement, referred to as the 2nd Amended LPA, entered into by R (original claimant in the arbitration and plaintiff in the Court judgment) and the first defendant, for certain investment in 2018. R alleged that the defendants breached the second Amended LPA (LPA) by, inter alia, failing to comply with requests for distributions in kind from the 2018 investment, and commenced arbitration against the defendants.

C (third Defendant in the judgment) applied to join the arbitration as claimant. C claimed that it is the true principal and beneficiary of the investment made by R. A crucial contention put forth by C is that a reimbursement of RMB300 million was made by her and her family to a nominee acting on behalf of R’s controlling shareholders. Such reimbursement, as C argued, established her as the true beneficiary and rightful party to the agreement. R, on the other hand, argued that the reimbursement was solely intended to assist C’s family in a share manipulation scheme and unrelated to the 2018 investment.

The Tribunal ruled that C was the true principal and party to the argument, and R commenced court proceedings with new evidence adduced to set aside the award (Award). Pursuant to Section 34 of AO, the plaintiff sought a declaration that the Tribunal lacks jurisdiction over the joinder and that the plaintiff is the true principal and party to the disputed agreement, as well as an order for the defendants to pay the plaintiff's costs.

 

Section 34 AO – Ruling on Jurisdiction

Section 34 AO gives effect to Article 16 of the UNCITRAL Model Law, which sets out the competence of arbitral tribunal to rule on its jurisdiction. Section 34(1)(1) writes that “The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.” Further, Section 34(1)(3) states that the arbitral tribunal may rule on a plea 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 the court to decide the matter within 30 days after receiving notice of the ruling.

 

Whether the Award was an Award on Jurisdiction

In the present case, the Court was first tasked to determine whether the Tribunal's decision in the Award constitutes a decision on jurisdiction. The Court rejected arguments that the Tribunal had only answered part of the jurisdiction question or that the decision was on the merits of the dispute.  Instead, the Court held that the Tribunal’s decision was ample and comprehensive enough on its jurisdiction, addressing both the question of who was the beneficial owner of the LPA and the “existence and validity of an arbitration agreement”. The Court therefore found that the Award was a decision by the Tribunal on jurisdiction and the Court has power to review the Award.

 

The Court’s Power to Determine the issue de novo

The second issue to be considered is whether the Tribunal’s decision as to the existence of an arbitration agreement between the parties was correct, which would render C the true principal to the LPA. In decide this, the Court is not bound by the Tribunal’s view of its own jurisdiction [50]:

• Scope of the Court’s review [49]
  The Court has authority to independently review the ruling on jurisdiction, consider the evidence afresh and make its own decision based on the evidence before it, as per Dallah Real Estate v Ministry of Religious Affairs of the Government of Pakistan [2011] 1 AC 763. This ensures a fair assessment of the jurisdictional issues.

• De Novo Review [62]
  The Court's review is not limited to the Tribunal's findings or evidence presented during arbitration. It conducts a de novo review, making its own decision on jurisdiction based on all the evidence before it, including any new evidence and arguments not adduced during the arbitration proceedings.

 

New Evidence and Arguments Admitted by the Court

R has provided new evidence (New Evidence) that the RMB300 million was not s reimbursement but was transferred for the sole purpose of the share manipulation scheme to acquire Listco shares. In addition, R provided evidence that the remittance was not derived from C’s family, but from funds advanced by R’s parent company. In this regard, the Court provides the following summary of legal principles for consideration:

• Admissibility of New Evidence [49] – [50]
  The Court accepts that it may receive New Evidence relevant to the question of jurisdiction, even if it was not presented before the Tribunal. The focus is on the admissibility and relevance of the evidence, rather than its timing or potential prejudice.

• Admissibility of New Arguments [49]
  When the hearing is de novo, if necessary, witnesses can be called and are entitled to put forward new arguments on the question of jurisdiction which the Court is entitled to consider. The Court should not be in a worse position to make an assessment on an issue of fact, and is therefore able to examine the evidence in the usual manner.

• Weighing of the New Evidence and its impact on jurisdiction [62] – [63]
  The Court exercises discretion in weighing the new evidence presented during the review. It considers factors such as credibility, completeness, and compliance with procedural rules. The Court may attach little or no weight to evidence that has been deliberately withheld or lacks reliability.
  The introduction of New Evidence may have a significant impact on the determination of jurisdiction. If the evidence undermines the tribunal's decision and casts doubts on the existence of an arbitration agreement or reimbursement claims, it may affect the court's decision on jurisdiction.

• Fairness and prejudice [63]-[64]
  The Court considers fairness and potential prejudice when assessing the admissibility of new evidence. It may refuse to allow evidence that does not comply with procedural rules or selectively presents documents.

• Burden of Proof [109]
  The onus is upon the person seeking to show that the beneficial ownership is different from the legal ownership of property, i.e. the burden is on the third party C to prove that they are the beneficial owner of the investment. Adopting the principles in Filatona Trading v Navigator Equities [2020], the Court observes that in a de novo hearing, there is a heavy burden of proof on the party who argues that a known and identified principal is to be excluded.

 

The Court’s Ruling

After weighing the New Evidence and considering New Arguments without hearing oral evidence, the Court set aside the arbitral award and declared that the tribunal had no jurisdiction over C. Applying the strict principle of the “heavy burden” of proof seeking to exclude a known and identifiable principal (R) as a party to the contract, the Court concluded that C failed to prove that there was a payment made by way of reimbursement, that the RMB300 million was the reimbursement alleged and subsequently, failed to prove that they themselves were the beneficial owners of the investment in question. The Court decided that it was more probable that the 300 million remittance was part of the regular transfers of funds made for the share manipulation scheme as put forward by R. As a result, the Court found in favor of R, and held that C was not the party to the arbitration agreement contained in LPA. The Tribunal had no jurisdiction over C’s claims and the Award was set aside. C and the defendants were ordered to pay the costs of the proceedings on an indemnity basis.

 

Practical implications and Considerations

R v A, B and C has left an indelible mark on the legal landscape, which reshaped the contours of jurisdiction as per Section 34 AO and reinforced the Court’s power to conduct de novo review of new evidence and argument in deciding a jurisdictional decision by the arbitral tribunal afresh.

Comparing to the UK case of The Kalisti, in which the disgruntled party relied on Section 67 of the UK Arbitration Act 1996 as recourse to the Court to challenge the Tribunal’s findings, the Court was reluctant in relying on new evidence despite the fact that the fresh evidence is reliable and relevant. The Court thinks the claimant was “plug[ging] the gaps in its case as identified by the arbitrators”. While it is true that the principle of finality is an integral aspect of arbitration, it is also essential to balance it with the need for fairness and justice. The ability to consider newly admitted evidence is not intended to render the arbitral award useless – rather, it serves as a safeguard against potential injustices that may arise due to unforeseen circumstances. Striking this balance ensures that substantial justice is upheld.

It is believed that the decision is in line with the Court’s power enshrined in Section 34 and should be supported to ensure fairness and justice are afforded to parties of the jurisdiction. In this case, by exercising its statutory power to consider fresh evidence and arguments and taking into account the heavy burden on the party seeking to substitute an apparent party as principal to the arbitration agreement, the Court ensured that R reclaims its rightful position as party to the arbitration agreement, as well as claimant to the arbitration.  

Further, the Court has laid down guidance on how new evidence should be treated to ensure fair balance between the parties’ respective interest. The Court’s guidance provides a comprehensive framework that encompasses admissibility criteria, evaluation standards, burden of proof, procedural fairness, and finality considerations. This decision offers clear and useful directions to practitioners and arbitrating parties for similar cases in the future.