Commencing Arbitration

The appointment of an arbitrator and the serving of an arbitration notice should protect the time bar in the contract.  If the contractual time bar operates to bar a claim, the tribunal would still have jurisdiction over the question of whether the claim was time-barred, unless the parties agree to take the issue to court.  The Model Law does not deal with time bar and its extension, but according to Section 2GD of the Hong Kong Arbitration Ordinance (Cap. 341), our client may apply to a tribunal for an order extending the period.  However, the tribunal may do so only in limited circumstances.  Our client should know that extensions are rare nowadays and time bars are strictly enforced, as illustrated by “The “Catherine Helen” and “The Calypso”.

In the present case, a lot depends on timing, on when the dispute “arose” or when our client became aware of the dispute or knew/should have known of the infringement of their rights; when a cause of action was taken and what causes of action were taken.  Our client should make sure that they list all the claims that are outstanding against the other party, e.g., monetary as well as indemnity claims.  When considering time bar, arbitral tribunals and courts would avoid the difficulties and uncertainties of trying to deal with claims long after the event and would take the view that parties should know what claims are outstanding against each other at an early stage.

Arbitration Notice

The notice of arbitration serves to outline the scope of the dispute and thus the jurisdiction of the tribunal.  It should include all possible issues being raised in sufficient detail, since it will play an important role in influencing the appointment of arbitrators by an institution in the event that the parties cannot agree the appointment of arbitrators.  As mentioned in the section on Time Bar, limitations indirectly require the service of a notice of arbitration, which may be served in one of four ways, e.g., by delivering it to the person on whom it is to be served.  In our client’s case, it should be noted that if the parties choose institutional arbitration administered by the HKIAC, its rules specify how a valid notice is to be given.

Jusitce Moore-Bick held in “The Baltic Universal” that an arbitration notice is sufficient to commence arbitration if it makes clear by whatever language that the sender is invoking the arbitration agreement and is requiring the respondent to take steps so that the arbitral tribunal can be set up.  For example, a message to an arbitrator asking him to accept appointment, copied to the respondent with a specific requirement that they indicate if they would accept the arbitrator, or alternatively appoint their own arbitrator, would be regarded as a proper notice.  A proper notice must be clear as to its intention to invoke the arbitration agreement, so a conditional request to concur in an arbitrator’s appointment would not suffice to commerce arbitration.  Similarly, a letter was held not to be “objectively clear” in giving notice of arbitration.  The letter was written in the context of seeing whether the defendant would insist on arbitration, not in the context of intending to start the process of arbitration.  Therefore the letter was not construed as sufficient to commence arbitration and the claimant’s subsequent appointment of an arbitrator was invalid.  Finally, a notice of arbitration should identify the claim(s) with sufficient particularity and make clear the claimant’s intention to refer the claim(s) to arbitration, not just threatening to do so.

Draft Arbitration Notice

Date: November 20, 2008

(Respondent Company Name and Address)

(Respondent Law Firm and Address)

Attention: (Names of Company Director and Counsel)

Re: Notice of Arbitration

1. In view of your refusal to pay US$xxx under the attached international sales contract, we hereby notify you that the matter be referred to arbitration pursuant to the arbitration clause in paragraph xx of our sales contract that refers “All disputes to arbitration in Hong Kong SAR, and PRC law shall govern”.

2. The particulars of the matter are as follows: (Provide a brief outline of all the issues)

3. We make the following claims and seek the following remedies: (State briefly all claims and remedies sought.)

4. The value of this claim is estimated at US$xxx.

5. We have appointed Mr Philip Yang as its nominee for a sole-arbitrator tribunal.  Mr Yang’s consent as the nominated arbitrator in this matter and his CV are attached.  We would call upon you to agree to the appointment of Mr Yang as sole arbitrator, or alternatively appoint your own arbitrator.

6. The foregoing shall not be construed as a complete account of the facts and events of the above matter, or a waiver of any rights, remedies or claims which we may have.

(Claimant/Counsel Name, Title and Company Name)

(Claimant/Counsel Signature)

Danger of “spending good money after bad”

Our client has expressed doubt about the potential debtor’s financial strength.  The ability to have the assets of the potential debtor attached, or securities lodged to have the assets released would help our client avoid “spending good money after bad”.  The benefit of obtaining security for claims is not just to ensure that our client will be paid, if their claim is successful, but also to enhance the possibility of an early amicable settlement.  If an amicable settlement is not reached, with security in place the debtor is not likely to employ delaying tactics.

Our client can obtain security for claims by applying for a Mareva injunction, a procedural order nisi, a Rule B Attachment, an order for lien on cargo, arrest of ship (for maritime claims), or an interim protection order.  A Mareva injunction is usually made against the bank accounts, property or insurance proceeds of the defendants.  It might be the most useful to our client, since it allows the assets of the potential debtor to be “freezed”, even before the arbitration is under way, on the ground that the potential debtor would be unable to pay if ordered to do so or would try to dispose of their assets to avoid payment.  A procedural order nisi is a conditional interim order which is to be confirmed unless something required is done by a specified time.  It can be ordered, provided it does not cause delay.

Section 2GB of the Hong Kong Arbitration Ordinance (Cap. 341) empowers arbitral tribunals to make orders or give directions requiring money in dispute to be secured, along with other interim measures of protection.  Section 2GC(6) provide for concurrent jurisdiction of the High Court and arbitral tribunal in granting interim measures; it states that the Court may refer the granting of such measures to a tribunal.  Section 2GC empowers the High Court to grant interim measures of protection.  Section 2GG also provides for the enforcement of tribunal decisions, which can be used for enforcing all kinds of orders and awards.

Further to the powers provided by Hong Kong law, Article 9 and the amended Article 17 of the Model Law also vest the tribunal with the power to order interim measures and preliminary orders.  Before its amendment, Article 17 did not specify what interim measures might be.  Now it states that interim measures are any temporary measures that preserve assets and evidence, prevent actions prejudicial to the arbitral process, or maintain/restore the status quo pending determination of the dispute.  Our client needs to satisfy a tribunal that they would suffer irreparable harm if the measure is not granted, and they have a reasonable chance of success with their claim(s).  They may apply for an interim measure ex parte together with an application for a preliminary order directing the debtor not to frustrate the purpose of the measure.

Our client may also need to obtain interim measures against the debtor in jurisdictions outside of Hong Kong, in which the debtor is located or has assets.  In Hong Kong, courts may make interim orders in support of foreign arbitral proceedings, although they will exercise caution in doing so.  As “The Lady Muriel” shows, the Court of Appeal was reluctant to encroach on the procedural powers of arbitrators and refused an application for an order to inspect the vessel (for the preservation of evidence to be used in arbitration) when the arbitrators in London (seat of arbitration) were not asked to approve such an application.  The Court also required proof of serious and irreparable damage to the applicant’s position; it was not enough that it would be just and convenient to make the order.

Danger for dilatory claimants

Our client, faced with a potentially insolvent debtor, has good reasons to be dilatory, especially if commencing arbitration fails to force payment or bring the respondent to the negotiation table.  However, as Philip Yang clearly warns, our client should be aware of the danger of employing delay tactics.  Although the House of Lords’ decision in “The Bremer Vulkan” held that neither the courts nor arbitrators should have the power to dismiss arbitration claims for want of prosecution, changes in the law both in the UK and HK have empowered arbitrators to do so.  In TAG Wealth Management v West [2008], the arbitrator’s dismissal of the claim on the ground of inordinate and inexcusable delay was upheld under Section 41(3) of the Arbitration Act 1996.

Dilatory claimants are somewhat dealt with in Article 25 and 23(1) of the Model Law: where there is delay in submitting a claim, the arbitration proceedings may continue and an award may be made on the evidence before it.  Philip Yang rightly points out that these provisions do not adequately address delays, which can occur at any time during the proceedings.  The Model Law does not provide strict time periods for the exchange of submissions or pleadings, and the parties have to rely on the arbitrator’s discretion; neither does it provide arbitrators with the power to dismiss a claim for want of prosecution and prohibit further proceedings in respect of the same claim(s).

The inadequacies of the Model Law are remedied in Section 2GE of the Hong Kong Arbitration Ordinance (Cap. 341).  It states that a claimant has a duty to prosecute the claim without delay, implying that the respondent is under no obligation to press ahead with the arbitration.  In other words, contrary to Lord Diplock’s ruling in “The Bremer Vulkan”, the respondent can “let sleeping dogs lie”, even if the claimant does not progress the reference.  Section 2GE(2) provides an arbitrator with the power to make an order to dismiss a claim without applying to the court, if satisfied that the claimant or their advisor has unreasonably delayed in prosecuting the claim.  “Prosecuting” a claim must, by implication, refer to maintaining the momentum of proceedings once brought.  Section 2GE(4) defines what amounts to unreasonable delay.

Serious prejudice is likely to be caused by dilatory claimants when, e.g., key witnesses/ documents disappear, or companies go bust.  Under these circumstances, arbitrators would be inclined to dismiss a claim, since it is their overriding duty to avoid unnecessary delay and expense (Section 2GA).  Another situation where serious prejudice is likely would be when the claimant succeeds in obtaining security for the claim, such as a Mareva injunction, the arrest of a ship or forms of attachment in foreign jurisdictions, but delays and uses the security as a “ransom” to force settlement.  Our client should know that case law has placed a special duty on a claimant who obtains a Mareva injunction to proceed diligently.  Philip Yang argues that the arbitrator should dismiss a dilatory claim with a Mareva injunction earlier than other dilatory claims.  Therefore, we and our client must take care not to delay, especially when we succeed in obtaining security for the claim(s).  Furthermore, our client needs to know that if their claim(s) has been dismissed, they would not be able to start a fresh reference of the same dispute, nor would they be able to go to court to prosecute their claim.

(2,810 words)

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