International arbitration News, analytics and practice

16Jul/130

Binding Recalcitrant Respondents to Default Arbitral Awards

by Martin Andrew Jarrett

Overview

When may an arbitral panel bind non-consenting respondents to a default award proposed by the claimant and other consenting respondents?  In Grant Thornton International Ltd. (the “Claimant”) v. JBPB & Co. (a partnership) (the “Respondents”) [2013] HKCFI 523, the High Court of the Hong Kong Special Administrative Region Court of First Instance (Construction and Arbitration Proceedings) (the “Court”) had occasion to rule on this question.

Background

The Respondents were members of the global accounting firm commonly known as ‘Grant Thornton’.  The Claimant is the principal corporate entity which is responsible for the administration of Grant Thornton.

The Claimant and Respondents were parties to the Member Firm Agreement (the “MFA”).  The MFA regulates the legal relations between members of Grant Thornton, and it contains an arbitration agreement designating London as the arbitral seat.

In late 2010, the Respondents were expulsed from Grant Thornton.  Subsequently, in April 2011, the Claimant initiated arbitration against the Respondents claiming for monies owed under the MFA and other damages incurred by reason of the breach of the MFA.

The Respondents were divided at the arbitration with one group, constituting a majority of the respondents (the “Majority Respondents”), and another group, constituting a minority of the respondents (the “Minority Respondents”), being represented by different legal counsel.

During the arbitration, the Majority Respondents settled the dispute with the Claimant, and applied to the arbitral panel to have the settlement embodied in a default arbitral award (the “Award”).  The arbitral panel granted this request, notwithstanding the objections of the Minority Respondents that the Majority Respondents did not have the authority to bind them to the settlement.

The Minority Respondents applied to annul the Award in the High Court of Justice of England and Wales (Chancery Division).[1] On 14 November 2012, this application was rejected.  The Claimant then obtained an order, on an ex parte basis, from the Court enforcing the Award.  The Minority Respondents appealed this determination in an inter partes hearing.

Issue

Should enforcement of the Award be denied on the ground that the arbitral panel issued a non-mandated decision?

Decision

The Court held that the arbitral panel had not decided disputes beyond its mandate, and ordered enforcement of the Award.

Arguments

Given the nature of enforcing arbitral awards, only the arguments of the Minority Respondents were detailed in the judgment.

The Minority Respondents relied on section 89(2)(d) (Refusal of enforcement of Convention awards) of the Arbitration Ordinance 2011 (Cap 609; Hong Kong), and it provides:

“(d) subject to subsection (4), that the award -

(i) deals with a difference not contemplated by or not falling within the terms of the submission to arbitration; or

(ii) contains decisions on matters beyond the scope of the submission to arbitration;”

As readers will note, these provisions copy verbatim article V(1)(c) of the New York Convention.  For ease of reference, the grounds contained within these provisions shall be compendiously referred to as ‘non-mandated decision making’.[2]

To establish that the facts of this case constituted ‘non-mandated decision making’, the Minority Respondents first sought to define the scope of the mandate.  They asserted that the scope of the mandate was informed by the request to arbitration, and that document stipulated that only disputes between the Claimant and the Respondents fell within the scope of the mandate.  By binding the Minority Respondents to the Award, the arbitral panel decided a dispute between the Majority Respondents and the Minority Respondents, and this decision necessarily exceeded its mandate.

To further reinforce the argument, the Minority Respondents referred to documents which governed the relationship between themselves and the Majority Respondents, none of which contained arbitration agreements.

Reasoning

The Court first considered what informed the scope of the mandate of the arbitral tribunal.  Contrary to the Minority Respondents’ contention that only the request for arbitration was relevant, the court ruled that the statements of defence and counterclaim also informed the scope of the mandate of the arbitral tribunal.

Upon consideration of those documents, three issues emerged for resolution by the arbitral tribunal, one of which was the adjudication of the Minority Respondents’ counterclaim.  Accordingly, one issue for the arbitral panel was: did the Minority Respondents have a valid counterclaim?

In answering whether the Minority Respondents had a valid counterclaim, the arbitral tribunal was obliged to consider whether the Respondents (considered together) had a valid counterclaim, particularly in light of the settlement by the Majority Respondents.  It was acknowledged by the Minority Respondents that the validity of their counterclaim rested on the validity of the counterclaim of the Respondents.

The Court quoted with approval the approach of the arbitral panel to this issue.  The arbitral panel first referred to Hong Kong law on partnerships, as the Respondents were a Hong Kong law partnership.  It determined that, under Hong Kong law, the Majority Respondents bound the Minority Respondents to the settlement.

Thereafter, the tribunal arbitral assessed the argument of the Minority Respondents that the settlement was in breach of a document signed by the Respondents in which they gave each other certain undertakings on matters relating to disputes arising out of their expulsion from Grant Thornton.  The arbitral tribunal held, however, that it was not permitted to rule on this matter because it was a dispute between the Majority Respondents and the Minority Respondents and, for that reason, not within the scope of its mandate.

In conclusion, the Court summarised its approach to the matter of non-mandated decision making by the arbitral panel as follows:

“In my view, the words “decision on matters beyond the scope of the submission to arbitration” under s 89(2)(ii) should be construed narrowly to only include those decisions which are clearly unrelated to or not reasonably required for the determination of the subjects disputes, matters or issues that have been submitted to arbitration.”

Comments

It is noteworthy how the Court skilfully disposed of the argument of the Minority Respondents.

The Minority Respondents sought to cast the issue of the case specifically: did the arbitral panel exceed the scope of its mandate by deciding a dispute between the Majority Respondents and Minority Respondents?  Although, as indicated the reasoning of the court, the arbitral panel denied that it decided this issue it is submitted that the decision of the arbitral panel practically decided this issue.

The Court, however, took a more general approach.  It cast the issue more broadly as: did the arbitral panel exceed the scope of its mandate by deciding on the validity of counterclaims of the Minority Respondents?  Clearly, this issue of the validity of a counterclaim fell within the scope of the mandate.

Accordingly, if any principle can be taken from this case, it is that any issue, which might, if consideration in isolation, fall outside the scope of the mandate, is incidental to a broader issue, which does fall within the scope of the mandate, that incidental issue may be decided by the arbitral panel.


[1] Tang Chung Wah and anor. v. Grant Thornton International Limited and ors. [2012] EWHC 3198 (Ch).

[2] See further Van den Berg, A. J.; The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation (1981); p. 311.

Author

Martin Andrew Jarrett Martin Andrew Jarrett Solicitor and Barrister New South Wales Australia Binding Recalcitrant Respondents to Default Arbitral Awards

Bachelor of Arts, Bachelor of Laws (with first class honours) (UoN), & Graduate Diploma of Legal Practice (CoL)

Solicitor and Barrister, New South Wales, Australia

Associate, Melchers Rechtsanw?lte Partnerschaftsgesellschaft, Heidelberg, Germany (www.melchers-law.com)

Lecturer, Universit?t Mannheim, Germany

Doctoral candidate, Universit?t Mannheim, Germany

Guest researcher, Ruprecht-Karls-Universit?t Heidelberg, Germany

Email: m.jarrett [a] melchers-law.com

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