Title
Fung Sang Trading Ltd. v. Kai Sun Sea Products & Food Co. Ltd., Supreme Court of Hong Kong, High Court, YCA 1992, at 289 et seq.
Content

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Fung Sang Trading Ltd. v. Kai Sun Sea Products & Food Co. Ltd., Supreme Court of Hong Kong, High Court, 29 October 1991.

Parties:                 Plaintiff: Fung Sang Trading Ltd. (Hong Kong)

                             Defendant: Kai Sun Sea Products & Food Co. Ltd. (Hong Kong)

Published in:         unpublished

Subject matters:   - "domestic" or "international" [not included in the TransLex]

                             - place of substantial part of performance of contract [not included in the TransLex]

                             - formation of contract [not included in the TransLex]

                             - competence-competence

                             - separability of the arbitration agreement

                             - validity of arbitration agreement

                             - appointment of arbitrator by court (Art. 16 Model Law)

Facts

Fung Sang Trading Ltd. (Fung Sang), as seller, and Kai Sun Sea Products & Food Co. Ltd. (Kai Sun), as buyer, allegedly agreed by contract of 9 November 1990 to the sale of 5,000 tonnes of Chinese soybean extraction meal, with delivery FOB Dalian, PR China. Payment was to be made by Letters of Credit in favour of the sellers. The contract contained an arbitration clause providing for arbitration to "take place in Hong Kong or governed by Hong Kong Laws and Court".

Fung Sang alleged that the buyer failed to nominate a vessel to take delivery and to establish the required Letter of Credit. On 11 July 1991, Fung Sang's solicitors sent a "letter before action" to Kai Sun's registered office, which was returned marked "moved address unknown". On 1 August 1991, Fung Sang's solicitors wrote to Kai Sun that they had appointed their arbitrator. Their letter290pointed out that Art. 10(2) of the UNCITRAL Model Law1 provides that there shall be three arbitrators in the absence of agreement by the parties, and that if buyer did not appoint an arbitrator within thirty days, Fung Sang would apply to the court to have an arbitrator appointed on Kai Sun's behalf. Kai Sun did not appoint an arbitrator and Fung Sang applied to the court for the appointment. Kai Sun objected that the arbitration was not international and that no contract had actually been concluded.

The court, holding that the arbitration was international and that it was competent to decide on its own jurisdiction, appointed an arbitrator on behalf of Kai Sun.

Excerpt

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23 "I now turn to the question raised by Mr. Yeung, namely that the defendants deny that they ever entered into any agreement and that for this reason no arbitrator should be appointed.

One has to start with Art. 16 of the Model Law.

'Article 16. Competence of arbitral tribunal to tule on its jurisdiction:

(1)

The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

(2)

A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. A party is not precluded from raising such a plea by the fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified.

(3)

The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article 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 30 days after having received notice of that

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ruling, the court specified in article 6 to decade 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.'

24 "It is important to appreciate the scope of Art. 16 and the way in which it is affected by other provisions in the Model Law.

25 "The Tribunal's decision on its jurisdiction is neither exclusive nor final. It is subject to immediate but final review under Art. 16(3). The Tribunal's decision may later be considered in an application to set aside the award under Art. 34 and although Art. 36 does not apply in Hong Kong ... the enforcement of the award may be refused under the New York Convention ('the agreement is not valid under the law to which the parties have subjected it'). It is also pertinent to point out that where a stay of legal proceedings is sought under Art. 8 the court may have to consider whether an arbitration agreement is null and void.6

26 "It is also to be noted that the UNCITRAL Arbitration Rules which have been adopted by the Hong Kong International Arbitration Centre and are in wide use throughout the world do give the arbitral tribunal power to rule 'on objections' that it has no jurisdiction.

27 "Art. 16(1) enshrines the doctrine of separability which English law has partially recognized since Heyman v. Darwins (1942) A.C. 356. Thus the arbitration clause is separable from the contract containing it so that if the contract is repudiated and the repudiation is accepted the arbitration clause survives the repudiation thus enabling the arbitrator to tender an award on the claim resulting from the alleged repudiation. Mustill and Boyd at pp. 108/97 suggest that where the initial existence of the contract is challenged the arbitrator can rule on this point but he cannot bind the court. They refer to the doctrine of separability at p. 7 and express the view that however widely drawn an arbitration clause it cannot 'give an arbitrator jurisdiction to decide upon issues which go to the essential validity of the substantive contract'. However298in a footnote they recognize that the wider doctrine of separability recognized in other jurisdictions has not been recognized in English law although the English form leads frequently to the same result.

28 "Very recently the Commercial Court in London had cause to consider the very scope of the separability principle under English law. In Harbour Assurance Company (UK) Ltd. v. Kansa General International Insurance Company Ltd. [judgement given on 31 July 1991] (unreported) Steyn J. (as he then was) delivered a detailed and closely reasoned judgement on the principle of separability of the arbitration clause in an integral written contract. At the outset of his judgement he referred to the question whether arbitrators could under English law decide a question as to their own jurisdiction. He summed up the position thus:

'The approach in English law is simple, straightforward and practical. As a matter of convenience arbitrators may consider, and decide, whether they have jurisdiction or not: they may decide to assume or decline jurisdiction. But it is well settled in English law that the result of such preliminary decision has no effect whatsoever on the legal rights of the parties. Only the court can definitively rule on issues relating to the jurisdiction of the arbitrators. And it is possible to obtain a speedy declaratory judgement from the Commercial Court as to the validity of an arbitration agreement before or during the arbitration proceedings.'

29 "On the scope of the doctrine of separability he concluded that the doctrine was applicable to cases concerning the initial invalidity of the contract. However in cases where illegality is raised to render the agreement containing the arbitration clause void ab initio he said:

'... while the distinction between invalidity and illegality is not one which in my view should nowadays prevail ... I conclude that ... the separability principle does not extend to ab initio illegality of a contract in which the arbitration is imbedded.'

30 "Returning to the Model Law at pp. 74-5 Aron Broches in his commentary on Art. 16(1) summarises the position as to competence and separability in the following useful passage:

'4.

The concept of "competence-competence" concerns the degree to which an arbitral tribunal may rule on its own jurisdiction as defined by the arbitration agreement. It does not imply the power of an arbitral tribunal

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to take a final and binding decision as to its jurisdiction. It rather denotes a tribunal's power to adopt an initial ruling as to its jurisdiction. The issue 'is not the finality of the arbitrators' decision on their jurisdiction and the consequent ouster of the jurisdiction of the courts, but rather the time at which and the conditions under which the courts may play their role as the final authority on the question of arbitral jurisdiction. It is therefore an issue which is to be resolved on the basis of practical rather than doctrinal considerations. The basic problem is how to reconcile the realization of the objectives of commercial arbitration, which would be defeated if an arbitral tribunal would have to suspend or terminate its proceedings each time a party pleaded invalidity of the arbitration agreement, with an effective measure of court supervision to ensure that the arbitral tribunal does not finally confer on itself a jurisdiction which by reason of the consensual nature of arbitration can only derive from the agreement of the parties.

5.

The power to investigate its own jurisdiction is inherent in the appointment of an arbitral tribunal and is now generally accepted. Notwithstanding its essential role in the discharge of an arbitral tribunal's task, it has in the past not been explicitly stated. The tendency over the last few decades has, however, been to set this power of arbitral tribunals forth in express terms. The explicit recognition of competence-competence in the Model Law is in accordance with this tendency and lends it additional authority.

6.

The second principle enunciated in paragraph (1) is "separability". It must be carefully distinguished from "competence-competence". While the latter, as we have just seen, recognizes the power of an arbitrator to rule, at least initially, on his own jurisdiction, separability of the arbitration clause is intended to have the effect that if an arbitrator who has been validly appointed and who stays within the limits of the jurisdiction conferred upon him by the arbitration clause concludes that the contract in which the arbitration clause is contained is invalid, he does not thereby lose his jurisdiction. This concept which is relatively new has been accepted by judicial decisions or by doctrine in a large number of countries. It has, however, not been universally accepted and with few exceptions it has not been enacted as statutory law anywhere, otherwise than through adoption of the Model Law, of which the Canadian legislation is an example. There is, moreover no evidence that it has the same meaning and effect in the countries and among the authors which have accepted it. Nor has its precise meaning been defined in Art. 16 or in the discussions leading to its adoption.'

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31 Mr. Davidson invited me to rule on the issue as to wether there was in fact a binding agreement between the parties. Tempting as it was to dispose of the matter on the affidavits, to adopt such a course would have been to turn Art. 16 on its head. What should happen is this: I should appoint an arbitrator. The 2 appointed arbitrators will then appoint the third to make up the tribunal of 3. If the defendants wish to rely on the point that they never entered into an agreement at all, then they must do so 'not later than the submission of the Statement of Defence'. The Tribunal may rule on this point as a preliminary issue or as part of an award on the merits. If done by way of preliminary question and if in favour of the plaintiffs the defendants will then have 30 days in which to invite this court to decide the question. Such decision of this court is final. It should be noted that the arbitration can continue whilst a request is pending to the court. In Hong Kong this will not be as an important provision as elsewhere because of the speed with which parties will be able to come before this court.

32 "lf the Tribunal makes an award on the merits, which clearly would encompass a finding that they had jurisdiction to do so, then the defendants will have an opportunity to apply to set the award aside under Art. 34 if they can establish that the agreement is not valid under Hong Kong law.8

33 "Mr. Yeung submitted that the Position would be very different if this dispute were a domestic one because be submitted arbitrators could not rule on their own jurisdiction. He relied on the Christopher Brown Case [1954] IQB 8 at 12 and 13 where Devlin J. (as he then was) said:

'It is not the law that arbitrators, if their jurisdiction is challenged or questioned, are bound immediately to refuse to act until their jurisdiction has been determined by some court which has power to determine it finally. Nor is it the law that they are bound to go on without investigating the merits of the challenge and to determine the matter in dispute, leaving the question of their jurisdiction to be held over until it is determined by some court which had power to determine it. They might then be merely

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wasting their time and everybody else's. They are not obliged to take either of those courses. They are entitled to inquire into the merits of the issue whether they have jurisdiction or not, not for the purpose of reaching any conclusion which will be binding upon the parties - because that they cannot do - but for the purpose of satisfying themselves as the preliminary matter whether they ought to go on with the arbitration or not. If it became abundantly clear to them, on looking into the matter, that they obviously had no jurisdiction as, for example, it would be if the submission which was produced was not signed, or not properly executed, or something of that sort, then they might well take the view that they were not going to go on with the hearing at all. They are entitled, in short, to make their own inquiries in order to determine their own course of action, and the result of that enquiry has no effect whatsoever upon the rights of the parties.'

34 "It follows that every arbitrator should, preferably before accepting an appointment but certainly shortly thereafter, check the arbitration agreement and ensure that he comes within any qualification therein contained. When he sees the nature of the claims being made he should likewise check to see that they come within the scope of the arbitration agreement. If he is in doubt he will take the matter up with the parties. He should not be too astute in this process leaving it basically to the parties to raise points as to his jurisdiction.

35 "If, however, an issue is fairly and squarely raised as to his jurisdiction he can, of course, enquire of the parties as to whether one of them wishes to seek declaratory relief to clarify the matter. In the absence of their doing this he has 2 choices. These are succinctly set out in Mustill & Boyd Commercial Arbitration (2nd Ed.) at 575/6:

'(1)

To decide the question of jurisdiction himself, subsequently continuing or abandoning the arbitration according to what he decides;

(2)

To set the question of jurisdiction on one side, leaving the parties to raise it in court, either before or after the award has been published. Which course the arbitrator should adopt will depend on the circumstances. If the objection is straightforward, he may consider it better to rule at once, always bearing in mind that if either party is dissatisfied, the matter can be reopened by the court. On the other hand, if the question of jurisdiction is difficult, or if the hearing on the merits is unlikely to be expensive, so that even a null award will not involve a great waste of costs, the arbitrator may think it better to proceed with the reference, warning the claimant that he goes ahead at his peril.'

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36 "It is appropriate in this context to refer to some observations of Lord Mackay in Metal Trade v. Kato Shipping [1990] 1 WLR 115 & 117 where he said:

'I would like to emphasise two matters. I believe it is highly desirable that the question whether or not there was a concluded contract and if there was whether or not there was an arbitration clause included in it, should be decided before costs are incurred in the arbitration.'

37 "In my judgement, an arbitrator faced with a challenge to his jurisdiction should first see whether the parties wish to seek declaratory relief. If not, then he appears to have 3 choices. Firstly, he may decide he has no jurisdiction and that is the end of the matter unless a court subsequently takes a contrary view. Secondly, he may issue an interim award on jurisdiction and see whether it is effectively challenged before he goes on to consider the merits. Thirdly, he may decide jurisdiction and the merits and render an award.

38 "If the case is fairly simple, he may wish to take the third course if he is satisfied that not too much expense will be incurred by deciding liability at the same time as jurisdiction. If the case on the merits is difficult and likely to be costly then he may go for the second alternative, namely rendering an interim award on jurisdiction. In both these ways Lord Mackay's injunction as to wasted costs will be adhered to.

39 "Thus, each case will depend on its own particular facts. One thing, however, is clear. Arbitrators should not pull down the shutters on the arbitral process as soon as one party objects to the jurisdiction of the tribunal. The arbitrator can rule on the question as to whether he has jurisdiction but he cannot make a binding and final decision on that issue as the matter can always be taken to court either by direct challenge or at the setting aside or enforcement stage.

40 "In so far as Mr. Yeung might have been contending that the separability principle does not apply where the initial validity of the agreement containing the arbitration clause is challenged, then I agree with Steyn J. in Harbour Assurance (supra) that commercial reality is to be preferred to logical purity.

41 "I would like to refer to the case of Aboitiz Jebsen Bulk Transport Corp. v. KIT Shipping Agency Ltd. which is a decision of Bokhary, J. given on 16 March 1990 referred to at p. 33 of Hong Kong Arbitration - Cases and Materials. In that case the learned judge in considering whether or not to grant a stay stated that the question whether or not there had been a submission to arbitration is not to be decided by the arbitrator but by the court. If by that the learned judge meant that the arbitrator could never ever rule on the question of jurisdiction, I must respectfully but profoundly disagree. If he meant, however, that an303arbitrator could never make a binding ruling as to his jurisdiction because the matter could always be considered by the court then I respectfully agree. In any event that case was quite extraordinary as the party seeking the stay was the same party who alleged that he was not a party to the arbitration agreement!

42 "If this case were a domestic one I would still appoint an arbitrator if asked so to do and I am confident he would act in accordance with the principles above stated.

43 "The summons seeks the appointment of Mr. Robin Peard who is well known to this court as an able, experienced and imperial arbitrator. Mr. Peard was a partner in Johnson, Stokes & Master and is now a consultant with that firm. Mr. Davidson quite properly told me that up to two years ago, Johnson, Stokes & Master used to act for the plaintiffs but Mr. Peard had no involvement whatsoever in those matters. Mr. Yeung has asked me not to appoint Mr. Peard on behalf of the defendants in the light of this fact. Although I have not the slightest doubt that Mr. Peard would act impartially if appointed, I think it is important that when the court is appointing on behalf of the defaulting appointing party, it should go out of its way to ensure that no sense of grievance is felt, however unreasonable that attitude might appear to others. Fortunately, there is now a pool of experienced, talented and trained arbitrators in Hong Kong and this makes my task in appointing a substitute for Mr. Peard very easy indeed. I propose to appoint Mr. Philip Yang who is at present Chairman of the Hong Kong Branch of The Chartered Institute of Arbitrators and is one of the most experienced arbitrators in Hong Kong with particular experience in the field of international sale of goods."

1The UNICITRAL Model Law came into force in Hong Kong on 6 April 1990, with the coming into force on that date of the Arbitration (Amendment) (No. 2) Ordinance 1989. ("Arbitration Ordinance"). Art 10(2) of the UNICITRAL Model Law provides: "Failing such determination, the number of arbitrators shall be three."
6Art. 8 of the UNICITRAL Model Law provides: l. A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. 2. Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court."
7Commercial Arbitration (2nd Ed.) (1989).
8Art. 34 of the UNCITRAL Model Law reads in pertinent part: "1. Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article. 2. An arbitral award may be set aside by the court specified in article 6 only if: a. the party making the application furnishes proof that (i) a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State;..."

Referring Principles
Trans-Lex Principle: XIII.2.4 - Principle of separability of the arbitration clause
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