Court Binds Third Party to Arbitration Agreement

In Dickson Valora Group (Holdings) Co Ltd and another v Fan Ji Qian [2019] CFI 482, the Hong Kong Court of First Instance granted an anti-suit injunction restraining a non-party to a contract from enforcing rights thereunder by bringing court proceedings in the Mainland Chinese court in violation of the contractual arbitration clause.

The case serves as a salient reminder that individuals and companies looking to enforce contractual rights should seek to comply with the relevant contractual dispute resolution provisions even where the individual or company is not itself a signatory to the agreement.   

Olga Boltenko, Matthew Townsend and Stephanie Tsang, Fangda Partners Hong Kong

LEGAL BACKGROUND

Anti-suit injunctions are not addressed to or binding upon the court in question.  Instead, they are directed at a party, which must comply with the terms of such an injunction or face sanctions under Hong Kong law.

Hong Kong courts have derived their power to award anti-suit injunctions from two statutory provisions, namely:

  1. section 21L of the High Court Ordinance (Cap. 4) (“HCO”), which empowers a court to grant equitable relief, such as an injunction (whether interlocutory or final), if it finds that it is just or convenient to do so; and
  2. section 45(2) of the Arbitration Ordinance (Cap. 609)(“AO”), which similarly empowers a court to grant an interim measure in relation to any arbitral proceedings, whether in or outside of Hong Kong, which have been or are to be commenced.

It is fairly rare, but not unheard of, for Hong Kong courts to restrain a Hong Kong party from pursuing foreign (as opposed to Hong Kong) court proceedings.  In 2018 the Hong Kong Court of First Instance (the “Court”) relied upon the AO to restrain a party from pursuing PRC proceedings (Arjowiggins HKK2 Ltd v Shandong Chenming Paper Holdings Ltd [2018] HKCFI 93; HCCT 53/2015 (19 January 2018))(see the authors’ report here); and previously in 2015 it relied upon the HCO to restrain a party from pursuing Turkish proceedings (Ever Judger Holding Co Ltd v Kroman Celik Sanayii Anonim Sirketi [2015] 3 HKC 246).

By principles established in the English case of Aggeliki Charis Cia Maritime SA v. Pagnan SpA, The Angelic Grace [1995] 1 Lloyd’s Rep 87, 96, a court need not show excessive “diffidence” to a foreign court in circumstances in which the foreign proceedings have been brought in breach of a contractual dispute resolution clause.  Specifically, if an injunction is sought to restrain a party from pursuing foreign proceedings brought in breach of an arbitration agreement, the court need feel no diffidence to the foreign proceedings providing that (i) the relief is sought promptly; (ii) the foreign proceedings are not too far advanced; and (iii) there is no other “good reason” for the court not to so exercise its discretion.

Whilst the Angelic Grace principles instill a pro-injunction approach, the English and Hong Kong courts have nonetheless employed them to refuse to grant anti-suit injunctions sought at a late stage in the foreign proceedings (see for instance Sea Powerful II Special Maritime Enterprises (ENE) v Bank of China Limited [2016] 1 HKLRD 1032; [2016] 3 HKLRD 352 (CA)).  

Nor are the Hong Kong courts willing to enforce in Hong Kong a foreign judgment which has been brought in breach of an arbitration clause.  Section 3 of the Foreign Judgements (Restriction on Recognition and Enforcement) Ordinance (Cap. 46) (“FJRREO”) provides that, inter alia, “a judgement given by a court of an overseas country in any proceedings shall not be recognized or enforced in Hong Kong if the bringing of those proceedings in that court was contrary to an agreement under which the dispute in question was to be settled otherwise than by proceedings in the courts of that country”.

FACTUAL BACKGROUND

The dispute concerned a joint venture relating to a real estate transaction in Jiangsu, China.

By a 2010 Shareholders Agreement (“SHA”), Hong Kong incorporated Dickson Holding Enterprise (“DHE”), and a Netherlands-incorporated company Moravia CV (“Moravia”) agreed to establish a Joint Venture Vehicle (the “Company”).

All three parties were signatories to the SHA.  DHE’s director, a Hong Kong resident named Mr. Fan, was not.  The SHA contained a dispute resolution clause providing for arbitration seated in Hong Kong.  

Subsequently in early 2011, the same parties entered into a Supplementary Agreement and an Addendum of the Supplementary Agreement (“Supplementary Agreement” and “Addendum”).  The Addendum made provisions for DHE to receive a completion “success fee” payable by an associated company (the “Subsidiary”).  Again, neither Fan, nor the Subsidiary were parties to the Addendum.

Following the breakdown of the joint venture relationship, The Company cancelled DHE’s shares.

DHE’s director Fan alleged a breach by the Company and Subsidiary of the “success fee” provisions of the Addendum.  In June 2018, he commenced an action against both the Company and the Subsidiary in the Shenzhen Qianhai Cooperation Zone People’s Court (the “Qianhai Proceedings”).

The Company and Subsidiary were unaware of these proceedings until August 2018, when Fan obtained a freezing and execution order over their assets.  The Company and Subsidiary brought a jurisdictional challenge but it was rejected by the Qianhai Court.

In November 2018, with the Qianhai Proceedings still afoot, the Company and Subsidiary applied to the Court in Hong Kong for an order under section 21L of the HCO restraining Fan from pursuing these proceedings.

THE DECISION

The judge, Lam J, granted the injunction and ordered Fan to pay the applicants’ costs.

In reaching this determination, Lam J determined four separate issues: (a) whether there is an arbitration clause in the contract being sued upon by Fan, (b) what the court’s approach should be in the absence of privity to the arbitration agreement, (c) whether the application is precluded by issue estoppel arising from a Mainland judgment, and (d) whether there are other reasons why the injunction should be refused.

On the first issue, Lam J determined that the Addendum was in fact subject to the arbitration clause in the Shareholders Agreement.

For the judge, this was a question of contractual interpretation and incorporation.  The contractual agreements – the SHA, the Addendum, and the Supplementary Agreement - had complementary nature and purposes.  All three documents were executed by the same parties.  Furthermore, none contained separate provisions on general matters such as choice of law or dispute resolution which “are of particular importance in a project such as this involving businessmen and entities from multiple jurisdictions”.  Accordingly, Lam J determined that the Supplementary Agreement and the Addendum were intended to read as “part and parcel” of the Shareholder Agreement.   In his view it was “plain that the general provisions in the [SHA] are intended to govern these …later documents of a supplemental nature”.

As for the second issue in dispute, the Court determined that notwithstanding Fan was not a party to the SHA or the Addendum, the Angelic Grace approach should nonetheless be employed with respect to  Fan’s bringing of foreign proceedings.

Although the arbitration agreement in the SHA had no governing law clause, Lam J found it to be governed by the law of the SHA, namely Hong Kong law.  He determined that the Contracts (Rights of Third Parties) Ordinance (Cap 623) did not apply in this matter as the Ordinance came into operation after the relevant agreements were executed.  However, he nonetheless found that “there exist various devices at common law which are sometimes employed to temper the structures of the doctrine of privity”, arising from principles of trusteeship, assignment and agency.

The Court drew inference from a number of English vessel-related authorities, in which an “assignee” or “subrogee” sought to enforce legal rights under an agreement in fora inconsistent with the provisions of the dispute resolution provisions of those agreements.  In those cases, the Courts applied Angelic Grace principles notwithstanding that the party was a non-signatory to the agreement in question.  For Lam J “the basis for the court’s intervention is the same in the case of a claimant who has become entitled to enforce an obligation but is not a party to a contract of any kind with the defendant, as in the case of a claimant who is an original party to an arbitration agreement”.  The court will therefore be willing to intervene by granting an anti-suit injunction to restrain such a claimant from enforcing the obligation by proceedings abroad instead of by arbitration.

On the third issue under deliberation, the Court found that no estoppel arose from the decisions in the Qianhai Proceedings.  These had been brought contrary to the dispute resolution provision in the SHA. Therefore, pursuant to section 3 of the FJRREO, the decision of Qianhai Court would neither be enforced nor recognized in Hong Kong.

On the fourth issue, the Court determined there were no other “good reasons” for the Court not to exercise its discretion to award the injunction.  The applicants’ delay in bringing the application was not “inexcusable or inordinate” given that (a) they had brought it “slightly more than two months after learning of the Qianhai [P]roceedings” and (b) a further “flurry of steps” had been required in the Mainland to ameliorate the effect of the orders in the Qianhai Proceedings.  Fan had suffered no prejudice from the progress of the Qianhai Proceedings which “had not gone on to an advanced stage” of a merits hearing. The applicants’ conduct was not abusive in view of the circumstances, including their prompt efforts to defend the Qianhai Proceedings.   Nor was there a valid comity consideration arising from inconsistent decisions of the Hong Kong arbitrator and Qianhai Court.  This consideration was in any event reduced in view of the fact that the foreign proceedings are inconsistent with the contractual mode of dispute resolution. 

CONCLUSION

This case lends support to the common sense proposition that an individual or an entity should not be allowed to seek enforcement of rights under a contract or suite of contracts in violation of the contractual dispute provisions, in particular when in the presence of a valid arbitration agreement. With the Dickson Valora findings, the Hong Kong courts take that proposition further by applying non-signatory theories to bind a non-party to the arbitration agreement and restrain it from pursuing foreign litigation. 

Chairperson, ICC Hong Kong Commercial Law and Practice Committee

Ms. Boltenko is a registered foreign lawyer with Fangda Partners in Hong Kong. She specialises in investment arbitration. She has acted as legal counsel in investor-state disputes under the auspices of the Permanent Court of Arbitration, and as tribunal secretary in dozens of commercial disputes, both ad hoc and institutional (including SIAC, ICC, HKIAC, SCC), in a wide array of industries including oil and gas, infrastructure, construction, telecommunications and pharmaceuticals. She is an adjunct lecturer at the University of Hong Kong. She chairs the ICC Hong Kong Commercial Law and Practice Committee. She is listed as arbitrator on the HKIAC list of arbitrators, and on the AIAC, SIAC, and CIETAC panels of arbitrators.

Registered Foreign Lawyer, Fangda Partners 

Matthew Townsend is an arbitration lawyer based in Hong Kong.  His practice is primarily focused on international arbitration and dispute resolution, often (but not always) involving Chinese parties.

Townsend has experience of arbitration in a number of jurisdictions under a number of different arbitration rules.  His practice focuses on the energy, infrastructure, construction, technology and international trade sectors.  He has experience acting as advocate at all stages of an arbitration hearing

Fangda Partners