Hong Kong Court Stays Proceedings in Favour of Arbitration Clause in Related Contract

In Bluegold Investment Holdings Ltd v Kwan Chun Fun Calvin [2016] HKEC 532, Hong Kong’s Court of First Instance has stayed court proceedings brought under a personal guarantee containing a jurisdiction clause favouring the Hong Kong courts, and instead referred the matter to arbitration under the primary agreement to which the guarantee related.

The decision illustrates the willingness of the Hong Kong courts, in multi-contract disputes, to refer cases to arbitration where there is only a prima facie case that a valid arbitration agreement covers the subject matter in dispute.

The Court’s Power to Stay Proceedings and Refer a Matter to Arbitration

A court before which an action is brought in a matter subject to an arbitration agreement shall, if a party so requests, stay the proceedings and refer the parties to arbitration (s. 20(1) of the Arbitration Ordinance).

The test for the applicant is not a strict one. It need only show that there is a prima facie case that the parties were bound by an arbitration clause (PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309).

A court hearing a s. 20(1) application will ask four questions: (1) Is there an arbitration agreement between the parties? (2) Is the clause in question capable of being performed? (3) Is there in reality a dispute or difference between the parties? (4) Is the dispute or difference between the parties within the ambit of the arbitration agreement? (Tommy CP Sze & Co v Li & Fung (Trading) Ltd).

The Facts

The parties to a corporate transaction entered into a number of agreements, including:

  • A Subscription Agreement by which the plaintiff (“Bluegold”), defendant (“Kwan”) and others agreed upon certain rights and obligations regarding an underlying subscription transaction.
  • A Deed of Guarantee by which Kwan guaranteed to Bluegold the performance of certain obligations under the Subscription Agreement. 

Further, the Subscription Agreement anticipated the issue of convertible notes by Kwan’s company, to be subscribed for by Bluegold. Kwan and others were to use their best endeavors to conduct a qualified IPO within three years, failing which the Bluegold was entitled to redeem the notes.

The Deed of Guarantee contained a dispute resolution clause specifying that “the Guarantor irrevocably submits to the non-exclusive jurisdiction of the Hong Kong courts”. However, the Subscription Agreement contained an arbitration clause in favour of Hong Kong seated HKIAC administered proceedings.  The note conditions incorporated the arbitration agreement in the Subscription Agreement.

The Plaintiff, in an attempt to assert its claims under the Guarantee, commenced Hong Kong court proceedings against the Defendant as guarantor under the Deed of Guarantee. The Defendant, made a s. 20(1) application, seeking to rely on the arbitration clause of the Subscription Agreement, for a stay of these proceedings and for the dispute to be referred to arbitration.

The Decision

Justice Mimmie Chan, who is often assigned to hear applications under s. 20 of the Arbitration Ordinance, noted that the dispute in this case was “whether the Plaintiff’s claim made in this action against the Defendant under the Guarantee is in the same matter that is the subject of the Subscription Agreement made between the Plaintiff, the Defendant and the [Defendant’s] Company”.

In the event, Chan J found that this was the case.

The Judge first noted that “it is not entirely correct to say that the Plaintiff’s claims against the Defendant do not arise under the Subscription Agreement.” To substantiate its claims against the Defendant as guarantor, the Plaintiff had to first establish that there had been breach by the Company and the Defendant of their obligations under the Subscription Agreement and of their obligations under the Notes to make the payments due.

As such, in order to determine whether there was a breach of the Guarantee, it was necessary to first determine whether there was a breach of the Subscription Agreement. 

Accordingly, employing the low standard of proof for s. 20(1) applications, Judge Chan found that the court “do[es] not agree that it is clear and obvious that the Plaintiff and the Defendant had provided for a method of dispute resolution which is clearly contrary to the intention expressed in the arbitration clause in the Subscription Agreement”.

Chan J also noted that the Hong Kong law position on this matter is different from that under English law, since in Hong Kong, it is mandatory under the Ordinance to order a stay if it is established that the action is brought in a matter which is the subject of an arbitration agreement. This contrasts with the English position which gives the court discretion to order a stay on case management and other grounds.

The Court also suggested that the jurisdiction clause in the Guarantee may operate in parallel with the arbitration clause in the Subscription Agreement, the former specifying the governing law of the arbitration.

Judge Chan therefore granted the application and ordered Bluegold to pay Kwan’s costs on an indemnity basis.

Take-Aways

The decision highlights the primacy the Hong Kong courts give to arbitration, demonstrating the willingness to stay court proceedings and refer the matter to a tribunal even where there is only prima facie subject to an arbitration clause.

Parties should also take note of the additional time and costs parties can be put to in establishing jurisdictional questions arising when transactions are governed by multiple contracts containing inconsistent dispute resolution clauses. 

Jurisdictions: 

Norton Rose Fulbright Hong Kong

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