Stay of Proceedings in Favour of Arbitration

In Chee Cheung Hing & Company Limited v Zhong Rong International (Group) Limited [2016] HKEC 656 ("Chee Cheung Hing & Co."), the Hong Kong courts upheld the validity of the arbitration clause, and on that basis ordered that the court proceedings be stayed and the matter be referred to arbitration.

Legal Background

Section 20(1) of the Arbitration Ordinance (Cap. 609) gives effect to Art. 8 of the UNCITRAL Model Law. It sets out the basic principle that 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.

However, under s. 20(1) a referral will only be made if certain conditions are met, including that the court does not find that “the agreement is null and void, inoperative or incapable of being performed”.

It is noteworthy that Hong Kong law also recognises the principle that an arbitration tribunal should have the power to rule on its own jurisdiction (the principle of competence-competence), which is itself enshrined within s. 34(1) of the Ordinance.

Accordingly, a court considering a s. 20(1) application on the basis that an arbitration clause is invalid, will weigh, on the one hand, the need to itself investigate the validity of the agreement, and on the other, the application of the competence-competence principle.

Hong Kong case law suggests that the balance is struck by limiting the extent of the court's investigation. Specifically, a court will consent to make a s. 20(1) referral in circumstances where the party requesting the stay of proceedings can demonstrate that there is a prima facie or plainly arguable case that the parties are bound by an arbitration agreement.

The Facts

Some time before 5 April 2012, Chee Cheung Hing & Company Limited (“CCH”) put out a tender for works to be carried out at a development in Lantau Island (“Tender”).

The conditions of the Tender referred to the terms of the “Agreement and Schedule of Conditions of Building Contract” issued by the Hong Kong Institute of Architects which included an arbitration clause.

On 5 April 2012, Zhong Rong issued to CCH a letter of intent stating, inter alia that the Tender and other documents “are acceptable” to Zhong Rong (“Letter of Intent”).

While the conditions of the Tender referred to a further “Main Contract” to be executed between the parties, no such contract was ever signed. However, CCH commenced the relevant works in April 2012, later made interim requests for payment pursuant to the provisions of the Main Contract, and eventually completed the works.

CCH subsequently commenced court proceedings in Hong Kong seeking a declaration that the parties had not entered into any contract for the execution of the works, and that CCH was entitled to a sum of money in excess of the revised Tender price, as the reasonable value of the relevant works actually carried out by CCH.

Zhong Rong brought an application under s. 20(1) alleging that inter alia the Tender and Letter of Intent formed a binding contract which included an arbitration clause.

The Decision

The court considered whether, on the proper construction of the contractual documents exchanged between the parties, the Tender had been accepted by Zhong Rong, and whether a binding agreement, incorporating an arbitration clause, existed between the parties.

As for the test to be employed in the s. 20(1) application, Ms. Justice Chan noted that “the authorities are clear that the onus on the applicant for stay is only to demonstrate that there is a prima facie case that the parties were bound by an arbitration clause”. Indeed, “[u]nless the point is clear, the Court should not attempt to resolve the issue and the matter should be stayed in favor of arbitration” (Chee Cheung Hing & Co., para. 6).

In the present case the judge was “satisfied that there is a prima facie and plainly arguable case that the Letter of Intent is more than an expression of the parties’ intention to enter into a contract at a future date, which creates no binding effect” (Chee Cheung Hing & Co., para. 11). The judge noted various factors including that the terms of both the Tender and Letter of Intent expressly provided that, pending further agreement the Tender and relevant correspondence constitute a binding contract.

Take-Aways

The case confirms the “hands off” approach of the Hong Kong courts in relation to arbitration – in particular, the wide application the Hong Kong courts give to the competence-competence principle.

It could in principle be argued that the competence-competence principle need only be applied in circumstances where the tribunal is itself faced with an objection to its jurisdiction, for instance in ongoing arbitration proceedings. On this viewpoint, it would be acceptable for a court on a s. 20(1) application to make a thorough investigation of the existence and validity of the arbitration clause and come to its own conclusions.

However, this case suggests that the Hong Kong court will not usually make such an investigation, but will instead simply decide if the applicant has failed to show a good prima facie or plainly arguable case that an arbitration clause or agreement exists. Absent such failure, a reference to arbitration will be made.


The authors would like to thank Raymond Yeung for his input into this article.

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