Introduction

In circumstances where the parties to a contract choose the forum and mechanism for any disputes to be resolved, it is critical to ensure that their intentions are precisely expressed. Failure to do so leads to uncertainty and the risk of litigation arising in relation to how disputes should properly be dealt with. This is particularly the case where there are multiple related agreements. In Bluegold Investment Holdings Ltd v Kwan Chun Fun Calvin the Hong Kong Court of First Instance recently considered the proper approach when asked to grant a stay of proceedings commenced in potential breach of an arbitration agreement.(1)

Facts

The underlying dispute concerned a disagreement between a BVI company (Bluegold) and the director of another BVI company (Mr Kwan) over their respective rights and responsibilities under a deed of guarantee which secured the due performance of obligations under a subscription agreement.

In an attempt to assert its claims under the guarantee, Bluegold initiated court proceedings in Hong Kong against Kwan. In response, Kwan applied under Section 20 of the Arbitration Ordinance (Cap 609) for a stay of proceedings, and for an order that the dispute be referred to arbitration, on the basis that the court proceedings were commenced in breach of an agreement to arbitrate.

Kwan sought to rely on the arbitration clause of the subscription agreement, which provided that "[a]ny dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity thereof, shall be submitted to arbitration".

Bluegold opposed Kwan's application, asserting that it had commenced proceedings on the basis of the jurisdiction clause in the guarantee, which provided that "the Guarantor irrevocably submits to the non-exclusive jurisdiction of the Hong Kong courts". Bluegold's principal argument was that the guarantee was a separate agreement from the subscription agreement and had its own governing law and jurisdiction clause. As such, the parties had expressly indicated their intention that all claims arising from the guarantee be litigated in the Hong Kong courts, instead of by arbitration as stipulated under the subscription agreement.

Law

Section 20 of the Arbitration Ordinance (Cap 609) gives effect to Article 8 of the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration, which provides that:

"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."

In other words, unless the court finds that an arbitration agreement is defective or that it is incapable of being performed, the court must (upon a party's request) refer a court action to arbitration where the claims are brought in a matter which is the subject of an arbitration agreement.

Issues

In dealing with Kwan's application for a stay, the court scrutinised the substance of the dispute and considered the following key issues:

  • whether Bluegold's claims under the guarantee fell within the intended scope of the arbitration clause of the subscription agreement;
  • whether Bluegold and Kwan had separately agreed on a method of dispute resolution for the underlying dispute which was contrary to the intention expressed in the arbitration clause of the subscription agreement; and
  • whether the jurisdiction clause in the guarantee could operate in parallel with the arbitration clause of the subscription agreement.

Decision

Ultimately, the court accepted Kwan's argument that Bluegold's claims under the guarantee stemmed from the subscription agreement and that the guarantee did not displace the parties' intention to resolve the dispute by way of arbitration (ie, as expressed in the subscription agreement).

The court's findings were based principally on the following grounds:

  • While the guarantee was, strictly speaking, a separate agreement from the subscription agreement, it was intended to secure due performance of obligations under, among other things, the subscription agreement.
  • In order for Bluegold to substantiate its claims against Kwan as the guarantor under the guarantee, Bluegold would be required to establish a breach of the underlying subscription agreement.
  • The jurisdiction clause in the guarantee (notwithstanding its reference to the jurisdiction of the Hong Kong court) could operate in parallel with the arbitration clause of the subscription agreement.

The court found a prima facie case that there was a valid arbitration agreement between the parties, and that the court proceedings had been brought in the same matter which was the subject of an arbitration agreement. On this basis, the court ordered a stay of the proceedings in order for the dispute to be referred to arbitration.

Comment

While the arbitration clause of the subscription agreement in Bluegold was deemed sufficiently wide to cover claims arising from a separate agreement guaranteeing due performance, there would have been no room for argument (and the court action would not have been necessary) if:

  • the arbitration clause had been drafted by the parties to expressly cover disputes arising from agreements relating to the subscription agreement; or
  • the dispute resolution clause in the guarantee had been drafted in a consistent manner with the wording of the arbitration clause in the subscription agreement.

As can be seen, ambiguity and inconsistency in drafting can result in expensive and time-consuming satellite litigation over the meaning and effect of the arbitration agreement.

Considering that the core of all arbitration is the parties' agreement to arbitrate, parties must carefully consider how the arbitration clause should be framed if they are keen on selecting arbitration as the forum of dispute resolution. In particular, parties must ensure that the applicable arbitration clause is drafted sufficiently widely to include any dispute, controversy or claim which may become the subject of arbitration, and that dispute resolution clauses across related agreements are drafted in a consistent manner.

For further information on this topic please contact Jonathan Cary or Mark So at Smyth & Co in association with RPC by telephone (+852 2216 7000) or email (jonathan.cary@rpc.com.hk or mark.so@rpc.com.hk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) [2016] HKEC 532, HCA 1492/2015, March 4 2016. The judge concerned is usually assigned to hear applications for a stay of court proceedings in favour of arbitration proceedings and, therefore, the judgment has much force. The issues raised are not novel, but the judgment is a lucid summary of the issues that can arise on an application for a stay of court proceedings in favour of arbitration.

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