In a previous article we reported on the Court of First Instance (CFI) decision in T v W, HCA 366/2020, in which the court held that the action brought on a dishonoured cheque should not be stayed to arbitration, even though there was an arbitration clause in the underlying loan agreement under which the cheque had been provided for repayment of the loan. The Court of Appeal (T v W, CACV 20/2021) recently upheld that decision.

Background

To briefly recap, the Plaintiff and Defendant entered into a Loan Agreement under which the Plaintiff loaned the Defendant HK$5 million. The Loan Agreement referred to the Plaintiff’s cheque drawn for the loan and to the Defendant’s cheque drawn for repayment. The Loan Agreement provided that any dispute should be arbitrated in Hong Kong. The Defendant’s cheque was dishonoured and the Plaintiff issued a writ claiming the sum due under the cheque. The Defendant, relying on the arbitration clause contained in the Loan Agreement, applied under s.20 (1) of the Arbitration Ordinance to stay the proceedings to arbitration.

CFI Decision

The court noted that the cheque was a separate contract from the Loan Agreement and that bills of exchange were generally regarded as the equivalent of cash. The court was not satisfied that the arbitration clause in the Loan Agreement could be construed to extend to claims made under the dishonoured cheque. The court therefore dismissed the Defendant’s application to stay the proceedings to arbitration, holding that the Plaintiff’s claim was on the cheque and the cause of action on the cheque was separate to the cause of action on the underlying Loan Agreement.

In reaching its decision, the CFI followed CA Pacific Forex Ltd v Lei Kuan leong [1999] 1 HKLRD 462, where the Court of Appeal held that “there must be a plain manifestation in the arbitration clause that it is to apply to bills of exchange if the presumption against taking bills of exchange to arbitration is to be rebutted.” It rejected the Defendant’s submission that the court should depart from CA Pacific and adopt the “one-stop shop dispute resolution presumption” advocated in Fiona Trust & Holding Corporation & others v Privalov & others [2007] UKHL 40 and Uttam Galva Steels Ltd v Gunvor Singapore Pte Ltd [2018] 2 Lloyds Rep 152.

The arguments on appeal

Defendant’s case

The Defendant’s primary position was that CA Pacific is plainly wrong because the case of Nova (Jersey) Knit Ltd v Kammgarn Spnnerei GmbH [1977] 1 WLR 713, on which the Court of Appeal’s reasoning was based, was a decision on German law, not English law. Further, it argued that CA Pacific has been overtaken by the subsequent decision in Fiona Trust with which it is inconsistent. In Fiona Trust the courtheld that where businessmen have entered into an agreement with an arbitration clause, construction of the arbitration clause should start from the assumption that the parties as rational businessmen are likely to have intended that any dispute arising from their relationship is to be decided by the same tribunal and that the arbitration clause should be construed in accordance with that presumption, unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.

Alternatively, the Defendant submitted that CA Pacific is plainly wrong to the extent that it directs consideration to the language of the arbitration clause alone, to the exclusion of the other circumstances of the case. The Defendant invited the court to depart from CA Pacific to the extent of holding that the presumption against taking bills of exchange into arbitration can be rebutted, not only by manifestation of the intention to arbitrate, but also by reference to the circumstances of the case. Thus construed, the Defendant argued, the arbitration clause in this case applied to the claim on the cheque.

The Defendant also challenged the CFI’s obiter conclusion that even if one was to start with a presumption of a one-stop dispute resolution, the parties’ intention here was that a claim on the cheque was not covered by the arbitration clause. The Defendant submitted that the factors in favour of up-holding the one-stop dispute resolution presumption are stronger than those against it, and that if there is any uncertainty, the matter should be referred to arbitration.

The Defendant invited the Court of Appeal to depart from CA Pacific and to adopt the position in Uttam, where the English High Court applied the Fiona Trust presumption that rational businessmen will not contemplate fragmentation as regards dispute resolution and decided (obiter) that an arbitrator had jurisdiction to deal with a claim on bills of exchange on the basis that the underlying contract of sale contained an arbitration clause which provided that all disputes arising out of or in connection with the contracts were to be referred to arbitration. In doing so, the court distinguished Nova (Jersey) Knit as a case concerned with German law and declined to follow CA Pacific and Rals (for the decision in Rals, please see below).

Plaintiff’s case

The Plaintiff argued that the presumption against taking bills of exchange into arbitration, as articulated in CA Pacific, is still good law and applicable in this case and that the Defendant had not raised any dispute under the Loan Agreement and that there was nothing to be referred to arbitration under the arbitration clause.

Was CA Pacific plainly wrong?

Under the doctrine of precedent, the Court of Appeal was bound by CA Pacific, unless satisfied that it is plainly wrong. The Court of Appeal held that the Defendant had failed to demonstrate that CA Pacific is plainly wrong. Further, it was not satisfied that Fiona Trust represented a development of law that has so undermined the foundations of CA Pacific that it could regard itself as being at liberty to depart from it.

In relation to Nova (Jersey) Knit, the Court of Appeal said thatwhilst true that the construction of the arbitration clause there was undertaken applying German law, the bills of exchange were governed by English law, and the court specifically considered the position under English law. More importantly, none of this was lost upon the Court of Appeal in CA Pacific, who nevertheless decided, as a matter of Hong Kong law, that the approach was the same.

As regards Fiona Trust, the Court of Appeal noted that the Fiona Trust approach to construction has been applied in many first instance decisions in Hong Kong, but that it is not a case concerned with bills of exchange, to which a competing principle is also applicable. A bill of exchange, the Court of Appeal said, is a separate and distinct contract from the underlying transaction and is treated as the equivalent of cash, and moreover, is so regarded generally. Further, an unliquidated cross-claim under the underlying agreement is no defence to an action on the bill. Whilst it may be said that rational businessmen are likely to intend to have a single forum for the resolution of any dispute arising out of the transaction they have entered into, it may also be said – and has been said in CA Pacific – that rational businessmen will not readily forgo their rights on a dishonoured cheque, which include the right to sue in court for judgment.

The Court of Appeal said that it is notable that CA Pacific has been applied in Singapore, a jurisdiction that has adopted both the UNCITRAL Model Law and the Fiona Trust approach of presuming that all disputes between parties fall within the scope of the arbitration clause unless shown otherwise (Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA). In Rals, the court concluded that a negotiable instrument such as a promissory note, is not governed by an arbitration agreement in the underlying contract, unless the agreement has been expressly incorporated in the instrument.

Whether CA Pacific confines attention to the arbitration clause

As regards the Defendant’s submission that the sentence in CA Pacific that “there must be a plain manifestation in the arbitration clause that it is to apply to bills of exchange if the presumption against taking bills of exchange into arbitration is to be rebutted”, is too restrictive in excluding examination of other circumstances of the case beyond the language of the arbitration clause, the Court of Appeal disagreed. It said CA Pacific does not have this effect at all and whether or not an action on a bill falls within the scope of an arbitration clause in the underlying written agreement is a question of construction. The clause has to be construed in the context of the agreement as a whole against the factual matrix, which includes all relevant circumstances. In the ultimate analysis, the object of the exercise is to find the intention of the parties from their written agreement properly construed.

Construction of the agreement

The Defendant did not dispute that, applying the CA Pacific approach, there was no basis to construe the arbitration clause in the Loan Agreement as covering an action on the cheque alone. It was unnecessary, the court said, to deal with the question of the scope and extent of the arbitration clause under the Fiona Trust approach, which did not arise.