In 李明實, 方壘 and 史洪源 and Others v. Ace Lead Profits Ltd and Another  HKCFI 3342, the court dismissed the defendants’ application for a stay of the action in favour of arbitration. Whilst the court determined that the pertinent arbitration agreement was capable of being performed despite the nomination of a non-existent arbitration institution, it found that the defendants had failed to establish that the dispute fell within the ambit of the arbitration agreement.
Dr Wang (P2) was the founder of Beijing HollySys. As the company’s business expanded, it was restructured in preparation for listing, which included the incorporation of Plus View Investment Limited (P3) and Ace Lead Profits Limited (D1) as shareholding entities.
P2 was the sole director and shareholder of D1. On 12 August 2016, P2 transferred his entire issued share capital in D1 to Mr Shao (D2), making D2 the sole director and shareholder of D1.
In 2006, HollySys Automation Technologies Limited (HollySys) was incorporated in the BVI and was listed on the NASDAQ stock exchange in 2008. As founding members of HollySys, P3 and D1 were allotted shares in HollySys (HOLI Shares) in accordance with their holding in Beijing HollySys.
To share the success of the group, P2 intended to give out HOLI Shares held by P3 and D1 to its employees (P1) under a trust scheme (Trust Scheme). As a result, the HollySys Trust Committee (Trust Committee) was formed and was regulated by its own set of articles (Articles). It was P2’s case that D2 should administer and manage the Trust Scheme via D1.
The Trust Scheme consisted of different layers between P3, D1 and HollySys employees. Eligible employees could obtain HOLI Shares at a certain subscription price. Declarations of trust (DoTs) would then be signed with the participating employee as the beneficiary and the companies, P3 and D1, as trustees.
The arbitration agreement invoked was found in each of the DoTs, which reads “[t]he governing law of this contract is Hong Kong law, and either party shall have the rights to, when mediation is ineffective, refer any disputes arising from the trust relationship between the settlor and the trustee to the Hong Kong arbitration committee for adjudication.” (Arbitration Agreement).
The plaintiffs’ argument was that there were two tiers of trusts created that were separate from each other.
- The first tier was “a de facto trustee-beneficiaries relationship between Ace Lead and Plus View as trustees and HollySys employees over the trust shares” (the Overarching Trust).
- The second tier comprised the trusts created individually by the signed DoTs (DoT Trusts).
Disputes arose between the plaintiffs and D2. The plaintiffs commenced the present proceedings against the defendants for (among other things) a declaration that the HOLI Shares held by and in the name of D1 were held by D1 on trust for the HollySys employees under the Trust Scheme (Trust Shares Claim). The defendants applied for a stay of the Trust Shares Claim on the basis that it fell within the ambit of the Arbitration Agreement.
In considering whether a stay should be granted under section 20(1) of the Arbitration Ordinance (Cap. 609), the court asked four questions:
- Was there an arbitration agreement between the parties?
- Was the arbitration agreement capable of being performed, in the sense that it was not null and void, inoperative or incapable of being performed?
- Was there in reality a dispute or difference between the parties?
- Was the dispute or difference between the parties within the ambit of the arbitration agreement?
Question 1 – Whether there was an arbitration agreement between the parties
There was no dispute that as between the signatories of the DoTs, the Arbitration Agreement constituted an arbitration agreement between them.
Question 2 – Whether the arbitration agreement was capable of being performed
The plaintiffs argued that the Arbitration Agreement was incapable of being performed because of (i) the non-fulfilment of a “precondition” when mediation was ineffective and (ii) the non-existence of “the Hong Kong arbitration committee” as nominated in the arbitration agreement.
The Court rejected the plaintiffs’ arguments:
(i) The non-fulfilment of the “precondition” of mediation before submitting the dispute to arbitration did not cause the arbitration agreement to be incapable of performance. The court cited C v. D  HKCFI 1474 and held that the fulfilment of precondition to arbitration only went to the admissibility of the claim that was a matter for the arbitral tribunal and not subject to review by the court (see also our previous alert).
(ii) While “the Hong Kong arbitration committee” did not exist, this did not invalidate the Arbitration Agreement. Following the decision in, among others, Lucky-Goldstar International (H.K.) Ltd v. Ng Moo Kee Engineering Ltd  1 HKC 404 per Kaplan J, the court held that “where the parties have clearly expressed an intention to arbitrate, the agreement is not nullified even if they chose the rules of a non-existent organization”.
Therefore, the court held that the Arbitration Agreement was capable of being performed.
Question 3 – Whether there was a dispute between the parties
The Court found that, in circumstances where there was no clear or unequivocal admission as to both liability and quantum with regard to the dispute, there remained a dispute between the parties.
Question 4 – Whether the parties’ dispute was within the ambit of the arbitration agreement
The plaintiffs argued that the Arbitration Agreement only covered disputes that arose from the trust relationship between the trustees and individual beneficiaries under the DoTs, whereas the Trust Shares Claim related to the Overarching Trust and hence fell outside the scope of the Arbitration Agreement.
The court reviewed the statement of claim and the relevant terms of the Articles (which predated the execution of the DoTs) when the Trust Committee was set up and noted that the Articles clearly stated that the HOLI Shares held by P3 and D1 were to be used in setting up the Trust Scheme. On the other hand, the DoT Trusts were created by the DoTs for the implementation of the Trust Scheme. As such, the nature of the Overarching Trust was different from that of the DoT Trusts. Accordingly, the court concluded that the dispute regarding the existence and nature of the Overarching Trust (i.e., the Trust Shares Claim) fell outside of the scope of the Arbitration Agreement that was contained only in the DoT.
The court therefore dismissed the stay application and ordered that the defendants should bear the plaintiffs’ costs.
This decision affirms the existing line of Hong Kong court judgments that held that, despite the nomination of a non-existent arbitral institution, an arbitration agreement could still be valid provided that the intention of the parties to submit their disputes to arbitration was clear. While this decision once again illustrates the Hong Kong court’s pro-arbitration stance, it also highlights that the Hong Kong court will examine, among other things, whether the subject claims and disputes truly fall within the scope of the arbitration agreement invoked and, if not, a stay application will not be granted.