Hong Kong court allows stay of court proceedings in favour of arbitration and rejects parallel application to stay arbitration

In Lin Ming and another v Chen Shu Quan and others HCA 1900/2011, the Hong Kong Court of First Instance has allowed a stay of court proceedings in favour of arbitration and refused to grant an anti-arbitration injunction in parallel applications. The court held that it retains discretion to restrain arbitration cases, as part of its general jurisdiction to grant injunctive relief, but noted that such jurisdiction must be exercised “very sparingly and with great caution”. On the facts, the court was not persuaded to restrain the arbitration in this case.

In this decision, the Hong Kong Courts have shown themselves once again reluctant to interfere with arbitration proceedings except in the limited circumstances prescribed by the Arbitration Ordinance. The decision is therefore a welcome one, and confirms Hong Kong as a leading centre for international arbitration.

Background

The facts arose out of a share purchase agreement dated January 2008 between Sequedge Investment Inc. (“Sequedge”), an institutional investor, and Mr Lin Ming (“Lin”), the sole director and shareholder of Win Power Investment Limited (“Win Power”), a Chinese food processing and trading business. Under the SPA, Sequedge agreed to buy 10% of the shares in Win Power. The agreement contained an arbitration clause and a put option that allowed Sequedge to require Lin to repurchase the shares if Win Power was not floated on a recognised international stock exchange within two years.

There was no IPO of Win Power, and Sequedge therefore exercised the put option. In September 2011, Sequedge, Sequedge ASA Capital Ltd (together the “Sequedge group”), and a third company, Gingero Associated SA, which had held the shares in trust, commenced an HKIAC arbitration against Lin for failing to comply with the put option.

In November 2011, Lin and one of his companies issued an action in the Hong Kong courts against the Sequedge group and 26 other defendants. Lin claimed that the defendants had unlawfully conspired to take over the management of his business and had wrongfully caused the PRC government authorities to arrest him. Lin argued that because of their participation in the conspiracy, the Sequedge group were in fundamental breach of the share purchase agreement and therefore, it had been terminated. As a result, Lin argued, the Sequedge group had lost the right to exercise the put option. It was common ground between the parties that the facts and matters were substantially the same in both the litigation and arbitration proceedings.

On 29 November 2011 (after the arbitration had been commenced), Lin applied to the Hong Kong courts for an injunction to restrain the Sequedge group from proceeding with the HKIAC arbitration. On 19 December 2011, the Sequedge group applied for an order that Lin’s claims against them in the Hong Kong courts be stayed in favour of the HKIAC arbitration.

Decision of the Court of First Instance

Deputy High Court Judge Peter Ng SC considered each application in turn, before deciding to allow the stay of the court proceedings in favour of the HKIAC arbitration, and declining to grant an anti-arbitration injunction.

The application for the stay of the court proceedings

The HKIAC arbitration was commenced after the new Hong Kong Arbitration Ordinance (Cap 609) had come into effect. Under Section 20 of the Arbitration Ordinance, which gives legal effect to Article 8 of the UNCITRAL Model Law, a court before which an action is brought in a matter that is the subject of an arbitration agreement must refer the parties to arbitration unless it is established that the arbitration agreement is null and void, inoperative or incapable of being performed. If the conditions of Article 8 are satisfied, a stay of the court proceeding is mandatory. As the arbitration clause is separable from the contract containing it, even if the contract had been terminated for fundamental breach, as Lin submitted, the arbitration clause would have survived the termination. This principle is enshrined in Section 34 of the Arbitration Ordinance, which gives legal effect to Article 16(1) of the Model Law.

The Court considered that since a good prima facie case had been established that a valid arbitration agreement existed between Sequedge and Lin, it was bound to grant the stay application in favour of the HKIAC arbitration. The Court then considered Lin’s anti-arbitration injunction application.

The anti-arbitration injunction

Lin relied on the court’s general jurisdiction to grant injunctive relief under Section 21L of the High Court Ordinance (Cap 4). He argued that there was a risk that two different tribunals adjudicating upon the same matter based on the same facts and evidence might come to inconsistent findings and that it would be unjust and oppressive for him to handle two proceedings concurrently. The Sequedge group submitted in response that the court had no power to restrain the HKIAC arbitration at all, relying on Section 12 of the Arbitration Ordinance, which gives legal effect to Article 5 of the Model Law (“In matters governed by this Law, no Court shall intervene except where so provided in this Law”), and Section 20 (“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall … refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”).

The Court noted a possible tension between the Arbitration Ordinance (which requires Courts not to intervene in arbitrations except as specifically provided in the Ordinance) and the court’s general jurisdiction under Section 21L of the High Court Ordinance. Nevertheless, the Court was not prepared to accept the Sequedge group’s submission that Sections 12 and 20 of the Arbitration Ordinance have the effect of ousting the court’s general jurisdiction. It considered earlier English authorities and found that they assumed that the broad jurisdiction to grant injunctive relief under Section 37(1) of the English Supreme Court Act 1981 continues to exist in arbitration-related proceedings. However, it should be exercised only sparingly, where (i) the injunction does not cause injustice to the claimant in the arbitration; and (ii) the continuance of the arbitration would be oppressive, vexatious, unconscionable or an abuse of process. Since the Court did not hear full arguments on the relationship between the two statutes, Judge Ng refrained from expressing any concluded view on this. However, he commented that it is “a matter that requires detailed consideration and is eminently suitable for decision by the higher courts”. The Court was prepared to assume that it retained jurisdiction to restrain arbitration cases, as part of its general jurisdiction to grant injunctive relief, but reiterated that such jurisdiction must be exercised “very sparingly and with great caution”.

On the facts, in commencing the litigation proceedings and delaying his application for the anti-arbitration injunction for two months after the commencement of the HKIAC arbitration, the Court held that it was Lin’s own actions that had led to him handling two proceedings concurrently. The Court also considered that if the HKIAC arbitration were stayed until after the determination of the litigation proceedings, the Sequedge group could face considerable delay before it could resume the arbitration. Therefore, the Court declined to exercise its discretion to restrain the Sequedge group from proceeding with the HKIAC arbitration.

Conclusion

It remains to be seen whether the relationship between the two ordinances will be considered in the event of any appeal, or in separate future proceedings, and any further clarification of this issue would be welcomed. In this decision, however, the Hong Kong Courts have shown themselves once again reluctant to interfere with arbitration proceedings except in the limited circumstances prescribed by the Arbitration Ordinance. The decision is therefore a welcome one, and confirms Hong Kong as a leading centre for international arbitration.

by Yi-Shun Teoh, Registered Foreign Lawyer (England and Wales), Herbert Smith