Hong Kong court upholds validity of arbitration agreement in dispute concerning formation of underlying contract

In Chee Cheung Hing & Co Ltd v Zhong Rong International (Group) Ltd (HCA 1454/2015), the Hong Kong Court of First Instance ("CFI") stayed proceedings under s.20 Arbitration Ordinance ("the Ordinance"), which provides for referrals to arbitration where "…an action is brought in a matter which is the subject of an arbitration agreement…". The CFI considered the arbitration agreement to be "prima facie" valid and binding despite the Plaintiff's contention that the underlying contract was not validly formed. 

Background

Chee Cheung instituted the court proceedings, seeking a declaration that the parties had not entered into a binding contract for the execution of certain construction works, and that it was entitled to compensation for the reasonable value of the works it carried out for the Defendant; an amount higher than the price set out in the tender it had submitted.

The Plaintiff sought the declaration on the basis that a letter of intent issued by the Defendant did not constitute acceptance of the tender it had submitted for the works, such that there was no binding contract between them. The Defendant argued that the parties' signing of the letter of intent constituted acceptance of the tender, and in any event, the Plaintiff's execution of the works and the parties' subsequent conduct affirmed and evidenced the existence of a binding contract.

The conditions of the tender referred to the terms of the "Agreement and Schedule of Conditions of Building Contract" which included an arbitration clause. The Defendant (as Applicant) applied to the CFI under s.20 of the Ordinance on the basis that the contract (and arbitration agreement) between the parties were valid and binding.

The judgment

The CFI's decision turned on the proper construction of the contractual documents exchanged between the parties. In particular, it had to determine whether the letter of intent signed by the parties amounted to more than "… the expression in writing of a party's present intention to enter into a contract at a future date" and sufficed to establish a binding contract and valid arbitration agreement. 

Applying settled law on this point, Chan J noted that where there is a dispute as to the existence of an arbitration agreement, the onus is on the applicant for stay to prove that there is "a good prima facie or plainly arguable case, predicated on cogent, and not dubious or fanciful, evidence…" that an arbitration agreement exists. On the evidence presented by the parties, Chan J found that there was a contract between them for the execution of the works and that, even if it was arguable that there was no contract based on the documents exchanged, the parties' subsequent conduct evidenced the existence of a valid and binding contract.

Notably, she added "…even if the Tender for the execution of the Works had not been validly accepted by the Defendant's issue of the Letter of Intent, it is arguable that there was a valid and binding arbitration agreement, evidenced in writing, even if the Main Contract was not signed" as "…it is trite that an arbitration agreement can be separate from the underlying contract, in this case the underlying contract for the Works."

Chan J's reasoning is a positive endorsement of the doctrine of separability of arbitration agreements in situations where the existence of the underlying contract is in dispute. It provides an excellent reminder of the doctrine's fundamental aim: to preserve the parties' agreement on dispute resolution.

The Plaintiff was ordered to pay the Defendant's costs on an indemnity basis, as is usual in unsuccessful applications under the Arbitration Ordinance.

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