HONG KONG COURT REAFFIRMS PRO-ARBITRATION STANCE BY GRANTING STAY OF COURT PROCEEDINGS BROUGHT UNDER A SETTLEMENT AGREEMENT IN FAVOUR OF ARBITRATION

The judgment of the Hong Kong District Court ("Court") in Gurkhas Construction Ltd v Craft Façade Tech (Hong Kong) Co Ltd is the latest example of the Hong Kong judiciary's willingness to give effect to an arbitration clause wherever possible. In this case, the Court granted a stay of proceedings in favour of arbitration on the basis that an arbitration agreement incorporated in various purchase orders ("POs") agreed between the parties remained effective despite a subsequent settlement agreement allegedly entered into between the same parties providing for the non-exclusive jurisdiction of the Hong Kong courts.

Background

In this case, the plaintiff, a provider of skilled labour, claimed the sum of HK$1,492,753.80 that was allegedly outstanding under five invoices issued by the plaintiff to the defendant, a building contractor, between January and April 2018 based on four POs placed by the defendant between September and January 2018 ("Outstanding Sum"). Each of the four POs incorporated the defendant's standard "General Terms and Conditions" which included an arbitration clause providing that any dispute arising out of or in connection with the parties' agreement, if unable to be settled, should be submitted to arbitration under the HKIAC Rules.

The plaintiff, however, did not initiate arbitration proceedings in order to recover the Outstanding Sum but instead brought its claim in the Hong Kong courts pursuant to an alleged settlement agreement dated 6 April 2020 ("Settlement Agreement") in which the defendant had allegedly agreed to pay the plaintiff the Outstanding Sum. The Settlement Agreement contained the following jurisdiction clause:

"This settlement shall be governed by and construed in accordance with the laws of Hong Kong Special Administrative Region and the parties to this settlement hereby irrevocably undertake to submit themselves to the non-exclusive jurisdiction of the courts of Hong Kong Special Administrative Region to resolve any dispute arising out of or in connection with this settlement."

It was the defendant's case that no binding settlement was ever reached between the parties but that, in any event, the plaintiff's claims fell within the scope of the arbitration clause in the POs and should therefore be submitted to arbitration. The defendant therefore applied to the Court to stay the proceedings in favour of arbitration.

The Court's Decision

At the outset of the judgment, the Court set out the applicable test for determining whether a stay should be granted. It observed that if questions 1, 3 and 4 of the following questions were answered in the affirmative and question 2 in the negative, a stay should be granted:

1. Is the clause in question an arbitration agreement?
2. Is the arbitration agreement null and void, inoperative or incapable of being performed?
3. Is there in reality a dispute or difference between the parties?
4. Is the dispute or difference within the ambit of the agreement between the parties?

The Court was able to determine in relatively short order that the answer to each of questions 1 and 3 was "yes" and the answer to question 2 was "no". The fourth question, however, was the significant one for the purposes of the determination of this case and required a more detailed consideration.

The Court ultimately held that the answer to the fourth question was "yes" and therefore that a stay should be granted. In reaching this conclusion, the Court found that the arbitration clause in the POs was sufficiently wide in scope and that the claim against the defendant arose prima facie out of or in connection with the agreement containing the arbitration clause (note that this finding was made on a prima facie basis only because the issue of whether the claim falls within the scope of the arbitration clause is ultimately one for the arbitral tribunal, once constituted, to settle). The Court further found that the jurisdiction clause in the Settlement Agreement did not amount to a sufficiently clear and unequivocal waiver of the arbitration clause.

The Court also found that, on a proper construction, the jurisdiction clause in the Settlement Agreement was not inconsistent with the arbitration clause and both were reconcilable. The Court observed that the jurisdiction clause may, for example, have been a submission by the parties to the Hong Kong jurisdiction, not their disputes. This may therefore have been included to fix the supervisory court of the arbitration or for the purposes of post-arbitral enforcement.

Significantly, the Court identified that even if the Settlement Agreement were enforceable (contrary to the defendant's position in the case), an arbitration clause must take precedence over a non-exclusive jurisdiction clause as has been consistently held by the Hong Kong courts.

In reaching its decision, the Court addressed a submission from the defendant that if a stay were not granted, it would result in two sets of proceedings, one involving disputes over the defendant's liabilities under the POs in arbitration, and one involving disputes over the settlement agreement in court. The Court agreed with the defendant and highlighted the presumption of one-stop adjudication, observing that "[t]he court should be slow to attribute to reasonable parties an intention that there should in any foreseeable eventuality be two sets of proceedings".

Comment

The Court's decision provides another welcome reminder as to the pro-arbitration stance of the Hong Kong judiciary.  It also confirms that, when faced with a choice between an arbitration clause and a non-exclusive jurisdiction clause, the Hong Kong courts will uphold the former.

The decision also serves as a cautionary tale to parties who have entered into related commercial agreements (including settlement agreements) containing different and potentially inconsistent dispute resolution clauses. As this case shows, this may lead to considerable time, effort and costs being expended in determining which is the appropriate forum to resolve a dispute. It is therefore strongly advisable for parties to related commercial agreements to ensure that consistent dispute resolution clauses are included in each of those agreements in order to avoid the type of unwelcome consequences seen in this case.

In the event that parties wish for a dispute resolution clause in an earlier agreement between them (for example, providing for arbitration) to be superseded by a different dispute resolution clause in a subsequent agreement (for example, providing for litigation), they should do so expressly by agreement and with clear wording to this effect.

For more information, please contact Simon Chapman QC, Partner, Madhu Krishnan, Registered Foreign Lawyer (England & Wales), or your usual Herbert Smith Freehills contact.