HONG KONG COURT CONSTRUES INCONSISTENT DISPUTE RESOLUTION CLAUSES IN RELATED CONTRACTS

In a recent decision that involved interlinked agreements containing different dispute resolution clauses, the Hong Kong Court of First Instance refused to stay court proceedings in favour of arbitration, on the basis that the centre of gravity of the dispute did not fall within the contracts that contained the arbitration agreement.

Zpmc-Red Box Energy Services Limited v Philip Jeffrey Adkins and Others [2021] HKCFI 3501

Background

The Plaintiff (ZPMC) was a joint venture company.  The first defendant (D1) was the former CEO and a director of ZMPC.  The second defendant (D2) provided consulting services to ZPMC.  The third defendant (D3) was a shareholder of ZPMC.  At all material times, D2 and D3 were controlled by D1.

There existed between the parties:

• a Chief Executive Officer Employment Agreement between ZPMC and D1 (CEO Contract), containing an exclusive jurisdiction clause in favour of the Hong Kong courts;
• a Service Agreement between ZPMC and D2 (FSA), containing an arbitration clause in favour of HKIAC arbitration; and
• a Shareholders Agreement amongst D3, another shareholder of ZPMC and ZPMC (SHA), which also contained an arbitration clause referring disputes to HKIAC arbitration.

Disputes arose between the parties.  ZPMC commenced court proceedings in Hong Kong, alleging breach of fiduciary duties, contractual duties and breach of trust by D1.  ZPMC also claimed against D2 and D3 as constructive trustees for knowing receipt of payments from ZPMC allegedly caused by D1 without authority.

Relying on the arbitration agreements in the FSA and SHA, the Defendants applied for a stay of further court proceedings pending arbitration under section 20 of the Arbitration Ordinance (Cap. 609).

Decision

The central question before the Hong Kong court was whether ZPMC's claims fell within the ambit of the arbitration agreements in the SHA and FSA.

The court referred to the approach to the construction of an arbitration agreement as set out by Mimmie Chan J in Houtai Investment Holdings Ltd v Leung Yat Tung & Others [2021] HKCFI 1504. In essence, when constructing an arbitration agreement:

1. the court starts from the "one-stop" presumption in Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, namely that the parties intend all disputes arising out of the relationship to be decided by the same tribunal;
2. the Fiona Trust presumption is, however, rebuttable and each arbitration clause must be considered in its own context;
3. in particular, where there are multiple related commercial agreements each dealing with different aspects of the parties' relationship, and each containing its own dispute resolution clause, the Fiona Trust presumption is not applicable. The court should instead identify "the nature of the claim" and "the agreement that has the closest connection with such dispute" (also referred to as the agreement "at the centre of gravity of the dispute").

With the above principles in mind, the court held that the substance of the dispute was ZPMC's claims against D1 for breaches of fiduciary duties, contractual duties and trust.  These were personal duties which arose from D1's position as director and former CEO.  As such, the agreement "at the centre of gravity" of the dispute was the CEO Contract, under which the parties had submitted to the exclusive jurisdiction of the Hong Kong courts.

As for the claims against D2 and D3, the court noted that there was no allegation that they had committed any breaches of the SHA or the FSA, and that the nature of their liability was one of secondary or accessory liability for knowing receipt, which hinged on D1's primary liability.  It therefore made commercial sense to determine D2 and D3's accessory liabilities in the same proceedings.

The court accordingly dismissed the stay application.  The fact that the action might be one part of a wider struggle for control of ZPMC between its shareholders did not detract from the real focus of the action.

Comment

This decision demonstrates Hong Kong courts' approach to the rather common situation where disputes arise between parties to interlinked contracts which contain different dispute resolution clauses.  It serves as a timely reminder that the parties should consider in advance whether adopting the same dispute resolution provisions in related, or linked, contracts is appropriate, as well as the consequences of having different forums for resolving disputes.  In this case, the court was able to determine the entire dispute within the ambit of the CEO Contract, but it is always worthwhile thinking through the possible areas of dispute in advance of any transaction, and tailoring the dispute resolution provisions accordingly.

For more information, please contact Kathryn Sanger, Partner, Briana Young, Professional Support Consultant, Charlotte Wong, Associate, or your usual Herbert Smith Freehills contact.