HONG KONG COURT FOLLOWS ENKA V CHUBB TO DETERMINE GOVERNING LAW OF DISPUTE RESOLUTION CLAUSE

A Hong Kong Court has followed the landmark judgment of the English Supreme Court in Enka v Chubb (reported here) to determine the governing law of a dispute resolution clause, holding that an express choice of governing law applicable to the main contract will generally also apply to the dispute resolution clause.

The decision of the Court of First Instance in China Railway (Hong Kong) Holdings Limited v Chung Kin Holdings Company Limited [2023] HKCFI 132 is consistent with previous Hong Kong authority and represents a continuity of approach by the Hong Kong Courts on this important issue.

Background

The dispute arose out of a loan provided by the Plaintiff (“China Railway”) to the Defendant (“CKH”), both of which were Hong Kong companies.  It was documented in a number of agreements concluded over a 15 year period. The Court found the various agreements to comprise a single debt agreement which was subject to a Hong Kong governing law clause.

China Railway commenced proceedings before the Hong Kong courts for the recovery of the debt said to be due from CKH. CKH sought to have the proceedings stayed in favour of the Court of Wuhan in the PRC, on the basis that the dispute was subject to a dispute resolution clause which provided for the submission of disputes by China Railway to either the “arbitration committee” or the People’s Court where a certain third-party guarantor was located (being Wuhan).  The Court accepted that this clause applied to the dispute.

The core issue was whether the dispute resolution clause was “exclusive” (in which case the Court would normally stay the proceedings before it in favour of the specified foreign forum) or “non-exclusive” (in which case the burden would be on CKH, as the party seeking the stay, to show that the foreign forum was clearly and distinctly more appropriate).  In order to decide this question, it was first necessary to determine the governing law of the dispute resolution clause (which did not include an express choice of governing law). China Railway contended for Hong Kong law (following the governing law clause in the main agreement), while CKH contended for PRC law (following the dispute resolution clause).

Decision

Following Enka v Chubb, the Court held that “generally an express choice of law clause applicable to the main contract will also apply to the [dispute resolution] clause”.  The governing law clause in the single debt agreement was the best indication of the parties’ intentions as to the issue of governing law, and had not been superseded by any subsequent express or implied agreement on governing law.  It followed that the governing law of the dispute resolution clause was Hong Kong law.

The Court went on to find that, as a matter of Hong Kong law, the dispute resolution clause was non-exclusive. This was because (i) it was permissive rather than mandatory (permitting but not obliging China Railway to litigate in the Mainland), and (ii) it was asymmetric (with the right to litigate in the Mainland being conferred upon China Railway only), having been designed to protect China Railway’s interests as a creditor by granting it the right to sue where the third party provider of security was located (a type of provision which is known as a "unilateral option" clause).  In contrast, there was no reason why the parties would have wished to preclude China Railway from suing in Hong Kong, where CKH was located.

The burden was therefore on CKH to show that the foreign forum was clearly and distinctly the more appropriate forum, which it had failed to do.  The application for a stay of the Hong Kong proceedings was therefore dismissed.

Commentary

Although the Court referred to the dispute resolution clause as a “jurisdiction agreement” and neither party sought to rely upon the arbitration option, the Court clearly considered the same core legal principles to apply to both jurisdiction clauses and arbitration clauses.  The decision in China Railway is therefore directly relevant for the purpose of determining the governing law of arbitration agreements as a matter of Hong Kong law.

The decision is consistent with the 2011 Hong Kong case of Klöckner Pentaplast GMBH & Co KG v Advance Technology (H.K.) Company Limited HCA 12526/2010, in which the main contract was governed by German law and disputes were to be resolved by arbitration in Shanghai. The Hong Kong Court of First Instance endorsed the view that, "[if] there is an express choice of law to govern the contract as a whole, the arbitration agreement will also normally be governed by that law".  It was only if there was no express or implied stipulation of the governing law of the arbitration agreement or the contract as a whole that the implication would arise that the arbitration agreement would be governed by the law of the seat.  Although the parties had chosen Shanghai as the seat of the arbitration, they had made an implied choice of German law (as the law of the main contract) to govern the arbitration agreement.  The Hong Kong Court of Appeal agreed with this assessment in rejecting leave to appeal.

It is important to note that the decisions in Enka v Chubb, Klöckner Pentaplast and China Railway all concern the situation where there is no express choice of law to govern the arbitration agreement. Where there is such an express choice, it will generally be upheld by the courts in Hong Kong (as well as those in England and other leading jurisdictions).

For more information, please contact Kathryn Sanger, Partner, Martin Wallace, Professional Support Consultant, or your usual Herbert Smith Freehills contact.