HONG KONG COURT LIFTS STAY OF PROCEEDINGS BECAUSE ARBITRATION AGREEMENT SPENT

The Hong Kong Court of First Instance has lifted a stay of proceedings previously granted in favour of arbitration because the arbitration agreement was spent.  The tribunal had issued final awards and essentially ruled that the parties’ disputes should be determined by the Hong Kong courts.  The basis for the stay had therefore gone, notwithstanding that an application to set aside the awards at the seat was pending.  (ZS Capital Fund and Others v Astor Asset Management 3 Limited and Another [2023] HKCFI 1047.)

Background

The borrowers under certain loan agreements commenced proceedings before the Hong Kong courts contesting the enforceability of the agreements.  The lender applied for, and was granted, a stay in favour of arbitration seated in Jamaica.

The tribunal issued an award which concluded that the lender would have to apply to the Hong Kong courts to obtain relief.  This was because the lender was an unlicensed money lender under the Hong Kong Money Lenders Ordinance (Cap. 163), and under that legislation only the Hong Kong court could grant relief in such circumstances.  The tribunal subsequently issued a further award which held that the borrowers' counterclaim should also be dealt with by the Hong Kong courts because it involved similar issues relating to the enforceability of the loan agreements, and to avoid inconsistent rulings.

The lender applied to the Jamaican courts to set aside the awards on the basis that the tribunal had refused to exercise its jurisdiction to adjudicate most of the issues submitted to it.  The lender argued in that application that a fresh arbitration should be commenced before a new tribunal.

The borrowers argued that the stay should be lifted because the arbitration agreement was spent and no longer capable of being performed.  The lender contended that it was wrong to say that the arbitration had concluded because the application to set aside the awards was pending, and that the lifting of the stay would therefore be premature.

Decision

Yvonne Cheng J held that the Tribunal had ruled on the parties’ disputes, there was nothing further for it to address in the arbitration proceedings, and the basis for a stay had accordingly gone.

The existence of the lender’s application to set aside the awards did not change this conclusion.  The Court considered various authorities relied upon by the lender and concluded that none of them supported its contention that the proceedings should be stayed pending the determination of the application to set aside the award.  The awards were operative and binding on the parties unless and until they were set aside.  If they were set aside in the future, it would be open to the lender to apply for a further stay at that stage.  The stay of proceedings was therefore lifted.

Commentary

The Court’s refusal to continue the stay on the basis that the arbitration agreement was spent reflects the well-known principle that, once the final award is made, the tribunal’s mandate is exhausted and the tribunal is rendered functus officio.  Although that principle was not expressly referred to by the Court in this case, it was discussed recently in another case in the context of the distinction between the dispute resolution and enforcement phases of the arbitration process (see Xu Hongbiao v Oasis Investment Group and Others [2023] HKCFI 860, which concerned an action to enforce an award at common law).

The decision to lift the stay notwithstanding the lender's application to set aside the award at the seat contrasts with the ability of the Hong Kong courts to stay enforcement proceedings pending the resolution of set-aside applications (see for example Dana Shipping and Trading SA v Sino Channel Asia Ltd [2016] HKEC 599 and our blog post on that case).  This difference of approach can be explained by reference to the relevant statutory provisions and the policy intent behind them.

• Enforcement proceedings. There is an express statutory basis to stay enforcement proceedings before the Hong Kong courts (on condition that security is provided, if necessary) where an application to set aside the award has been made at the seat (see sections 86(4), 89(5), 98D(5) of the Hong Kong Arbitration Ordinance (Cap. 609)).  This reflects the fact that both the set-aside proceedings at the seat and the enforcement proceedings in Hong Kong would relate to an award already rendered, with a clear potential for conflict between the outcomes of those proceedings if they were allowed to run in parallel.
• Substantive proceedings. In contrast, section 20 of the Arbitration Ordinance (which provides the statutory basis for stays of Hong Kong court proceedings in relation to the substance of the dispute) does not address the scenario where an award has already been made and a set-aside application is pending at the seat.  This is unsurprising, given that the purpose of the provision is to enable the courts to "refer the parties to arbitration" where the substance of their dispute is prima facie covered by an arbitration agreement.  In other words, the purpose of the stay is to enable the tribunal to make up its own mind as to its jurisdiction and ability to grant relief (if those points are in issue), and to make an award on the substance of the dispute (if appropriate).  Where an arbitration over the relevant subject matter has already taken place and a final award has been issued, there are no live or potential proceedings in support of which a stay could operate (at least pending a successful set-aside application).

The Court's decision in this case is consistent with the overall policy of deference by the Hong Kong courts towards arbitral tribunals.  The Court essentially declined to second-guess the tribunal's finding that it had no power to grant the relief requested by the lender, and made clear that the awards (including the tribunal's conclusion that the parties should resolve their dispute before the Hong Kong courts) would be respected unless and until they were set aside.

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