HONG KONG COURT SETS ASIDE DEFAULT JUDGMENT AND REFERS PARTIES TO ARBITRATION

The Hong Kong Court of First Instance has stayed proceedings under a loan agreement in favour of arbitration before the Guangzhou Arbitration Commission, setting aside a prior default judgment entered when the borrower failed to acknowledge service of the proceedings (楊佩玲 v. Super Best Investment Limited [2023] HKCFI 2494).

Key issues

The usual legal test for a stay of Hong Kong court proceedings in favour of arbitration is whether there is a "prima facie or plainly arguable case" that the parties are bound by an arbitration clause (PCCW Global Ltd v. Interactive Communications Service Ltd [2007] 1 HKLRD 309).

On the other hand, the test in applications to set aside a default judgment is whether the applicant has a "real prospect of success" in the action (O Mark Polyethylene Products Fty Ltd v. Reap Star Ltd [2000] 3 HKLRD 144).

Because the borrower had applied both for a stay of proceedings in favour of arbitration and to set aside the default judgment, the court therefore had to consider what legal test to adopt (a point on which there was no direct authority).

Having accepted that the stay application would be determinative of the application to set aside the default judgment, the court concluded that it should apply the prima facie test "established by cogent as opposed to dubious or fanciful evidence."  In reaching this conclusion, the court reasoned that it would be illogical if the existence of a default judgment were to lower the threshold for a stay of proceedings (such that the test would become a "real prospect of success in establishing a prima facie case that the parties were bound by an arbitration agreement"), and that the application of a higher threshold would give the party opposing a stay an undue advantage based on the existence of a default judgment.

On the facts of the case, however, the court found that the borrower (the party seeking a stay) had demonstrated a "good prospect of success" as to the existence of a binding arbitration agreement between the parties, and thus satisfied the higher standard in any event.

The arbitration agreement was contained in a supplemental agreement which was signed by an individual named "Chen JX" and not by the lender (who the borrower alleged was Chen JX's girlfriend).  The lender contended that the supplemental agreement was unrelated to the underlying loan agreement.  The court rejected her version of events as "inherently improbable", finding the borrower to have a good prospect of successfully demonstrating that either the lender was the agent and nominee of Chen JX, or Chen JX was the agent of and had authority to represent the lender, such that the supplemental agreement and the arbitration clause contained in it were binding on the parties.

Comment

This case provides a helpful example of the approach which the Hong Kong courts may take to an application for a stay in favour of arbitration under section 20 of the Hong Kong Arbitration Ordinance made in parallel with an application to set aside a default judgment.  In particular, it suggests that the Hong Kong courts will be reluctant to allow plaintiffs to use default judgments tactically to impose a higher threshold than normal for a stay of proceedings in favour of arbitration.

This is the second recent arbitration-related case involving PRC parties in which issues of agency have been determinative of the court's findings on the parties to an arbitration agreement (see R v. A, B and C [2023] HKCFI 2034 and our blog on that case).  It therefore serves as a reminder of the importance at the transaction stage of properly documenting agency relationships and making clear the capacities in which parties enter into contracts.  It also underlines the need for dispute resolution lawyers to carefully analyse the parties to contracts before proceedings commence, and (in appropriate cases, including multi-contract scenarios involving related parties) to avoid taking the putative signatories to an agreement at face value without further investigation.