Hong Kong Court upholds exclusive jurisdiction clause in favour of PRC Court

The choice of exclusive jurisdiction in favour of either Hong Kong or the PRC courts in a contract may enable litigants to take benefit from the reciprocal enforcement arrangement underpinned by the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned.  However, careful consideration must be given before adopting any exclusive jurisdiction clause in contracts.

In Hyundai Engineering & Construction Co., Ltd. v UBAF (Hong Kong) Limited and Bank of China Limited, the Court of First Instance allowed an application brought by Bank of China Limited ("BOC") to stay the third party proceedings brought by UBAF (Hong Kong) Limited ("UBAF", a company incorporated in Hong Kong) against it arising out of a claim initiated by Hyundai Engineering & Construction Co., Ltd. ("Hyundai").

In this case, Hyundai entered into a contract with a supplier for supply of steel tubular piles for a project in Kuwait in November 2010.  According to the supply contract, Hyundai was to make an advance payment of about US$6 million to the supplier against the provision of, inter alia, an advance payment guarantee.  Before these were effected, the supply contract was sub-contracted and thereafter assigned to a PRC company in Luoyang City in the Henan Province ("Mainland Luoyang").

The Henan branch of BOC ("BOC Henan") was the banker of Mainland Luoyang. On New Year's Eve in 2010, UBAF issued an advance payment guarantee ("APG") and a performance bank guarantee ("Performance Guarantee") both in favour of Hyundai at the request of BOC Henan.  In turn, BOC Henan issued two back-to-back guarantees in favour of UBAF.  Under the APG, UBAF assumed the express and irrevocable obligation to pay the money to Hyundai upon receipt of the first written demand from Hyundai.  Predictably, the supplier defaulted and Hyundai demanded payment of some US$5.5 million from UBAF pursuant to the APG.  UBAF refused on the ground that there was a fraud in the underlying contract. 

Between late 2011 and early 2012, Mainland Luoyang and Hyundai commenced proceedings in the Intermediate People’s Court of Luoyang City against Hyundai while Hyundai commenced proceedings in Hong Kong against UBAF.  The Hong Kong court granted summary judgment in favour of Hyundai in 2012, which judgment is the subject of an impending appeal.  In the meantime, Mainland Luoyang managed to obtain injunctions in the PRC against Hyundai and BOC Henan freezing their assets to the amount of RMB85 million.  To alleviate its exposure, UBAF also brought third party proceedings against BOC in Hong Kong. BOC applied to stay the third party proceedings to the Henan court on the ground of forum non conveniens.

The APG, Performance Guarantee and the two back-to-back guarantees were expressed to be governed by the Uniform Rules for Demand Guarantees ICC Publication No.758 ("the Uniform Rules").  Articles 34 of the Uniform Rules provides that the governing law of a guarantee/counter-guarantee shall be that of the guarantor's/counter-guarantor's branch or office that issued the guarantee/counter-guarantee.  Article 35 goes on to say that any dispute between the guarantor and the beneficiary relating to the guarantee/counter-guarantee shall be settled exclusively by the competent court of the country of the location of the guarantor's/counter-guarantor's branch or office that issued the guarantee/counter-guarantee.

In other words, the APG and the Performance Guarantee are governed by Hong Kong law and any dispute relating thereto shall be subject to the exclusive jurisdiction of the Hong Kong court, whilst the 2 back-to-back guarantees aregoverned by PRC law and any dispute relating thereto shall be subject to the exclusive jurisdiction of the PRC courts.

In deciding the BOC application to stay the proceedings, the Hong Kong court held that the presence of an exclusive jurisdiction clause is an important factor to be considered in determining whether to grant a stay of proceedings on the ground of forum non conveniens.  This is particularly so in international commercial disputes because the parties would probably have made the deliberate choice of governing law and exclusive forum after careful consideration of risk allocation.  For essentially the same reason, the Court also considered that the possibility of conflicting judgments by different courts on the same matter did not justify granting of a stay in the present case.  Any foreseeable inconvenience arising therefrom is generally irrelevant in determining the question of stay.  The party seeking to deviate from the contractual exclusive jurisdiction clause needs to show strong cause in favour of doing so.  The Court also confirmed that strength of a claimant's claim is of very little significance if not totally irrelevant in determining this type of application.

This judgment is consistent with the general principle that contracting parties should be held to the terms of their agreement in order to meet the need for predictability, consistency and stability in the resolution of international commercial disputes.  Unfortunately, the parties in this case are likely to face a genuine risk of conflicting decisions in Hong Kong and in the PRC.  In drafting jurisdiction clauses, due consideration should be given (often on the basis of professional advice) to the most effective clause in the circumstances.

Please contact Gareth Thomas or Rachel Yu of the Hong Kong Dispute Resolution team if you wish to discuss.