A jurisdiction clause in favour of a foreign court cannot operate to stay an unfair prejudice petition in a Hong Kong court

In the recent case of Joseph Ghossoub v Team Y&R Holdings Hong Kong Ltd and others, the Hong Kong High Court considered issues of third party rights, jurisdiction clauses and forum in the context of an unfair prejudice petition. In considering whether the Hong Kong action ought to be stayed pursuant to a jurisdiction clause in favour of the English court, the Court emphasised the statutory nature of the right to bring an unfair prejudice petition, and showed its reluctance to fetter this right.

This case is a related episode to the landmark case of Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (the "Makdessi Dispute"), in which the UK Supreme Court restated the English law on penalties, see our earlier blog post here.

Background

The case arose out of an unfair prejudice petition (the "Petition") by the Petitioner, a minority shareholder in the 1^st Respondent being a Hong Kong company (the "Company"). The 2^nd to 4^th Respondents were the other shareholders in the Company.

The Petitioner was a party to the following agreements:

• a sale and purchase agreement ("SPA") with the 2^nd Respondent, and other parties who were not parties to the proceedings('non-parties') whereby the Petitioner agreed to sell certain shares in the Company; and
• a service agreement ("SA") with the Company under which the Petitioner was employed as the chief executive officer of the Company.

Both agreements contained a jurisdiction clause providing for the parties' submission to the exclusive jurisdiction of the English courts. In the SPA, the relevant clause covered "any dispute arising out of or in connection with [the SPA]". In the SA, the relevant clause provided that "[the SA] is governed by and interpreted in accordance with the laws of England and Wales".

The Petitioner made the following complaints in the Petition:

1. the Company had failed to declare or distribute any dividends to the Petitioner;
2. the Petitioner was wrongfully excluded from the management of the affairs of the Company; and
3. the 4^th Respondent's conduct of the Makdessi Dispute was improper, in that it had caused the Company to settle its claim against Mr Makdessi in the English court for a token sum. In doing so, the 4^th Respondent was acting in its own best interests but contrary to the best interests of the Company or the Petitioner.

The Company and the 2^nd to 4^th Respondents applied to stay the Petition on the ground that the allegations in the Petition consisted of or gave rise to issues or disputes on which the Petitioner had submitted to the exclusive jurisdiction of the English courts by way of the SPA and SA.

Issues

The following issues arose:

1. Did the jurisdiction clauses (in the SPA and SA) apply to the Petition?
2. If the answer to (1) was yes, could the Petitioner still bring the Petition in Hong Kong?
3. Was the Hong Kong court the proper forum?

The Court resolved all the issues in the Petitioner's favour and refused the stay application, the details of which are discussed below.

Analysis

The first issue involved considering the effect of the jurisdiction clauses on non-parties, as the Petition was against parties to the agreements and non-parties alike. The Company and the 3^rd and 4^th Respondent were not parties to the SPA; and the 2^nd to 4^th Respondents were not parties to the SA. Assuming that the Petitioner was bound by the jurisdiction clauses when dealing with the parties to the SPA and SA, was he similarly bound in terms of the non-parties?

The Court held that the key question was whether it would reasonably be understood that the parties to an agreement had promised each other that claims arising out of the agreement would be brought in Hong Kong regardless of whether the claims were against the other or a non-party to the agreement. On their true construction, the jurisdiction clauses in both the SPA and the SA did not have this effect, and thus did not bind non-parties.

In terms of the complaints which fell into or out of the scope of the jurisdiction clauses, the Court reached the following conclusions:

1. as the SPA covered distribution of dividends, the Petitioner's complaint in this regard fell within the jurisdiction clause in the SPA. However, non-distribution of dividends was also an independent ground for an unfair prejudice petition against the non-parties to the SPA;
2. the "exclusion from management" complaint was not a claim made under the SA, as it was directed to the other shareholders of the Company, not the Company itself. Neither was it based on the limited, non-exhaustive clauses in the SPA which dealt with certain aspects of the management of the Company; and
3. the complaint relating to the Makdessi Dispute was directed at the 4^th Respondent's conduct (through the directors it caused to be appointed to the Company's board). It is therefore a claim of oppression by a non-party to the SPA or the SA, and not governed by the jurisdiction clauses.

Importantly, on the second issue, the Court held that even if the 4^th Respondent had, on its face, an entitlement to enforce the jurisdiction clause in response to the dividends complaint, the Court would still refuse to enforce the jurisdiction clause to stay the Petition. This is because the incorporation and continued existence of a Hong Kong company is on the condition that it and its operations, including its status and internal affairs, would be subject to Hong Kong company law. The right to bring an unfair prejudice petition is a statutory right conferred by legislation and cannot be circumvented by private agreement between shareholders.

On the third issue, the Court held that the Hong Kong court was the proper forum. This is because, were the Petitioner to bring claims under the SPA in the English court, he would be unable to obtain an effective remedy and would thus be denied substantive justice. The chief factors that led to this conclusion were:

• as the company is incorporated in Hong Kong, the English court lacked jurisdiction to deal with the valuation of its shares for a buyout as a result of unfair prejudice. The Court rejected the Respondents' argument that the English court could look to a put option mechanism in the SPA to value the shares for a buyout. It was clear that the put option and the pricing formula had not been negotiated to take wrongdoing into account; and
• under the put option mechanism in the SPA, the price could not be calculated until three years after the put option is exercised. The delay was a major and serious disadvantage to the Petitioner.

Based on the above, the Court refused the stay application.

Comments

As the Court noted, whether a third party can rely on a jurisdiction clause is a matter of construction. In this case, the SPA expressly excluded the operation of the Contracts (Rights of Third Parties) Act 1999, and non-parties to the agreements concerned could not rely on that automatic statutory right to be involved in proceedings on matters arising out of the agreements. Hong Kong has recently enacted the Contract (Rights of Third Parties) Ordinance. Shareholders who are non-parties to certain key contracts entered into by other members of the company where the non-parties may have an interest or a conferred benefit may wish to consider including reference to the Contract (Rights of Third Parties) Ordinance in the agreement to avoid satellite litigation on its rights and remedies if a dispute was to arise. Whether or not to include the operation of this statutory right is a matter which ought to be considered on a case by case basis and the relevant clause should ideally be tailored to suit the needs.  For some examples of the type of contracts where we have seen such clauses, please click here to read our previous ebulletin.

Would the Court in this case have still reached the same result, had there not been an express exclusion of the Contracts (Rights of Third Parties) Act 1999? The answer is perhaps still a yes. To allow a third party to enforce a jurisdiction clause would lead to considerable imbalance between a party and a non-party, not least because there would be an absence of reciprocity in their choice of the forum. This was another consideration by which the Court was "seriously troubled".

That said, where shareholders' statutory rights are at stake, it is clear that the Court's paramount consideration is public policy. Any agreement that, on its true construction, seeks to fetter a shareholder's statutory rights is contrary to public policy, and as such, will not be enforced by the Hong Kong Court.

Parties looking to incorporate or acquire a stake in a Hong Kong company should therefore be aware of the important implication that such a business deal carries. In doing so, they submit to the jurisdiction of the Hong Kong courts in relation to certain aspects stipulated by Hong Kong legislation, and this cannot be overridden by contract.

If you wish to discuss, please contact the following members of our Dispute Resolution team.