Hong Kong Court reconciles jurisdiction and arbitration clauses to order s.20(1) stay

In Neo Intelligence Holdings Ltd v Giant Crown Industries Ltd HCA 1127/2017, the Hong Kong Court of First Instance held that an arbitration clause was not necessarily superseded by a clause in a supplemental agreement that conferred non-exclusive jurisdiction on the Hong Kong courts.

While the two clauses did not sit “wholly happily” together, it was at least possible that the parties intended the jurisdiction clause to govern post-award enforcement, or to indicate the lex arbitri. As a result, the court’s proceedings should be stayed and the question of jurisdiction referred to the arbitral tribunal. The applicant for a stay need only show that there is a prima facie, or plainly arguable, case that the parties are bound by an arbitration clause. Once that threshold is met, it is for the arbitral tribunal to determine its own jurisdiction.

Background

In June 2015, the parties concluded a Letter of Intent (June Agreement), by which they agreed to negotiate the plaintiff’s purchase of 80% stakes in Giant Crown Industries and another company. The parties entered into a supplemental agreement dated 30 November 2015 (November Agreement), which supplemented and varied the June Agreement.

The June Agreement provided for disputes to be negotiated by the parties, “failing which any party may submit the dispute to arbitration in accordance with the UNCITRAL Arbitration Rules then enforce [sic] at the Hong Kong International Arbitration Centre in Hong Kong”.

The November Agreement amended certain of the parties’ obligations under the June Agreement. It contained the following clause:

“4.1  The conclusion, the validity, interpretation of performance of this Supplemental Letter of Intent and [any] dispute arising therefrom shall be governed by the laws of the Hong Kong Special Administrative Region of the People’s Republic of China, and the parties agree to submit to them on exclusive jurisdiction of the Hong Kong Special Administrative Region.”

The stay application

The defendants applied to stay the court’s proceedings under s.20(1) Arbitration Ordinance. S.20(1) requires the court to order a stay if the matter before it is the subject of an arbitration agreement, unless it finds that the agreement is null and void, inoperative or incapable of being performed.

The plaintiff objected to the stay application, arguing that the dispute before the court arose from both the June and November Agreements, and that when construing those Agreements, the parties’ intentions had to be considered.. The plaintiff’s case was that, against this backdrop, the parties’ express decision to include the jurisdiction clause in the November Agreement must mean that the parties intended to supersede the arbitration agreement in the June Agreement.

The defendant disagreed, arguing that the November Agreement only amended certain aspects of the June Agreement. . There was no reference to the November Agreement superseding or amending the arbitration clause in the earlier June Agreement. Rather, Clause 4.1 of the November Agreement was a governing law clause which “sits happily, and can operate “in parallel” alongside the arbitration clause in the June Agreement.

The court’s decision

The case was heard by Deputy Judge Sherrington, who agreed with the defendant. Sherrington DJ held that it was “clear that the parties did not intend the November Agreement to replace the June Agreement” in its entirety. In reaching his decision, he relied on the express provision in the November Agreement that, unless otherwise provided, the June Agreement has full force in accordance with its content. That the November Agreement post-dated the June Agreement, and was in some respects inconsistent with it, did not necessarily mean that the parties must have intended to invalidate the arbitration agreement. Referring to both English and Hong Kong case law, the judge found that it was not necessarily inconsistent to have both arbitration and jurisdiction clauses in the same agreement. The clauses in this case had “differing scopes”, with the jurisdiction clause in the November Agreement operating to confirm that Hong Kong law governs the parties’ agreement and where the non-exclusive submission to the Hong Kong courts “could be … the lex arbitri or for the purposes of post arbitral enforcement“.

On this basis, and absent “overwhelming evidence of an unequivocal waiver” of the arbitration clause in the June Agreement, the judge ordered a stay. To do otherwise would be to “usurp the function of the arbitral tribunal, which is empowered [by law] to rule on its own jurisdiction“.

Moreover, the defendant had done enough to establish a “plainly arguable” case that the parties were bound by an arbitration agreement. Thus, the s.20(1) threshold test was met, and the court was required to stay its proceedings.

Conclusion

As the judge noted, it can be difficult to reconcile the presence of both arbitration and jurisdiction clauses in the same agreement. However, common law courts will typically strive to do so, in order to uphold the fundamental principle that parties who have agreed to arbitrate should not find themselves in court instead. Although the courts have shown themselves willing to reconcile such apparent inconsistencies, a decision to stay proceedings under s.20(1) merely refers the final decision on jurisdiction to the arbitral tribunal. The parties in this case do not yet have a final resolution to their dispute over jurisdiction, let alone the substantive issues in dispute.

This case reminds draftsmen to pay close attention to the dispute resolution mechanisms they include in a contract, particularly supplemental or amendment agreements. Far from being mere “boilerplate” provisions, these clauses are a crucial pillar in the contractual framework. If undermined, there is a risk they will not survive.