HONG KONG COURT CLARIFIES JURISDICTION TEST FOR CONTRACTS WITHOUT EXPRESS JURISDICTION AND DISPUTE RESOLUTION CLAUSES

In Hong Ziyun v Chan Kwan Ming [2019] HKCFI 2125, the Court of First Instance considered the relevant jurisdiction applicable to a host of related loan documents where only one of the documents contained an express jurisdiction clause (in favour of the court of Xiamen in Mainland China). The defendants applied for a stay of proceedings in Hong Kong in favour of Mainland China. The court granted the application and provided useful guidance on determining the relevant jurisdiction for dispute resolution where the contract is silent on the issue.

Background

The plaintiff, who extended two loans to the defendants, issued proceedings in Hong Kong against five defendants. Defendants 1 and 2 (D1-2) were the borrowers and were being sued for default of two loans, and defendants 3 to 5 (D3-5) were the guarantors and were being sued for failure to pay up under the guarantee provided against the two loans. Following D1-2's default in payment of the first loan and in payment of the interest due under the second loan, the parties entered into a Supplemental Agreement (SA) in which D1-2 acknowledged their default and agreed, among other things, to pay additional interest.

The SA included an express jurisdiction clause in favour of Mainland China which stated that disputes connected with the loan agreement should be submitted to the Xiamen Court (the Mainland Court). The defendants applied to the Hong Kong Court to stay proceedings in favour of the Mainland Court, arguing that (i) the express jurisdiction clause was exclusive (although this was not expressly provided for) and applied to all the loan documents; and (ii) the proceedings should be conducted in the Mainland Court considering the best interests and convenience of the parties and witnesses (i.e., on the ground of forum non conveniens).

Judgment

The court found that the correct jurisdiction and place for dispute resolution for all of the loan documents was the Mainland Court. In doing so, it held that the following factors were important in determining the correct forum:

1. When there is no express jurisdiction clause, the applicable law is that which has the "closest and most real connection" with the transaction.
2. Most of the defendants' business was in Mainland China They also spent most of their time in Mainland China. On the evidence presented, the court was unable to place significant reliance on the permanent "residence" of any of the defendants in Hong Kong as showing any real or closest connection with Hong Kong.
3. The location of the debt, currency, and place of performance of the loans as well as the execution of and governing law clause in the SA all had a strong connection with Mainland China.

Notably, the court advised that the approach for dealing with connected documents (which in this case were the first loan agreement, the second loan agreement, the guarantee and the SA) should be to take a practical view and deal with all disputes associated with a transaction in one jurisdiction. The court also found that the plaintiff was unable to demonstrate strong reasons (i) not to give effect to the parties' choice of forum (namely Mainland China); and (ii) to stay the proceedings in Hong Kong.

Further, in obiter, the court noted that:

1. the parties could only have intended to litigate exclusively through the Mainland Court because the test is (when looking at the express jurisdiction clause) to construe the meaning of the clause as it would convey to a reasonable person having all the background knowledge reasonably available to the parties at the time of the contract; and
2. the absence of a conclusive word such as "exclusive", "must" or "shall" is not fatal or conclusive and does not mean a jurisdiction clause cannot be construed as exclusive. The test is whether the agreement obliged a party to litigate in the chosen jurisdiction.

Taking all the above factors into consideration and the fact that the express jurisdiction clause stated it was to apply to disputes connected with the loan documentation, the court held that the clause in question was an exclusive jurisdiction clause and applied to all the loan documents.

Comment

This judgment serves as a reminder of the factors the Hong Kong court will take into account when deliberating jurisdictional issues. It also provides practical guidance on the approach the courts will take in interpreting jurisdiction clauses and in respect of stay of proceedings when faced with disputes arising from different documents (some of which may be silent on jurisdiction) which are all part of the same transaction.