Hong Kong Court Stays Proceedings to Arbitration

Overview

In Polytec Overseas Ltd and another v. Grand Dragon International Holdings Co Ltd and others [2017] HKCFI 604, the Hong Kong Court of First Instance upheld the defendant's application under s. 20 of the Arbitration Ordinance to stay court proceedings issued by the plaintiffs in favour of arbitration.

Notwithstanding that the relevant contracts between the parties appeared to contain incompatible dispute resolution provisions, the Court confirmed the existence of a valid and operative arbitration clause binding on the plaintiffs and defendants and prima facie encompassing the substantive claims advanced.

Read more of this post

Background

The dispute opposed Polytec Overseas Limited (POL) and Polytec Holdings International Limited (PHIL) against Grand Dragon International Holdings Company Limited (LHK), Guandong Longhao Group Limited (LG) and an individual shareholder of both LHK and LG (X).

POL and LHK entered into a Cooperation Framework Agreement (BOT), setting out the terms and conditions of their joint project to develop, construct and operate highways in Mainland China. The BOT contained an arbitration clause providing that "any dispute between the parties in the implementation or performance of the BOT may be submitted to CIETAC in Hunan for arbitration, if the dispute cannot be conciliated". Pursuant to the BOT, X signed written guarantees under which it undertook obligations in relation to the project.

Various supplemental agreements were concluded. PHIL was joined as a party to the first supplemental agreement (1^st Supplemental), which purported to clarify the terms of the relationships between the parties. The 1^st Supplemental contained a jurisdiction clause, designating the courts of Hong Kong as competent courts. The second supplemental agreement (2^nd Supplemental), concluded between POL, PHIL, LHK and LG, set out the terms of the parties' continued involvement in the projects and stated expressly that it represented the "final and comprehensive settlement of matters" between the parties. The 2^nd Supplemental did not include a dispute resolution clause.  

POL and PHIL claimed that LHK and LG were in breach of the BOT, as amended by the 2^nd Supplemental, notably by failing to inject sufficient funds into the project companies, which led to the suspension of the project works, and by preventing POL and PHIL from exercising their right of control and management of the project companies. POL and PHIL further claimed that X was in breach of the Guarantee by failing to properly manage and organise the project works and supervise the project companies. The defendants applied for a stay of proceedings. In response, the plaintiffs argued that the defendants could not rely on the arbitration agreement to stay the proceedings in court due to an alleged inconsistency between the BOT arbitration clause and the jurisdiction clause in the 1st Supplemental.

Decision

Pursuant to s. 20 of the Arbitration Ordinance, the Hong Kong court must stay its proceedings and refer the parties to arbitration if a party so requests and the action is brought in a matter which is subject of an arbitration agreement, unless the arbitration agreement is invalid, inoperative, or incapable of being performed.

Justice Mimmie Chan based her decision whether to allow a stay of proceedings on the four-stage process established in Tommy CP Sze v Li & Fung (Trading) Ltd [2003] 1 HKC 418, namely: (1) is there an arbitration agreement between the parties, (2) is the clause capable of being performed, (3) is there a dispute or difference between the parties and (4) is the dispute between the parties within the ambit of the arbitration agreement.

Regarding the existence of an arbitration agreement covering the claims made by the plaintiffs, Chan J noted that the claims against LHK and X as to the amounts due from LHK and its obligation to cooperate were inextricably based on obligations established under the BOT, as supplemented by the 1^st Supplemental and the 2^nd Supplemental. Therefore, the dispute between POL, PHIL and LHK fell within the ambit of the arbitration clause contained in the BOT.

In relation to the inconsistency between the dispute resolution clauses contained in the BOT and the 1^st Supplemental, the Court pointed out that regard should be given to the context of the parties' dealings and the circumstances of the case. In fact, it was expressly stated in the 1^st Supplemental that it had equal effect as the BOT. Therefore, in the Court's view, the 1^st Supplemental could not be said to supersede the BOT.

The Court concluded that the test laid out in PCCW Global Limited v Interactive Communications Service Ltd [2006] HKCA 434; [2007] 1 HKLRD 309, that is the existence of a valid arbitration agreement on a prima facie basis, was satisfied.

The plaintiffs had also argued that the defendants had waived their right to arbitration by commencing court proceedings in the Higher People's Court of Hunan. However, according to the judgment of Lord Goff in Kanchenjunga [1990] 1 Lloyd's Rep 391, such waiver should have been "clearly or unequivocally" expressed to be effective. Chan J could not establish that the defendants had abandoned their right to arbitration, as it was not clear whether the Hunan proceedings had been commenced before or after the application to stay the Hong Kong proceedings.

Ultimately, the Court granted the mandatory stay under s20 of Arbitration Ordinance as requested by the defendants.

With regards to the claims made against X, the Court decided the liability of X under the Guarantee depended on whether LHK was liable under the BOT and the 2^nd Supplemental. Accordingly, and in order to avoid waste of costs and risking conflicting outcomes, the Court exercised its inherent discretion to stay the plaintiff's claims against X.

Discussion

As we have come to expect, the Hong Kong Court has applied the provisions of the Arbitration Ordinance robustly. While the judgment confirms that the application of s. 20 Arbitration Ordinance will depend on the facts of each case, the threshold for ordering a s.20 stay is relatively low. The Court must merely be satisfied on a prima facie basis that there is a valid arbitration clause, and that it encompasses the disputes before the court. As such, Chan J's decision is consistent with the overarching aim of the Arbitration Ordinance (and the Model Law) that courts should intervene in a dispute that is subject to arbitration only insofar as necessary, and shall defer to the arbitral tribunal wherever possible, to determine its own jurisdiction on a final basis.