Hong Kong court reconciles conflicting dispute resolution clauses and refers parties to arbitration

The Hong Kong Court of First Instance has stayed proceedings before it and referred a dispute to arbitration 18 months after one of the parties obtained a default judgment on the merits (Tongcheng Travel v. OOO Securities [2024] HKCFI 2710).

The court found that the parties had clearly intended to arbitrate the dispute, even though the arbitration agreement did not unambiguously designate an institution and the contract also contained an exclusive jurisdiction clause.  Although the party seeking a stay had itself commenced separate proceedings before the Hong Kong courts in relation to certain merits issues, these had not been pursued and did not give rise to a waiver or estoppel in respect of the right to arbitrate.

The default judgment and a garnishee order obtained by way of enforcement were also set aside despite the judgment debtor's "long period of delay", with the court noting that its defence on the merits clearly had a real prospect of success.

Background

The underlying dispute arose out of an agreement for OOO Securities to manage US$30 million of the proceeds of Tongcheng Travel's initial public offering.  The terms were recorded in a written investment management agreement and (according to Tongcheng Travel) a prior oral agreement.

The written agreement contained a clause providing for disputes to be submitted to "the relevant legally authorised body in Hong Kong for arbitration" and a clause providing that "[T]he courts of Hong Kong shall have exclusive jurisdiction over the parties to this Agreement".

After disagreements arose between the parties, Tongcheng Travel sent a termination notice in respect of the agreement and demanded the return of the managed assets.  OOO Securities disputed the termination and did not return the assets.

The parties then commenced two separate sets of Hong Kong court proceedings:

• Tongcheng Travel commenced proceedings seeking declarations that the agreement had been terminated and for the return of the managed assets and damages (Termination Proceedings).  OOO Securities did not acknowledge service or file any defence, leading to (i) a default judgment for approximately US$30 million in favour of Tongcheng Travel and (ii) a garnishee order to show cause (a preliminary order which requires third parties holding funds of the relevant judgment debtor to freeze them temporarily pending a hearing on whether to make a final order).

• OOO Securities commenced proceedings alleging that Tongcheng Travel had wrongfully terminated and breached the investment management agreement, and seeking damages, specific performance and a declaration that the agreement remained in full force and effect (Wrongful Termination Proceedings).  OOO Securities did not serve the Wrongful Termination Proceedings on Tongcheng Travel and the writ expired without renewal. 

OOO Securities applied to set aside the default judgment and stay the Termination Proceedings in favour of arbitration pursuant to section 20 of the Hong Kong Kong Arbitration Ordinance, which gives effect to Article 8 of the UNCITRAL Model Law. 

Legal principles

Article 8(1) of the UNCITRAL Model Law provides that: "A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed."  [Emphasis added]

The usual legal test for a stay of Hong Kong court proceedings in favour of arbitration is whether there is a "prima facie or plainly arguable case" that the parties are bound by an arbitration agreement (PCCW Global Ltd v. Interactive Communications Service Ltd [2007] 1 HKLRD 309).

On the other hand, the test for setting aside a default judgment is whether the applicant has a "real prospect of success" in the action (O Mark Polyethylene Products Fty Ltd v. Reap Star Ltd [2000] 3 HKLRD 144).

Decision

Mimmie Chan J granted a stay of the Termination Proceedings in favour of arbitration and set aside the default judgment and garnishee order to show cause:

• Stay application should be determined first: the court followed previous authority that the application for a stay should be dealt with first.  Only if the stay application failed would the court consider the merits of the application to set aside the default judgement and determine if the defence had a "real prospect of success".

• Valid arbitration agreement: where the parties had clearly expressed an intention to arbitrate, the agreement was not nullified even if they chose the rules of a non-existent institution (following what Mimmie Chan J had previously described as "clear authority" to that effect in Lucky-Goldstar International (HK) Ltd v. Ng Moo Kee Engineering Ltd [1993] 1 HKC 404).  Here, the parties had clearly expressed an intention to submit disputes to arbitration in Hong Kong.  The HKIAC, which had broad powers under the Arbitration Ordinance to manage disputes, could be considered a "relevant" and "legally authorised" body for arbitration in Hong Kong.  Even if it were not, the parties' clear intention to arbitrate in Hong Kong was sufficient for a valid and operable arbitration agreement which could be performed in Hong Kong, with applications being made if necessary to the HKIAC under the Arbitration Ordinance to (for example) decide the number of, and appoint, arbitrators.

• Reconciliation of arbitration and jurisdiction clauses: there was no irreconcilable conflict between the two dispute resolution provisions, because the jurisdiction clause could be construed to mean that the Hong Kong courts were to have supervisory jurisdiction over the arbitration in Hong Kong.

• Prima facie requirement satisfied: there was therefore a prima facie case of the existence of an arbitration agreement which was not null and void, inoperable or incapable of being performed.

• Stay application not time-barred: by advancing its claim in the Wrongful Termination Proceedings, OOO Securities had not already submitted its "first statement on the substance of the dispute" for the purposes of Article 8(1) of the UNCITRAL Model Law.  That statement must be in the same matter as that which was to be stayed in favour of arbitration (namely, the Termination Proceedings).  What was required, moreover, was a statement on the "substance" of the dispute, not a mere proclamation, assertion or denial of a claim.  OOO Securities had not answered or made any statement on the Termination Proceedings in the Wrongful Termination Proceedings.

• No abandonment of arbitration right: OOO Securities had not unequivocally and clearly abandoned its right to arbitrate by commencing the Wrongful Termination Proceedings.  It was relevant in this regard that: (i) OOO Securities had not served the writ for the separate proceedings on Tongcheng Travel and the writ had expired without any renewal; (ii) OOO Securities had never filed its defence in, or taken any step to defend, the Termination Proceedings; and (iii) the parties had expressly agreed in the written agreement that it constituted the entire agreement between them and could not be amended unless approved in writing signed by both parties.  The court also rejected an attempt by Tongcheng Travel to rely in support of its abandonment argument upon a conversation which was in substance without prejudice and therefore privileged and inadmissible.

• Default judgment should be set aside: although 1.5 years was "a long period of delay" (and this was reflected in the order on costs), the court emphasised that all other circumstances had to be taken into account in deciding whether to set aside the default judgment, including the explanation of OOO Securities for the delay (which related to a major change in control in its shareholding and management), and the fact that, even on a peripheral review of the written agreement, it was clear that OOO Securities did have a defence with a real prospect of success.  Accordingly, it was a proper exercise of the court's discretion to allow OOO Securities to set aside the default judgment.

Comment

The case is noteworthy for the unusual combination of factors at play.  While applications for stays in favour of arbitration frequently involve arguments as to the validity and operability of the arbitration agreement itself, this case involved a range of additional factors, including a potentially conflicting exclusive jurisdiction clause, an 18 month delay in the application for a stay, and the commencement by the party seeking a stay of separate court proceedings in relation to certain merits issues.

The decision to grant a stay underlines the general policy of the Hong Kong courts to uphold arbitration agreements and give effect to the parties' intentions wherever possible, including by adopting constructions which address or reconcile imperfections, inconsistencies or conflicts in the contractual drafting.

The decision comes a year after another case in which the Court of First Instance set aside a default judgment and referred the parties to arbitration (楊佩玲 v. Super Best Investment Limited [2024 HKCA 520, on which we blogged here).