The extended reach of arbitration agreements in Hong Kong

Nov 2021

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While one would be forgiven for assuming that the doctrine of privity of contract would preclude a non-signatory from being bound by a dispute resolution process to which it had not subscribed, an arbitration clause may be binding on a third party by assignment, succession or agency. Indeed, in certain jurisdictions, two doctrines have developed that allow for the extension of arbitration agreements to non-signatories: these are commonly known as ‘piercing the corporate veil’ and the ‘group of companies’ theory. While both doctrines are based on considerations of fairness and good faith, veil piercing focuses primarily on fraud or abuse of right where the real party is shielded from liability by the corporate structure, and the ‘group of companies’ doctrine concerns situations where a third party is found to be sufficiently connected to a contract by reason of its corporate ties with an original signatory.

The reach of an arbitration clause can now be extended yet further in certain circumstances as confirmed by the Hong Kong courts in recent years. Specifically, where a non-signatory is involved in the performance of a contract it may be bound by the arbitration clause contained in that contract.

In the case of Dickson Valora Group (Holdings) Company Ltd (“DVGH”) v Fan Ji Qian[1], investors in Mexico together with a Mainland Chinese resident (“Investors”) set up a joint venture company – DVGH. The Investors’ respective nominated companies together with DVGH proceeded to enter into a Shareholders’ Agreement (“SHA”). In the event of a dispute, the three corporate entities that were parties to the SHA agreed to be bound by an arbitration clause contained within.

The three corporate entities later entered into a Supplementary Agreement and an Addendum. Neither of these documents contained separate provisions on general matters such as choice of law or dispute resolution. However, the Addendum, which would become central to the litigation, provided that Fan was entitled to a “success fee” upon the fulfilment of certain conditions. Although mentioned by name, Fan did not sign the Addendum in his own capacity.

In short summary, the parties’ relationship subsequently broke down, and Fan commenced an action in Mainland China claiming the success fee pursuant to the Addendum. DVGH, among others, initiated proceedings in Hong Kong to seek an anti-suit injunction and relied on the ground that Fan was bound by the arbitration clause as opposed to any forum non conveniens considerations. The court granted the injunction on the bases that (1) the Addendum was subject to the arbitration clause in the SHA because it was an “addendum” to the Supplementary Agreement, which was intended to “complement” the SHA and (2) although not a party to the contract, by asserting his right to the success fee, Fan would be bound by the contractual conditions integral to that right.

The court clarified that it does not require said right to be assigned to or subrogated by a non-party as they would still not be a party to the contract in the full sense. If the claim is one ‘arising out or relating to’ the contract, it is justiciable only in accordance with the contractual mechanism, i.e. arbitration. It was therefore only conscionable that Fan be bound by the arbitration clause.

Another recent Hong Kong case, AIG Insurance Hong Kong Ltd v Lynn McCullough and Another[2], has since applied the decision in Dickson Valora. In this case, the court found that the defendant, a non-signatory to an insurance policy that contained an arbitration clause, was bound by that clause. An anti-suit injunction which had been granted to prevent the defendant from pursuing a common law bad faith claim before the US courts, in non-compliance with the arbitration clause in the policy, was therefore upheld. In assessing whether the defendant’s common law bad faith claim should be characterised as a claim arising out of the policy or an independent claim, the court held that despite the defendant’s claim being wider in scope, determination of coverage is a condition precedent of deciding the common law bad faith claim, and that as the coverage issue is contractual in nature, the claim was deemed to arise out of the policy. However, it should be noted that the defendant has obtained leave to appeal in this regard and the appellate court will now reconsider how the claim should be characterised and whether the defendant’s action in the US can proceed in light of the arbitration clause.

An important takeaway from Dickson Valora is that it is open to contracting parties to impose limits or conditions on any third party’s right to enforce or be bound by a specific term. In particular, contracting parties should be clear as to whether arbitration clauses should extend to non-signatories involved in a project as it is not unusual for business affiliates or companies within the same group to be involved in carrying out various parts of a project, even in the absence of contracts that formally set out their roles. The Dickson Valora decision has also established that where a claimant has become entitled to enforce an obligation under a contract (containing an arbitration clause) but is not a party to it, the court can intervene by granting an anti-suit injunction to restrain such claimant from enforcing the obligation by proceedings abroad instead of by arbitration.

[1] [2019] HKCFI 482

[2] [2020] HKCFI 1793

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