It is not uncommon for a Defendant to try and stay, or even dismiss, court proceedings by arguing that there is an arbitration agreement concerning the dispute in issue and thus the proper method of dispute resolution is arbitration instead of court proceedings.
In the recent case of Bond Tak (Holdings) Ltd v King Frame Trading Ltd  HKCFI 1509 (“Bond Tak”), the Defendant attempted to stay the court proceedings on two grounds: (1) the dispute was subject to an arbitration agreement and should be submitted to arbitration (which is the focus of this article), or (2) alternatively, the court action should be stayed on the grounds of forum non conveniens. The Plaintiff argued that the arbitration clause had been superseded by a jurisdiction clause directing disputes to Hong Kong courts, and was thus no longer valid or binding. Hence, the key issue was whether the arbitration clause had been superceded by the jurisdiction clause.
This case involved three key contracts, where the arbitration clause was in the initial agreement, and the jurisdiction clause was in a settlement agreement, which was the last agreement in time. The relevant clauses read as follows:
- “Any dispute between the parties relating to this agreement shall be settled through friendly (negotiation) by both parties on the basis of making their best endeavor and sincere cooperation. If the friendly (negotiation) fails, the dispute may be submitted by either party to China Guangzhou Arbitration Commission for arbitration.” (English Translation) (the “Arbitration Clause”); and
- “Any further disputes arising from [the Project] after Parties A & B have entered into this agreement shall be settled through friendly negotiation first. If the negotiation fails, the dispute may be submitted to the Court in Hong Kong for legal action.” (English Translation) (the “Jurisdiction Clause”).
In relation to the first ground, the Defendant submitted that at this stage, it only needed to establish a prima facie or arguable case that the Arbitration Clause was or remained binding on the parties, and in which case, the Court has no discretion but to refer the matter to arbitration under Article 8(1) of the UNCITRAL Model Law (which is incorporated into section 20 of the Arbitration Ordinance (Cap. 609) (“AO”)). It will then be for the Plaintiff to raise the issue of jurisdiction in the arbitration and for the arbitral tribunal to rule on its own jurisdiction under Article 16 (which is incorporated into section 34 of AO). Depending on the tribunal’s ruling, the Plaintiff may have recourse to the Court under Article 16.
Deputy Judge Douglas Lam SC concluded that the proper approach to be adopted in the case would be to determine “whether it is clear on the evidence and the construction of the agreements that the Arbitration Agreement has been superceded by the Jurisdiction Agreement”. If superceded, it would be inappropriate for the Court to leave the matter to the arbitral tribunal which would only result in unjustifiable delay and expense. However, if the matter is less than clear or is fact sensitive, then the Court must refer the matter to the arbitral tribunal for determination.
Based on the factual circumstances, the Court found that the Arbitration Clause was superceded by the Jurisdiction Clause. The Court first reviewed the Jurisdiction Clause, which was embedded in the settlement agreement, and found that such clause was referring to any disputes arising from the project (i.e. covering all three agreements). Further, there was a clause in the settlement agreement stipulating that in the event of inconsistency between the settlement agreement and the prior agreements, the settlement agreement shall prevail (“Inconsistency Clause”). Moreover, the Jurisdiction clause was to be interpreted in accordance with Mainland Chinese Law: despite the absence of a choice of law clause in the settlement agreement, the settlement agreement was directly concerned with the initial agreement which contained a governing law clause; and it was the Defendant’s case (in support of its alternative ground) that the transaction was closely connected with Mainland China where the project was situated. The Court then accepted the Mainland Chinese Law expert’s opinion that the Jurisdiction Clause was an exclusive jurisdiction clause in favour of the Hong Kong courts. As there was an obvious conflict between the Jurisdiction Clause and the Arbitration Clause, the Jurisdiction Clause prevailed because of the Inconsistency Clause. The Court dismissed the Defendant’s application for a stay of proceedings for arbitration.
Bond Tak may be contrasted with another recent case – Neo Intelligence Holdings Ltd v Giant Crown Industries Ltd  HKEC 2530 (“Neo Intelligence”). Similar to Bond Tak, the arbitration clause in Neo Intelligence was in the earlier agreement and the non-exclusive jurisdiction clause was in the later agreement.
The two clauses in Neo Intelligence read as follows:
- “This Letter of Intent shall be governed by the laws of Hong Kong Special Administrative Region. Any dispute arising from this Letter of Intent or in connection therewith shall first be resolved by consultation and negotiation among the parties, failing with any party may submit the dispute to arbitration in accordance with the UNCITRAL Arbitration Rules then enforce at the Hong Kong International Arbitration Centre in Hong Kong. The award of the arbitration panel shall be final and binding upon the parties.” (arbitration clause)
- “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 the non-exclusive jurisdiction of the Hong Kong Special Administrative Region.” (jurisdiction clause)
However, Neo Intelligence can be distinguished from Bond Tak on two grounds. (1) The two clauses in Neo Intelligence are co-existing while the jurisdiction clause in Bond Tak superceded the arbitration clause. This is because on the facts in Neo Intelligence, the Court of First Instance found that the later agreement was supplementing and/or amending the earlier agreement instead of superceding it (for instance, the amendments were limited to certain specified clauses only). (2) Bond Tak concerned an exclusive jurisdiction clause (with uncertainty as to whether the arbitration is mandatory under Mainland Chinese Law) while Neo Intelligence concerned a non-exclusive jurisdiction clause and a non-mandatory arbitration clause. The Court in Neo Intelligence found that the inclusion of the non-exclusive jurisdiction clause, which could have been inserted for the purposes of post arbitral enforcement, did not amount to a sufficiently clear and unequivocal indication of waiver of the arbitration clause. The two clauses could sit in parallel (even if not wholly happily). The Court expressly stated that absent overwhelming evidence of an unequivocal waiver, a stay in favour of arbitration should be ordered. The Court was satisfied that the Defendant had established a prima facie or plainly arguable case that the parties are bound by an arbitration clause and ordered a stay of proceedings.
“The distinction between the two cases reiterates that whether a court proceedings can be stayed for arbitration depends on whether there is clear evidence indicating the applicability of the arbitration clause.“
Has the arbitration agreement been superceded? Is there an expressed priority of the method of resolution? Does the Court have exclusive jurisdiction? Is it mandatory to arbitrate? Are certain matters to be arbitrated and others taken to Court? Without clear evidence indicating the applicability or inapplicability of the arbitration clause, the Court would stay the matter in favour of arbitration.
The lessons learned from the above cases are:
- Prevent disputes arising out of the dispute resolution clause (or clauses!) by using clear, but well-thought through language. Less is often very much more;
- Consider the effect of non-dispute resolution clauses on the dispute resolution clauses, e.g. inconsistency and language clauses. Do they have a happy co-existence, or is there conflict? Consider related agreements too; and
- For amendment / later agreements, stipulate whether they are intended to supercede or supplement the prior agreement(s)?