Acknowledgement of Debt meant there was no dispute to refer to arbitration

In the case of Suzhou Quam-SND Venture Capital Enterprise & Anor v Great East Packaging International Ltd & Ors, 23 July 2013, Hong Kong's High Court (Court of First Instance) considered an application for a stay of proceedings in favour of arbitration.

The parties had entered into an "Agreement on Additional Issues" ("AAI") in connection with a share subscription agreement between them. The AAI contained dispute resolution and arbitration provisions to the effect that disputes arising from or in connection with it would be finally settled by arbitration in Hong Kong at the Hong Kong International Arbitration Centre, in accordance with the UNCITRAL Arbitration Rules (1976).

The parties had also entered into an "Acknowledgement of Debt" by which the Defendants acknowledged their debt to the Plaintiff. The debt was not paid and the Plaintiff issued a writ against the Defendants, the cause of action being based on the Acknowledgement of Debt. One of the Defendants made an application to stay the proceedings in favour of arbitration, arguing that the Acknowledgement of Debt did not constitute a cause of action in itself, the proper cause of action being under the AAI, which contained the arbitration provision.

The Court dismissed the application for a stay, holding that:-

1. It was not necessary for the Defendants to enter into the Acknowledgment of Debt to create liability for the sums due, as that liability had arisen in any event under the AAI.
2. An Acknowledgement of Debt in itself did not provide a cause of action. It was the underlying obligation giving rise to the Acknowledgement of Debt that was the cause of action. The Plaintiffs would be permitted to amend their Statement of Claim to plead the correct cause of action.

In its judgment, the Court also set out its views on the stay application and the relevant principles applying to such. It said that four questions needed to be answered, namely:-

1. Was the clause in question an arbitration agreement?
2. Was the arbitration agreement null and void, inoperative or incapable of being performed?
3. Was there in reality a dispute or difference between the parties?
4. Was the dispute or difference between the parties within the ambit of the arbitration agreement?

The first, third and forth questions needed to be answered "yes" and the second "no" or there could be no stay.

The Court answered those questions as follows:-

1. The clause in question was an arbitration clause.
2. There was no suggestion that the arbitration agreement was null and void, inoperative or incapable of being performed.
3. The principal question was whether there was, in reality, a dispute between the parties. A dispute would exist unless there was a clear and unequivocal admission of liability and quantum. The Acknowledgment of Debt was an unequivocal admission. The Defendant raised the allegation that the Acknowledgment was entered under pressure but it was not particularised. The Court held that no weight was to be given to it. Therefore, in reality, there was no dispute between the parties which might go to arbitration and the Defendant was therefore not entitled to a stay of proceedings in favour of arbitration. Such Acknowledgment of Debt would of course have to include acknowledgment of the amount due in order to amount to an unequivocal admission of the debt.

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