Arbitration clause cannot be imposed on a related but separate contract

Hannice Industries Ltd v Elite Union (HK) Ltd & Anor HCA 1876/2011, 22 March 2012

When drafting settlement agreements, it is not common to provide that any disputes arising out of the settlement agreement are to be referred to arbitration. The following Hong Kong case provides useful guidance as to what will happen if the underlying contract contains an arbitration clause, but the settlement agreement does not.

The Defendants sought an order that the action be stayed, pursuant to s. 20 of the Arbitration Ordinance (Cap. 609).

In 2004 the parties had entered into a Share Transfer Agreement ("the 2004 Agreement"), the terms of which were not complied with. Six or more years passed without any proceedings being commenced and the Plaintiff acknowledged that any cause of action arising from the 2004 Agreement was time-barred. However, it was the Plaintiff's case that in 2010 the same parties had reached a settlement agreement ("the 2010 Settlement Agreement") and the Plaintiff commenced the present action based on breach of the 2010 Settlement Agreement.

The 2004 Agreement contained an arbitration clause, whereas the 2010 Settlement Agreement did not. The Defendants argued that as the 2004 Agreement contained an arbitration clause, the matter should be referred to arbitration. They said that even though no claim was being made for breach of the 2004 Agreement, the underlying facts of the case concerned the 2004 Agreement and the existence of an arbitration clause in that agreement indicated an intention of both parties to submit to arbitration in the event of a dispute.

The Court dismissed the Defendants' application for a stay. It said that although an arbitration clause continues to exist, regardless of a time bar frustrating a cause of action flowing from a contract which contains such clause, that principle was not relevant to and did not answer the issue in this application. Here, there was nothing to stay because the agreement being sued upon did not contain an arbitration agreement. A settlement agreement, the Court said, was a separate agreement and the terms of a settlement agreement invariably differ from those of the underlying contract, the breach of which led to the settlement. What the parties might have intended in 2004 could not be unilaterally imposed on the parties in 2010, when entering into a different agreement.

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Kwok Kit (KK) Cheung

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