Draft Arbitration Clauses with care!

In the recent case of Bio-Chem Technology (HK) Ltd v Rich Leaf International (HK) Ltd, HCA 476/2017, Hong Kong’s Court of First Instance granted the Defendant’s application to stay the proceedings on the basis that the dispute should be submitted to arbitration and dismissed the Plaintiff’s application for summary judgment. The Plaintiff had opposed the Defendant’s application for a stay on two grounds, namely:-

(1)        the claim was outside the ambit of the arbitration clause; and /or

(2)        the Defendant had abandoned or waived reliance on the arbitration clause.

Was the Claim outside the ambit of the Arbitration Clause?

The Plaintiff’s action against the Defendant was for goods sold and delivered under various contracts between the parties. The Arbitration Clause in the contracts stated as follows:

“All disputes in connection with this contract of the execution thereof shall be settled by negotiation. In case no settlement can be reached the case in dispute shall then be submitted for arbitration in accordance with the Hong Kong Arbitration ordinance and with arbitration to take place in Hong Kong….”   

The Plaintiff argued that the Arbitration Clause was limited to disputes in connection with the execution of the contract and that the Plaintiff’s claim was a debt, which only became due and payable after execution of the contract, by delivery of the products to the Defendant. That argument relied on a restrictive reading of the Arbitration Clause and, in particular, the use of the word “of” in line 1, to narrow the scope of disputes covered to those connected to execution only.

The Defendant argued that:-

• the word “of” was a typographical error and should read “or”, which would be the more usual formulation in a standard arbitration clause. In support of that argument, the Defendant pointed to a number of other typographical errors in both the Arbitration Clause and in other parts of the contract. These errors were the product of the Plaintiff’s drafting, the Defendant said, and the Plaintiff should not be able to rely on them to its advantage; under the contra proferentem rule any draft or ambiguity should be construed against the Plaintiff;

• in any event, the words “contract of the execution thereof” simply referred to the performance of the contracts. The Defendant’s payment duty arose out of the contracts and was clearly a matter relating to the performance of the contracts and therefore within the ambit of the Arbitration Clause; and

• as rational businessmen are presumed to have intended any dispute arising out of their relationship to be decided by the same tribunal, it made no sense to adopt the Plaintiff’s interpretation that performance in relation to shipment was governed by the Arbitration Clause whilst disputes regarding performance as they relate to payment were not.

The Court agreed with the Defendant that the disputes fell within the ambit of the Arbitration Clause. The Court said that the parties clearly intended the Arbitration Clause to apply to disputes between them arising out of their relationship under the contracts in question, and the contrary interpretation flew in the face of commercial sense.

Had the Defendant abandoned/waived reliance on the Arbitration Clause?

The Plaintiff relied on a letter (written in Chinese) from the Defendant in reply to a letter from the Plaintiff’s solicitors, in which the Defendant referred to the method of resolving the dispute. Certified English translations of the letter were provided to the Court, which included a sentence saying “…our company considers that adjudication by legal means is the best way to resolve the dispute.” The Plaintiff took issue with this part of the translation and argued that it made specific reference to a court of law, namely: “… our company also considers that resort to legal process in court is the best way to resolve the dispute”.   

The translator was cross-examined and gave evidence that when she had first been asked to certify the translation of the letter, she had been given different versions of translations prepared by the Plaintiff and Defendant respectively and that with a desire to be helpful to the Court had produced a version of her own, which largely adopted the syntax and style of the Defendant’s translation, which she considered preferable. When she received the notice to attend for cross-examination she asked for the background materials to prepare herself, understood that the focus was the Chinese characters and produced to the Court an alternative formal translation of the sentence, which was confirmed by two leading dictionaries on which she placed reliance, namely:

“  …, in that case, our company also considers resorting to a law court/tribunal will be the best means to resolve the present dispute.”

* 公堂 = Law court; tribunal

In support of its argument that the Chinese characters (the translation of which it disputed) which formed part of an exchange of correspondence between the parties and/or their solicitors, properly translated amounted to a waiver, the Plaintiff relied on the well-known authority in respect of waiver, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, where it was said:

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

However, the Court noted that the above sentence ended with the words “at the time of the contract” since that case was specifically about the interpretation of contractual terms. This was not applicable to letters written by laymen (as in the present case), the Court said, especially when as here, the Defendant was in an emotional state.

The Court held that the Defendant had succeeded in showing that, prima facie, a valid arbitration clause existed between the parties and that there was no unequivocal agreement to terminate it and that the proceedings should be stayed in favour of arbitration.

Comment

This case is a useful reminder of the importance of taking extreme care when drafting arbitration clauses, to ensure that the correct words are used to reflect the parties’ true intentions and that it does not include any typographical errors. It also shows the importance of the accuracy of any translation of an arbitration clause that is before the court and of ensuring that translators are given sufficient relevant information. Here, the translator had been given no idea of the significance the parties might attach to the particular Chinese characters which formed the basis for one of the Plaintiff’s submissions that the Defendant had abandoned/waived reliance on the Arbitration Clause.   

One should also note that once the Court has found that there is, prima facie, a valid arbitration clause, a stay in favour of arbitration will be granted. It is then up to the plaintiff to apply to challenge the jurisdiction of the arbitrator in the arbitration pursuant to section 34 of the Arbitration Ordinance. The arbitrator may rule on such challenge either as a preliminary question or in an award on the merits. If the arbitrator rules as a preliminary question that he has jurisdiction, any party may request, within 30 days after having received notice of that ruling, the Court to  finally decide on whether there is a valid arbitration clause, not only on a prima facie basis.

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Justin Yuen

Partner | Litigation and Dispute Resolution

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