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Court refuses to enforce arbitrator’s award for emergency relief

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Authored by: Joseph Chung

In the recent case of GD v HY, HCCT 76/2021, the court had to construe the provisions of a loan agreement to determine whether an arbitration agreement in a subsequent document varying the repayment schedule of the loan was valid. The court held that there was no valid arbitration agreement. Therefore the court’s previous order allowing the Applicant (GD) to enforce an award of an emergency arbitrator for emergency relief was set aside.

Background

GD (a licensed Hong Kong money lender) had commenced arbitration proceedings in respect of a Loan Agreement between GD as Lender, HY and SD as Borrowers, and two companies (AEHL and HYL) as Covenantors/ Guarantors. The Loan Agreement contained a dispute resolution clause providing for disputes in relation to or arising out of the Loan Agreement to be resolved by litigation in the courts of Hong Kong.  A Supplemental Agreement to the Loan Agreement was signed by the same parties, whereby the schedule of instalment payments of the Loan Agreement was revised. The repayment date of the loan under the Loan Agreement was extended 4 times, as evidenced by letters and attaching a repayment schedule and signed by HY and SD.

Subsequently, GD issued a letter to HY and SD (5th Extension Letter), referring to their request for a further extension of the time for repayment of the outstanding loan. The 5th Extension Letter contained, for the first time, an arbitration clause (Arbitration Agreement), stating that “notwithstanding any provision in the Loan Agreement”, the Borrowers and Covenantors irrevocably agreed that they had liberty to choose to refer any disputes, differences or claims relating to or arising out of the Loan Agreement and the related guarantees to arbitration in Hong Kong. The 5th Extension Letter and the Schedule to it were countersigned by HY, but not by SD, AEHL or HYL.

Application to set aside Enforcement Order

GD commenced arbitration proceedings against HY in Hong Kong (Arbitration). The emergency arbitrator made an Award whereby emergency relief was granted, restraining HY from removing, encumbering, dissipating or otherwise disposing of his property, until further order or award was made in the Arbitration or upon termination of the Arbitration (Enforcement Order) and to make disclosure of his assets.  The court had granted GD leave to enforce the Award.

HY now sought to set aside the Enforcement Order on the basis that there was no valid arbitration agreement between GD and HY, as the 5th Extension Letter was not signed by all parties to the Loan Agreement, and was not a valid variation under the Loan Agreement. In the Award, the arbitrator considered the question of the 5th Extension Letter not having been signed by SD, but considered that it was not relevant to GD’s application for the injunction and relief sought.  He concluded that he had jurisdiction to grant the Award. 

Meaning of “Party” and “Parties”

The court noted that the Loan Agreement was signed by GD, HY, SD, AEHL and HYL. Clause 15 of the Loan Agreement expressly provided that it “shall not be amended, supplemented or modified except by written instrument signed by the Parties hereto or their respective duly authorised representatives”. Counsel for HY highlighted that the Loan Agreement stated that “the Lender, the Borrowers and the Covenantors” shall collectively be referred to as “Parties” and each individual as a “Party” and that the term “Parties” by definition therefore referred to GD as Lender, HY and SD as Borrowers, and AEHL and HYL as Covenantors. Further, “Parties” and “Party” were referred to in a number of clauses in the Schedule to the Loan Agreement, and in the dispute resolution clause of the Loan Agreement. Another Clause dealt with communications between the “Parties” and the confidentiality obligations of the “Parties”.

The court said that, having considered the terms of the Loan Agreement as a whole, in the context of the nature of the Loan Agreement and obligations of the Borrowers and Covenantors under it, as a matter of construction and objective interpretation, the meaning and effect of clause 15 was that the Loan Agreement could not be amended or supplemented except by written instrument signed by all Parties, named and defined as including not only HY, but also SD, AEHL and HYL.

The court said that the meaning of “Parties” and “Party”, as defined and contended by HY, was consistent with the presumed intention of the parties as to the meaning to be placed to and purposes of Clauses 13 and 15. Clause 13 dealt with communications between the Parties collectively, i.e. communications amongst the Lender, Borrowers and Covenantors, and information and material supplied to or received by any of them from the other Party, and referred to the release of any of the Parties from the Loan Agreement.  Likewise, notice to be served under the Loan Agreement was required to be served and signed by the individual Party giving the notice, i.e. by any of the Parties to the Loan Agreement as may be individually serving the notice.

By referring in the dispute resolution clause to the submission of the “Parties” to the jurisdiction of the Hong Kong courts, the court said that the Lender, Borrowers and Covenanters expressed their collective agreement on jurisdiction. By using “Parties” in the collective sense, Clause 15 required any amendment and modification of the Loan Agreement to be in writing signed by the Lender, Borrowers, and Covenantors collectively, in order to be valid and binding on them.

It had to be borne in mind, the court said, that in this case, the Loan Agreement contained a dispute resolution clause, whereby the Parties, including GD and HY, submitted to the non-exclusive jurisdiction of the Hong Kong courts. The Arbitration Agreement relied upon by GD was thus a variation of the dispute resolution provision of the Loan Agreement, agreed between GD and HY. GD and HY were bound by Clause 15 of the Loan Agreement, such that if they wished to vary the dispute resolution mechanism, such variation had to be by written instrument signed by the “Parties” to the Loan Agreement, defined to mean GD as Lender, HY and SD as Borrowers, and AEHL and HYL as Covenantors.  As the 5th Extension Letter was only signed by GD and HY, it was not a valid variation of the dispute resolution provision of the Loan Agreement, and hence, there was no valid Arbitration Agreement.

The Arbitration Agreement itself referred to the Covenantors as well as the Borrowers, and their agreement to submit their disputes to arbitration.  The 5th Extension Letter also provided for the confirmation by AEHL and HYL, to be signed by them, by way of their acknowledgment and agreement to the amendments to the Loan Agreement and the provision for arbitration. The court said that this supported the construction that the parties had intended the 5th Extension Letter to be signed by all the defined Parties.

As a commercial agreement, the construction of “Parties” as contended by HY made commercial sense, the Court said.  The named Parties had rights amongst themselves, and would wish and expect any variation of the terms of the Loan Agreement to be disclosed to and agreed by each of them, and for all disputes amongst themselves to be resolved together, in one forum.

Court’s decision

The court therefore set aside Enforcement Order, as there was no valid arbitration agreement between GD and HY.

Comments

This case illustrates the complications which may arise out of multi-party agreements, although GD might have thought that the change from court litigation to arbitration did not concern other parties to the Loan Agreement. In particular, if the dispute between GD and HY touchedupon the Covenantors, the assumption would be that all parties would like to have all disputes resolved in a single forum. Further, when HY signed the 5th Extension Letter, it is not clear whether it intended that the variations in it were to be immediately binding or subject to the signature of the Covenantors.

Key Contacts

Joseph Chung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9647

Related Services and Sectors:

International Arbitration

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