Hong Kong Court stays proceedings to arbitration despite jurisdiction clause in favour of Hong Kong Courts

In the recent case of Bluegold Investment Holdings Ltd v Kwan Chun Fun Calvin, HCA 1492/2015, Hong Kong’s Court of First Instance stayed the proceedings in favour of arbitration, even though the Plaintiff was claiming against the Defendant under a guarantee which contained a non-exclusive jurisdiction clause in favour of the Hong Kong courts.

Background

The Plaintiff (Bluegold), Defendant (Kwan) and a BVI company (Company), of which Kwan was founder and director, entered into a Subscription Agreement under which the Company agreed to issue convertible notes of US$10 million to Bluegold and also issue a warrant to it to subscribe for shares in the Company. Pursuant to the Subscription Agreement, the Company issued Notes to Bluegold. Under the Note Certificate, the Company promised to pay Bluegold such amounts as should become due and payable in respect of such Notes, and to comply with the provisions of the conditions of the Notes. The Notes were expressed to be “unconditionally and irrevocably guaranteed by” Kwan. Kwan also executed a separate Guarantee in favour of Bluegold.

Dispute Resolution Clauses

So far as governing law and dispute resolution clauses were concerned, the Subscription Agreement contained an arbitration clause providing: “Any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity thereof, shall be submitted to arbitration. The arbitration shall be conducted in Hong Kong under the auspices of the Hong Kong International Arbitration Centre (the “Centre” or “HKIAC”). The number of arbitrators shall be three (3)…”  Both the Note Certificate and Note Conditions provided that the dispute resolution clause in the Subscription Agreement would apply to them.

On the other hand, the Guarantee provided: “This Guarantee and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of Hong Kong without regard to the principle of conflicts of laws, and the Guarantor irrevocably submits to the non-exclusive jurisdiction of the Hong Kong courts.”

Application for stay of proceedings

Bluegold brought proceedings against Kwan as guarantor for HK$10million, claimed to be due under the Guarantee. Kwan applied under section 20 of the Arbitration Ordinance for a stay of proceedings in favour of arbitration, relying on the arbitration clause in the Subscription Agreement.

Court’s Ruling

The Court stayed the proceedings in favour of arbitration, holding:

• It was not entirely correct to say that Bluegold’s claims against Kwan did not arise under the Subscription Agreement, as argued by Bluegold. To substantiate its claims against Kwan as guarantor, Bluegold had to establish that there had been breach by the Company and Kwan of their obligations under the Subscription Agreement and of their obligations under the Notes to make the payments due. 
• Unless the point is clear, the Court should not decide the matter, but should refer the parties to arbitration, for the Tribunal to determine its own jurisdiction. The Court was not satisfied that the exclusive jurisdiction clause in the Guarantee was sufficient to exclude or displace the intention of Bluegold and Kwan expressed in the arbitration clause in the Subscription Agreement and Note Conditions. There was a prima facie case that there was an arbitration agreement between the parties.
• The arbitration clause was widely drafted, to include any dispute, controversy or claim arising out of or relating to the Subscription Agreement and the Note Conditions. It was wide enough to include the present claim as to whether there was a breach by the Defendant as Guarantor to make payment under the Note.
• Accordingly, Kwan had established a prima facie and plainly arguable case that the parties were bound by an arbitration clause and a stay of proceedings in favour of arbitration was therefore justified.

Some readers may be surprised by the Court’s above ruling, despite the Guarantee expressly providing for the non-exclusive jurisdiction of the Court. However, the Court came to its conclusion because it said that the obligation sought to be secured by the Guarantee and default in payment relied upon by Bluegold, was the Company’s obligation to pay under the Note and its failure to do so and the Note expressly applied the dispute resolution clause of the Subscription Agreement and arbitration clause relied on by Kwan. It was therefore not clear and obvious, the Court said, that Bluegold and Kwan had provided for a method of dispute resolution which was clearly contrary to the intention expressed in the arbitration clause in the Subscription Agreement. Therefore, in accordance with case authority, unless the point is clear, the Court should not decide the matter, but should refer the matter to arbitration for the Tribunal to determine its own jurisdiction. This case is a clear example of the “arbitration biased” approach generally adopted by the Hong Kong Courts in dealing with applications to stay proceedings to arbitration.

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張國傑

合夥人 | 訴訟與爭議解決

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