Hong Kong CFI Stays Proceedings in favour of Arbitration

In a judgment delivered on 4 March 2016 the Hong Kong CFI has ruled that the court need only be satisfied on a prima facie basis that a valid arbitration agreement applies, in order to stay court proceedings. The case in question is Bluegold Investment Holdings Limited v Kwan Chun Fun Calvin [HCA 1492/2015].

The decision confirms Hong Kong’s position as an attractive seat for international arbitration and highlights the importance of ensuring consistency across suites of documents.

Background

The dispute between Bluegold and Kwan arose out of a subscription agreement and a guarantee, which secured the performance of the parties’ obligations under the subscription agreement.

The subscription agreement contained a standard form HKIAC arbitration clause, whereas the guarantee provided for a non-exclusive submission to the Hong Kong courts.

 

The Proceedings

Bluegold commenced court proceedings in Hong Kong asserting its claims against Kwan under the guarantee.

Kwan, in response, applied under section 20 of the Arbitration Ordinance (Cap. 609) for a stay of the proceedings and for the dispute to be referred to arbitration based on the arbitration agreement contained in the subscription agreement.

 

Issues and Ruling

Under section 20 of the Arbitration Ordinance, which gives effect to Article 8 of the UNCITRAL Model Law, a court before which an action is brought in a matter that is the subject of an arbitration agreement must (upon a party’s request) refer the parties to arbitration unless it is established that the arbitration agreement is null and void, inoperative or incapable of being performed.

One of the critical issues before the Court was whether Bluegold’s claim under the guarantee was a matter which was the subject of an arbitration agreement.

Bluegold attempted to argue that the guarantee was a separate and distinct agreement with an independent governing law and jurisdiction clause and that Kwan’s obligations sought to be enforced arose under the guarantee, not the subscription agreement.

In her analysis, Mimmie Chan J considered that a breach of the guarantee would further necessitate a determination as to whether there was any breach of the subscription agreement, as the claims under the guarantee stemmed from the subscription agreement.

The Court confirmed that the onus on the applicant for stay is only to demonstrate that there is a prima facie case that the parties are bound by an arbitration agreement.

The Court held that since a good prima facie case had been established that a valid arbitration agreement existed between Bluegold and Kwan and the dispute fell within the ambit of the arbitration clause contained in the subscription agreement, a stay of the court proceedings was justified.

The Court also ruled that the jurisdiction clause in the guarantee could operate in parallel with the arbitration clause in the subscription agreement to specify the governing law of the arbitration.

 

Conclusion

The decision is noteworthy as it not only confirms the prima facie standard of review for stay of court proceedings in favour of arbitration, it also reinforces Hong Kong’s position as an attractive seat for international arbitration.

If a party attempts to litigate a dispute that falls within the scope of an arbitration agreement, the Hong Kong courts will usually grant an application for stay, unless the arbitration agreement is ‘null and void, inoperative or incapable of being performed’.

The key to avoiding these common jurisdictional disputes lies in drafting straightforward and consistent arbitration agreements, particularly across suites of documents in multi-contract scenarios.

Contacts

Brooke Holden, Partner
Tel +852 3405 7671
brookeholden@gallhk.com

Ashima Sood, Legal Analyst
Tel +852 3405 7628
ashimasood@gallhk.com