HK Court Sets Aside Judgment And Refers Matter to Arbitration

Phillip Rompotis reviews the July 2019 decision from the Hong Kong High Court in Truearns Company Limited v Wealthy Fountain Holdings Inc [2019] HKCFI 1840, where the Plaintiff commenced court proceedings and obtained a default judgment against the Defendant and the Defendant subsequently made an application to set aside the Judgment, stay the court proceedings and refer the matter to arbitration. The decision provides a useful reminder of the Court’s approach to stay application noting, by reference to Dah Chong Hong (Engineering) Ltd v Boldwin Construction Company Ltd (HCA 1291/2002, 11 October 2002), [@21], that when faced with a stay application made under section 20 of the Arbitration Ordinance (which gives effect to Article 8 of the Model Law), the court must refer the dispute to arbitration unless one or more of the following is demonstrated:

(1) There is no arbitration agreement at all;
(2) The arbitration agreement is null and void, inoperative or incapable of being performed;
(3) There is in fact no dispute or difference to be referred to arbitration; or
(4) The relevant dispute is not one that is covered by the arbitration agreement.

Referring to PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, [49] – [51], [60] and [61], the Court noted that in considering whether there should be a stay in favour of arbitration, the proper test was whether there was a prima facie case that the parties are bound by an arbitration clause, that the onus is on the applicant to demonstrate this, and that unless the point is clear, the court should not attempt to resolve the issue and the matter should be stayed for arbitration.

One of the issues in the case was whether the extent to which an arbitration clause in one document (a Transfer Agreement) formed part of another document (Letter of Surety). In dealing with this issue, the Court set out the relevant principles of contract interpretation:

  • The ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. The relevant reasonable person is one who has 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 (Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, [14])
  • The exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other. The business sense is that which businessmen, in the course of their ordinary dealings, would give the document (Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, [21] & [27])
  • Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. Textualism and Contextualism are not conflicting paradigms. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement (Wood v Capita Insurance Services Ltd [2017] AC 1173, [13], cited with approval in Eminent Investments (Asia Pacific) Ltd v DIO Corporation [2019] HKCA 606, [7.3])
  • The more unreasonable the result the more unlikely it is that the parties could have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear. On the other hand, the Court must also be alive to the possibility that one side may have agreed to something which with the benefit of hindsight may not have served his interest (Building Authority v Appeal Tribunal (Buildings) (ENM Holdings Ltd) (2018) 21 HKFAR 194, [54])

The Court concluded that it could not definitely say that the arbitration clause in the Transfer Agreement had been incorporated into the Letter of Surety but also that it could not say otherwise, concluding that it was arguable that there was such incorporation. Accordingly, the Court made an order staying the action to arbitration (and setting aside the Judgment).

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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