Summary of facts
On 22 March 2019, P and D entered into a loan agreement (the Loan Agreement) for a principal sum of HK$5 million (the Loan). In accordance with the Loan Agreement, D drew a postdated cheque for the repayment of the Loan without interest (the Cheque). The Cheque was dishonoured. P then brought the present proceedings at the Hong Kong Court of First Instance (CFI), claiming against D for the Loan as due and payable under the Cheque.
On 6 May 2020, D applied by summons (the Summons) to stay the proceedings in favour of arbitration in reliance upon the arbitration clause contained in the Loan Agreement. The key dispute between the parties was whether P’s claim fell within the ambit of such arbitration clause. The Summons was dismissed by the CFI.
Legal arguments
D argued that the well-known English House of Lords decision in Fiona Trust & Holding Corporation v. Privalov [2007] 4 All ER 951 should be followed. According to Fiona Trust, there is an assumption that the parties, as rational businesspeople, are likely to have intended any dispute arising out of their relationship to be decided by the same tribunal, unless there is clear language to exclude any particular dispute. D also argued that the Cheque and the Loan Agreement formed part of the same transaction and that P and D had intended disputes relating to the Loan Agreement and the Cheque to be determined by the same tribunal.
P argued that the position under Hong Kong law (as adopted by the Hong Kong Court of Appeal (CA) in CA Pacific Forex Ltd v. Lei Kuan Ieong [1999] 1 HKLRD 462) was that there must be a “plain manifestation” in an arbitration clause that it would apply to bills of exchange before the presumption against taking bills of exchange into arbitration would be rebutted. Further, P submitted that, even if the construction of the arbitration clause was to start with a one-stop shop dispute resolution presumption in accordance with Fiona Trust, there were good commercial reasons for the parties to agree otherwise. As businesspeople, the parties must have realised and accepted that the quicker and easier procedure for P to recover the sum due under the Cheque was by instituting legal proceedings and seeking summary judgment, in exchange for waiving any interest that might be due under the Loan Agreement.
Decision
Did the parties intend that the Cheque form part of a single transaction or a separate contract?
Chan J upheld the trite principle that the cause of action on a cheque was separate from the cause of action on the underlying contract, as the cheque itself was a separate contract. To hold that an arbitration clause referring to disputes arising from the underlying agreement applied to bills of exchange would make “a very substantial inroad upon the commercial principle on which bills of exchange have always rested”. Accordingly, there must be a “plain manifestation” in the arbitration clause that it would apply to bills of exchange if the presumption against taking bills of exchange into arbitration were to be rebutted.
With respect to the conflicting assumptions adopted in the CA decision in CA Pacific (regarding bills of exchange specifically) and the English House of Lords decision in Fiona Trust (regarding contracts generally), Chan J held that, ultimately, the issue was a matter of construction of the language used in the arbitration clause and in the case of any conflict between the two approaches, the CFI would be bound by the CA decision in CA Pacific; i.e., there was a presumption against the inclusion of bills of exchange in the arbitration clause unless there was a “plain manifestation” that they would be included.
Although the Cheque was referred to in the Loan Agreement, it was referred to as “evidence” of the Loan and of the agreement to repay the Loan. Reading the Loan Agreement as a whole, Chan J did not consider that the references to the Cheque in the Loan Agreement, as evidence of the Loan, could per se negate the fact that the Cheque and the Loan Agreement were separate contracts, and it was clear to Chan J that the parties had intended the Cheque to be offered and retained as security for D’s repayment of the Loan on the due date.
Was there a plain manifestation of the intention of the parties to include the Cheque within the arbitration clause?
The arbitration clause in the Loan Agreement provided that “any disputes” should be submitted to arbitration. Chan J held that, read in context, “disputes” could be construed to cover disputes relating to the Loan Agreement only. There was no sufficiently clear language or a “plain manifestation” of the parties’ intention that the agreement to arbitrate be extended to claims made on the Cheque.
Further, Chan J found force in P’s argument that, as rational businesspeople, P and D must have had high regard for the importance and value of a cheque being issued and held as security (which was “as good as cash”, as generally understood), to ensure due payment of the Loan and to facilitate easy and speedy enforcement of the security. It would defeat the rationale in Fiona Trust if the court should infer from a generally phrased arbitration clause that the parties would be prepared to discard the value of the security in the Cheque in the absence of a clearly expressed intention that disputes relating to the Cheque should be resolved by arbitration, together with disputes relating to the underlying Loan Agreement.
Since the arbitration clause in this case did not extend to cover the claims made under the Cheque, which was a separate agreement, Chan J held that there was no prima facie case that the parties were bound by the arbitration clause in relation to the Cheque. The application for stay was accordingly dismissed.
Concluding remarks
This decision is welcome as it accords with the long-standing principle that a cheque forms a separate agreement from the underlying agreement and is also consistent with commercial reality. This decision will likely be noteworthy for future claimants who find themselves in a similar situation, with the benefit of Chan J’s clarification that the assumption against bills of exchange being included in the arbitration clause prevails over the broader assumption adopted in Fiona Trust in the case of any conflict. As held by Chan J, it would be more sensible to assume that parties, as rational businesspeople, would not intend to discard the value of the security offered by a cheque, which would otherwise be a “deferred instalment of cash” or “as good as cash”, in the absence of a clearly expressed intention to the contrary.
Client Alert 2020-620
