Summary of facts
This case concerned an application made by the respondent (HY) to set aside an order made by the Court of First Instance (the Enforcement Order) granting leave to the applicant (GD) to enforce an award of an emergency arbitrator (the Award).
The arbitration was commenced in respect of a loan agreement (the Loan Agreement) made between GD as lender (the Lender), HY and another party (SD) as borrowers (the Borrowers) and two companies as “covenantors” or guarantors (the Covenantors). Pursuant to the Loan Agreement, GD made a loan of HK$303 million (the Loan) to the Borrowers. The Covenantors agreed jointly and severally to repay the Loan with interest. The dispute resolution clause in the Loan Agreement provided for disputes to be resolved by litigation in the courts of Hong Kong. The variation clause stated that the Loan Agreement should not be amended, supplemented or modified “except by written instrument signed by the Parties hereto or their respective duly authorized representatives” (the Variation Clause).
The repayment date of the Loan was extended four times by way of extension letters issued by GD. GD issued a fifth extension letter to the Borrowers (the Fifth Extension Letter), which contained, for the first time, the arbitration clause relied upon by GD (the Arbitration Agreement). The Arbitration Agreement stated, among other things, that “notwithstanding any provision in the Loan Agreement”, the Borrowers and the Covenantors irrevocably agreed that they had the liberty to choose to refer any disputes relating to or arising out of the Loan Agreement and the related guarantees to arbitration in Hong Kong. The Fifth Extension Letter was countersigned by HY, but not by SD or the Covenantors.
In the Award, the emergency arbitrator concluded that he had jurisdiction to grant the Award notwithstanding that the Fifth Extension Letter was not signed by SD.
HY sought to set aside the Enforcement Order on the basis that there was no valid arbitration agreement between GD and HY, as the Fifth Extension Letter was not signed by all the parties to the Loan Agreement and was not a valid variation under the Loan Agreement.
Legal analysis
Was the dispute resolution clause validly amended by the Fifth Extension Letter signed by GD and HY?
Mimmie Chan J (the Judge) held that, as a matter of construction and objective interpretation, the Loan Agreement could not be amended or supplemented except by written instrument signed by all “Parties”, which was defined to mean the Lender, the Borrowers and the Covenantors collectively. The Fifth Extension Letter was only signed by GD and HY and therefore did not constitute a valid amendment of the Loan Agreement.
The defined meaning of “Parties” was consistent with the presumed intention of the parties as to its meaning in the context of the communications and notice provisions in the Loan Agreement. The Arbitration Agreement itself also referred to the Covenantors as well as the Borrowers and their agreement to submit their disputes to arbitration and provided for the Covenantors to sign in acknowledgment of and agreement to the amendments to the Loan Agreement and the provision for arbitration.
Further, as the Loan Agreement was a commercial agreement, the Judge found that the construction of “Parties” as contended by HY made commercial sense. The defined Parties would wish and expect any variation of the terms of the Loan Agreement to be disclosed to and agreed by each of them, and to resolve all disputes among themselves in one forum.
Was there a valid Arbitration Agreement as between GD and HY?
It was indisputable that an arbitration agreement was separate to and severable from the underlying contract. However, the Judge held that GD and HY were bound by the Variation Clause, such that if they wished to vary the dispute resolution mechanism, such variation had to be done by written instrument signed by the “Parties” to the Loan Agreement. As the Fifth 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 therefore there was no valid Arbitration Agreement.
The Judge set aside the Enforcement Order on this basis.
Concluding remarks
In line with first principles, the Hong Kong court will need to be satisfied that there exists a valid arbitration agreement between the relevant parties as a matter of contractual interpretation before it will enforce an arbitral award. In the context of a variation of the dispute resolution clause to an arbitration clause, parties should be careful to ensure that the contractual variation requirements in the underlying agreement, as well as the execution formalities, are complied with to avoid any issues as to the validity of the variation, the arbitration agreement and any arbitral award made thereupon.
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