Background
In AAA, BBB, CCC v. DDD [2024] HKCFI 513 (16 February 2024), the lender (DDD) claimed against the borrower (AAA) and guarantors (BBB and CCC) for an unpaid loan. The lender commenced the arbitration pursuant to the arbitration clause contained in the loan agreement, which provided that:
“(a) Any dispute, controversy, difference or claim arising out of or relating to this contract, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration in Hong Kong administered by the Hong Kong International Arbitration Centre (the “HKIAC”) under the HKIAC Administered Arbitration Rules in force when the Notice of Arbitration is submitted. For the purpose of such arbitration, there shall be three arbitrators…”
In the arbitration, however, the lender purported to claim against the guarantors under another (albeit related) transaction document, namely a promissory note. The promissory note was issued by the borrower in favour of the lender as security for the loan, and the guarantors jointly and severally guaranteed the borrower’s payment obligation under the promissory note. The promissory note contained a separate arbitration clause:
“Dispute Resolution. If the parties are unable to settle any dispute arising out of or in connection with this Note through negotiations within thirty (30) calendar days of initial notification of such dispute, such dispute shall be submitted to the Hong Kong International Arbitration Centre (the “HKIAC”) to be finally settled by arbitration in Hong Kong. Such arbitration shall be conducted in the English language. The arbitration shall be conducted in accordance with the HKIAC’s arbitration rules as in effect at the time of submission to arbitration.”
The borrower and guarantors contended that the tribunal had no jurisdiction over the claims based on the promissory note. The tribunal held that it had jurisdiction. The borrower and the guarantors applied to the Hong Kong court for a review of the tribunal’s decision.
Decision
Anselmo Reyes SC set aside the tribunal’s jurisdictional decision while sitting as a deputy High Court judge.
The court rejected the tribunal’s finding that the arbitration clause of the loan agreement covered all disputes arising out of or in connection with the transaction documents, including the promissory note.
The court identified three broad paradigms involving conflicting dispute resolution clauses:
- where there was a single contract with two or more conflicting dispute resolution clauses (“basic paradigm”);
- where there were multiple related contracts, but only one of the contracts contained a dispute resolution clause (“intermediate paradigm”); and
- where there were multiple related contracts with conflicting dispute resolution clauses in two or more of the contracts (“generalised paradigm”).
The court further stated that:
- The Fiona Trust presumption that the parties intended all their disputes to be resolved in a single forum applied to the basic paradigm.
- The extended Fiona Trust principle that a jurisdiction agreement contained in one contract could extend to a claim made under another contract applied to the intermediate paradigm.
- The court noted that the promissory note’s dispute resolution clause was a related but distinct agreement, which required a 30-day negotiation period before arbitration and did not specify the number of arbitrators. Therefore, the present case fell within the generalised paradigm. Neither the Fiona Trust presumption nor extended Fiona Trust principle applied to the generalised paradigm.
In the case of a generalised paradigm, the court held that one must locate the “centre of gravity” of that issue or dispute, assessing which dispute resolution clause was “closer” to the issue or dispute. The court considered various factors such as the nature, scope and purposes of the arbitration clauses, the relationship between the contracts and the parties’ intentions and expectations. In determining whether the overlapping issue fell within the tribunal’s jurisdiction, the court could consider the ultimate relief sought in connection with that issue.
The court found that the question of whether the guarantors were liable to pay under the promissory note fell within the “centre of gravity” of the dispute resolution clause in the promissory note, not the arbitration clause of the loan agreement.
How to avoid conflicting outcomes?
The court’s obiter considered following ways to avoid conflicting outcomes in the two arbitrations respectively commenced under the loan agreement and promissory note:
- Either party could invoke the principle of issue estoppel arising from findings determined in the earlier arbitration.
- The parties could invite HKIAC to appoint the same tribunal in the two related arbitrations.
- Either party could apply for consolidation of the two arbitrations according to Article 28 of the HKIAC Rules.
- Either party could apply for staying one of the arbitration references pending the outcome of the other arbitration reference.
Concluding remarks
This decision clarifies that the “centre of gravity” approach applies to the construction of distinct dispute resolution clauses in multiple contracts. In cases where multiple arbitration clauses are involved, there is no presumption that disputes are to be resolved in one single forum. Parties facing multiple arbitration clauses or references should consider adopting practical ways under applicable arbitral rules to avoid conflicting outcomes, including seeking to consolidate the arbitration proceedings or stay one of the arbitration references pending the outcome of the other.
Client Alert 2024-051
