Background
The plaintiff successfully entered a default judgment against the defendant in a dispute arising from an Investment Management Agreement (IMA). The judgment awarded the plaintiff: (1) a declaration that the plaintiff was entitled to terminate the trust in relation to all assets managed by the defendant for it and held in a discretionary account; (2) return of the amount of the assets managed under the IMA, and (3) damages.
The defendant then applied to set aside the default judgment on the grounds that there was a valid arbitration agreement in the IMA, such that the proceedings should never have been commenced in court.
The jurisdiction clause and arbitration clause of the IMA read as follows:
“11.2 The courts of Hong Kong shall have exclusive jurisdiction over the parties to this Agreement.
11.3 Any and all dispute(s) arising out of or in connection with this agreement shall be resolved by friendly negotiations between the parties insofar as possible. Both parties agree to negotiate in good faith to resolve any dispute(s). If, within 7 days of one party notifying the other of any dispute(s), the parties fail to resolve any such dispute(s), the dispute(s) shall be submitted to the relevant legally authorised body in Hong Kong for arbitration in accordance with the arbitration rules presently in force at the time of submission to arbitration. The place of arbitration shall be Hong Kong and the language for arbitration shall be Chinese or English. The arbitral award is final and binding on both parties. During the period of dispute resolution, the parties shall continue to perform this agreement save for the disputed matters.”
The court decided to set aside the default judgment and stayed the proceedings to arbitration.
Decision
Approach in considering application to set aside default judgment and stay application
In considering the defendant’s application to stay, Mimmie Chan J followed the approach in Dah Chong Hong (Engineering) Ltd v. Boldwin Construction Co Ltd HCA 1291/2002.
- The court first considered the application to stay on the basis that if it was successful, the default judgment would also be set aside and the court would not consider the merits of the defence.
- If, on the other hand, the stay application will or is likely to fail, the defendant would have to mount a defence with a real prospect of success in order for the court to set aside the default judgment.
A generous interpretative approach to give effect to arbitration clauses1
The court emphasised its commitment to upholding the intentions of the parties when interpreting contract clauses, including arbitration clauses. The court will not declare a clause null and void unless absolutely necessary. Instead, it interprets arbitration agreements in a way that maintains their validity. As such, when the court was faced with the issue of whether an arbitration clause is still effective even when the parties chose the rules of a non-existent institution, the court referenced previous case law and reiterated that as long as the parties clearly expressed an intention to arbitrate, the arbitration clause will remain enforceable. The courts will simply construe the clause to mean that the parties intended to arbitrate at the particular seat but not under the rules of the non-existent institution.
The court may also interpret arbitration clauses as necessary to ensure the efficacy of an agreement. In the present case, the court observed that as the Hong Kong International Arbitration Centre (HKIAC) has wide powers under the Arbitration Ordinance Cap. 609, the court will interpret the arbitration clause to provide for disputes to be referred to HKIAC even though the arbitration clause provided for disputes to be referred to “the relevant legally authorized body in Hong Kong for arbitration” rather than HKIAC specifically.
Reconciling arbitration clauses with exclusive jurisdiction clauses2
Mimmie Chan J continued to adopt this generous approach in considering the issue of whether arbitration clauses and exclusive jurisdiction clauses may be reconciled.
The judgment reiterated that the courts would strive to reconcile apparently conflicting dispute resolution clauses, and that an exclusive jurisdiction clause did not nullify the parties’ agreement to arbitrate. An exclusive jurisdiction clause only has the effect of submitting the parties to a certain jurisdiction (in this case, Hong Kong), and is therefore a stipulation regarding the law governing the arbitration, whereas an arbitration clause is a self-contained agreement that provides for the parties to resolve disputes via arbitration. Exclusive jurisdiction and arbitration clauses are stipulations regarding different matters, and therefore a difference between the two does not jeopardise their respective validity. As such, when there is both an exclusive jurisdiction clause and an arbitration clause, the arbitration will merely be taken to have submitted to the supervisory jurisdiction of the Hong Kong courts.
Mandatory arbitration clauses vs exclusive jurisdiction clauses3
The court recognised that reconciling mandatory arbitration clauses, which specify that disputes “shall” be referred to arbitration, could be more complex. In considering this issue, Mimmie Chan J maintained the approach of striving to give effect to all clauses in the contract. As with non-mandatory arbitration clauses, the court held that mandatory arbitration clauses and exclusive jurisdiction clauses can be reconciled by interpreting the arbitration as subject to the supervisory jurisdiction of the Hong Kong courts.
The court also commented that arbitration clauses and exclusive jurisdiction clauses are not necessarily mutually exclusive; rather, they have a collaborative relationship. An exclusive jurisdiction clause builds on an arbitration clause and gives it meaning as it enables the parties to find a jurisdiction in a court where the validity, recognition and enforcement of the arbitral award can be declared.
Commentary
This case exemplifies the court’s steadfast commitment to the principles of freedom of contract and the sanctity of parties’ contractual intentions. The court’s willingness to engage in the reconciliation of inconsistencies within contract clauses underscores its proactive approach to ensuring that contractual agreements are honoured and enforced. This decision reaffirms Hong Kong’s position as a pro-arbitration jurisdiction, where the courts are deeply reluctant to invalidate arbitration clauses, even in instances where they reference non-existent arbitration institutions or face challenges from exclusive jurisdiction clauses.
- Tongcheng Travel Holdings Ltd v. OOO Securities (HK) Group Ltd [2024] HKCFI 2710 at [29] - [31].
- Tongcheng Travel Holdings Ltd v. OOO Securities (HK) Group Ltd [2024] HKCFI 2710 at [32]; [34] - [35].
- Tongcheng Travel Holdings Ltd v. OOO Securities (HK) Group Ltd [2024] HKCFI 2710 at [36].
Client Alert 2024-236
