P’s case against D1

P’s case against D1 could be summarised as follows:

1. In around the end of 2017, at D1’s suggestion, P and D1 both acquired shares in a listed company (Listco).
2. In or around June 2018, on certain representations made by D1 to P, P signed various documents under D1’s arrangement in the belief that P’s shares in the Listco (Shares) were to be transferred to a company owned or controlled by D1 on trust for P.
3. In or around May 2019, P discovered that the Shares had in fact been transferred to another company in which D1 had no interest (Company), and the representations previously made by D1 to P were therefore false.
4. Upon discovering the above, P requested D1 to pay or compensate for the Shares or to honour the above arrangement, but D1 refused or failed to do so.
5. Subsequently, P obtained a copy of the Agreement, according to which D1 (as one of the vendors) purported to sell the Shares to the Company as purchaser. While the Agreement bore a signature that appeared to be P’s, P was not aware of the Agreement and never agreed to it. P was informed that the Agreement was prepared by D1.

In defence, D1 averred that he was only a passing acquaintance of P and that he never had any communication or contact with P concerning the Shares. In short, D1 denied having anything to do with the Shares.

Issues

The Application was heard before the Hon. Anthony Chan J (Judge). By applying Tommy CP Sze & Co v. Li & Fung (Trading) Ltd [2003] 1 HKC 418, [19]-[22], the Judge identified the following two issues required for the determination of the Application:

1. Is the dispute or difference between the parties within the ambit of the arbitration agreement? (Ambit Issue)
2. Is the arbitration agreement null and void, inoperative or incapable of being performed? (Waiver Issue)

Ambit Issue

It was common ground between P and D1 that the construction of the Arbitration Clause was governed by PRC law and that P’s claim as well as the disputes that it gave rise to were tortious in nature. The Ambit Issue turned upon the question of whether the tortious disputes fell within the scope of the Arbitration Clause. As P and D1 had put forward contested PRC law evidence as to how such question should be answered, the Judge considered that he had to come to a view on whether D1 had established a prima facie or plainly arguable case that the tortious disputes fell within the scope of the Arbitration Clause.

Upon considering the contested PRC law evidence, the Judge was eventually swayed by the PRC law evidence of P’s legal expert. In particular, the Judge was convinced by the opinion of the P’s legal expert that the beginning words of the Arbitration Clause, i.e., “因履行本协议所发生的争议” (“Any dispute arising from the performance of this agreement”), should be construed to mean disputes arising from a party’s failure to perform its obligations under the Agreement or to comply with its terms. Such opinion was supported by the Supreme People’s Court’s (SPC) decision in (2020) 最高法知民辖终111号 （English Translation: (2020) Zui Gao Fa Zhi Min Xia Zhong 111）, where the SPC held that a practically identical arbitration clause did not cover a tortious dispute. According to the SPC, such clause should only cover the formation, validity, variation, assignment, performance, breach, interpretation and discharge of a contract, but not tortious disputes.

Based on the above, the Judge held that the tortious disputes arising in the Action fell outside of the ambit of the Arbitration Clause and therefore ruled in favour of P in respect of the Ambit Issue.

Waiver Issue

The Judge also held that D1 had waived his right to arbitrate and, therefore, the arbitration agreement was inoperative.

The Judge pointed to the following conduct of D1 in finding that D1 had waived his right to arbitrate:

1. D1 took no objection to P’s Summons dated 25 April 2022 seeking to make amendments to the Statement of Claim that introduced the Agreement under particulars of fraud. The Judge referred to Ahad v. Uddin [2005] EWCA Civ 883, which provided that “where an amendment of a pleading will introduce issues which the defendant says he is entitled to have resolved by arbitration, the defendant should object to the amendment on this ground at the time the amendment application is made”. While the Judge acknowledged D1 should be given proper opportunity to consider his right, the Judge pointed out that the Action had been on foot since August 2021 and that D1 well knew about the Agreement and was legally represented throughout the proceedings.
2. D1 took out an application for security for costs against P on 11 February 2022. The Judge was referred to La Donna Pty Ltd v. Wolford AG (2005) 194 FLR 26, where the Supreme Court of Victoria held that the defendant had waived its right to arbitrate by applying for security for costs. In the present case, P and D1 had agreed on the security, which covered D1’s costs up to the exchange of witness statements, to be paid by P to D1. The Judge held that the agreement on costs up to the exchange of witness statements was plainly inconsistent with the Application that sought a stay of the Action.

By reason of the above, the Judge held that D1 had waived his right to arbitration and therefore also ruled in favour of P in respect of the Waiver Issue.

As the Judge had ruled against D1 on both issues, the Judge dismissed the Application and made an order nisi that the costs of and occasioned by the Application be paid by D1.

Concluding remarks

This judgment serves as a reminder to arbitration users and practitioners of the importance of (i) ensuring that the arbitration clause is broadly drafted in order for it to encompass all disputes including contractual and tortious disputes, (ii) specifying an express governing law for the arbitration agreement in order to avoid any dispute on the same and the construction of the arbitration clause under different applicable laws and (iii) avoiding taking any action that may be considered inconsistent with or amounting to a waiver of the right to arbitrate. It is also interesting to note the approach that the Hong Kong court may adopt towards the resolution of contested foreign law evidence in determining an application for a stay of the action in favour of arbitration.

Client Alert 2023-103