Background facts
The plaintiff (Plaintiff) and the defendant company (Defendant) entered into a loan agreement in 2015 (2015 Loan Agreement), which was a rollover of an earlier loan agreement dated May 2013 (collectively, Loan Agreements).
The Defendant allegedly defaulted on repayment of the loans under the Loan Agreements. The Plaintiff issued a writ of summons and served it on the Defendant’s registered office in Hong Kong. The Defendant failed to file an acknowledgement of service. The Plaintiff therefore sought a default judgment against the Defendant, which the Plaintiff obtained on 28 December 2022.
The Defendant applied to set aside the default judgment and to stay the proceedings in favour of arbitration, relying on a written agreement said to be supplemental to the 2015 Loan Agreement (Supplemental Agreement), which contained an arbitration clause (Arbitration Clause). Alternatively, the Defendant applied to stay the proceedings on the ground of forum non conveniens, arguing that the dispute should be resolved by a mainland Chinese court (collectively, Application).
The Supplemental Agreement was allegedly signed by a third party agent on behalf of the Plaintiff. The Plaintiff denied signing or otherwise being privy to the Supplemental Agreement.
The applicable threshold
The Application was heard before the Hon. K Yeung J (the Judge). The Judge observed that:
- Insofar as the application for stay in favour of arbitration was concerned, section 20 of the Arbitration Ordinance (Cap 609) (Ordinance), which gave effect to Article 8 of the UNCITRAL Model Law, obliged the court to stay a legal action in favour of arbitration where applicable (UNCITRAL Regime). The question of whether an action should be stayed was a freestanding matter and not encompassed within the merits of the defence. The applicant for stay had to demonstrate a prima facie case that the parties were bound by an arbitration clause (Prima Facie Test).
- However, in an application to set aside a default judgment, the applicant had to show a real prospect of success in the action.
The Application concerned was an application to set aside a default judgment premised on the ground, among others, that the action should be stayed in favour of arbitration. The issue before the Judge was whether the Application called for a threshold that was different from the Prima Facie Test. The Judge was advised by counsel on both sides that there was no direct authority on the point.
The Judge first considered whether a lower threshold than the Prima Facie Test should apply; namely, was the applicant required to show “a real prospect of success in establishing a prima facie case that the parties were bound by an arbitration agreement”? The Judge answered this question negatively, indicating that such a test might be too low a threshold to be meaningful.
The Judge then also rejected the Plaintiff’s submissions that a higher threshold than the Prima Facie Test should be applied, as to do so would ignore the UNCITRAL Regime and provide the Plaintiff with undue juridical advantage based on the existence of a default judgment.
The Judge therefore concluded that the threshold applicable to the Application remains the Prima Facie Test.
The court’s decision to stay the proceedings in favour of arbitration and set aside the default judgment
The Judge applied the four questions set out in Tommy CP Sze & Co v. Li & Fung (Trading) Ltd & Ors [2003] 1 HKC 418 to determine whether a stay pursuant to section 20(1) of the Ordinance should be granted, namely:
- Is there an arbitration agreement between the parties?
- Is the arbitration agreement capable of being performed in the sense that it is not null and void, inoperative or incapable of being performed?
- Is there a dispute or difference between the parties in reality?
- Is the dispute or difference between the parties within the ambit of the arbitration agreement?
The main question in dispute was the first question, namely, whether there was an arbitration agreement between the parties under the Supplemental Agreement.
The Judge considered the evidence presented by both parties and found that the version of events put forward by the Defendant was supported by contemporaneous documents, was inherently probable, and made commercial sense. On the other hand, the version of events put forward by the Plaintiff was not consistent with contemporaneous documents, was inherently improbable, and made little commercial sense. Although the Supplemental Agreement was not signed by the Plaintiff, the Judge noted that the Plaintiff’s signature was not necessary to qualify the Supplemental Agreement as an arbitration agreement under the Ordinance. The Judge concluded that the Defendant had demonstrated at least on a prima facie basis that the Supplemental Agreement (and hence the Arbitration Clause therein) bound the Plaintiff.
Insofar as necessary, the Judge also held that the Defendant had shown a good prospect of success in demonstrating those matters, and that the other three questions identified in Tommy CP Sze should also be answered in favour of granting a stay of proceedings.
The Judge therefore set aside the default judgment.
The Judge also held that, if necessary, he would have stayed the proceedings in favour of the mainland Chinese court on the ground of forum non conveniens.
Conclusion
The Hong Kong court has had a chance to consider what appears to be a novel point of law in Hong Kong and ruled that, in an application to set aside a default judgment premised on the ground, among others, that the action should be stayed in favour of arbitration, the applicable threshold should continue to be the Prima Facie Test; namely, the applicant is required to demonstrate a prima facie case that an arbitration agreement applies to the dispute to which the action relates. The decision provides helpful clarity to the law pertaining to a stay of action in favour of arbitration in Hong Kong, demonstrates the Hong Kong court’s “minimal curial intervention” and “pro-arbitration” approach, and further reinforces Hong Kong’s status as one of the most popular seats for international arbitration.
Client Alert 2023-222
