Hong Kong court clarifies effect of settlement agreements disapplying dispute resolution clauses of original contract

27 August 2025 Reed Smith Client Alerts

Page d'accueil Perspectives Hong Kong court clarifies effect of settlement agreements disapplying dispute resolution clauses of original contract

Key takeaways

If settlement agreement expressly disapplies dispute resolution clause of original contract, disputes arising under the settlement agreement will not be subject to that dispute resolution clause
Parties should pay close attention to drafting of dispute resolution clauses in settlement agreements
If disputes arise after settlement agreement is reached, plaintiffs wishing to rely on dispute resolution clause of the settlement agreement must plead claims carefully to ensure they fall within ambit of the same

Auteurs: Lianjun Li Min Li Zeldar Wang Steve Tam Donald Sham Cheryl Yu Matthew Townsend Angus Yu

Background

In the recent decision of Kat Yue Construction Engineering Limited v. Fai Lee Construction (H.K.) Limited [2025] HKCFI 3298, the Hong Kong Court of First Instance addressed a significant issue: whether a dispute arising from a settlement agreement, which does not contain any arbitration clause and expressly disapplies the original contract’s arbitration clause, should be referred to arbitration or resolved in court.

The parties, both Hong Kong construction companies, entered into a contract in June 2024 for the supply and disposal of sea sand (Contract), which included a dispute resolution clause (clause 12) mandating mediation and, if necessary, arbitration in accordance with Hong Kong law.After a suspension in sand deliveries and subsequent disputes, the parties negotiated and executed a settlement agreement in November 2024 (Settlement Agreement). Crucially, the Settlement Agreement provided at clause 1.6 that: “Clause 12 of the original contract shall not apply to this settlement agreement”.

After a suspension in sand deliveries and subsequent disputes, the parties negotiated and executed a settlement agreement in November 2024 (Settlement Agreement). Crucially, the Settlement Agreement provided at clause 1.6 that: “Clause 12 of the original contract shall not apply to this settlement agreement”.

When further disputes arose regarding compliance with the Settlement Agreement, the plaintiff commenced court proceedings, in which the defendant made an application for a stay of proceedings in favour of arbitration, arguing that the plaintiff’s claim was based on the Contract and not on the Settlement Agreement, and so it fell within the Contract’s arbitration clause.

Hong Kong court’s decision

The court refused to stay the proceedings for arbitration and held that:

Clause 1.6 of the Settlement Agreement expressly disapplied the arbitration clause in the Contract for disputes arising under the Settlement Agreement.
Hence, there was no issue of multiple dispute resolution clauses sitting in parallel and the question became one of whether the plaintiff’s claim was made under the Contract or under the Settlement Agreement.
Based on the statement of claim filed by the plaintiff, its claim was made under the Settlement Agreement and not within the ambit of the Contract’s arbitration agreement because it had been disapplied for such claim.

The court also reminded the parties that, in such cases, a careful and commercially minded construction of the agreements is required.

Conclusion

This decision provides important guidance for parties who enter into settlement agreements following disputes under contracts containing arbitration clauses. In particular, it underscores the importance of clear drafting in settlement agreements, especially regarding dispute resolution mechanisms. Parties should not assume that an arbitration clause in the original contract will automatically govern all future disputes, particularly after a settlement agreement is reached. Legal advice should be sought to ensure that the parties’ intentions are accurately reflected and to avoid unintended legal proceedings.

Client Alert 2025-224

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