DR Essentials: Hong Kong Court grants stay for arbitration despite subsequent litigation clause

02 June 2017

Robert Rhoda, Jenny Zhuang

In the recent judgment of Polytec Overseas Ltd and another v Grand Dragon International Holdings Co Ltd and others [2017] HKCFI 604, the Hong Kong Court has once again demonstrated its willingness to uphold an arbitration agreement, despite the presence of an inconsistent litigation clause in a subsequent agreement.

In this case, the 1st Plaintiff, Polytec Overseas Limited, entered into a Cooperation Framework Agreement with Grand Dragon in relation to the establishment of a joint venture company in Hong Kong, which contained an arbitration clause for CIETAC arbitration. Subsequently, the 2nd Plaintiff, Polytec Holdings International Limited, and Grand Dragon entered into a Supplemental Agreement, which contained a litigation clause for disputes to be submitted to the Hong Kong Courts for resolution.

It was not clear whether the Supplemental Agreement superseded or replaced the Framework Agreement.

When a dispute arose, Polytec Overseas and Polytec Holdings commenced a High Court action against, among others, Grand Dragon who then applied for a stay of the High Court proceedings in favour of arbitration. The question for the Court was whether there was a binding or operative arbitration agreement pursuant to which the High Court action must be stayed pursuant to section 20 of the Arbitration Ordinance (Cap. 609).

In order to succeed in a stay application, the applicant must show that the action before the Court is "in the same matter" that is the subject of the arbitration agreement and not purely "related" to it or "involved" in it. The focus is on the substance of the dispute and not the pleadings.

The Court, in determining the question of whether a stay should be granted, followed the principles in Tommy CP Sze v Li & Fung (Trading) Ltd [2003] 1 HKC 418, which sets out 4 questions:

  • Is there an arbitration agreement between the parties?
  • Is the clause in question capable of being performed?
  • Is there in reality a dispute or difference between the parties?
  • Is the dispute or difference between the parties within the ambit of the arbitration agreement?

The Court emphasised the principle that its role is simply to determine on a prima facie basis whether there is a valid arbitration agreement and, in this particular case, the Court found that the applicant had adequately established a plainly arguable case that the parties are bound by an arbitration clause, predicated on cogent and not dubious or fanciful evidence. As to whether and how the arbitration clause can be reconciled with the litigation clause, the Court said that is a question for the arbitral tribunal.

This latest decision by Mimmie Chan J is consistent with a string of previous decisions demonstrating the Court's willingness to uphold arbitration agreements and to grant a stay in favour of arbitration. In the previous judgment of Bluegold Investment Holdings Ltd v Kwan Chun Fun Calvin [2016] HKCFI 415, Mimmie Chan J also stayed High Court proceedings in favour of arbitration where two agreements relating to the same matter had an arbitration clause in one and a litigation clause in the other.

Takeaway point

The Polytec case demonstrates again the pro-arbitration stance of the Hong Kong Courts. The Hong Kong Courts are reluctant to usurp the function of the tribunal in the absence of compelling reasons and only the prima facie existence of a valid arbitration agreement needs to be established to justify a stay in favour of arbitration (even where the arbitration agreement appears to be superseded by a litigation clause). In complex transactions, where multiple agreements are executed, parties must take care where possible to use consistent dispute resolution clauses across all transaction documents to avoid uncertainty and unnecessary satellite litigation if disputes arise in the future.

Authors

Robert Rhoda

Robert Rhoda

Partner
China and Hong Kong

Call me on: +852 2248 6000
Jenny Zhuang photo

Jenny Zhuang

Managing Associate
China and Hong Kong

Call me on: +852 2248 6000