The Hong Kong Court of First Instance has reversed the decision of an HKIAC tribunal appointed under a loan agreement that it had jurisdiction to determine claims under a related promissory note containing a different HKIAC arbitration clause (AAA, BBB, CCC v. DDD [2024] HKCFI 513).
The decision provides helpful guidance on the approach which the Hong Kong courts are likely to take in multi-contract scenarios where a dispute potentially falls within the scope of more than one different or conflicting dispute resolution provision.
Background
The transaction was documented in (i) a loan agreement between the borrower, the lender and two guarantors, (ii) a promissory note issued to the lender by way of security and signed by the borrower and the guarantors, and (iii) various other security documents concluded by the borrower and the guarantors in favour of the lender.
The loan agreement and the promissory note both provided for HKIAC arbitration, but with two differences. First, the promissory note imposed a 30-day negotiation period prior to arbitration, whereas the loan agreement did not. Second, the promissory note did not specify the number of arbitrators, whereas the loan agreement specified that there should be three arbitrators. The other security documents contained different dispute resolution provisions.
The lender commenced an HKIAC arbitration against the borrower and the guarantors after the borrower failed to repay the loan. The notice of arbitration indicated that the arbitration was being brought under the dispute resolution provisions of the loan agreement, although it referred to and exhibited the promissory note. In the statement of claim, the lender asserted (in response to arguments by the guarantors that they had been released from their obligations under the loan agreement) that in any event the guarantors remained liable under the promissory note. The lender did not seek relief under the promissory note in the statement of claim, but subsequently signalled its intention to do so.
The borrower and the guarantors challenged the jurisdiction of the tribunal to hear the lender’s claims against the guarantors under the promissory note.
The tribunal ruled that it had jurisdiction over those claims, because the notice of arbitration mentioned and exhibited the promissory note and therefore implicitly referred the lender’s claims under it to arbitration.
The borrower and the guarantors applied to the court to overturn the tribunal’s decision on jurisdiction pursuant to Article 16(3) of the UNCITRAL Model Law (given effect by section 34 of the Hong Kong Arbitration Ordinance).
Decision on jurisdiction
Deputy High Court Judge Reyes SC upheld the challenge to the tribunal’s jurisdiction over the lender’s claims under the promissory note for two key reasons.
First, the court doubted that merely referring to and exhibiting a document in the notice of arbitration would be sufficient to invoke the arbitration agreement in that document. Clear words were needed to indicate that a dispute was being submitted to arbitration under a specific provision in a particular contract. On its face, the notice of arbitration only invoked the arbitration clause in the loan agreement.
Second, and in any event, the HKIAC had only confirmed the appointment of the tribunal pursuant to, and the tribunal’s mandate could therefore only have become effective under, the arbitration agreement in the loan agreement. The tribunal could not of its own motion unilaterally declare itself to have also been appointed under the arbitration agreement in the promissory note.
The court rejected the lender’s contention that this issue was inconsequential because the dispute resolution provisions in the loan agreement and the promissory note were “substantially similar”. Those provisions constituted distinct, non-fungible regimes for the resolution of disputes, the differences between them were “significant”, and they could not be treated in a broad-brush manner as essentially the same. In particular, the appointment and confirmation of the tribunal under one clause could not be treated as tantamount to appointment and confirmation under the other clause, merely because both specified HKIAC arbitration.
This point was brought home by the difference in the number of arbitrators. If the case was genuinely an arbitration under the promissory note, it would be for the HKIAC to consider and decide whether it should be referred to one or three arbitrators (pursuant to Article 6.1 of the HKIAC Rules, which stipulated that the HKIAC would decide on the number of arbitrators in the absence of agreement between the parties, taking into account the circumstances of the case). The HKIAC never having done so, it was hard to see how the tribunal could claim to have been formed under that clause. Indeed, the tribunal’s assumption of jurisdiction effectively deprived the parties of a potential benefit of the dispute resolution clause they had bargained for in the promissory note, namely, the flexibility of having one or three arbitrators appointed by the HKIAC in the exercise of its discretion.
Guidance on conflicting dispute resolution provisions
The court then considered how the tribunal ought to have approached the question of its jurisdiction. The court reasoned that:
- The “one-stop-shop” approach advanced by the House of Lords in Fiona Trust & Holding Corporation v. Privalov [2007] UKHL 40 (whereby commercial persons will be presumed to have bargained for all disputes arising from their contract to be decided in a single forum) was not applicable, because the facts of that case involved a single contract with apparently conflicting dispute resolution clauses (which was not the position here).
- The “extended Fiona Trust principle” posited in the English case of Terre Neuve SARL & Others v. Yewdale Limited & others [2020] EWHC 772 (Comm) was not applicable either, because that could operate (in appropriate circumstances) to extend the application of a dispute resolution clause in one contract to a claim made under another contract, in circumstances in which only the former contract contained a dispute resolution clause, while other related contracts did not (which, again, was not the position here).
- A pragmatic approach in circumstances where there were multiple related contracts with conflicting dispute resolution clauses was that adopted by the English Court of Appeal in AmTrust Europe Ltd v. Trust Risk Group SpA [2015] EWCA 437, which had previously been applied in the Hong Kong cases of X v. Y [2021] 2 HKC 68 and H v. G [2022] HKCFI 1327. This involved the identification of the “centre of gravity” of the dispute and thus the contract (and dispute resolution provision) which was “closer to the claim”. One way of doing this was to look at the ultimate relief sought in connection with the relevant issue. If granting the ultimate relief being sought fell within the scope of the arbitration agreement under which the tribunal was appointed, the issue could be regarded as coming within the tribunal’s jurisdiction.
Applying these principles to the facts, the court concluded that the question of the guarantors’ liability under the promissory note would seem to fall within the centre of gravity of the dispute resolution provision in the promissory note, and thus outside the scope of the tribunal’s jurisdiction.
The court noted that there would still be ways of minimising the risk of conflicting outcomes in the present case, including for example by: invoking issue estoppel in relation to certain issues; requesting that the tribunal appointed in the arbitration under the loan agreement also be appointed in any arbitration under the promissory note; applying for consolidation of the arbitration under the loan agreement with any arbitration under the promissory note; or applying for a stay of proceedings of an arbitration under the promissory note, pending the outcome of the arbitration under the loan agreement.
Comment
Although the Fiona Trust “one-stop-shop” presumption can be a helpful tool for courts construing dispute resolution provisions in appropriate circumstances, it is likely to have limited application in cases where there are multiple contracts containing different dispute resolution provisions. In such cases, the Hong Kong courts can be expected to construe each of the relevant contracts to determine which dispute resolution provision properly applies to a particular dispute.
It is advisable for potential claimants in multi-contract scenarios to analyse carefully the interaction between the dispute resolution provisions of the relevant contracts before commencing proceedings, formulate an advance strategy for dealing with proceedings under more than one contract and minimising the risk of conflicting outcomes (where these are a possibility), and ensure that proceedings are unambiguously commenced under the dispute resolution provisions of all contracts under which relief might need to be sought.
It is notable that both the tribunal and the court applied the landmark decision of the Court of Final Appeal in C v. D [2023] HKCFA 16 (in which Herbert Smith Freehills partner Simon Chapman KC appeared as advocate) in holding that any question as to whether the negotiation condition in the arbitration clause in the promissory note had been satisfied was an issue going to admissibility rather than jurisdiction. This is the second recent case to apply C v. D, following the decision in G v. N [2023] HKCFI 3366 (reported here).
For further information, please contact:
Kathryn Sanger, Partner, Herbert Smith Freehills
kathryn.sanger@hsf.com
