26 March, 2016
Hong Kong CFI has stayed a claim under a deed of guarantee pending arbitration on the basis of an arbitration agreement in a Subscription Agreement containing the guaranteed obligations (Bluegold Investment Holdings Ltd v Kwan Chun Fun Calvin [2016] HKEC 532) – notwithstanding a non-exclusive choice of the Hong Kong courts in the Guarantee. Applying established authority, Mimmie Chan J concluded that it was not "clear" that the dispute was outside the scope of the arbitration agreement (to the contrary, it was arguable the claim was within the scope of the arbitration agreement) and therefore stayed the claim. The court again ordered that the claimant in the Hong Kong proceedings pay costs on an indemnity basis, justified by the claimant's failure to comply with the arbitration agreement.
This decision is a warning to consider the full suite of documents when drafting choice-of-venue clauses in a multi-contract relationship. Unless there is clear provision to the contrary (potentially an exclusive jurisdiction agreement) in the contract generating the claim, the Hong Kong courts will likely stay proceedings in favour of an arbitration agreement between the same parties.
Background
Bluegold claimed against Mr Kwan, the founder and director of Accelstar Enterprises Limited (the Company). All three parties entered into a Subscription Agreement whereby the Company was to issue to Bluegold convertible notes to the value of US$ 10 million (the Notes); and a warrant to subscribe for shares in the Company. Furthermore, Mr Kwan, the Company and its PRC, BVI and HK subsidiaries, covenanted and agreed to use their best endeavors to conduct a public offering of certain shares (Qualified IPO) within three years with a pre-listing value of not less than US$ 235 million. Bluegold had the right to redeem the notes at a specified rate of return if the Qualified IPO did not occur within three years.
Mr Kwan executed a separate guarantee in favour of Bluegold which provided, amongst other obligations, that he (as primary obligor) would guarantee the punctual performance by the Company of its obligations under the Subscription Agreement and Notes (the Guarantee). The Subscription Agreement and Notes contained a standard form (broad) HKIAC arbitration clause. The Guarantee contained a non-exclusive submission to the Hong Kong courts.
The Judgement
The question before the Court was whether, under s. 20 of the Arbitration Ordinance, the action brought by Bluegold under the Guarantee was "a matter which is the subject of an arbitration agreement". Mimmie Chan J followed PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, emphasising that under s. 20, the burden on the applicant for stay was only to establish a prima-facie case that the parties were bound by the arbitration clause and that unless the point was clear, the Court should stay the matter in favour of arbitration rather than attempt to resolve the issue.
Applying the test to the particular facts before it, the Court held that the question whether there is a breach of the Guarantee in this instance necessitates a determination of whether there was a breach of the Subscription Agreement and in particular, whether there was a Qualified IPO within 3 years. The non-exclusive choice of Hong Kong courts in the Guarantee was not "clear" evidence to displace the intention of the parties as expressed in the arbitration clause in the Subscription Agreement.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
