24 September, 2016
In William Lim and Another v. Hung Ka Hai Clement and Others [2016] HKCFI 1439; HCA 1282/2016 (24 August 2016), the Hong Kong Court of First Instance ordered a stay of court proceedings and referred an ongoing dispute to arbitration pursuant to s 20 (1) of the Arbitration Ordinance (Cap 609). The Court found that it had no jurisdiction when an action brought before it is one which is the subject of an arbitration agreement.
Background
Disputes arose between the parties after the Defendants, members of the Governing Board of a large professional services firm, decided to impose a financial penalty on two firm members (the Plaintiffs). The Plaintiffs had sent emails to other partners of the practice expressing concerns on the Board’s decisions and further raised issues with the Board’s governance. By their dispatch of various emails to other partners, the Plaintiffs allegedly acted in breach of their confidential obligations by communicating highly sensitive information concerning the firm.
The Plaintiffs sought an order from the court that the Board’s sanctions were void, had no effect and should be set aside because the Plaintiffs were not given the opportunity to know and answer the charges made against them, and that members of the Board had exercised their power for improper purposes. The Defendants applied to stay the proceedings to arbitration, pursuant to the arbitration clause contained in the Shareholders’ Agreement. The judge granted the stay, with costs to be paid by the Plaintiffs on an indemnity basis.
The judgment
The Court first reiterated that an applicant for stay has only to demonstrate that there is a prima facie case that the parties are bound by an arbitration clause. Unless the point is clear, the Court should not attempt to resolve the issue but should stay the matter in favour of arbitration (PCCW Global Ltd v. Interactive Communications Services Ltd [2007] 1 HKLRD 309). The Court has no discretion under s 20 (1) of the Arbitration Ordinance (Cap 609), if the action brought before it is one which is the subject of an arbitration agreement – unless the agreement is null and void, inoperative or incapable of being performed.
The Shareholders’ Agreement, which was the governing document in this matter, contained an escalation dispute resolution clause. It provided for disputes to be referred, first to the Chairman, and failing such resolution, to the Governing Board. If the dispute is still not resolved by the Governing Board within the time specified, then it may be referred to arbitration for final resolution.
The Plaintiffs’ main argument was that they were entitled to maintain the court proceedings, since the dispute between the parties had already been referred to the Chairman for resolution, and the mechanism for dispute resolution had been exhausted.
The Court found no merit in the Plaintiffs’ argument. If the dispute had been referred to the Chairman, and/or the Board, and if, as the Plaintiffs contended, the dispute was resolved by the Chairman by imposing the monetary sanctions, such resolution was clearly not to the satisfaction of the Plaintiffs. Since the sanctions imposed by the Board were not admitted by the Plaintiffs, there was clearly a dispute between the parties, and such dispute fell within the ambit of the arbitration clause in the Shareholders’ Agreement. All the other matters raised by the Plaintiffs, as to whether or not they were entitled to circulate the emails amongst the partners, are to be considered and decided by the arbitral tribunal, not by the Court.
In the Court's view, the Plaintiffs’ resistance to the stay was misconceived. There was no merit in their claim that the dispute resolution procedure had been exhausted when there were clearly residual disputes, which had not been resolved by the Chairman or the Board to the satisfaction of the parties. In the broader context, even in the course of one reference to arbitration, more than one dispute may arise, and unless all these disputes are resolved and decided by the tribunal, the arbitration cannot be said to have been terminated. Further, one or more disputes may arise under the arbitration agreement between the same parties. The fact that one dispute has been referred to arbitration does not mean that the arbitration agreement has been performed, and cannot be further implemented.
Costs were ordered on the indemnity basis. However, it is unclear from the judgment whether this was on the basis of the Plaintiffs' conduct or an extension of the court's general practice of awarding indemnity costs in failed arbitration-related applications.
For further information, please contact:
Simon Chapman, Partner, Herbert Smith Freehills
simon.chapman@hsf.com
