Hong Kong – Stay Of Proceedings In Favour Of Arbitration And Multi-Tiered Dispute Resolution Clauses.

3 March, 2017

 

In the recent case of Lim Choon Hock & Another v Hung Ka Hai Clement & Others (HCA 1282/2016), Hong Kong’s Court of First Instance stayed the proceedings in favour of arbitration and ordered the Plaintiffs to pay the Defendants’ costs on an indemnity basis, for having unsuccessfully opposed the stay. The Plaintiffs opposed the stay on the basis that they were entitled to maintain the court proceedings, since the dispute resolution mechanism set out in the arbitration clause had been exhausted. Whilst this is not a construction case, the legal principles discussed in the judgment are applicable to construction contracts, where a multi-tiered dispute resolution procedure is usually adopted.

 

Background

 

The Plaintiffs were members of an accounting firm (the Firm) pursuant to a Shareholders’ Agreement dated 26 November 2003 (Shareholders’ Agreement), which contained an arbitration agreement (Arbitration Agreement). The Defendants were members of the governing board (Board) constituted under and in accordance with the Shareholders’ Agreement.

 

The underlying dispute was whether the Plaintiffs had been in breach of the Shareholders’ Agreement by divulging, communicating or making use of confidential information of or relating to the Firm received or obtained while partners of the Firm. As a result of the alleged breach of Agreement, the Board imposed sanctions on the Plaintiffs (Sanctions). The Plaintiffs sought orders from the court that the findings by the Board and Sanctions should be set aside as being void and of no effect.

 

The Defendants requested the Court to stay the court proceedings for arbitration.

 

Arbitration Agreement

 

Clause 8.12 of the Shareholders’ Agreement provided:

 

“If at any time any dispute shall arise under this Agreement between any Member….. (Aggrieved Member) and any other party……, in relation to any matter ……, such dispute shall first be referred, to the Chairman (or if he is the Aggrieved Member then it shall be referred direct to the Governing Board) who shall attempt to resolve such disputes to the satisfaction of the parties in dispute. If the matter is not so resolved within twenty one (21) clear Business Days of being referred to the Chairman, the Chairman shall refer such matter to the Governing Board. If such dispute shall not be resolved within twenty one (21) clear Business Days of being referred to the Governing Board, any party to the dispute may refer the matter for final resolution to arbitration in accordance with and subject to the provisions of the Arbitration Ordinance (Cap 609) of the Laws of Hong Kong. The provisions of the Arbitration Ordinance Schedule 2 sections 1-7 shall apply. The Hong Kong International Arbitration Centre Domestic Arbitration Rules existing at the Effective Date shall apply to any arbitration instituted in accordance with this Section 8.12.”

 

Stay of proceedings to arbitration

 

The issue before the Court was whether the proceedings should be stayed under section 20(1) of the Arbitration Ordinance (Cap. 609) (Ordinance) in favour of arbitration. The Court stated the general principle, namely that it has no discretion under section 20(1), if the action brought before the court is one which is the subject of an arbitration agreement, unless the agreement is null and void, inoperative or incapable of being performed. Further, the applicant for a stay only needs to show that there is a prima facie case that the parties are bound by an arbitration clause, and unless this point is clear, the court should not attempt to resolve the issue but should stay the matter in favour of arbitration.

 

The Court held that disputes such as whether the Board had any disciplinary powers under the Shareholders’ Agreement and whether the Sanctions were void and of no effect were clearly within the scope of the Arbitration Agreement, which covered “any disputes” “in relation to any matter” under the Shareholders’ Agreement.

 

The Plaintiffs argued that the dispute resolution mechanism had been exhausted by the disputes being referred to the Chairman or the Board for resolution. The Court held that this argument was unmeritorious because the Arbitration Agreement provided for a multi-tier dispute resolution mechanism, in which arbitration was for “final resolution”. [Note: referral to the Board was only the second-tier in the Arbitration Agreement].

 

In response to the argument that there had been an arbitration actually conducted and concluded by the Chairman or the Board, the Court observed that the Defendants did not admit this and there was, therefore a dispute concerning what dispute resolution procedures had taken place and such dispute was in relation to matters which arose under the Arbitration Agreement. The Court said that even in the course of one reference to arbitration, more than one dispute may arise and the arbitration cannot be said to have been terminated unless all disputes are resolved and decided by the tribunal. The fact that one dispute had been referred to arbitration did not mean, the Court said, that the arbitration agreement had been performed and could not be further implemented. 

 

The Court criticized the Plaintiffs’ resistance to the stay for arbitration as “entirely misconceived” and “totally without basis”.