Hong Kong Court Finds Third Party Bound By Arbitration Agreement.

21 June, 2019

 

In Dickson Valora Group (Holdings) Company Ltd v Fan Ji Qian, HCMP 1954/2018, Hong Kong’s Court of First Instance granted the Plaintiffs an anti-suit injunction, restraining the Defendant from taking further steps in proceedings that he had commenced against them in Mainland China because the arbitration clause in the relevant contract provided for arbitration in Hong Kong, even though the Defendant was not a party to the contract containing the arbitration clause. Where a claimant has become entitled to enforce an obligation under a contract (containing an arbitration clause) but is not a party to it, the court can still intervene by granting an anti-suit injunction to restrain such claimant from enforcing the obligation by proceedings abroad instead of by arbitration.

 

Background

 

Investors based in Mexico (including a Rodriguez) agreed with Mainland Chinese resident, Fan, to pursue a joint venture real estate project in the Mainland. Through their respective corporate vehicles, namely, Moravia(owned by the Mexican investors) and DHE(owned by Fan), they agreed to set up a JV company in Hong Kong (Company). DHE, Moravia and the Company entered into a Shareholders’ Agreement providing for funding of the project and management of the Company, which contained a clause stating that it was governed by Hong Kong law and that disputes would be settled by arbitration under HKIAC arbitration rules. The same three parties entered into a Supplementary Agreement providing for a “success fee” payable to DHE, upon fulfilment of certain conditions. An addendum to the Supplementary Agreement was then entered into by the same three parties to deal with the success fee and its payment to two investors of Moravia and Fan. None of those three named individuals were stated to be a party to the Addendum or signed it in their own capacity. 

 

The relationship between the parties broke down and DHE presented a petition to the High Court of Hong Kong against Moravia, Rodriguez and the Company seeking relief from unfairly prejudicial conduct. Meanwhile, unknown to Moravia or the Company, Fan had commenced an action in the Qianhai Court against the Company and its Subsidiary (Companies) claiming the success fee pursuant to the Addendum. The Companies lodged a challenge to the jurisdiction of the Qianhai Court, contending that the matter was subject to the Hong Kong arbitration clause in the Shareholders’ Agreement, which the Qianhai Court rejected. The Companies lodged an appeal, which was pending.

 

The Companies instituted the current proceedings in Hong Kong, seeking an anti‑suit injunction against Fan to restrain him from pursuing the Qianhai proceedings and commencing any other similar proceedings in Mainland China. The Companies’ application was based on the arbitration clause in the Shareholders’ Agreement and not simply on ordinary forum non conveniensconsiderations. In particular, they relied on the court’s approach in cases between parties to an arbitration agreement under which an anti‑suit injunction will ordinarily be granted to restrain a party from suing in a non‑contractual forum, unless there are strong reasons to the contrary. The fountain head of the principles underlying that approach is the decision of the English Court of Appeal in The Angelic Grace [1995] 1 Lloyd’s Rep 87, which has been applied in Hong Kong.

 

The court granted the anti-suit injunction and held as follows.

 

Was the arbitration clause in the Shareholders’ Agreement incorporated into the Addendum?

 

Yes. The Addendum was an appendix or subsidiary addition, to the Supplementary Agreement. It substituted a provision on success fees in place of that in the Supplementary Agreement. The Supplementary Agreement itself was expressly intended to be a “complement” – to form a complete whole – with the Shareholders’ Agreement. All three documents were executed between and only between the same three parties, so that each party to the later documents was fully aware of the content of the previous documents.

 

There was no doubt, that the documents were intended to be read and take effect together as a whole and that, in particular, the Supplementary Agreement and Addendum were not standalone documents, but were intended to be read as part and parcel of the Shareholders’ Agreement. 

 

Neither the Supplementary Agreement nor Addendum contained separate provisions on general matters such as choice of law or dispute resolution, which were of particular importance in a project such as this involving businessmen and entities from multiple jurisdictions. It was plain that the general provisions in the Shareholders’ Agreement were intended to govern the two later documents of a supplemental nature.

 

Did the principles established by cases starting from The Angelic Grace apply, given that Fan was not a party to the Shareholders’ Agreement or Addendum?

 

Yes. Where a party (albeit not a contractual party to the arbitration clause) seeks to enforce a right conferred by a contract which contains an arbitration clause, he must do so by arbitration according to the contract. Applying equitable principles, the court is willing to intervene by granting an anti‑suit injunction to restrain such party from enforcing the obligation by proceedings abroad instead of by arbitration.

 

Even if Fan was not an assignee of DHE’s rights under the contract, his rights to the success fee, if any, were derived from the promise the Companies made to DHE, which was subject to the arbitration clause. The promise of the success fee was subject to the enforcement mechanism chosen by the parties to the contract, namely, arbitration in Hong Kong.

 

Accordingly in determining whether an anti‑suit injunction should be granted against Fan, the court should be guided by The Angelic Grace approach and should grant an injunction to restrain Fan from acting inconsistently with the inherent conditions forming part of the promise of the success fees, unless there were strong reasons for not doing so.

 

Did the Qianhai Court’s dismissal of the Companies’ jurisdictional challenge give rise to an issue estoppel against the Companies?

 

No. The dispute was under the Addendum which incorporated the arbitration clause, to be settled by arbitration in Hong Kong rather than by court proceedings in the Mainland. The bringing of the Qianhai proceedings by Fan was contrary to that agreement. Under section 3 of the Foreign Judgments (Restriction on Recognition and Enforcement) Ordinance (Cap 46) (FJRREO), the Hong Kong Court would not recognise or enforce a judgment of an overseas court if the bringing of such proceedings was contrary to an agreement under which the dispute was to be settled.

 

Were there strong reasons not to grant the injunction?

 

No. In taking slightly more than two months after learning of the Qianhai proceedings to issue the application for the anti‑suit injunction in Hong Kong, the Companies were not guilty of inexcusable or inordinate delay. No prejudice had been suffered by Fan as a result of the time taken. Nor was the delay serious when viewed against the progress of the Qianhai proceedings which had not got on to an advanced stage. 

 

The failed jurisdictional challenge in the overseas court was no bar in itself to an application for an anti-suit injunction. The Companies had within days of becoming aware of the Qianhai proceedings sought to put a stop to them, albeit by lodging a challenge in that court to its jurisdiction instead of applying in Hong Kong for an anti‑suit injunction. Nothing the Companies had done so far in the Qianhai proceedings amounted to submission to the jurisdiction of the Qianhai Court. The Companies could not be criticised for lodging a jurisdictional challenge in the Qianhai proceedings – unless the Companies had raised a jurisdictional challenge promptly within the time allowed for filing their defence, they would be regarded under Mainland law as having accepted the Qianhai Court’s jurisdiction.

 

It was not abusive for the Companies to apply for the injunction after having failed in the jurisdictional challenge and at the same time as an appeal was lodged in Qianhai because:

 

• the Qianhai proceedings were not far advanced and therefore the wastage of resources, if an anti‑suit injunction was granted, would not be unduly substantial;
• the importance of comity considerations was “reduced”  where foreign proceedings were involved which were inconsistent with the contractual mode of dispute resolution; 
• the Qianhai Court could reasonably be expected to understand that the Hong Kong Court was bound by statute (i.e. the FJRREO) not to recognize or enforce the Qianhai Court’s decision on the jurisdiction challenge; 
• to be placed in the balance against comity considerations was the unambiguous policy of the Hong Kong Courts in support of arbitration;
• there was evidence that the Qianhai Court – was a “judicial reform demonstration court”, which was a recently‑established court, receptive to common law principles;
• the Qianhai Court had not applied Hong Kong law in reaching its jurisdictional decision;
• although Fan was a Mainland resident, the Subsidiary a Mainland company and the project was situated in the Mainland, the JV vehicle was a Hong Kong company, the contract governed by Hong Kong law with a stipulation for arbitration in Hong Kong under Hong Kong arbitration rules. The foreign and Chinese investors had consciously chosen Hong Kong as a mutually acceptable neutral ground and such choices were an important part of the bargain between commercial men, and should not be easily neglected or thwarted;
• the fact that the Companies’ assets were located in the Mainland carried little weight.