China – Court Held That Jurisdiction Clause In Settlement Agreement Superseded Arbitration Clause In Original Agreement.

5 August 2020
 

The recent case of Bond Tak (Holdings) Ltd v King Fame Trading Ltd, HCA 2129/2018, concerned an application by the Defendant to dismiss or permanently stay the High Court action on the grounds that the dispute was subject to an arbitration agreement and should be submitted to arbitration or, alternatively, the action should be stayed on the grounds of forum non conveniens and in favour of the Intermediate People’s Court of Guangzhou City in Mainland China (Guangzhou Court). The Court dismissed the application on the basis that the arbitration clause in the original agreement entered into by the parties had been superseded by a Jurisdiction Clause in a subsequent settlement agreement between them, which provided for the submission of any further disputes to the Hong Kong Court i.e. the Defendant had failed to show a prima facie or arguable case that the arbitration clause remained valid and binding on the parties. Having found (in the absence of expert evidence to the contrary) that the Jurisdiction Clause was an exclusive jurisdiction clause in favour of the Hong Kong courts and that the Plaintiff had issued the present action against the Defendant as of right in Hong Kong (the Defendant being a Hong Kong incorporated company), there was no arguable basis for depriving the Plaintiff of its contractual right to commence and pursue the action in Hong Kong.
 

Background
 

The Plaintiff and Defendant are both Hong Kong incorporated companies. The Plaintiff was the 99.99% shareholder and beneficial owner of Bond Tak Properties Ltd (Bond Tak) which had acquired rights to develop a project in Guangzhou (Project).
 

On 8 March 2010, the Plaintiff and Defendant entered into a Chinese written agreement (Transfer Agreement), whereby the Plaintiff agreed to transfer to the Defendant its 99.99% shareholding in Bond Tak, for RMB 112,864,000, payable by five instalments. The Transfer Agreement provided that any matters in relation to the understanding, validity, performance and dispute settlement of the agreement shall be governed by Mainland China law, but that conveyance of title carried out in accordance with the agreement shall be governed by Hong Kong law (Governing Law Clause).
 

The Transfer Agreement also provided that any dispute between the parties relating to the agreement shall be settled through friendly negotiation and if that failed the dispute may be submitted by either party to the China Guangzhou Arbitration Commission for arbitration (Arbitration Clause).
 

After the Defendant had paid the first instalment under the Transfer Agreement, the parties entered into a written Chinese Supplemental Agreement whereby the Transfer Agreement was varied to increase the consideration payable and allow payment by 3 further instalments.
 

In October 2012, the Defendant paid the Revised Second Instalment pursuant to the Supplemental Agreement. However, payment of the Revised Third Instalment was RMB 23 million short, and on 10 March 2016, the parties entered into a further Chinese written Settlement Agreement providing for a further revised payment schedule and for the consequences of non-payment. It also provided that any further disputes between the parties arising from the Project shall be settled through friendly negotiation first and if that failed, the dispute may be submitted to the Hong Kong court for legal action (Jurisdiction Clause). It also provided that if there was any conflict between the Settlement Agreement and original contract, the Settlement Agreement would prevail.
 

Although payment of the Third Instalment was made in accordance with the Settlement Agreement, the Plaintiff claimed that in breach of the Supplemental Agreement, the Defendant failed to pay the Revised Fourth Instalment.
 

Defendant’s Case
 

The Defendant’s case was that the action should be stayed in favour of arbitration on the grounds that there was at least a prima facie case that the dispute in the action fell within the Arbitration Clause, which remained binding on the parties. Therefore, it was argued, the court had no discretion but to refer the matter to arbitration pursuant to section 20(1) of the Arbitration Ordinance (Cap 609) (AO). Alternatively, it was contended that if the court were to find that the Arbitration Clause was no longer binding on the parties, the action should nonetheless be stayed in favour of the Guangzhou Court on the grounds that Hong Kong was not the appropriate forum.
 

The Defendant argued that the Jurisdiction Clause must be read in the context of the Settlement Agreement as a whole, which was concerned only with disputes arising from the Revised Third Instalment. Since there was no dispute that that instalment had been fully paid, the Settlement Agreement, including the Jurisdiction Clause, was nothing more than “a matter of history” and had no application to the Plaintiff’s claims in this action.
 

Plaintiff’s Case
 

The Plaintiff did not dispute that (i) the Arbitration Clause was a valid arbitration clause; (ii) the clause was binding on the parties until the Settlement Agreement; and (iii) the Plaintiff’s claim for the Revised Fourth Instalment would have fallen within the ambit of the clause had it been still binding on the parties. However, the Plaintiff argued that the Arbitration Clause was superseded by the Jurisdiction Clause in the Settlement Agreement and was therefore no longer valid or binding
 

The Court said that the proper approach was to determine whether it was clear on the evidence and the construction of the agreements that the Arbitration Agreement had been superseded by the Jurisdiction Agreement. If so, it would be inappropriate for the Court to leave the matter to the arbitral tribunal, which would only result in unjustifiable delay and expense. On the other hand, if the matter was less than clear or fact sensitive, then the matter must be referred to the arbitral tribunal for determination, at least in the first instance. In this regard, whilst the court will consider any challenges as to jurisdiction on a de novo basis, it is well established that the court will be “…cautious not to stray into the merits of findings of fact and law made by the tribunal, on issues unrelated to or not necessary for the question of jurisdiction”.
 

The Court said that it was clear that the Jurisdiction Clause had superseded the Arbitration Clause, or put another way, the Defendant had failed to show a prima facie or arguable case that the Arbitration Clause remained valid and binding on the parties. It said:
 

• The starting point must be the Jurisdiction Clause itself, where it is provided that after the signing of the Settlement Agreement, any disputes arising from the Project shall first be resolved by negotiation, failing which, the parties may commence an action in the Hong Kong courts;
   

• The reference to any disputes arising from the Project was unequivocal – it was plainly not referring to merely disputes concerning the Third Instalment or the Settlement Agreement, but rather the Project as a whole, that is, all three agreements;
   

• Although the recital – in particular, the words, “第三期款項支付后续問题” could perhaps have been more felicitously drafted, it was tolerably clear that it was referring to matters concerning and following from the Revised Third Instalment. In any event, the recital could not, as a matter of construction, override the plain and unequivocal meaning of the Jurisdiction Clause;
   

• Moreover, the provisions of the Settlement Agreement were not concerned solely with the Revised Third Instalment – clause 2 provided for interest payable not only on the Revised Third Instalment in the event of default but also on the Revised Fourth Instalment, and clause 3 potentially impacted upon the entire consideration payable for the Project;
   

• More significant, however, was clause 5, which provided that where matters had not been agreed to in the Settlement Agreement, the parties shall remain bound by the “原來簽訂的合同、協議” (which must be a reference to the Transfer and Supplemental Agreements), and in the event of inconsistency between the Settlement Agreement and those prior agreements, the Settlement Agreement shall prevail. It was plain, therefore, that the parties intended the Settlement Agreement to apply not only to their obligations concerning the Revised Third Instalment, but also those contained in the Transfer and Supplemental Agreements;
   

• Although the Settlement Agreement did not itself contain a governing law clause, the Jurisdiction Clause was to be interpreted in accordance with Mainland Chinese law. First, the Settlement Agreement was directly concerned with the parties’ obligations under, the Transfer Agreement, which contained the Governing Law Clause.  Further, the transaction was closely connected with Mainland China where the Project was situated.  
   

• The Plaintiff’s expert had opined that, as a matter of Mainland Chinese law, the Jurisdiction Clause was an exclusive jurisdiction clause in favour of the Hong Kong courts. That opinion was uncontroverted and so the Defendant was not in a position to challenge it and the Court accepted the opinion as correct.
   

• There was an obvious conflict between the Jurisdiction Clause and Arbitration Clause and only one of those provisions could govern the relationship between the parties. It was clear from clause 5 of the Settlement Agreement that in such circumstances, the Jurisdiction Clause must prevail over the Arbitration Clause.
   

Should the action be stayed in favour of the Guangzhou Court?
 

The Court said that in the absence of any expert evidence to the contrary, the Jurisdiction Clause was an exclusive jurisdiction clause in favour of the Hong Kong courts. Moreover, as the Defendant is a Hong Kong incorporated company, the Plaintiff issued the present action against the Defendant as of right in Hong Kong. There was plainly no arguable basis for depriving the Plaintiff of its contractual right to commence and pursue the present action in Hong Kong.  
 

Comments
 

As mentioned in the judgment, the question of jurisdiction of the arbitral tribunal should usually be left for the tribunal to determine itself pursuant to section 34 of the Arbitration Ordinance. If the tribunal decides that it has jurisdiction, the party alleging otherwise may request the Court to decide the matter afresh. In this case, the judge was of the view that the Defendant even failed to show a prima facie case that the Arbitration Clause was still valid and binding and the Court should decide the matter now, rather than wasting time in referring the case back to the arbitral tribunal. If the Defendant loses before the tribunal, it is likely that the Defendant will come back to the Hong Kong Court to decide the same matter again.
 

It is not uncommon that parties in drafting supplemental or settlement agreement forgot that they have an arbitration clause in the original agreement. It is important that the parties check the provisions of the original agreement to ensure that any conflict with the supplemental or settlement agreement is sufficiently addressed.