China – When Will The Court Grant An Interim Injunction To Stay Arbitration Proceedings?

15 September 2020

 

In the recent case of Atkins China Ltd v China State Construction Engineering (Hong Kong) Ltd, HCMP 1193 2020, the Plaintiff sought in its Originating Summons (i) a declaratory judgment that, as a matter of construction, a settlement agreement entered into between the parties had settled all claims and counterclaims arising under a Design Agreement; and (ii) a final injunction restraining the Defendant from taking further steps in the arbitration proceedings commenced in the name of the Defendant by its insurers. The Plaintiff sought an interim injunction to stay the arbitration proceedings, pending resolution of the Originating Summons. Since the summons for an interim injunction was served less than two clear days before the hearing, although the Defendant appeared by counsel, the Court could only treat it as an ex parte application on notice.
 

Background
 

The Plaintiff and Defendant had signed a Design Agreement whereby the Plaintiff was appointed to design permanent structures of certain sections of the Hong Kong Zhuhai-Macao Bridge, including reclamation works and construction of a seawall (Project). There was an arbitration clause in the Design Agreement requiring the parties to refer disputes arising out of or in connection with the Design Agreement to arbitration.
 

Pursuant to the Design Agreement, the Plaintiff designed and the Defendant erected various structures. Certain instability incidents occurred at the Project, as a result of which, part of the seawall collapsed. The Plaintiff was owed money in respect of unpaid variation orders.
 

Negotiations ensued between the parties, culminating in a settlement agreement under which the Defendant agreed to pay the Plaintiff HK$10 million. It was a term of the Settlement Agreement that the Plaintiff and Defendant  “…unanimously and irrevocably agree[d] to the Final Design Agreement Value for the said Design Agreement, this being in full and final settlement of all Variation Works claims, counterclaims, and contra-charges between [the Defendant] and [the Plaintiff] howsoever arising under the Design Agreement.” The Settlement Agreement did not contain an arbitration clause. Upon execution of the Settlement Agreement, the ongoing settlement discussions and negotiations came to an end and the payment was made to the Plaintiff.
 

Arbitration proceedings commenced
 

Seven months later, the Defendant, by its insurers, served a Notice of Arbitration on the Plaintiff, claiming that the arbitration arose from a dispute between the Plaintiff and Defendant in relation to the Plaintiff’s defective design under the Design Agreement, which had caused the collapse of the seawall. Damages of HK$240,000,000 were claimed.
 

The Plaintiff sought an interim injunction to restrain the Defendant from proceeding with the arbitration. The Defendant argued that the Plaintiff’s application for an injunction should be dismissed because there was no urgency to grant interim injunctive relief. It argued that the arbitration clause in the Design Agreement was binding on the parties and the current dispute fell within its ambit and that the same injunctive relief could be applied for in the arbitration. 
 

Interim injunction to restrain arbitration proceedings
 

The Court said that it had jurisdiction to grant an injunction to restrain arbitration proceedings upon consideration of the following factors (although the discretion to grant such injunction will be exercised sparingly): (i) the injunction does not cause injustice to the plaintiff in the arbitration; (ii) the continuance of the arbitration would be oppressive, vexatious, unconscionable or an abuse of process; and (iii) delay in making an application for an injunction may be fatal to the application.
 

Court’s decision
 

The Court found that the Plaintiff had shown a serious issue to be tried as to whether or not the Settlement Agreement was so broad as to have settled all disputes (including the negligence claim) between the parties so that nothing could be referred to arbitration. It said, upon settlement, the Defendant had no justification for relying on the arbitration clause in the Design Agreement.
 

The Court said that the Settlement Agreement, which formed a separate and distinct contract to the Design Agreement, should be construed on its own terms. The Settlement Agreement did not contain an arbitration clause and any dispute as to the validity or effect of the Settlement Agreement was not within the jurisdiction of an arbitrator appointed under the Settlement Agreement, but was to be resolved by a court of competent jurisdiction.
 

The Plaintiff, the Court said, was invoking the Court’s jurisdiction to restrain a vexatious and oppressive arbitration and it may be justified in doing so if the Settlement Agreement was found to be valid and covered the subject matter of the arbitration. The Plaintiff should not, it said, be asked to incur endless time and costs in defending an arbitration which should never have been commenced and which is abusive.
 

The Plaintiff submitted that the interim injunction was unlikely to cause injustice to the Defendant and would only push back the arbitration for a few months, pending resolution of the Originating Summons. There was no delay on the Plaintiff’s part in taking out the summons.
 

The Court held that there was not such urgency that the Defendant should even be deprived of an inter partes hearing of the summons and to file evidence in opposition beforehand. The only urgency that the Plaintiff had shown was that the Arbitration Notice required the Plaintiff to give a response by 19 August 2020.  Little  prejudice would be caused to the Plaintiff, the Court said, before the next summons day for an inter partes hearing, that could not  be compensated for by costs or money, even if  the Plaintiff  had to respond to the Arbitration Notice by 19 August 2020. 
 

Accordingly, the Court declined to grant an interim injunction on an ex parte on notice basis
 

Comments
 

The arguments raised by the parties are interesting. Although counsel for the Defendant attended the hearing, since less than 2 clear days’ notice was given, the hearing was deemed to be ex parte and was adjourned to another date to give the Defendant a full opportunity to file an affirmation in opposition and argue its case properly. Please stay tuned for our update on the decision of the Court at the adjourned hearing.