In Li Wenjun v Chen Chunhui [2023] HKCFI 405, the 1st Defendant applied to court to stay the proceedings in favour of arbitration, pursuant to section 20 of the Arbitration Ordinance, Cap 609 (Ordinance) or the court’s inherent jurisdiction. The court dismissed the application, holding that the Plaintiff’s action was tortious in nature and did not fall within the ambit of the relevant arbitration clause. The court also found that the 1st Defendant had waived his right to arbitrate.
Background
The Plaintiff’s action had been commenced by specially endorsed Writ, stating a case of deceit and conspiracy against the 1st and 2nd Defendants. The Plaintiff alleged that she had been induced into transferring her shares by the 1st Defendant’s false representations. Subsequently, the Plaintiff was able to obtain a copy of the Share Transfer Agreement (Agreement) and by an Amended Statement of Claim, the Agreement was introduced under particulars of fraud.
Arbitration clause (Clause)
The Agreement contained an arbitration clause (Clause) providing: “Disputes arising from the performance of this agreement shall be resolved through friendly negotiation between the parties; if negotiation fails, either party shall have the right to submit to the Hong Kong International Arbitration Center in accordance with its agreement at the time of signing this agreement. The currently effective arbitration rules shall be resolved by arbitration.”
Section 20 Arbitration Ordinance
Section 20 of the Ordinance, provides that if the matter in the action is the subject of an arbitration agreement, the court shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration, unless it finds that the agreement is null and void, inoperative or incapable of being performed. If these requirements are satisfied, the stay is mandatory.
The court has to consider four questions in determining a stay application, namely (i) is the clause in question an arbitration agreement? (Question 1); (ii) is the arbitration agreement null and void, inoperative or incapable of being performed? (Question (2); (iii) is there in reality a dispute or difference between the parties? (Question 3); (iv) is the dispute or difference between the parties within the ambit of the arbitration agreement? (Question (4).
The court said that in this application, there were in truth only two issues, namely whether Questions (2) and (4) could be answered in D1’s favour. The court dealt with Question(4) first, since the answer, it said, was reasonably clear and determinative of the application, as if the this issue was determined against D1, there was no question of invoking the court’s inherent jurisdiction.
Question (4): Is the dispute or difference between the parties within the ambit of the arbitration agreement?
It was common ground that the construction of the Clause was governed by PRC law and the issue turned upon whether, on a proper construction, the Plaintiff’s causes of action in the proceedings fell within the scope of disputes embraced by the Clause.
The court noted that the threshold requirement which had to be met by D1, who bore the burden of proof in this application, was that he had to show that there is a prima facie or plainly arguable case that the parties are bound by the Clause, and unless the point is clear, the court should not resolve the issue, and the matter should be stayed in favour of arbitration for the arbitral tribunal to determine its own jurisdiction.
Expert evidence
The Plaintiff and D1 each adduced PRC expert evidence. The court noted that when approaching expert evidence on foreign law, the court must look at the basis of legal reasoning to determine what weight, if any, should be attached to the opinion and that if neither opinion renders useful assistance, the court is left with a “linguistic and common sense interpretation”.
The court said that, on the face of it, the threshold of prima facie or plainly arguable case is not a high one, but on the other hand, even if the court only has PRC legal expert evidence from the applicant, it does not follow that the court would accept the evidence without evaluation of the legal reasoning.
In this case, the evidence of D1’s legal expert (Pan) was contradicted by that adduced by the Plaintiff’s expert (Ye). The court said that such evidence had to be assessed and it had to come to a view as to whether the Plaintiff’s case was properly grounded. It said that once the PRC law evidence is contested, the court has to come to a view whether the prima facie or plainly arguable case is properly supported.
The court said that the critical part of the Clause is the first sentence: “因履行本协议所发生的争议”. It was common ground between Pan and Ye that the disputes in this action were tortious in nature (侵权之诉). The question over which they differed was whether the tortious disputes fell within the scope of the Clause. Ye answered this question in the negative, stating that “因履行本协议所发生的争议” should be construed to mean disputes arising from a party’s failure to perform his obligations under the Agreement or to comply with its terms. Ye’s opinion was supported by a judgment of the Supreme People’s Court (SPC), which held that a practically identical arbitration clause did not cover a tortious dispute.
The court found that Ye’s opinion was consistent with the clear wording of the Clause and supported by the highest authority in the Mainland.
D1’s expert, Pan, gave a contrary opinion, adopting a wide construction of the Clause. His opinion was that the Clause was capable of covering the tortious disputes between the parties. However, the court found that on a close reading of Pan’s opinion, his reasoning was not really supported by the legal authorities he cited. Apart from the lack of adequate underpinning for his opinion, the court was also unable to see how, in the face of a clear authority from the SPC, Pan’s view could be supported.
Determination of Question (4)
In view of the above, Question (4) was resolved against D1.
Question (2): Is the arbitration agreement null and void, inoperative or incapable of being performed?
The court noted that an arbitration agreement is inoperative if a party has waived his right to arbitrate. There would be such a waiver if (i) a party has a right under a contract or by operation of law; (ii) he knows of the existence of the right or the facts giving rise to such right; and; (iii) he has by conduct, clearly and unequivocally abandoned his right, or indicated that he is not exercising his right.
The court said it should take a holistic view in examining D1’s conduct generally in this action, and evaluate the particular action or non-action relied upon by the Plaintiff to contend that D1 had abandoned the right to arbitration in light of his conduct.
The court said it was quite clear from the original Statement of Claim (SOC) that the Plaintiff was alleging a case of fraud against D1. She alleged that by virtue of his fraud, her shares in the company in question were transferred to another company for no consideration. It was the Plaintiff’s case from day one, the court said, that in reliance upon D1’s representations she had signed various documents given to her.
The court said that despite his knowledge of and involvement in the Agreement, D1 had chosen to defend this action on the basis that he had nothing to do with the disposal of the Plaintiff’s shares and such defence was inconsistent with the Agreement. First, D1 had chosen not to rely upon the Agreement and contend that the disposal was a genuine sale. Second, this was an opportunistic application.
Contrary to D1’s contention, the court found that the Plaintiff had not changed her case. The Agreement was added by way of amendment to the particulars of fraud after she had obtained a copy of it and she was relying upon it as an instrument used to cheat her out of the shares.
The court held that D1 had not in any way indicated that he would be applying for a stay in light of the proposed amendment to the Statement of Claim, after having received the Plaintiff’s application to amend the Statement of Claim. Instead, he took no objection to the amendment at the hearing. The court said that where an amendment of a pleading will introduce issues which the defendant says he is entitled to have resolved by arbitration, the defendant should object to the amendment on this ground at the time the amendment application is made
Further, D1 had agreed to pay the Plaintiff security for costs, which was plainly inconsistent, the court said, with this application by which he sought a stay pending arbitration.
Determination of Question (2)
Question (2) was also resolved against D1: he had waived his right to arbitration.
Comments
Generally, given the “pro-arbitration” approach of the Hong Kong Courts, one would have expected the court to adopt a broad interpretation of the arbitration clause to hold that the tortious claim should also be referred to arbitration. However, this decision of the court turns on the particular wording of the arbitration clause and the expert evidence on Mainland Chinese law.
Under Hong Kong law, the test for determining whether a tortious claim is within the ambit of an arbitration clause is the two-limb close connection test:-
- the resolution of a contractual issue is necessary for a decision on the tortious claim; or
- the contractual and tortious disputes are so closely knitted together on the facts, that an agreement to arbitrate on one can properly be construed as covering the other.
The above test has been applied in various cases. For further details, please see our previous article.
In this case, the plaintiff did not dispute that the construction of the arbitration clause was governed by PRC law. It is not clear from the judgment whether the arbitration clause was expressly governed by PRC law. In the absence of an express provision, even if the governing law of the agreement is PRC law, it may be possible to argue that the governing law of the arbitration clause is the law of the seat of the arbitration, which is in Hong Kong. Please see our previous article for more details on this subject.
For further information, please contact:
Kwok Kit (KK) Cheung, Partner, Deacons
K.K.Cheung@deacons.com
