In 李明實，方壘 AND 史洪源 & Ors v Ace Leads profits Ltd & Ors, HCA 597/2021  HKCFI 3342, the Defendants’ applied for an order that the action be stayed and referred to arbitration. One of the grounds relied on was that certain claims in the action (Trust Shares Claim) were within the ambit of the ArbitrationAgreement in the Declarations of Trust (DoTs). The court held that in substance, the focus of the dispute between the parties in respect of the Trust Shares Claim was the existence of the Overarching Trust and was different in nature from the DoTs created by the DoTs in implementation of the Trust Scheme, and was outside the ambit of the Arbitration Agreement. Accordingly, the Defendants’ application was dismissed. The court said that in terms of approach, when determining whether a particular matter is the subject of an arbitration agreement, the court should consider the substance of the controversy as it appears from the evidence and not just in the particular terms of how the claimant has formulated its claim in the pleadings.
The disputes centered around Declarations of Trust (DoTs) which contained the following preamble (DoT Preamble), that: “根據香港信託法例，特別是《受託人法例》及其他成文法或不成文法信託權法例，本合約各方自願遵守上述法律，並在上述法例保護之框架內，達成對合約信託的一致理解和一致遵守。” Clause 8.5 of the same (Clause 8.5) provided that: “本合約以香港法例為准據法，信託人與受託人之間信託關係的任何爭議在調解無效時，均有權提交香港仲裁委員會裁決。” It was the Defendants’ case that Clause 8.5 constituted an arbitration agreement (Arbitration Agreement).
The applicable legal principles
The court referred to the applicable legal principles, namely:
1. The starting point is s.20(1) of the Arbitration Ordinance, Cap 609 (Article 8 of the UNCITRAL Model Law), which provides that: “A court before which an action is brought in a matter which is the subject of an arbitration agreement 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.”
2. The court asks 4 questions:
- Question 1: is there an arbitration agreement between the parties?
- Question 2: Is the arbitration agreement capable of being performed, in the sense that it is not null and void, inoperative or incapable of being performed?
- Question 3: Is there in reality a dispute or difference between the parties?
- Question4: Is the dispute or difference between the parties within the ambit of the arbitration agreement?
3. The onus is on the applicant for a stay to demonstrate that there is a prima facie case that the parties are bound by an arbitration clause, and unless the point is clear, the court should not attempt to resolve the issue and the matter should be stayed in favour of arbitration, as it is for the tribunal to decide first on its jurisdiction.
Was there an arbitration agreement between the parties?
The court referred to the two limbs to this question: (i) whether an arbitration agreement is in existence, and (ii) between whom. On the facts of this case, the court held that there was an arbitration agreement between the parties.
Was the Arbitration Agreement capable of being performed?
The Plaintiffs argued that the Arbitration Agreement was not capable of being performed because of the non-fulfilment of a “precondition”; and the non-existence of “香港仲裁委員會”.
Was any “precondition” not fulfilled?
The Plaintiffs argued that according to the wording of Clause 8.5, the parties’ entitlement to submit the dispute to arbitration arose only when mediation is ineffective (在調解無效時). However, the court rejected this as a matter of law. It said this was not supported by authorities and the question of whether a party has complied with the procedure or conditions as to the exercise of the right to arbitrate, as set out in an arbitration agreement, is a question of admissibility of the claim, and the court has no role to play in relation to such a question, as it does not go to the question of the jurisdiction of the tribunal. It is for the tribunal to decide on admissibility and such decision of the tribunal is ﬁnal, and not for review by the court.
Non-existence of “香港仲裁委員會”
The fact that there was no arbitration body which bears that name was not in dispute. The court said there are two direct authorities in Hong Kong (Lucky–Goldstar International (H.K.) Ltd v Ng Moo Kee Engineering Ltd  1 HKC 404 and Chimbusco International Petroleum (Singapore) PTE Ltd v Fully Best Trading Ltd  1 HKLRD 582) that where the parties have clearly expressed an intention to arbitrate, the agreement is not nullified even if they chose the rules of a non-existent organisation.
The court found that the intention to arbitrate had objectively been clearly expressed and evinced in Clause 8.5 and it was not nullified by the non-existence of “香港仲裁委員會”. Accordingly, the court concluded that the Arbitration Agreement was capable of being performed.
Was there a dispute between the parties?
The court said there were disputes between the parties. The writ had been issued, and the Statement of Claim filed. The Plaintiffs argued that the Defendants had not revealed their defences. The court said that it saw no need to go to any detail of the evidence and the Defendants had sufficiently countered the Plaintiffs’ submissions in this regard by referring to and relying on the observations of Ma J in Tommy CP Sze & Co v Li & Fung (Trading) Ltd & Ors  1 HKC 418, that: “Prior to the enactment of the present section 6 of the Ordinance and Article 8 of the Model Law, the court’s approach had been that proceedings would only be stayed (and the relevant dispute or difference referred to arbitration) if a genuine dispute existed between the parties. A genuine dispute was one in which there was a substantial or arguable defence to the claim brought by the Plaintiff in the action. That is no longer the law. A dispute will exist unless there is a clear and unequivocal admission not only of liability but also of quantum.”
Was the parties’ dispute or difference within the ambit of the Arbitration Agreement?
The Plaintiffs argued that the Trust Shares Claim related to the Overarching Trust and was different from the DoT Trusts created by the DoTs, which only implemented the Trust Scheme. They said the Arbitration Agreement was contained in the DoTs, and covered only the disputes arising from the trust relationship between the trustees and individual beneficiaries under the DoTs. The Overarching Trust being the dispute between the parties in the Trust Shares Claim, its ambit was therefore outside the Arbitration Agreement. The Defendants argued that a disciplined approach should be adopted and the Plaintiffs’ case as pleaded in the Statement of Claim should be looked at and that the Plaintiffs’ contention that the claims were not based on the DoTs and therefore not subject to the Arbitration Agreement were contrary to the Plaintiffs’ pleaded case.
The court agreed with the Plaintiffs. It said in terms of approach, when determining whether a particular “matter” is the subject of an arbitration agreement, the court should consider the substance of the controversy as it appears from the circumstances and evidence, and not just the particular terms in which the claimant has sought to formulate its claim in court. The focus is on the substance of the dispute, and not the pleadings.
The court concluded that in substance, the focus of the dispute in respect of the Trust Shares Claim was the existence and nature of the Overarching Trust and was different in nature from the DoT Trusts created by the DoTs in implementation of the Trust Scheme, and was outside the Arbitration Agreement. Accordingly, the Defendants had failed to discharge the onus on them to establish that the relevant dispute was within the ambit of the Arbitration Agreement and the Defendants’ application to stay the Trust Shares Claim was dismissed. The Defendants’ application for leave to appeal this decision was also dismissed.
This case is a useful reminder to arbitration practitioners of the proper step-by-step approach in considering an application for a stay of proceedings to arbitration.
For further information, please contact:
Justin Yuen, Partner, Deacons