Hong Kong – Loan Agreement Arbitration Clause Did Not Confer Jurisdiction On Tribunal To Determine Dispute Regarding Related Promissory Note.
In AAA & Ors v DDD [2024] HKCFI 513 the issue was whether the arbitration clause in a Loan Agreement conferred jurisdiction on the arbitral Tribunal formed under it, to determine related disputes arising out of a Promissory Note, which had its own arbitration agreement. The Tribunal, constituted under the HKIAC 2018 Administered Arbitration Rules, decided that it had jurisdiction to determine the related disputes under the Promissory Note. The Borrower and Guarantors (who were parties to the Loan Agreement and Promissory Note) disagreed and appealed against the Tribunal’s decision on jurisdiction. Deacons acted for the Borrower and Guarantors (the Plaintiffs in this action and Respondents in the arbitration) in the appeal. Allowing the appeal, the court set aside the Tribunal’s decision on jurisdiction and made a declaration that the Tribunal had no jurisdiction to decide claims for payment under the Promissory Note.
Underlying Documents
DDD (the Lender) made a loan to AAA (the Borrower), which was guaranteed by two Guarantors (BBB and CCC, respectively). All of them were parties to the Loan Agreement, under which the Lender agreed to loan a Principal Amount to the Borrower and defined the “Transaction Documents” as comprising the Loan Agreement, Share Charge Agreements and Promissory Note. The Loan Agreement provided for the Borrower to issue a Promissory Note to the Lender as security for the loan.
The Arbitration
The Borrower failed to repay the Principal Amount and the Lender issued a Notice of Arbitration (NOA) against the Borrower and Guarantors, which defined the “Principal Amount” due as the loan amount provided under the Loan Agreement. The NOA mentioned the Promissory Note, reciting that the Borrower acknowledged receipt of the Principal Amount and issued a Promissory Note and the Promissory Note was exhibited to the NOA. However, the NOA said nothing else on the Promissory Note.
The Respondents complained that the Tribunal lacked jurisdiction over the Lender’s claims against the Guarantors based on the Promissory Note, alleging that a dispute over payment under the Promissory Note had yet to crystallise. The Tribunal heard submissions on the Respondents’ jurisdictional challenge and decided that it had jurisdiction over the Lender’s claims based on the Promissory Note.
The Tribunal considered that the NOA implicitly referred such dispute over payment under the Promissory Note to arbitration pursuant to the dispute resolution clause in the Promissory Note, evident it said from the fact that the NOA had mentioned the Promissory Note and exhibited a copy of the same.
Application to Court to set aside Tribunal’s decision on jurisdiction
The court first considered how the Tribunal should have approached the question of its jurisdiction. It identified three broad paradigms in which conflicting dispute resolution clauses can feature:
Basic Paradigm: where there is a single contract, with two or more conflicting dispute resolution clauses.
Intermediate Paradigm: where there are multiple related contracts, but only one of the contracts contains a dispute resolution clause.
Generalised Paradigm: where there are multiple related contracts, with conflicting dispute resolution clauses in two or more (but not necessarily all) of the contracts.
The court said that in the case of a generalised paradigm (which applied in this case), by multiple contracts, it meant agreements that appear to form a package, aimed at achieving some objective and typically executed at about the same time and where the parties to the contract will be the same or nearly the same.
The court said that whether a case involves the basic, intermediate, or generalised paradigm, the authorities are unanimous, that determining the scopes of conflicting dispute resolution clauses is essentially an exercise in objectively construing the clauses to ascertain the parties’ likely intentions. Absent contrary indications, one may employ certain common-sense presumptions or assumptions as an aid to construction. But one must be careful not to use the presumptions or assumptions in a manner that runs roughshod over the parties’ intentions as manifested in the dispute resolution clauses agreed among them.
Fiona Trust Presumption
The court said that the Fiona Trust Presumption that the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of their relationship to be decided by the same tribunal, only applied to the basic paradigm. It said that the extended Fiona Trust Presumption that a jurisdiction agreement contained in one contract may, on its proper construction, extend to a claim that is made under another contract, applied to the intermediate paradigm, where the parties to the multiple related contracts were the same and the contracts “have been concluded at the same time as part of a single package or transaction or (if concluded at different times) dealt with the same subject-matter”. In such situation, there would be scope for a common-sense presumption that, absent evidence to the contrary, the parties must have intended for all disputes arising out of their commercial package to be resolved by reference to the dispute resolution clause in the one contract. The court said that the extended Fiona Trust principle would not be applicable in the present situation, where there are different dispute resolution clauses in the agreements comprising the package.
Centre of Gravity
The Court said that in the case of the generalised paradigm, there can be no initial presumption that the parties intended all their disputes to be resolved in a single forum, even though the contracts here constituted a package, having the objective of providing financing for the Borrower’s acquisition of shares, while ensuring security for the Lender. Instead of applying a presumption, the court said, one must construe each contract in the package to map out what disputes must have been intended to be covered by the dispute resolution clause of a given contract. The contractual arrangements here being inter-related, disputes among the parties may, the court said, involve intertwined issues which might reasonably be regarded as falling within the ambit of two or more dispute resolution clauses. If so, in deciding whether a particular forum has jurisdiction to deal with an intertwined issue or dispute between the parties, one must locate the “centre of gravity” of that issue or dispute as best one can, assessing which dispute resolution clause is “closer” to the issue or dispute.
Applying the centre of gravity test, the court said that the Tribunal had competence to adjudicate claims (i) by the Lender that the Guarantors are or remain liable under the Loan Agreement and (ii) allegations by the Guarantors that they have been released from their obligations as guarantors. Such questions depend on the proper construction of the Loan Agreement and an examination of the corresponding facts. The court said the questions would be within the “centre of gravity” of the LoanAgreement and close to its disputeresolution clause. In contrast, the question whether the Guarantors are or remained liable to pay under the Promissory Note was distinct. The question fell within the “centre of gravity” of the dispute resolution provision in the Promissory Note and therefore outside the scope of the Tribunal’s jurisdiction.
Court’s Decision
Accordingly, the court quashed the Tribunal’s decision on jurisdiction and made a declaration that the Tribunal had no jurisdiction to decide claims for payment under the Promissory Note.
Comments
The Fiona Trust Presumption is often quoted as the authority that all disputes arising out of related transactions should be referred to the same arbitration. This judgment helpfully sets out the correct approach in applying the Fiona Trust Presumption.
For further information, please contact:
Kwok Kit (KK) Cheung, Partner, Deacons
K.K.Cheung@deacons.com
