Hong Kong – When Will An Arbitration Clause Apply To Bill Of Exchange Disputes?

23 December 2020

 

In the recent case of T v W, HCA 366/2020, the Plaintiff had commenced court proceedings against the Defendant for HK$5 million plus interest payable under a post-dated cheque drawn by the Defendant. The Defendant applied to stay the proceedings to arbitration, relying on the arbitration clause in the Loan Agreement that referred to the cheque. The Court dismissed the application for a stay, holding that the Plaintiff’s claim was on the cheque and that the cause of action on a cheque is separate to the cause of action on the underlying contract. It said that there must be a “plain manifestation” in an arbitration clause that it is to apply to bills of exchange, before the presumption against taking bills of exchange into arbitration is to be rebutted. The Court was not satisfied that the arbitration clause in the Loan Agreement could be construed to extend to the claims made under the cheque, which it considered to be a separate agreement.   
 

The Loan Agreement
 

The Defendant claimed that a Loan Agreement had been signed by the Plaintiff and Defendant, which was the last in a series of Chinese written agreements made between them, evidencing the Plaintiff’s loan to the Defendant of a principal sum of HK$5 million and the Defendant’s agreement to pay 2.5% interest per month on the principal sum. The Loan Agreement referred to the Plaintiff’s cheque drawn for the loan and to the Defendant’s cheque drawn for repayment.
 

The Loan Agreement provided that it was governed by Hong Kong law and that any dispute should be arbitrated in Hong Kong.
 

Section 20(1) of the Arbitration Ordinance
 

Section 20(1) of the Arbitration Ordinance (Ordinance) adopts Article 8 of the Model Law and 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, refer the parties to arbitration unless it finds the agreement to be null and void, inoperative or incapable of being performed.  The issue before the Court was whether the dispute between the parties fell within the ambit of the arbitration clause contained in the Loan Agreement.
 

Court’s ruling
 

The Court held that the Plaintiff’s claim was on the cheque drawn by the Defendant and that the authorities are clear and it is trite that the cause of action on a cheque is separate to the cause of action on the underlying contract. It said that a cheque is a separate contract and the courts have always recognised the general commercial legal principle, that bills of exchange are generally regarded as the equivalent of cash.  The intrinsic nature of a bill of exchange is an unconditional order to pay, and the holder or beneficiary of the bill is entitled to regard it as a deferred instalment of cash.  Based on these principles, the Court said, and the unique and intrinsic nature of a bill of exchange, the Court of Appeal in CA Pacific Forex Ltd v Lei Kuan Ieong [1999] 1 HKLRD 462 had held that there must be a “plain manifestation” in an arbitration clause that it is to apply to bills of exchange, before the presumption against taking bills of exchange into arbitration is to be rebutted. Following CA Pacific, the Court was not satisfied that the arbitration clause in the Loan Agreement could be construed to extend to the claims made under the cheque, which it considered to be a separate agreement. 
 

The Defendant argued that the fact that the cheque was referred to in the Loan Agreement and was handed over 2 months after the signing of the Loan Agreement made this case distinguishable from the facts in CA Pacific, where the underlying contract made no mention of the cheque sued upon, and the cheque in question was issued for payment 6 months after the date of the agreement. The Defendant also argued that the cheque and Loan Agreement formed part of the same, single transaction, strengthening its argument that the Plaintiff and Defendant had intended disputes relating to the Loan Agreement and disputes relating to the cheque to be determined by the same tribunal. The Court rejected the Defendant’s argument, holding that read as a whole, references to the cheque in the Loan Agreement, as evidence of the loan, could not per se negate the fact that the cheque and Loan Agreement were separate contracts and it was clear that the parties had intended the cheque to be offered and retained as security for the Defendant’s repayment of the loan on the due date.
 

The Court said that the arbitration clause provided that “any disputes” should be submitted to arbitration and that read in context, “disputes” may be construed to cover disputes relating to the Loan Agreement and the parties’ claims and liabilities under the Loan Agreement only.  There was not sufficiently clear language or a plain manifestation of the parties’ intention that the agreement to arbitrate extended to claims made and disputes as to the parties’ rights and liabilities under the cheque.
 

The Plaintiff and the Defendant should be regarded as reasonable and rational business people, the Court said, and their agreements should be construed in that light.  As rational business persons, they must have had high regard for the importance and value of a cheque being issued and held as security (“as good as cash”, as generally understood), to ensure due payment of the loan and to facilitate easy and speedy enforcement of the security.  The Court could not infer from a generally phrased arbitration clause that the parties would be prepared to discard the value of the security offered by the delivery of the cheque, as a “deferred instalment of cash”,in the absence of a clearly expressed intention that disputes raised in relation to the cheque should be resolved by arbitration together with disputes relating to the underlying Loan Agreement.
 

The Court said that even if the construction of the arbitration agreement should start with the presumption of one-stop dispute resolution, as the Defendant argued, there were good commercial reasons for the parties to agree otherwise.  As business people, they must have realised and accepted that the Plaintiff had a generally quicker and easier recovery procedure for the sum due under the cheque, by instituting legal proceedings and seeking summary judgment, in exchange for waiving interest that may be due under the Loan Agreement.  The cheque offered was for payment of the principal debt only, when the repayment obligations of the Defendant included the principal as well as monthly interest of HK$125,000.
 

Accordingly, the Defendant had failed to establish a prima facie case that the parties were bound by the arbitration clause in relation to the cheque and the application for a stay of proceedings to arbitration was dismissed. 
 

Comment
 

The Court’s conclusion in this case is not surprising. It is trite that a cheque is generally understood to be “as good as cash”. Usually, the question of whether a dispute is within the scope of an arbitration agreement should also be determined by the arbitral tribunal as a preliminary issue. However, as can be seen in this case, if the Court holds that the Defendant cannot even establish a prima facie case that the parties are bound by the arbitration clause, there is no need for the court to refer the matter to the tribunal for determination of such preliminary issue.