Introduction

Often, parties to a contract may agree that any dispute relating to the contract will be resolved by way of arbitration.  This is usually achieved by inserting an arbitration clause into a contract, specifying that all disputes arising out of or in connection with the contract shall be determined by arbitration at a particular jurisdiction under a particular law.  But what is effect of the arbitration clause if, for a particular transaction, further contracts are subsequently entered which do not prescribe the mode of dispute resolution?  This issue was examined in a Hong Kong High Court case, Xu Yi Hong vs Chen Ming Han & Others.

In that case, the Defendants applied for a stay of the Hong Kong proceedings so that the disputes would be arbitrated in China, in accordance with the arbitration clause in the first of the 3 contracts entered into for the transaction.

The Facts

The Plaintiff entered into a contract (the "Land Contract") with a Hong Kong company to acquire 100% of its shares in a wholly owned PRC company which in turn owned a piece of land in China intended for project development (the "Project"). 

The Plaintiff was unable to complete the Land Contract despite various extensions to make payments by the Vendor. It was at this time that 3 of the four Defendants approached the Plaintiff expressing an interest to invest in the Project.  The parties then formed a joint venture by entering into 2 contracts on the same date.  The first contract (the "1^st Contract") was to transfer the rights of the Land Contract to 3 of the four Defendants so that they might  jointly own the Project with the Plaintiff once the Land Contract was  completed.   The 1^st Contract stipulated that the parties agreed to refer any disputes arising from it to an arbitration centre in China whose adjudication would be binding (the "Arbitration Clause").   The second contract (the "2^nd Contract") was a joint venture contract regulating the parties¡¦ obligations in the joint venture.

Subsequently, the last Defendant expressed interests to partake in the joint venture for the Project.  This gave rise to a supplemental contract (the "3^rd Contract"), which stated that its purpose was to implement the 1^st Contract. Among other things, the 3^rd Contract contained a governing law clause stipulating that the laws of Hong Kong shall apply (the "Governing Law Clause") and if its terms were inconsistent or conflicting with the 1^st Contract, the terms of the 3^rd Contract would prevail.

Then disputes between the parties precipitated and the Plaintiff sued the Defendants for their breach of the 3^rd Contract (the "Contractual Claim") and procuring the Vendor¡¦s breach under the Land Contract (the "Non-Contractual Claim"), which was an action not arising from the 1^st, 2^nd and/or 3^rd Contracts.

The Arguments

The Defendants relied on the Arbitration Clause to apply for a stay of the Hong Kong proceedings for both the Contractual Claim and Non-Contractual Claim.  The Plaintiff argued that due to the Governing Law Clause and to give business efficacy to the 3^rd Contract, there was an implied understanding between the parties that any dispute under the 3^rd Contract should be resolved by Hong Kong Courts. Hence, such implied term invalidated the Arbitration Clause.  For the Non-contractual Claim, the Plaintiff argued that as it did not arise out of any contract, the Arbitration Clause did not apply.

The Court¡¦s Decision

The Court gave judgment in the Defendants¡¦ favour and stayed the proceedings for arbitration.  The Court ruled that the Arbitration Clause was valid and it was not inconsistent or conflicting with the Governing Law Clause.  Further, as the Non-Contract Claim was closely knitted with the Contractual Claim, the Arbitration Clause also governed it.

The Reasoning

The Court stated that all the 1^st, 2^nd and 3^rd Contracts entered by the parties were to be read as one composite contract since they related to one transaction with terms intertwining with one another.  For the Arbitration Cause to be inconsistent with the Governing Law Clause, both clauses must contradict one another or be in conflict such that effect cannot fairly be given to both clauses.   The Court will use every effort to give effect to the 1^st and 3^rd Contracts and no clause in any contract would be rejected unless they were manifestly inconsistent with or repugnant when read together as a whole.  As there was no express jurisdictional clause in the 3^rd Contract, it did not preclude an arbitration centre in China from resolving the dispute using laws of Hong Kong.  Therefore, the Arbitration Clause did apply to the Contractual Claim.

Non-Contractual Claim

To determine whether the Arbitration Clause applies to the Non-Contractual Claim, the Court would ask whether the resolution of the Contractual Claim was necessary for disposing of the Non-Contractual Claim or whether the facts of the 2 disputes were so closely knitted together that the agreement to arbitrate on one could be construed as covering the other.   Here, the Court concluded that depending on the outcome of or what facts were accepted for the Contractual Claim, the Defendants would have a complete defence for the Non-Contractual Claim.  Hence, the Arbitration Clause should also apply to the Non-Contractual Claim.

Conclusion

Clients are advised in a series of contracts to carefully define the relationships between each contract and how terms of various contracts interact.  Clear distinction should also be made between a jurisdictional clause and a governing law clause.

Lawyers in our Litigation and Dispute Resolution Department will be happy to provide you with a copy of the above judgment or assist you with any queries you may have on other litigation matters.