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Drafting Dispute Resolution Clauses : Court Litigation or Arbitration
1 August 2016

Arbitration has become an increasingly popular choice for dispute resolution in Hong Kong especially for cross border disputes involving Mainland China. Arbitration rules are generally simpler and more flexible than court rules and arbitral awards made in Hong Kong are binding and enforceable in many jurisdictions, including Mainland China under the “Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the HKSAR” which came into effect in 1999.

Arbitration is however based on the parties’ consent as it is a private procedure. If there is no valid and enforceable agreement to arbitrate, there will be no basis for an arbitrator’s jurisdiction and thus, there can be no arbitration. In practice, there are many cases where the agreements contain vague or even conflicting dispute resolution clauses making the choice of arbitration difficult to proceed; or unclear arbitration clauses e.g. references to a non-existing arbitral institution or rules leading to difficulty in administrating the arbitration process. Accordingly, an arbitration clause must be drafted effectively in an agreement so as to properly allow arbitration to displace litigation for the disputing parties.

The case of PCCW Global Limited v Interactive Communications Service

In the case of PCCW Global Limited v Interactive Communications Service Limited [2007] 1 HKLRD 309, the dispute arose out of a contract between Beyond The Network Limited (“Beyond”) and Vectone Limited (“Vectone”) where the parties had contracted to supply to and purchase from each other international long distance services. Vectone disputed a bill issued by Beyond. Beyond started legal proceedings against Vectone for a net amount of US$718,999.26 being the amount due on unpaid bills.

The agreement between the parties was in writing. Clause 4.3 provided that :-

“Each party will be responsible for payment of all undisputed charges as reflected on any billing statement…. Neither party shall have an obligation to pay any amount which has been disputed in good faith until such time that the dispute is satisfactorily resolved by the Parties…. In the event the Parties are unable to resolve the dispute amicably with[in] a reasonable period of time and havin[g] exchanged their respective call detail records, not to exceed 14 days, then, the parties will submit the difference to the Hong Kong Courts.”

Clause 5 stated that if there is a dispute between the contracting parties, they can only bring the dispute to the Hong Kong courts for resolution.

Clause 11.3 was the “arbitration” clause which provided that “either party may require any dispute arising under the agreement to be settled by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association….”.

As such, there is a conflict between Clause 5 and Clause 11.3 in that both the Hong Kong courts and an arbitrator have jurisdiction to resolve disputes between Beyond and Vectone. Beyond commenced court action against Vectone in the High Court in late 2004 for the sum owed by Vectone. Vectone, after some material time had passed, applied to stay the proceedings in favour of arbitration on the basis that there was a binding arbitration agreement.

What happened at the Court of First Instance?

The court held that Clause 11.3 was not a binding arbitration agreement and refused to stay the court proceedings, holding that although the party may require a dispute to be arbitrated, “but there is no obligation on the other party to accede to the invitation to arbitrate”. The judge took the view that under Clause 5, the parties had submitted to the exclusive jurisdiction of the Hong Kong courts. As such, Clause 11.3, was permissive only, not mandatory; under this clause, the parties could refer their dispute to arbitration if they mutually consented. This consent would override Clause 5 and arbitration can then follow the procedure in Clause 11.3. However, without such a consent, Clause 5 prevails.

Alternatively, the judge opined that pursuant to Clause 4.3, the requirement to “resolve the dispute amicably within a reasonable period of time” included to refer the dispute to arbitration under Clause 11.3. As Vectone’s request for arbitration came too late (about 5 months after the dispute first arose), the judge viewed that Vectone had “waived” any right under Clause 11.3 to arbitrate. Accordingly, Vectone’s application to stay litigation in favour of arbitration was dismissed.

The appeal

Vectone appealed the decision to the Court of Appeal, the main point of appeal being whether there was an agreement to arbitrate. The Court of Appeal accepted that if either Beyond or Vectone chose that the dispute be referred to arbitration under Clause 11.3, there would be a binding and enforceable agreement to arbitrate; the court should consequently stay the litigation in favour of the arbitration. The Court of Appeal remarked that it was important for the court not to usurp the function of the arbitrators, and unless it was clear that the arbitration clause did not cover billing disputes, the matter should be stayed for arbitration. However, as Clause 4.3 was a clause that specifically governed how any dispute or contest over billing should be determined, billing disputes should be dealt with differently and separately from Clause 11.3. Clause 4.3 provided a tight timetable for amicable settlement “not to exceed 14 days” and then the parties will submit to the Hong Kong Courts. Since Vectone’s request for arbitration was made out of time, the Court of Appeal did not stay the litigation and dismissed Vectone’s appeal – in other words, the billing disputes between Beyond and Vectone were held to be resolved by litigation at the courts.

Conclusion

The case plainly illustrates how unclearly drafted dispute resolution clauses can cause contracting parties to waste time and costs to argue over the meaning of those clauses instead of dealing with the parties’ actual commercial disputes. It is advisable for contracting parties who wish to have their future disputes be resolved by arbitration rather than court litigation, whether in whole or in part of the agreement to ensure that the drafting of the dispute resolution clauses, including the arbitration rules to be applied and choice of panel, is clear and unambiguous and so as to avoid litigation risks.

If you have any queries regarding the above eNews or any other questions relating to the drafting of commercial agreements or arbitration clauses, experienced lawyers in our Litigation department and Commercial department will be pleased to assist you.

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