Arbitration — Stay — Arbitration clause — Loan agreement — Action for dishonored check (T v W) – Litigation, Mediation & Arbitration

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Arbitration Analysis: Claimant (T) made a loan to Respondent (W) under a loan agreement that contained an arbitration clause. W provided a check in partial payment for the loan, but it was dishonoured, T sued W on the check in Hong Kong court. W requested a stay of the legal action in favor of arbitration under Section 20(1) of the Hong Kong Arbitration Ordinance (Cap 609) (which incorporates Section 8 of United Nations Commission on International Trade Law (the “Model Law”). The Hong Kong Court of Appeal upheld the lower court’s decision to deny the stay. The Hong Kong Court of Appeal applied the principle set out in CA Pacific Forex Ltd vs. Lei Kuan Leong that an arbitration clause contained in an underlying agreement would apply only to an expressly drawn up bill of exchange.

Written by Andrew Rigden Green, Partner, Head of International Arbitration Greater China, at Stephenson Harwood, Hong Kong.

T versus W [2022] HKCU 233

What are the practical implications of this case?

  • Generally, a check or bill of exchange will be considered an obligation independent of the underlying agreement.

  • To determine whether an arbitration clause in an underlying agreement applies to checks and bills of exchange, the clause must be interpreted in the context of the agreement as a whole in relation to the factual matrix, which includes all the relevant circumstances. For an arbitration clause in an underlying agreement to apply to checks or bills of exchange, clear and express language will be required.

  • The availability of an expedited determination procedure (roughly equivalent to summary judgment) in modern arbitration rules is not sufficient to persuade the Hong Kong court that beneficiaries should be deprived of their right to sue. prosecution for unpaid checks or bills of exchange.

  • This decision is in line with Hong Kong case law that express wording is required for an arbitration clause to be incorporated into negotiable instruments. In the case of OCBC Wing Hang Bank v Kai Sen Shipping Co Ltd [2020] HKCU 408, the Court also held that under Hong Kong law, express wording is required to incorporate an arbitration clause in a bill of lading.

What was the background?

By written agreement dated March 21, 2017, T agreed to lend $5 million to W to be repaid on March 21, 2018, with monthly interest payable. W drew a post-dated check dated March 21, 2018 for $5 million for principal repayment. It was also agreed that the monthly interest would be paid in cash.

The redemption date was extended to September 21, 2019 by written agreement (the “Loan agreement“). W issued a new check for $5 million post-dated September 21, 2019 (the “Check“). Following this, an amendment was concluded, in which W undertook to reimburse the interest in cash on February 4, 2020.

On March 10, 2020, T presented the check for payment and the check was dishonoured. Subsequently, T issued a summons against W. W in the Hong Kong Magistrate’s Court (“CFI“) to suspend the action in favor of arbitration on the basis of the arbitration clause of the loan agreement, which states that “…This loan agreement is subject to the laws of Hong Kong. In case of disputes, they will be settled by arbitration in Hong Kong.” (the “Arbitration Clause“).

The CFI dismissed W’s claim and concluded that (1) following CA Pacific Forex Ltd vs. Lei Kuan Leong [1999] 1 HKLRD 462, the presumption against the introduction of bills of exchange in the arbitration shall not be rebutted unless there is a clear manifestation in the arbitration clause that it was to apply to bills of exchange ; (2) the parties had intended the Check to act as security and that the word “disputes” in the Arbitration Clause refers only to disputes relating to the Loan Agreement and the parties’ claims and liabilities thereunder. this ; and (3) there were good business reasons to agree that the check disputes should not be resolved by arbitration.

W appealed to the Hong Kong Court of Appeal (“California“).

What did the court decide?

W’s appeal was based on the following:

  • the CA Pacific decision is manifestly wrong because its reasoning is based on a case of German law and that CA Pacific was overtaken by the decision of Fiona Trust & Holding Corporation and others v Privalov and others
    [2007] UKHL 40

  • Alternatively, the interpretation approach to the arbitration clause in the CA Pacific decision is restrictive because it only considers the wording of the clause to the exclusion of other circumstances

As W does not dispute that, if the CA Pacific approach is applicable, the arbitration clause will not apply to an action on the check, therefore W’s appeal depends solely on whether
CA Pacific is always a good law.

CA dismissed W’s appeal.

The Hong Kong court refuses to deviate from the CA Pacific decision

While the reasoning of CA Pacific was based on
Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713, in which the interpretation of the arbitration clause was undertaken applying German law, the position in relation to English law was also considered by Lord Russell in the said case. In CA Pacificthe approach taken in Hong Kong is also the same.

CA was not convinced that the “one-stop-shop” presumption of dispute resolution Fiona’s Confidence represents an evolution of the law insofar as the Court should depart from the legal position set out in CA Pacific. the Fiona’s Confidence decision considers that the Court should give effect to an arbitration clause to its business purpose, that is, when businessmen have entered into an agreement with an arbitration clause, their purpose is to have their disputes settled by arbitration. However, Fiona’s Confidence was not a matter of bills of exchange. The CA reaffirmed the principle that a bill of exchange is a separate and distinct contract from the underlying transaction and that there must be express language for an arbitration clause to be incorporated into a bill of exchange. Moreover, the CA also pointed out that this approach is consistent with the intent of rational businessmen, who will not readily waive their rights to an NSF cheque, including the right to sue for get a judgment.

Approach adopted in CA Pacific is not restrictive

The approach to the interpretation of an arbitration clause in CA Pacific is not intended to be limited to examining the wording of the clause alone, but rather, the clause must be interpreted in the context of the agreement as a whole in relation to the factual matrix, which includes all relevant circumstances.

Case details

  • Court: Hong Kong Court of Appeal

  • Judge: Honorable Madam Justice Kwan, Vice President and Honorable Justice Lam, JA

  • Judgment date: January 14, 2022

Andrew Rigden Green is Partner, Head of International Arbitration in Greater China, at Stephenson Harwood, Hong Kong.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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