In the recent case of CPC Construction Hong Kong Limited v Harvest Engineering (HK) Limited and another (HCA 2096/2013), a series of loan agreements set out for litigation to resolve disputes, while a broader, related subcontract, set out for disputes to be resolved by arbitration instead.
The Hong Kong Court of First Instance reserved its position to allow the plaintiff to consider if it would like the court to stay its claim pending arbitration. This would not be the same as acting to stay the claim in favour of arbitration – rather, it would be a case management solution, avoiding a duplication of time and resources, and possible inconsistent results between the arbitration and litigation proceedings.
Background
The plaintiff ("CPC") subcontracted a construction project to the 1st defendant ("Harvest"), of which the 2nd defendant ("Lau") was a shareholder and director. When Harvest ran into cash flow difficulties, CPC agreed to advance Harvest some sums, subsequent to which loan agreements were signed by both parties, with Lau guaranteeing and indemnifying Harvest's obligations under the agreements. The loan agreements allowed, among other things, for CPC to have an unfettered right to demand immediate repayment of the loan.
CPC recalled the loan, to which Harvest and Lau did not comply. In their defence, Harvest and Lau claimed that the sums advanced were merely 'special payments', to be taken into account upon finalizing the subcontract accounts at the completion of the project.
By summons, CPC applied for a summary final judgment against Harvest and Lau, while Harvest and Lau, by cross-summons, applied to stay the claim in favour of arbitration. The defendants also went on to make a counterclaim, arguing that CPC owed them sums under the subcontract for the value of work done, less payments already made, prior to the allegedly wrongful termination of the subcontract.
Dispute resolution
The initial subcontract expressed for disputes to be resolved by way of arbitration:
“All disagreements or disputes arising from this subcontract agreement shall be resolved by arbitration between the parties in accordance with the Arbitration Ordinance Cap 341, after the completion of CPC’s main contract or after the termination of this subcontract agreement.”
Meanwhile, the loan agreements did not refer to arbitration. Instead, they expressed that the parties irrevocably submit to the non-exclusive jurisdiction of the courts of Hong Kong in respect of any claims or disputes, without prejudice to CPC’s right to enforce the loan agreements in any other courts of competent jurisdiction. Lau's guarantee also contained a jurisdiction clause, referring to the non-exclusive jurisdiction of the courts of Hong Kong.
Issue
The main issue was whether the failure to repay the loans as requested was a dispute which came under the subcontract, and thus within the ambit of the arbitration clause.
CPC said it was not, as the payments advanced by it were stand-alone and independent transactions, pursuant to the loan agreements (and not the subcontract). Had the situation been otherwise, CPC argued that the parties would have included an arbitration clause in their loan agreements as a supplement.
To the contrary, Harvest and Lau said that the loan agreements were clearly not stand-alone agreements; reference was made in their terms to the fact that the amounts loaned were only to be used for expenses under the subcontract. As such, the loan agreements wholly related to the matter of Harvest's liabilities under the subcontract.
Judgment
Without controversy, the court stayed the counterclaim in favour of arbitration, as the counterclaim arose directly out of the subcontract (to which arbitration applied).
With respect to whether the original claim for the unpaid loan sums was captured by the loan agreements (and subject to litigation), or captured instead by the wider subcontract (and subject to arbitration), the court noted two points:
- Firstly, it said that "all disputes arising from", as was expressed in the subcontract, was more narrow in scope than a phrase such as "connected to" the subcontract. In its view, failure to repay the loans was not encapsulated under "all disputes" pertaining to the subcontract. Instead, the dispute as to loan sums was captured by the loan agreements in isolation.
- Secondly, it said that reference in these loan agreements to the jurisdiction of the courts was inconsistent with an agreement to arbitrate, irrespective of whether the jurisdiction was exclusive or non-exclusive. As such, it was not persuaded that the claim for the unpaid loan sums fell to be stayed in favour of arbitration.
This decision was reached with some reluctance by the court, as it was acknowledged that the result left open the possibility that there would be court-based litigation (as to the unpaid loan sums), and an arbitration (as to the counterclaim), running simultaneously, despite the fact that there was bound to be a considerable overlap in the issues and evidence canvassed in each forum.
The court ultimately reserved its position, giving CPC time to reflect on whether it would like the court to order a stay of the claim pending the arbitration instead. This would not be the same as staying the claim in favour of arbitration, as Harvest and Lau had wanted – rather, it would be a case management solution, to avoid duplication of time and resources, and the possibility of inconsistent results.
Comment
This case is a positive example of courts using their case management powers to try and avoid related arbitration and litigation proceedings running in parallel. Parties can expect the Hong Kong courts in particular to take a proactive approach on these issues, encouraging parties to submit their disputes to a single forum wherever possible.
For further information, please contact Simon Chapman, Partner, or your usual Herbert Smith Freehills contact.
