In Li Wenjun v Chen Chunhui  HKCFI 405, the court was presented with an application by the 1st Defendant to stay the proceedings and refer the dispute to arbitration. The court ultimately dismissed the application, holding that the dispute was not covered by the arbitration clause in question and that the 1st Defendant had waived his right to arbitrate.
Author: Michael Poon, Associate
Co-Author: Kelly Leung, Trainee Solicitor
Co-Author: Tajriyan Siddiqui, Marketing Assistant
The background of the case involved an investment arrangement between the Plaintiff and the 1st Defendant, whereby the Plaintiff agreed to transfer her shares to a company controlled by the 1st Defendant on the understanding that the 1st Defendant would manage those shares for her. The Plaintiff signed various documents to effect the share transfer under a Share Transfer Agreement that contained an arbitration clause in Chinese. Subsequently, the Plaintiff discovered that her shares had not in fact been transferred to a company controlled by the 1st Defendant, but to a company in which the 1st Defendant had no control or interest. The Plaintiff brought proceedings against the 1st Defendant for deceit and conspiracy.
Issues to be determined by the Court
The arbitration clause in question under the Share Transfer Agreement provided as follows:
The applicable principles that fall to be determined by the court in determining a stay application are trite. The court must consider:
whether the clause in question is an arbitration agreement ("Question 1");
whether the arbitration agreement is null and void or incapable of being performed ("Question 2”);
whether there is a genuine dispute between the parties (“Question 3”); and
whether the dispute falls within the scope of the arbitration agreement ("Question 4”).
On the facts, the court found that Question 4 and Question 2 were the key questions to be answered in favour of the Plaintiff if she were to succeed against the 1st Defendant in resisting the stay application.
Question 4: whether the dispute falls within the scope of the arbitration agreement
Under the first part of the clause in the arbitration agreement, “因履行本协议所发生的争议”, it was common ground that the disputes in the action was tortious in nature. It was also common ground that the construction of the clause in question was governed by PRC law, and, consequently, whether the disputes are embraced by the clause turns on its proper construction. In this regard, the Plaintiff and the 1st Defendant submitted their own expert evidence on foreign law.
The court’s approach to expert evidence on foreign law is to assess the basis of legal reasoning to determine what weight, if any, should be attached to the expert evidence. If expert evidence of the litigants is not useful, the court must adopt a linguistic and common sense interpretation.
The court found that the Plaintiff’s expert evidence on whether the tortious disputes fell within the scope of the clause (i.e. the phrase “因履行本协议所发生的争议”) should be construed consistently with a similar case determined at the Supreme People’s Court, which held that a practically identical arbitration clause did not cover a tortious dispute. In contrast, the court found that the Defendant’s expert evidence lacked the adequate underpinning for the reasoning. The court held that the arbitration clause did not cover a tortious dispute.
Question 2: whether the arbitration agreement is null and void or incapable of being performed
An arbitration agreement is inoperative if a party has waived his right to arbitrate, and such a waiver occurs if a party: (1) has a right under a contract or by operation of law; (2) knows of the existence of the right or the facts giving rise to such right; and (3) has by conduct, clearly and unequivocally abandoned his right, or indicated that he is not exercising his right.
The court took a holistic approach in examining the conduct of the 1st Defendant to determine whether it constituted abandonment of his right to arbitrate. The court found it clear from the Plaintiff’s statement of claim that the circumstances surrounding the Share Transfer Agreement were known to the 1st Defendant, and yet the 1st Defendant had chosen to defend the action on the basis that he had nothing to do with the share transfer by the Plaintiff. Such a defence was inconsistent with the Share Transfer Agreement. Moreover, when the Plaintiff subsequently sought leave to amend her statement of claim, the 1st Defendant took no objection to it. The court reiterated the applicable principle that where an amendment of a pleading will introduce issues which the defendant says he is entitled to have resolved by arbitration, the defendant should object to the amendment on this ground at the time the amendment application is made. As the 1st Defendant did not object at the time of the amendment application, the court found that the 1st Defendant had waived his right to arbitration.
This case is a cautionary tale that while Hong Kong courts are generally known for its pro-arbitration stance, when determining the issue of whether a dispute is within the scope of an arbitration clause, the courts will ultimately examine the arbitration clause according to its proper construction.
Parties should therefore clearly define and specify the key elements of a valid arbitration agreement and take care to avoid the pitfalls that prevent the court from giving effect to it.
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