Fraud unravelling all – case update on High Court of Hong Kong approach to stays in arbitration

It is a well-established principle in international arbitration that an arbitral Tribunal may rule on its own jurisdiction. This doctrine (known as kompetenz-kompetenz) is enshrined, for arbitrations seated in England, by s30(1) of the Arbitration Act 1996. This includes ruling on the question of whether or not there is in fact a valid arbitration agreement (see s30(1)(a)).

However, in practice, a claimant party who takes the view that there is no arbitration agreement at all, and is unlikely therefore to establish an arbitral tribunal simply to confirm that fact, will bring its claims to court. The party seeking to rely on the agreement will challenge that action – ordinarily by applying to stay the proceedings in favour of the alleged arbitration agreement. This power (to stay proceedings in favour of arbitration) is arbitration's first line of defence. In England this is reflected in s9(1) of the Arbitration Act. Article 8 of the UNCITRAL Model Law, as incorporated into the national legislation of several jurisdictions overseas, provides the same power to courts.

As a matter of English law, it will then be a defence to that stay application to show to the court's satisfaction that the arbitration agreement is "null and void, inoperative, or incapable of being performed” (per s9(4) of the Arbitration Act).

This is a difficult threshold to meet, in particular given the doctrine of separability, which allows an arbitration agreement to survive even where the main agreement might not. For instance, in Fiona Trust ([2007] UKHL 40 affirming the Court of Appeal decision in [2007] EWCA Civ 20), shipowners claimed that charterparties for various vessels had been rescinded on the grounds that they had been obtained illegally, via bribery. Charterers of the vessels brought proceedings in arbitration, and Owners brought Court proceedings to challenge this, arguing that the Tribunal had no jurisdiction as the arbitration agreements themselves were invalid. The House of Lords dismissed the challenge and stated the principles as follows (paragraph 35 of the Judgment):

"[Owners'] argument was not that there was no contract at all, but that they were entitled to rescind the contract including the arbitration agreement because the contract was induced by bribery. Allegations of that kind, if sound, may affect the validity of the main agreement. But they do not undermine the validity of the arbitration agreement as a distinct agreement. The doctrine of separability requires direct impeachment of the arbitration agreement before it can be set aside. This is an exacting test. The argument must be based on facts which are specific to the arbitration agreement. Allegations that are parasitical to a challenge to the validity to the main agreement will not do. That being the situation in this case, the agreement to go to arbitration must be given effect."

It followed that even though shipowners argued the charterparties had been rescinded and hence were void ab initio, they were bound to make those arguments in arbitration as mandated by those charterparties.

The test for a stay of proceedings was recently examined in the context of alleged fraud in Hong Kong. The Hong Kong Arbitration Ordinance (Cap. 609 of the Laws of Hong Kong) governs arbitration in Hong Kong and is based on the UNCITRAL Model Law on International Arbitration.

In the matter of Haller v Vestey International Group Limited and Another ([2022] HKCFI 652), the Plaintiff brought proceedings in Hong Kong for various sums outstanding under bills of exchange.

The second defendant, China Meheco Corporation ("CMC") argued that the disputes were subject to arbitration under an alleged tripartite agreement between the plaintiff and the defendants, and applied for a stay of the Hong Kong proceedings under s20(1) of the Arbitration Ordinance. Section 20(1) of the Arbitration Ordinance is the equivalent of s9(4) of the Arbitration Act, and provides that disputes subject to arbitration are to be stayed to arbitration "unless [the Court] finds that the agreement is null and void, inoperative or incapable of being performed".

The Plaintiff argued that the tripartite agreement was a forgery and denied entering into it.

The Hong Kong court stated (at paragraph 90 of the judgment):

"A stay under s.20 is mandatory where the applicant shows a prima facie or plainly arguable case that (1) an arbitration agreement exists; (2) the arbitration agreement is capable of being performed; (3) there is in reality a dispute or difference between the parties, and (4) the dispute is within the scope of the arbitration agreement. Unless the point is clear, the proceedings should be stayed for arbitration…"

There followed a discussion of the regimes in Hong Kong, Singapore (also a UNCITRAL Model Law jurisdiction) and England, with the Court commenting that "the English regime is not so different from that of Hong Kong/Singapore". The judge noted (at paragraph 101):

"…the consistent theme running in all the authorities cited is that where one party alleges that the arbitration agreement was a forgery, if the issue cannot be resolved on the evidence available, the court would have to decide whether to resolve the issue or stay the action so as to enable the issue to be resolved in arbitration. In such situation, the stay is granted by the court in the exercise of its inherent jurisdiction, rather than a stay under the equivalent provision of s.20 of the AO … In deciding whether to grant such a stay, the Court requires the party seeking a stay to show at least a prima facie case that the arbitration agreement existed. Such requirement is necessary, otherwise a party can simply derail an action commenced by the other party by producing a forged arbitration agreement, and asks the court to stay the action in favour of a forum which the other party never agreed to."

On that basis, and with regard to the facts of the case, the Court dismissed the application, finding that CMC had not managed to show even a prima facie case that the arbitration agreement in the tripartite agreement existed.

The Appeal

CMC appealed the Judgment on the grounds that (i) there was no real issue between the Plaintiffs and first defendant to satisfy the requirements for service out of the jurisdiction, and (ii) Hong Kong was not the appropriate forum (forum non conveniens). This appeal, on unattractive technical procedural grounds under the Hong Kong civil procedure rules, was upheld ([2022] HKCA 1743).

CMC had also sought to appeal on an additional ground discussed above, i.e. that the action should be stayed due to the existence of a prima facie arbitration agreement. However, the Court of Appeal declined to grant this, finding that they did not have the requisite jurisdiction as a result of s20(9) of the Arbitration Ordinance, which provides that leave to appeal a decision to refuse to refer parties to arbitration can only be granted by the deciding court (in this case, the Court of First Instance).

The Plaintiff sought leave to appeal to the Court of Final Appeal, and was denied permission.

Comment

Haller v Vestey International Group Limited and Another serves as a reminder that alleging the existence of an arbitration agreement does not automatically result in a stay to arbitration of litigation in Hong Kong (or indeed in London or Singapore). If the required threshold cannot be met, the proceedings will continue.

The helpful summary provided by the case is a useful recapitulation of the position in Hong Kong, and an illustration of the similarity between the major arbitration hubs of London, Singapore and Hong Kong on this issue.