T v. W

HCA 366/2020

[2020] HKCFI 2918

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 366 OF 2020

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BETWEEN

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D E C I S I O N

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Background

1.  On 19 March 2020, the Plaintiff issued the Writ endorsed with a Statement of Claim (amended on 13 May 2020), claiming against the Defendant a sum of HK$5 million, and interest thereon, as due and payable under a cheque No 000524 (“Cheque”) drawn by the Defendant on 16 May 2019 and postdated 21 September 2019.

2.  On 6 May 2020, the Defendant applied by summons to stay the proceedings to arbitration, in reliance upon an arbitration clause contained in a loan agreement which the Defendant claims was signed by the Plaintiff and Defendant on 22 March 2019 (“Loan Agreement”).  The Loan Agreement was the last in a series of Chinese written agreements made between the Plaintiff and the Defendant, evidencing the Plaintiff’s loan to the Defendant in March 2017 of a principal sum of $5 million, and the Defendant’s agreement to pay interest on the principal sum at 2.5% per month.  The repayment date of the loan was in March 2017 agreed to be 21 March 2018, which was extended first to 21 March 2019, and then to 21 September 2019 - the last extension evidenced by the Loan Agreement.

3.  The Loan Agreement is in terms substantially identical to the earlier loan agreements between the parties.  It refers to the Plaintiff’s specified cheque drawn for the loan, and the Defendant’s specified cheque drawn for repayment on 21 September 2019, both stated to be as evidence of the loan.

4.  The Loan Agreement further provides that Hong Kong law governs the 借據 (ie the agreement for loan, or the receipt), and that any dispute should be arbitrated in Hong Kong.

Application for stay

5.  Section 20 (1) of the Arbitration Ordinance (“Ordinance”) adopts Article 8 of the Model Law.  This states that “a court before which an action is brought in a matter which is the subject of an arbitration agreement” shall, if a party so requests, refer the parties to arbitration unless it finds the agreement to be null and void, inoperative or incapable of being performed.

6.  The stay is mandatory, so long as the action is brought in the same matter which is the subject of an arbitration agreement.  The onus is on the Defendant, being the applicant for stay, to show that there is a prima facie or plainly arguable case that the parties are bound by an arbitration agreement.  Unless the point is clear, the matter should be stayed in favour of arbitration (PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, for the tribunal to decide its own jurisdiction.

7.  The dispute between the parties in this case is whether the dispute or difference between the parties in this action falls within the ambit of the arbitration clause contained in the Loan Agreement, ie whether the action in these proceedings is in the matter which is the subject of the arbitration clause.

8.  The Plaintiff’s claim in this action is on the Cheque.  The authorities are clear, and it is trite that the cause of action on a cheque is separate to the cause of action on the underlying contract.  The cheque itself is a separate contract. The courts have always recognized the general commercial legal principle, that bills of exchange are generally regarded as the equivalent of cash.  The intrinsic nature of a bill of exchange is an unconditional order to pay, and the holder or beneficiary of the bill is entitled to regard it as a deferred installment of cash.  Based on these principles and the unique and intrinsic nature of a bill of exchange, the Court of Appeal in CA Pacific Forex Ltd v Lei Kuan Ieong [1999] 1 HKLRD 462 held that there must be a “plain manifestation” in an arbitration clause that it is to apply to bills of exchange, before the presumption against taking bills of exchange into arbitration is to be rebutted.

9.  In the judgment of Seagroatt J in CA Pacific (with which Rogers JA and Godfrey JA agreed), His Lordship referred to Nova (Jersey) Knit v Kammgarn Spinnerei GmbH [1977] 1 WLR 713 and the unique character of bills of exchange as emphasized by the English Court in that case.  The observations of Lord Russell in Nova (Jersey) were cited at p 466 of the reported judgment of Seagroatt J:

“It is conceivable in theory that an arbitration clause in an underlying contract of sale should sufficiently clearly embrace liability under a bill of exchange, though it is not easy to envisage a clause so inconsistent with the nature and function of such a bill.”

10.  In Nova (Jersey), Lord Fraser held that it was quite clear that the arbitration clause in the case did not contain a plain manifestation to extend the arbitration clause to claims under bills of exchange, and that unless there is some special reason arising from the intention of the parties, or the circumstances of the case, to make the arbitration clause applicable to claims on the bills, it should not do so.  Lord Wilberforce also stated in Nova (Jersey):

“If it had been allowed to stand it would have made a very substantial inroad upon the commercial principle on which bills of exchange have always rested. So to hold would seem quite counter to long accepted principles regarding claims on bills of exchange and would represent an undesirable change in the law.”

11.  Nova (Jersey) was followed by Kaplan J in York Airconditioning & Refrigeration Inc v Lam Kwai Hung (t/a North Sea a/c Elect Eng Co) [1995] 2 HKLRD 56.  There, the learned judge made this remark (at p 271):

“Unusual though it may be, I accept that it is possible for an arbitration clause to be drafted widely enough to cover a claim made under a bill of exchange.”

Nevertheless, it was held in York Airconditioning that the arbitration clause in the underlying contract for the sale and purchase of products was not sufficiently widely drawn to cover a claim arising under a cheque given in part payment of the products supplied.

12.  The conclusion of the Court of Appeal in CA Pacific was stated at p 466 of the reported judgment, as follows:

“The approach to be adopted in Hong Kong is no different from that in English law (and, it seems, German law). A bill of exchange is not valid if it incorporates an arbitration clause. To hold that an arbitration clause referring to disputes arising from the underlying agreement, applies to bills of exchange would make ‘a very substantial inroad upon the commercial principle on which bills of exchange have always rested’. Accordingly there must be a plain manifestation in the arbitration clause that it is to apply to bills of exchange if the presumption against taking bills of exchange into arbitration is to be rebutted. As Lord Russell indicated, there is an inconsistency between the nature and function of such a bill and an arbitration clause…

It also offends what must in my respectful view be the logical consequence of the commercial principle - there must be an express inclusion of bills of exchange if such an arbitration clause is to bite in this way. Furthermore, as matter of business common sense and efficacy, no right thinking merchant is going to agree to forgo his rights on the dishonored cheque. They cannot be taken away by implication.” (Emphasis added)

13.  The above represents the legal position in Hong Kong, as CA Pacific was followed and applied in Xu Ziming v Ruifeng Petroleum Chemical Holdings Ltd, unreported, HCA 450/2013, 29 October 2014.  Having read the analysis set out in the judgment of Seagroatt J, I do not agree that CA Pacific is confined to the facts of the case, as to when the cheque was issued or the nature of the underlying contract.

14.  On behalf of the Defendant in this case, it was argued by Counsel that following the decision in Fiona Trust & Holding Corporation v Privalov [2007] 4 All ER 951, the Court should depart from CA Pacific and follow the modern pro-arbitration trend and favour the one-stop dispute resolution presumption advocated in Fiona Trust.  That was the approach adopted by the English court in Uttam Galva Steels Ltd v Gunvor Singapore Pte Ltd [2018] EWHC 1098, where Picken J held, bearing in mind the “one-stop shop dispute resolution presumption”, that there is no rule of English law that an arbitration clause cannot extend to a claim under a bill of exchange, certainly anyway as between the immediate parties to the underlying sale contract and in circumstances where those parties remain the parties to the bills of exchange.

15.  CA Pacific speaks of the presumption against the inclusion of bills of exchange in an arbitration agreement without a clear manifestation of the intention to include such disputes, whilst Fiona Trust speaks of the assumption that disputes arising out of the same relationship should be determined by the same tribunal unless there is clear language to exclude any particular dispute.  At the end of the day, the issue is the construction of the language used in the arbitration clause.  In the exercise of construing the arbitration clause, if there is any conflict as to the significance to be placed to any presumption, then of course this Court is bound by the decision of the Court of Appeal in CA Pacific.

16.  The arbitration clause in the Loan Agreement provides for disputes relating to the loan/receipt for the loan to be submitted to arbitration.  On behalf of the Defendant, Counsel highlighted the fact that the Cheque was referred to in the Loan Agreement, and that the Cheque was handed over to the Plaintiff in May 2019, approximately 2 months after the signing of the Loan Agreement.  It was contended that these facts are distinguishable from the facts in CA Pacific, where the underlying contract made no mention of the cheque sued upon, and the cheque in question was issued for payment 6 months after the date of the agreement.

17.  The Defendant argued that the Cheque in this case and the Loan Agreement form part of the same, single transaction, strengthening the argument that the Plaintiff and the Defendant had intended disputes relating to the Loan Agreement and disputes relating to the Cheque to be determined by the same tribunal, and that the Plaintiff’s claim on the Cheque should be stayed to arbitration in accordance with the arbitration clause in the Loan Agreement.

18.  Although the Defendant’s postdated Cheque is referred to in the Loan Agreement, it (together with the Plaintiff’s cheque for the loan) was referred to as “evidence” of the loan and of the agreement to repay the loan.  The Loan Agreement provides for the date of repayment of the loan of $5 million, and for the payment of monthly interest in cash.  Read as a whole, I do not consider that the references to the Cheque in the Loan Agreement, as evidence of the loan, can per se negate the fact that the Cheque and the Loan Agreement are separate contracts.  Reading the Loan Agreement as a whole, it seems clear to me that the parties had intended the Cheque to be offered and retained as security for the Defendant’s repayment of the loan on the due date.

19.  In Trust Risk Group SpA v AmTrust Europe Ltd [2017] 1 CLC 456, the Court emphasised that where a complex financial or other commercial transaction is put in place by means of a number of interlined contracts, what is required is a careful and commercially-minded construction of the agreements providing for the resolution of disputes. This may include enquiring under which of a number of inter-related contractual agreements a dispute actually arises, and seeking to do so by locating its centre of gravity and thus which jurisdiction clause is ‘closer to the claim’.

20.  The arbitration clause in the Loan Agreement refers to the governing law of the loan agreement, and goes on to provide that “any disputes” should be submitted to arbitration.  Read in context, “disputes” may be construed to cover disputes relating to the loan agreement and the parties’ claims and liabilities under the Loan Agreement only.  There is no sufficiently clear language, and no plain manifestation of the intention of the parties, that the agreement to arbitrate extends to claims made and disputes as to the parties’ rights and liabilities under the Cheque.  These claims under the Cheque must be more closely related to the Cheque, and its intrinsic character, than to the Loan Agreement.

21.  I agree that the Plaintiff and the Defendant should be regarded as reasonable and rational business people and that their agreements should be construed in such light.  As rational business persons, they must have had high regard for the importance and value of a cheque being issued and held as security (“as good as cash”, as generally understood), to ensure due payment of the loan and to facilitate easy and speedy enforcement of the security.  It defeats the rationale in Fiona Trust if the Court should infer from a generally phrased arbitration clause that the parties would be prepared to discard the value of the security offered by the delivery of the Cheque, as a “deferred installment of cash” (the phrase used by Lord Dilhorne in Nova (Jersey)), in the absence of a clearly expressed intention that disputes raised in relation to the Cheque should be resolved by arbitration together with disputes relating to the underlying Loan Agreement.

22.  As Counsel for the Plaintiff submitted, even if the construction of the arbitration agreement should indeed start with the presumption of one-stop dispute resolution, there are good commercial reasons for the parties to agree otherwise.  The parties as business persons must have realized and accepted that the Plaintiff has a generally quicker and easier recovery procedure for the sum due under the Cheque, by instituting legal proceedings and seeking summary judgment, in exchange for waiving interest that may be due under the Loan Agreement.  As the Plaintiff also highlighted, the Cheque offered was for payment of the principal debt only, when the repayment obligations of the Defendant included the principal as well as monthly interest of HK $125,000.

23.  The Supplemental Agreement cannot assist the Defendant in the application for stay.  If relevant at all, it refers to the Plaintiff’s reservation of rights to sue under the Cheque, which is more consistent with the intention of the parties that the claims and liabilities under the Cheque should be pursued by court proceedings rather than arbitration. The plain and ordinary meaning of “訴訟權利”is litigation rights, and it would be artificial to construe the words as meaning “cause of action”, or right to arbitrate, as the Defendant suggests.

24.  Following CA Pacific, I am not satisfied that the arbitration clause in the Loan Agreement can be construed to extend to the claims made under the Cheque, which I consider to be a separate agreement. The Defendant has not established a prima facie case that the parties are bound by the arbitration clause in relation to the Cheque.

Conclusion

25.  The claim made under the Cheque in these proceedings is not in the same matter which is the subject of the arbitration agreement contained in the Loan Agreement.  The application for stay under section 20 (1) of the Ordinance is accordingly dismissed, with costs to the Plaintiff, including any costs reserved.