Hong Kong Court weighs in on the proper law of a hybrid dispute resolution clause
Dispute resolution clauses go off track
This case arose out of the financing arrangements provided by China Railway to Chung Kin Holdings (CKH) for the construction of a hotel in Hong Kong. In the agreement in question, the parties (and a third party, Jinyin) acknowledged CKH’s outstanding repayment obligations.
The relevant agreement provided China Railway with the option, in the event of a dispute, to either (a) commence arbitration in the arbitration commission where Jinyin was domiciled (Wuhan) or (b) initiate court proceedings before the People's Court where Jinyin was domiciled.
China Railway wished to recover a debt owed and therefore commenced an action against CKH before the HKCFI. CKH applied to the HKCFI for a stay in favour of the Wuhan courts.
HKCFI applies the choice-of-law framework in Enka v Chubb
After determining that the dispute resolution clause in the agreement applied, the HKCFI considered which law governed the clause. This was in order to answer the question of whether China Railway's submission to the Wuhan courts was exclusive or non-exclusive.
Noting that the approach of the UK Supreme Court in Enka “appears to tally with Hong Kong law”, the HKCFI summarised the choice-of-law framework for arbitration agreements in Enka and extended it to jurisdiction clauses more generally. In short, the HKCFI found that:
- in the absence of an express choice of law for a jurisdiction clause, the court will consider if the parties have designated a governing law through an implied choice;
- an express choice of law for the main contract will generally be implied as the governing law applicable to the jurisdiction clause; and
- it is only when the parties’ intentions cannot be identified through contractual interpretation that the court will resort to the system of law that has the ‘closest and most real connection’ to the jurisdiction clause, which for an arbitration clause is usually the law of the seat of arbitration.
Applying this test, the HKCFI found that the parties had expressly chosen Hong Kong law for the financing arrangement under the suite of contracts. Accordingly Hong Kong law was also the parties' implied choice for the dispute resolution clause.
Construing the clause under principles of Hong Kong law, the HKCFI concluded that the jurisdiction of the Wuhan courts was non-exclusive. Since CKH was unable to satisfy the burden placed upon it to demonstrate that Wuhan was clearly and distinctly more appropriate as a forum, its application to stay the proceedings was dismissed.
This case suggests that when determining the governing law of a dispute resolution clause, including an arbitration agreement, Hong Kong courts will likely apply the choice-of-law framework laid out in Enka. The Enka three-stage test is also the approach under Singapore law, as recently reaffirmed by the Singapore Court of Appeal in Anupam Mittal v Westbridge Ventures II Investment Holdings.
The alignment of the approach to choice of law in Hong Kong, Singapore and England & Wales is welcome as it reduces the likelihood of national courts in common law jurisdictions reaching conflicting outcomes when determining the proper law of an arbitration agreement. However, diverging views nevertheless exist in other jurisdictions. Notably, French law applies the law of the seat to interpret arbitration agreements in the absence of an express governing law for the arbitration clause.
Adding to the complexity, the English approach to ascertaining the governing law of an arbitration agreement may well be subject to change. On 27 March 2023, the Law Commission of England & Wales commenced a second consultation on the Arbitration Act 1996, which is principally focussed on its earlier decision not to propose reform to the position formulated in Enka. Relevantly, the provisional proposal of the Law Commission in the second consultation paper is the introduction of a default rule that the law of the arbitration agreement is the law of the seat, unless the parties expressly agree otherwise in the arbitration agreement itself. In the meanwhile, there have yet to be calls in Hong Kong or Singapore for legislative intervention on this question.