Introduction

In Tongcheng Travel Holdings Limited v OOO Securities (HK) Group Limited [2024] HKCFI 2710, the Court of First Instance set aside a default judgment due to the parties’ arbitration agreement. This case underscores the judiciary’s commitment to upholding party autonomy and minimizing Court interference in arbitrable matters.

Background of the dispute

The Plaintiff, a mainland Chinese online travel services company, commenced proceedings in September 2022 against the Defendant, a Hong Kong-based asset manager, seeking declarations for termination of an Investment Management Agreement (“IMA”), return of managed assets, and damages. The Plaintiff alleged that the Defendant failed to comply with repayment demands after the IMA’s purported termination in January 2022. The IMA included clauses stipulating that disputes be resolved through arbitration in Hong Kong.

The Plaintiff obtained a default judgment against the Defendant in January 2024 and a garnishee order nisi in February 2024. However, The Defendant applied under section 20 of the Arbitration Ordinance (Cap. 609) (“the Ordinance”) to stay the proceedings to arbitration and to set aside the default judgment and garnishee order nisi , arguing that the dispute fell under an arbitration clause in the IMA. The Plaintiff, however, contended that the arbitration clause was invalid due to ambiguities and contradictions with a jurisdiction clause favouring Hong Kong Courts.

Legal framework

The Court applied the principles outlined in Dah Chong Hong (Engineering) Ltd v Boldwin Construction Co Ltd HCA 1291/2002, where there was similarly judgment entered in default of an Acknowledgment of Service, and an application was made to set aside the default judgment and to stay the action to arbitration. The Court in Dah Chong Hong (Engineering) Ltd found that the judgment in the case had been regularly obtained. It then proceeded to deal, first, with the application for stay, explaining that if the stay application is successful, the default judgment will also be set aside and the court will not consider the merits of the defence. If the court takes the view that the stay application will or is likely to fail, then a defence which has a real prospect of success has to be shown in order for the court to set aside the default judgment.

When dealing with an application for stay made under section 20 of the Ordinance, the principles are clear and set out in Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418. The 4 questions for the Court are:

1.      Is the arbitration clause an arbitration agreement?

2.      Is the arbitration agreement null and void, inoperative or incapable of being performed?

3.      Is there in reality a dispute or difference between the parties?

4.      Is the dispute or difference between the parties within the ambit of the arbitration agreement?

Reasoning

Validity of the arbitration clause

The Plaintiff firstly argued that the arbitration clause was invalid because it referred disputes to a “legally authorized body in Hong Kong,” which they claimed was ambiguous. The Court rejected this, citing precedents such as Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd [2016] 1 HKC 149, where clauses referencing non-existent arbitral institutions were upheld. The Court held that the parties’ clear intention to arbitrate in Hong Kong sufficed, and procedural gaps (e.g., appointment of arbitrators) could be resolved under the Ordinance.

Reconciling arbitration and jurisdiction clauses

The Plaintiff further contended that Clause 11.2 of the IMA (“The courts of Hong Kong shall have exclusive jurisdiction over the parties to this Agreement.”), granting Hong Kong Courts “exclusive jurisdiction,” conflicted with the arbitration clause. The Court held that there was no irreconcilable conflict between the arbitration clause and the exclusive jurisdiction clause, as the two could be reconciled in the sense that Hong Kong courts would retain supervisory jurisdiction over arbitrations seated in Hong Kong.

Waiver of arbitration rights

The main thrust of the submissions made by Counsel for the Plaintiff is that the Defendant’s filing of a writ and claim in separate Hong Kong proceedings (HCA 1266/2022) constitutes its “first statement on the substance of the dispute” under Article 8(1) of the Model Law, thereby waiving its right to seek arbitration. The Plaintiff contends that this filing amounts to an unequivocal step in litigation, debarring the Defendant from later requesting a stay in favour of arbitration. However, the Defendant counter argued that Article 8(1) requires the statement to be made in the same proceedings being stayed, not in a separate action. The Court agrees, noting that the HCA 1266 claim does not substantively address the Plaintiff’s claims in the current proceedings and lacks the necessary detail to qualify as a statement on the dispute’s substance.

The Court further rejects the Plaintiff’s claim that the Defendant abandoned its arbitration rights, as there was no clear, unequivocal conduct or written agreement to that effect. The Defendant’s failure to serve the HCA 1266 writ or defend the current proceedings does not indicate waiver, nor does an alleged conversation between the parties, which the court deems inadmissible for this purpose. Since the Defendant sought a stay before submitting any substantive statement in these proceedings and no evidence shows an intent to abandon arbitration, the Court concluded that the Defendant had not unequivocally abandoned its right to arbitrate

Delay and discretion to set aside judgment

The Plaintiff also argued that the Defendant’s 1.5-year delay in applying to set aside the default judgment. The Court acknowledged this but accepted the Defendant’s explanation that a corporate “Change in Control” in late 2022 disrupted internal communications, and the judgment came to light only after a garnishee order. The Court also noted the Defendant’s arguable defence, the IMA’s express terms required mutual written termination, contradicting the Plaintiff’s unilateral termination claims. Given these factors, the Court exercised its discretion to set aside the default judgment and garnishee order nisi.

Takeaway

The Court’s decision reaffirms Hong Kong’s pro-arbitration stance, prioritizing party autonomy even in cases of procedural delays. By staying proceedings and setting aside the default judgment, the ruling ensures that disputes governed by arbitration clauses are resolved in the agreed forum. This case serves as a reminder to parties to scrutinize dispute resolution clauses carefully and act promptly to enforce arbitration rights.

The decision also offers valuable clarity on what constitutes an abandonment of arbitration rights, mere commencement of parallel proceedings under the same contract is insufficient unless the pleadings substantively engage with the dispute. Protective or procedural steps, without more, may not suffice, reinforcing the principle that arbitration agreements should not be easily displaced.