Introduction

In Zpmc-Red Box Energy Services Limited v Philip Jeffrey Adkins and Others [2021] HKCFI 3501, the Hong Kong Court of First Instance (“CFI”) was faced with the challenge of construing inconsistent dispute resolution clauses in related commercial agreements.

The facts

The Plaintiff (“ZPMC”) was a joint venture company. Mr Philip Jeffrey Adkins (“1^st Defendant”) was a director and Chief Executive Officer of ZPMC. Fathomless Advisory Services Limited (“2^nd Defendant”) provided consulting services to ZPMC and RBF HK Limited (“3^rd Defendant”) was the shareholders of ZPMC.

There were three agreements related to the proceedings:

1.       A shareholders agreement (“Shareholders Agreement”) amongst ZPMC and the 3^rd defendant, which contained an arbitration clause referring disputes to HKIAC arbitration;

2.       A service agreement (“Service Agreement”) between ZPMC and the 2^nd defendant, which also contained an arbitration clause referring disputes to HKIAC arbitration; and

3.       The Chief Executive Officer employment agreement (“CEO Employment Contract”) between the 1^st Defendant and ZPMC, with an exclusive jurisdiction clause in favour of the Hong Kong courts.

Disputes arose between the parties over ZPMC’s internal management and control. ZPMC claimed against the 1^st Defendant for breach of fiduciary duties, contractual duties and/or breach of trust for making unauthorized payments. ZPMC also claimed against the 2^nd and 3^rd Defendants as constructive trustees for knowing receipt of payments from ZPMC allegedly caused by the 1^st Defendant without authority.

Relying on the arbitration clauses in the Shareholders Agreement and the Service Agreement, the 2^nd and 3^rd Defendants applied for stay of proceedings under section 20 of the Arbitration Ordinance, Cap. 609.

Issues

The CFI considered four questions when determining an application for stay of an action to arbitration:

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?

In this case, the differences between the parties was in relation to the 4^th question.

The Approach: Construction of an arbitration agreement

The court reiterated the approach to the construction of an arbitration agreement as set out in Houtai Investment Holdings Ltd v Leung Yat Tung & Others [2021] HKCFI 1504. The starting point in cases involving inconsistent dispute resolution clauses is the “one stop” presumption in Fiona Trust & Holding Corp v Privalov [2007] UKHL 40 (“Fiona Trust presumption”). That is to say, the parties are likely to have intended dispute arising out of the relationship into which they have entered to be decided in the same way.

The Fiona Trust Presumption may be rebutted and would not be applicable particularly in cases where there exists conflicting dispute resolution clauses as to forum. In Trust Risk Group SpA v Am Trust Europe [2017] 1 CLC 456, the Fiona Trust Presumption was of limited application to the questions which arose where parties were bound by several contracts that contained inconsistent jurisdiction agreements. Instead, what was required was “a careful and commercially minded construction of the agreements providing for the resolution of disputes”, including an enquiry as to which agreement a dispute arises under by seeking to locate the dispute’s “centre of gravity”.

In other words, the proper approach for the CFI is to identify the nature of the claim or the agreement that has the closest connection with such dispute and claim (i.e. the agreement ‘at the centre of gravity of the dispute’), in order to ascertain the parties’ intention on how to deal with the dispute.

The CFI decision

Applying the above guidelines, the CFI found that the dispute in question was ZPMC’s claims against the 1^st Defendant for breaches of fiduciary duties, contractual duties and trust. As such, the agreement at the centre of gravity was the CEO Employment Contract, and not the Shareholders Agreement or the Service Agreement. The CFI also construed the nature of the 2^nd and 3^rd Defendant’s liability as being secondary to the 1^st Defendant’s primary liability, and was therefore commercially sensible to determine their liabilities in the same proceedings.

Accordingly, the CFI refused the application to stay court proceedings in favour of arbitration, on the basis that the centre of gravity of the dispute did not fall within the arbitration clauses in the Shareholders Agreement and the Service Agreement.

Takeaway

In complex commercial arrangements, problems may arise when there are inconsistent dispute resolution provisions in related commercial contracts. To prevent parties in a commercial arrangement end up having to litigate where the disputes should be resolved, it is advisable to draft consistent dispute resolution provisions for related commercial contracts and seek legal advice if necessary.