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Should an action based on dishonoured cheque be stayed because of an arbitration clause in the loan agreement?

2022-02-28

Should an action based on dishonoured cheque be stayed  because of an arbitration clause in the loan agreement?


Introduction

In T v W [2022] HKCU 233, the Court of Appeal (the “CA”) considered whether an action brought on a dishonoured cheque should be stayed because of an arbitration clause in the underlying loan agreement between the parties, under which the cheque had been provided as a post-dated cheque for repayment of the principal.


The facts

By a written agreement dated 21 March 2017, the plaintiff agreed to lend HK$5 million to the defendant for one year ending on 21 March 2018, with interest payable each month at the rate of 2.5% per month. The money was advanced and the defendant drew a cheque post-dated 21 March 2018 in the amount of $5 million for repayment of the principal.

The loan was not repaid and, on 20 April 2018, the parties entered into a written agreement to extend the repayment date to 21 March 2019. The date of the post-dated cheque was also amended to 21 March 2019.

The loan was again not repaid in March 2019. On 16 May 2019, the parties entered into another agreement to extend the repayment date, this time for half a year, to 21 September 2019 (the “Loan Agreement”). The defendant issued a new cheque in favour of the plaintiff for $5 million post-dated 21 September 2019 (the “Cheque”) for repayment of the principal.

The loan was still not repaid in September 2019. On 10 March 2020, the plaintiff presented the Cheque for payment but it was dishonoured. After giving notice of dishonour, the plaintiff issued a writ on 19 March 2020 simply suing on the Cheque. In response, the defendant applied to the Court of First Instance for an order staying all further proceedings in the action and referring the parties to arbitration, on the basis of the provision in the Loan Agreement that:

未盡事宜,友好協商,此借據以香港法律為準,如有任何糾紛,會在香港以仲裁處理」(the “Arbitration Clause”).

Under section 20(1) of the Arbitration Ordinance (Cap 609), which gives effect in Hong Kong to Article 8 of the UNCITRAL Model Law, the Court must refer the parties to arbitration if “an action is brought in a matter which is the subject of an arbitration agreement” and must make an order staying the action. Further, the general approach of the Court is that unless it is clear that the dispute in question does not fall within the arbitration agreement, the matter should be stayed in favour of arbitration, for the arbitral tribunal to decide its own jurisdiction.


The CFI’s decision

In the Court of First Instance (the “CFI”), the CFI judge noted that the Cheque was a separate contract from the Loan Agreement and that bills of exchange are generally regarded as the equivalent of cash. Further, the Court of Appeal in CA Pacific Forex Ltd v Lei Kuan Ieong [1999] 1 HKLRD 462 (“CA Pacific”) held that 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.

Construing the Loan Agreement as a whole, the CFI judge found that the parties had intended the Cheque to act as security for the repayment of the loan on the due date and that the word “disputes” in the Arbitration Clause was to be construed to mean disputes relating to the Loan Agreement and the parties’ claims and liabilities thereunder only. There was no sufficiently plain indication that the parties intended the Arbitration Clause to extend to claims under the Cheque. The CFI judge dismissed the defendant’s application, and the defendant appealed against the CFI judge’s decision to the CA.


The CA’s decision

The CA observed that under the doctrine of precedent, it was bound by CA Pacific unless it was satisfied that CA Pacific was plainly wrong. This requirement is not met even where the CA finds that the arguments against a previous decision of this court are more substantial and cogent than the contrary arguments in its favour, but only where the CA is convinced that the contentions against its previous decision are so compelling that it can be demonstrated to be plainly wrong. Having taken subsequent developments of the law into account, the CA was not satisfied that CA Pacific could be said to be plainly wrong.

The mainstay of the defendant’s argument was the subsequent decision in Fiona Trust and Holding Corp v Privalov [2007] UKHL 40 (“Fiona Trust”). There, Lord Hoffmann, with whom the other Law Lords agreed, considered that where businessmen have entered into an agreement with an arbitration clause, their purpose is to have the disputes arising from their relationship decided by a tribunal which they have chosen. A proper approach to the construction of an arbitration clause requires the court to give effect, so far as the language permits, to its commercial purpose.

The CA noted, however, that Fiona Trust was not a case concerned with bills of exchange. A bill of exchange is a separate and distinct contract from the underlying transaction. An unliquidated cross-claim under the underlying agreement is no defence to an action on the bill. A bill is treated as the equivalent of cash and moreover is so regarded generally. While it may be said that rational businessmen are likely to intend to have a single forum for the resolution of any dispute arising out of the transaction they have entered into, it may also be said – and has been said in CA Pacific – that rational businessmen will not readily forgo their rights on a dishonoured cheque, which include the right to sue in court for judgment. As a corollary a party who has given a bill of exchange may generally be taken to appreciate that its dishonour may be actionable in proceedings separate and independent from the underlying dispute.

The CA continued that whether or not an action on a bill falls within the scope of an arbitration clause in the underlying written agreement is a question of construction. The clause has to be construed in the context of the agreement as a whole against the factual matrix which includes all relevant circumstances.

On the facts, the CA held that applying the CA Pacific case, there was no basis to construe the Arbitration Clause as covering an action on the Cheque alone. It was unnecessary to deal with the question of the scope and extent of the Arbitration Clause under the Fiona Trust approach, which did not arise.

Accordingly, the CA dismissed the defendant’s appeal.


Takeaway

In this case, the CA held that the action brought on the Cheque should not be stayed simply because of the Arbitration Clause in the Loan Agreement. However, this may not necessarily reflect the parties’ intention when they entered into the Loan Agreement. It is therefore advisable to seek legal advice on the drafting of the relevant agreements as well as their dispute resolution clauses to ensure that the parties’ intention is accurately reflected in proper legal terms. 

 


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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022

 

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