Default judgment set aside in favour of arbitration in Hong Kong

The Facts 

In Tongcheng Travel Holdings Limited v OOO Securities (HK) Group Limited [2024] HKCFI 2710, the Plaintiff obtained a default judgment against the Defendant for failing to return managed assets under an Investment Management Agreement (“IMA”), and subsequently a garnishee order nisi was made by way of enforcement of the default judgment.  

The IMA contained the following clauses (with emphasis added): 

“11.2 The courts of Hong Kong shall have exclusive jurisdiction over the parties to this Agreement.”

“11.3 ... If, within 7 days of one party notifying the other of any dispute(s), the parties fail to resolve any such dispute(s), the dispute(s) shall be submitted to the relevant legally authorised body in Hong Kong for arbitration in accordance with the arbitration rules presently in force at the time of submission to arbitration.”

The Defendant applied to (1) set aside the regular default judgment and the garnishee order nisi and to (2) stay the proceedings to arbitration under section 20 of the Arbitration Ordinance (Cap. 609) (“Ordinance”) on the following grounds:

• There is a valid arbitration agreement such that the proceedings should never have been commenced in court.
• In the alternative, the default judgment should be set aside as there is a defence which has a real prospect of success.

The Decision

The Court allowed both of the Defendant’s applications, with an order that the Defendant shall pay the costs.

The Proper Approach: Stay Application before Determination of Merits of Defence

The Court followed the approach in Dah Chong Hong (Engineering) Ltd v Boldwin Construction Co Ltd HCA 1291/2002:

• The stay application is dealt with first.  
• If the stay application will or is likely to succeed, the default judgment will also be set aside and the court will not consider the merits of the defence at all.  The Court can, however, in the exercise of its discretion, give regard to the fact that it is clear that the Defendant does have a defence which has a real prospect of success. 
• If not, a defence which has a real prospect of success has to be shown for the Court to set aside the default judgment. 
• Before deciding whether the regular judgment should be set aside (even having decided in favour of a stay), the Court must also weigh in the balance other factors such as the reasons for letting the default judgment occur, any delay in making the application to set aside and the reasons for the delay.

Stay Application: Valid and Operative Arbitration Agreement?

The Court disagreed that the arbitration clause (clause 11.3 of the IMA) was invalid or inoperative because it referred to an allegedly non-existent institution (“relevant legally authorised body in Hong Kong”).  In any event, what is required is simply a clear intention expressed by the parties to have the dispute submitted to arbitration. 

The Court further held that clause 11.2 of the IMA, which conferred “exclusive jurisdiction over the parties” on Hong Kong courts, did not contradict the arbitration clause.  The clauses are reconcilable on the basis that clause 11.3 is an expression of the parties’ intention to refer disputes to arbitration in Hong Kong, whereas clause 11.2 provides that Hong Kong courts are to have supervisory jurisdiction over the arbitration.  It is noteworthy that, while ultimately it is a matter of construction of the contract, similar clauses have been construed by Hong Kong courts in the same manner on previous occasions.    

Time of the Stay Application & No Abandonment of Arbitration Agreement

Pursuant to section 20 of the Ordinance, a stay application shall be made not later than when submitting the first statement on the substance of the dispute.  A question arose as to whether the writ and indorsement of claim filed by the Defendant in a different Hong Kong court action against the Plaintiff (“Defendant’s Writ”), which appeared to be the reverse of those claims made by the Plaintiff in the present action, constituted such statement on the substance of the dispute. 

The Court held that:

• The Defendant’s Writ cannot be treated as the Defendant’s statement on “the substance of the dispute”.  There was no answer to and no statement on the substance of the claims made by the Plaintiff in the present action.  A mere proclamation or assertion of a claim, or a bare denial of a claim, does not count.   
• Section 20 of the Ordinance requires that the statement on the substance of the dispute should be in the same action commenced before the court and which is to be referred to arbitration. 

On a related note, the Plaintiff also argued that the Defendant had unequivocally abandoned its right to arbitrate and that the arbitration agreement had thereby become inoperative.  This was rejected by the Court:

• For an arbitration agreement to be inoperative because it has been abandoned, there must have been an agreement between the parties (express or implied) that arbitration would no longer comprise the final means of dispute resolution. 
• There must be sufficiently clear evidence of an unequivocal abandonment of the right to arbitrate, and the clear and unequivocal exercise of the intention to litigate instead. 
• On the facts of the case, the Defendant had not effected service on the Plaintiff of the Defendant’s Writ, the period of validity for service of which had expired.  The Plaintiff could not have reasonably believed, in the absence of any written variation of the IMA, that the Defendant had abandoned its right to arbitrate when the IMA provided that it was not to be amended unless approved in writing signed by both parties. 

Commentary

This decision supports Hong Kong’s position as a pro-arbitration jurisdiction.  Hong Kong courts will strive to reconcile apparently conflicting dispute resolution clauses, and are generally reluctant to strike down an agreement to arbitrate.

The full judgment is available at https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=163257&QS=%2B%7C%28HCA%2C1258%2F2022%29&TP=JU.

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