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Cheques "Bounce" Beyond the Scope of Arbitration Clauses

The Hong Kong courts have a strong record of requiring parties to observe arbitration agreements and have often shown a willingness to stay court proceedings in favour of arbitration. However, in a series of recently released judgments, the High Court of Hong Kong has confirmed that disputes involving dishonoured cheques do not fall within the ambit of an arbitration clause unless specifically provided for. The cases reiterate the importance of considering the words used in an arbitration clause (in order to determine whether those words govern a particular claim), irrespective of Hong Kong generally being viewed as an arbitration "friendly" jurisdiction.

In these two cases the plaintiff contractor entered into a building contract ("the Main Contract") with the first defendant employers. The Main Contract incorporated an arbitration clause in the following terms:

The first defendants defaulted on several payments claimed by the plaintiff under the Main Contract. Following protracted negotiations a revised payment schedule was agreed and this was documented in a Supplemental Agreement ("the Supplemental Agreement"). The Supplemental Agreement provided that "all terms and conditions of the Main Contract shall remain in full force and effect". Under the Supplemental Agreement the first defendants agreed to pay the plaintiff multi-million (HK$) sums in instalments. On signing the Supplemental Agreement the first defendants provided the plaintiff with post-dated cheques for the required amounts. When presented to the bank the cheques were dishonoured.

In both cases, the plaintiff sued various parties to the Supplemental Agreement, including the first defendants on the dishonoured cheques. The various defendants applied to have the proceedings stayed in favour of arbitration.

Issue

As between the plaintiff and the first defendants, one of the issues that fell to be determined by the court was whether the arbitration clause covered the claims on the dishonoured cheques; if so, it followed that a stay of the proceedings should be granted to allow the claims on the dishonoured cheques to be resolved by arbitration.

The Judgments

The court found guidance from the case of CA Pacific Forex Ltd v Lei Kuan Ieong [1999] 2 HKC 571 and held that claims arising out of dishonoured cheques are not generally caught by an arbitration clause, without express words to that effect. In the CA Pacific Forex case the Hong Kong Court of Appeal had reasoned that the commercial principles which underpin the use of cheques in business would be compromised if rights to sue on a dishonoured cheque were hindered by arbitration proceedings. A cheque is a promise to pay an amount of money which, in essence, amounts to a deferred payment of cash. Therefore, if the payee's right to obtain swift and effective redress through the courts was stayed, pending the payer's wish to arbitrate, the value and use of cheques might well be diminished.

Applying this reasoning to these two cases, the court held that the plaintiff's claims on the cheques were not covered by the arbitration clause. It was not sufficient that the Supplemental Agreement recited the fact that the cheques had been provided by the first defendants to the plaintiff. There had to be clear provision in the arbitration clause to rebut a presumption against having to arbitrate on claims arising out of dishonoured cheques.

Comment

The two cases highlight some important limitations with arbitration clauses. An arbitration clause will not be deemed to catch claims based on a dishonoured cheque unless the clause expresses this intention in terms. Under Hong Kong law, it will clearly take something quite special for a payee to be taken to have given up their right to litigate in favour of arbitration with respect to claims based on a dishonoured cheque. Given that there are so few defences to a dishonoured cheque there appears to be no commercial reason why a party to an arbitration agreement would agree to forego their right to sue on a dishonoured cheque in favour of arbitration (and particularly given that Hong Kong is also generally considered to be a pro-creditor jurisdiction). Suing on a dishonoured cheque could be by a summary judgment procedure (i.e. without trial) or, alternatively, a statutory demand might be served; all things being equal, either alternative is likely to be faster than an arbitration process.