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Determining the Existence of an Arbitration Clause

In Hong Kong (like other jurisdictions) it is not uncommon for two or more parties to an agreement to disagree as to whether or not a dispute between them should be referred to arbitration. Indeed, a particularly contentious issue may be whether the dispute is the subject matter of an arbitration agreement. Even more fundamental disagreement may arise as to whether an arbitration agreement exists. Such was the nature of the dispute between the parties in Pacific Crown Engineering Ltd v. Hyundai Engineering & Construction Co. Ltd, being a recent judgment of the Honourable Mr. Justice Burrell (in the Court of First Instance of the High Court of Hong Kong). The judgment provides some welcome clarification on two issues. First, whether the Court or an arbitrator should determine whether an arbitration agreement existed. Second, what was the proper test in determining this first issue?

In this case the Defendant sought to stay court proceedings commenced by the Plaintiff, on the basis that there was an arbitration agreement between the two parties that governed their dispute. The Plaintiff argued that the agreement was evidenced by no more than an exchange of letters and a contemporaneous meeting, out of which no arbitration agreement arose. The Defendant argued that such letters and meeting were negotiations preceding a written standard form contract, which contained an agreement to arbitrate disputes: despite not being signed, the Defendant further argued that the Plaintiff had accepted such written agreement by its subsequent conduct.

Appropriate Test

The Plaintiff argued that before the court proceedings could be stayed, in favour of an arbitration, it was for the Court to finally determine whether the Defendant had proved to the Court's satisfaction that an arbitration agreement existed. The judge did not agree. The judge first noted that s.6 of the Arbitration Ordinance (Cap. 341), which invoked Article 8 of the UNCITRAL Model Law, gave the Court no discretion when considering whether to stay proceedings before it. Rather, these provisions provided that unless the Court found an arbitration agreement to be null and void, inoperative or incapable of performance, it must refer the dispute to arbitration. With that in mind, the judge also noted that whilst the burden of proving that there was an arbitration agreement fell on the party seeking to rely on it (in this case, the Defendant applying for a stay of the Plaintiffs court proceedings), such a burden could be discharged if it was shown that there was a good prima facie (or plainly arguable) case that an arbitration agreement existed. If that burden was discharged then it was for an arbitrator to make a final determination as to whether an arbitration agreement existed. This succinctly determined the two issues posed in the case.

Application of Test to the Facts

The judge noted that both parties in the case were able to produce evidence that supported their respective arguments as to whether an arbitration agreement existed or not. In applying the test as to whether the applicant for a stay (the Defendant) had shown a good prima facie case that an arbitration agreement existed, the judge first looked at the evidence in support of such a contention. In order to further clarify the position, the judge also held that it was enough if, taken as a whole, the evidence to support the existence of an arbitration agreement was "cogent and arguable" (as opposed to being "dubious or fanciful"). In the case in hand, the facts that pointed to the possible existence of an arbitration agreement included (amongst other things):

• the Plaintiff had adopted the contract number which first appeared in the Defendant's covering letter, alleged to have enclosed the standard form contract;
• the Plaintiff had made applications for (interim) payments consistent with the rates set out in the standard form contract;
• there existed correspondence from the Plaintiff that referred to "our contractual obligations" when replying to the Defendant's letters quoting the contract number.

The judge noted that whilst the Plaintiffs arguments (opposing the existence of an arbitration agreement) were not devoid of merit, the Defendant had produced enough cogent and arguable evidence to establish a plainly arguable case that an arbitration agreement existed. Accordingly, a stay of the Plaintiffs court proceedings was ordered, in order to allow an arbitrator to make a final determination as to the existence of an arbitration agreement.

Comment

The judgment in the Pacific Crown Engineering Ltd case is to be welcomed as providing some useful and succinct clarification as to the respective roles of Courts and arbitrators in Hong Kong, in determining a not uncommon issue; namely, whether an arbitration agreement exists between parties in dispute. The decision of the Honourable Mr. Justice Burrell, in clarifying that a party seeking to stay court proceedings in favour of arbitration need only demonstrate a good prima facie (or plainly arguable) case that an arbitration agreement exists, does not appear to impose too onerous a test. The judgment is also consistent with an increasing pro-enforcement tendency shown by the Hong Kong Courts, insofar as arbitral issues are concerned.