Hong Kong court sets aside default judgment as a result of arbitration agreement despite delay

In Tongcheng Travel Holdings Limited v. OOO Securities (HK) Group Limited,¹ the Court of First Instance set aside a prior default judgment entered against the Defendant in light of the parties' arbitration agreement. This case demonstrates the Hong Kong courts' ongoing commitment to upholding party autonomy in arbitration.

Background

The dispute arose from an investment management agreement (IMA) pursuant to which the Defendant agreed to provide asset management services to the Plaintiff. The Plaintiff claimed that the IMA was terminated and that, therefore, it was entitled to withdraw the managed assets. Despite the Plaintiff's demand, the Defendant did not return the balance of the managed assets to the Plaintiff.

The writ was issued and served at the registered office of the Defendant in September 2022. No acknowledgement of service or notice of intention to defend the action was filed. The Plaintiff obtained a default judgment against the Defendant in January 2024 and a garnishee order nisi in February 2024.

The Defendant applied under section 20 of the Arbitration Ordinance (Cap. 609) (AO) to stay the proceedings to arbitration and to set aside the default judgment and garnishee order nisi on the basis that the IMA contained a valid arbitration agreement.

Decision

The court set aside the default judgment and garnishee order nisi and ordered that the proceedings be stayed for arbitration. Its reasoning and analysis are summarised below.

Legal principles

Adopting the approach set out in Dah Chong Hong (Engineering) Ltd v Boldwin Construction Co Ltd² and 楊佩玲 v Super Best Investment Limited ,³in the case of a regular judgment, the court will first deal with the application to stay. If the stay application is successful, the judgment will be set aside and the merits of the defence will not be considered. However, if the court takes the view that the stay application will fail, the court will proceed to consider whether the defence has a real prospect of success and, if this is established, the judgment will be set aside.

When dealing with an application to stay made under section 20 of the AO, four questions shall be asked. ⁴They are: (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?

Whether there is a valid arbitration agreement

The Plaintiff argued that the arbitration clause in the IMA is inoperable, as it provides that the dispute(s) "shall be submitted to the relevant legally authorised body in Hong Kong for arbitration". ⁵ In rejecting this argument, the court found the parties had clearly expressed an intention to arbitrate and considered HKIAC to be a "relevant" and "legally authorised" body for arbitration in Hong Kong. Therefore, the arbitration clause is valid and operable in Hong Kong.

The Plaintiff further argued that the arbitration clause is in conflict with another clause of the IMA which states that "[t]he courts of Hong Kong shall have exclusive jurisdiction over the parties to this Agreement". Having reviewed previous legal authorities, the court held that there is no irreconcilable conflict between the arbitration clause and the exclusive jurisdiction clause. These two clauses can be reconciled to mean that Hong Kong courts are to have supervisory jurisdiction over the arbitration in Hong Kong. This is the construction placed by the courts on similar provisions in other cases.

Whether the Defendant has abandoned its right to arbitrate

One unusual feature of this case is that, immediately after the Plaintiff's initiation of the proceedings in September 2022, the Defendant issued separate proceedings in the Hong Kong court against the Plaintiff alleging that the Plaintiff wrongfully terminated the IMA. This, according to the Plaintiff, amounted to the Defendant's statement on the substance of the dispute in relation to the IMA and further constituted the Defendant's abandonment of any right to arbitrate. The court rejected this argument and held that the Defendant's submission of its statement on the substance of the dispute would have to have been made in the same action commenced before the court, which it sought to have referred to arbitration. While the Defendant's claim in the other proceedings appeared to be the reverse of the claims made by the Plaintiff in the present proceedings, the court took into account the following factors and concluded that the Defendant had not unequivocally abandoned its right to arbitrate:

• The Defendant's initiation of the other proceedings by way of a writ and indorsement of claim is a mere proclamation or assertion of its claim, not a statement on the "substance" of the dispute.
• The Defendant had not effected service of the writ on the Plaintiff. Further, the period of validity for service had expired without any renewal.
• The Defendant had never filed any statement of its defence in these proceedings, nor taken any step to defend these proceedings.
• The parties had not agreed on any variation and amendment of the arbitration clause.

Defendant's delay in applying to stay

There had been a delay of more than one and a half years between the Plaintiff's commencement of proceedings and the Defendant's application to stay. The Plaintiff argued that this should be taken into account by the court in deciding whether to set aside the default judgment. While the court agreed this was a long period of delay, the court also took into account the change in control of the Defendant's shareholding and management in late 2022 and the merits of the Defendant's defence. Having considered the provisions in the IMA and the factual circumstances briefly, the court held that the Defendant does have a defence with a real prospect of success.

Taking into account all the factual circumstances, the court exercised its discretion and set aside the default judgment and garnishee order nisi.

Comments

This case is to be welcomed by arbitration practitioners as it demonstrates yet again the pro-arbitration stance adopted by the Hong Kong courts for many years. The courts will generally strive to uphold the parties' decision to arbitrate and interpret the arbitration clause as leniently as possible so that it is operable and capable of being performed.

This case also provides some useful guidance on when it can be said that the Defendant has abandoned its right to arbitrate. In essence, something unequivocal must be shown. Issuing another set of proceedings by filing a writ and indorsement of claim in relation to disputes arising from the same underlying contract does not automatically constitute an abandonment. However, the court may reach a different conclusion if the writ and indorsement of claim plead in detail the substance of the dispute between the parties.

One interesting feature of the case is that the court went further and briefly reviewed the merits of the case, although this was not strictly necessary given that the court had already allowed the application to stay and found that merits should be reserved for the tribunal. In its decision, the court remarked that the termination of the IMA alleged by the Plaintiff did not appear to comply with the terms of the IMA. Given this indication from the court, one might expect the Plaintiff to face some difficulty in pursuing its claim in the arbitration.

Last, but not least, an application to stay should be taken out promptly. The court will look into the reasons for any delay. If a Defendant is served with a writ, despite the existence of a valid arbitration agreement between the parties, it should of course seek legal advice immediately, avoid taking any steps in the court proceedings and, if advised, apply to stay pursuant to section 20 of the AO as soon as practicable.

1. [2024] HKCFI 2710.
2. HCA 1291/2002, 11 October 2002.
3. [2024] HKCA 520.
4. See Tommy CP Sze & Co v. Li & Fung (Trading) Ltd [2003] 1 HKC 418.
5. Clause 11.3 of the IMA is the arbitration clause which states the following: "11.3 Any and all dispute(s) arising out of or in connection with this agreement shall be resolved by friendly negotiations between the parties insofar as possible. Both parties agree to negotiate in good faith to resolve any dispute(s). 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 place of arbitration shall be Hong Kong and the language for arbitration shall be Chinese or English. The arbitral award is final and binding on both parties. During the period of dispute resolution, the parties shall continue to perform this agreement save for the disputed matters."

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