Default judgment and arbitration

Truearns Co Ltd v. Wealthy Fountain Holdings Inc (19/07/2019, HCA1560/2018) [2019] HKCFI 1840

Relevant documents are as follows:

• shareholding and shareholder’s loan transfer agreement (股權和股東貸款轉讓協議) 
• letter of surety (履約保函)
• counter-guarantee (反擔保函)
• amended transfer agreement (股權和股東貸款轉讓協議之修訂協議) 
• supplemental agreement 

The D has not repaid part of the total purchase price. A default judgment is granted against D.

D argued that there is an arbitration clause in the letter of surety.

The analysis:

• [A1] Is the default judgment a regular judgment? (to success, D has to show a real prospect of success in his defence)
• [A2] Stay application – s.20 of Arbitration Ordinance
  • Onus: applicant
• [A2.1] Arbitration clause included in the contract?
• [A2.2] If not, is an arbitration clause contained in another document – forming an “arbitration agreement in writing”?
  • (1) reference made
  • (2) doc has the arbitration clause
  • (3) the reference is to make that clause part of the contract
• [A2.2(3)] Contractual interpretation
  • For:
    • All agreements concern the same matter
    • Two different contractual relationships are on the same commercial relationship
    • Given close connection of the documents, hence as rational businessmen, they concern interests of efficiency, expediency and costs
    • It is surprising that one doc specifies and the other does not
    • The analysis above is fortified by the 3rd doc (e.g. same amount of money)
    • Doc 1 is negotiated against the background of the envisaged Doc 2
    • One party was given the copy of Doc 1 and never objected to such clause
  • Against:
    • Clear words of incorporation are required
    • Mere reference to Doc 2 in the preamble is not sufficient reference to incorporate the arbitration clause