In Cheung Shing Hong Ltd v China Ping An Insurance (Hong Kong) Co Ltd [2020] HKCFI 2269, the High Court (Court) addressed the question of whether a dispute between the parties to an arbitration agreement fell within the ambit of the arbitration agreement, and provided guidance on the role of previous court decisions on the interpretation of arbitration agreements.

Background

This case involved an application by an insurance company (Insurer) to stay a Court action commenced by a company insured by the Insurer (Insured) in favour of arbitration.

The Insured took out a fire insurance policy with the Insurer (Policy) for certain industrial premises it occupied in Shenzhen (Premises). The Insured commenced action in the Court, claiming approximately RMB 2 million from the Insurer for damage it claimed its Premises sustained from fire, such damage occurring during the period of insurance under the Policy. The Insurer denied liability under the Policy.

However, the dispute resolution clause of the Policy (DR Clause) provided that "if any difference shall arise as to the amount to be paid under this Policy such difference shall be determined by arbitration in accordance with the prevailing Arbitration Ordinance. If the parties fail to agree upon the choice of an arbitrators or umpires, then the choice shall be referred to the Chairman for the time being of the Hong Kong International Arbitration Center." (emphasis added).

Arguing that the DR Clause was broad enough to cover disputes or differences on both issues of liability and quantum, the Insurer applied to the Court to stay the proceedings in favour of arbitration in accordance with section 20 of the Arbitration Ordinance (Cap. 609) (Ordinance). The Insured resisted this application, arguing that the DR Clause covered only disputes on the issue of quantum and did not cover disputes where liability is denied wholesale, which was what the Insured did under the Policy.

The parties agreed that the only issue in dispute was whether the dispute or difference between them (Dispute) fell within the ambit of the DR Clause, and that if this was the case, the Court must grant the stay in favour of arbitration1.

Legal Principles

Section 20 of the Ordinance provides that, where an action is the subject of an arbitration agreement, the court must refer the parties to arbitration, unless it is established that the arbitration agreement is null and void, inoperative or incapable of being performed2.

To determine whether to grant a stay to arbitration, the court will consider the following questions3:

  • Is the agreement in question an arbitration agreement? There must be an element of compulsion in the agreement between the parties: any disputes or differences must be referred to arbitration. If the parties are given an option to go to arbitration if they choose, but with litigation in court being an option as well, clause will not be considered an arbitration agreement.
  • Is the arbitration agreement null and void, inoperative or incapable of being performed?
  • Does a dispute or difference exist between the parties which can be referred to arbitration?
  • Does the dispute or difference truly exist, and is it one that falls within the ambit of the arbitration agreement such that it should be referred to arbitration? This involves analysing the nature of the dispute or difference between the parties and then construing the arbitration agreement to see whether the alleged dispute or difference falls within it.

If the answers to all of the four questions are in the affirmative, the stay to arbitration is mandatory under section 20 of the Ordinance and the court has no discretion to not stay the action to arbitration.

Following the agreement of the parties, the Court focussed on the fourth question above: whether the dispute between the parties was one that fell within the ambit of the arbitration agreement.

Decision

The Court emphasised that determining whether the Dispute fell within the DR Clause (the arbitration agreement) was a question of contractual interpretation, to be decided by interpreting the clause itself, taking into account the precise wording of the clause and the agreement that contained it, and the surrounding circumstances and background.

The Court stated that where an arbitration clause/agreement, and the type of agreement containing it, are identical to those analysed in earlier cases, the Court will usually follow the construction and analysis of the earlier decisions, both because it is compelling, and for consistency reasons. However, in this case, none of the decisions cited by the parties' counsel dealt with identical arbitration clauses/agreements in identical types of agreement. Therefore, while the Court considered the general statements regarding interpretation of arbitration clauses/agreements contained in these previous decisions, it did not follow the construction and analysis.

Drawing upon statements from Sulamerica Cia Nacional De Seguros SA & Others v Enesa Engelharia SA & Others [2013] 1 WLR 102, the Court stated that:

  • It will generally apply "good commercial sense" to the interpretation of arbitration agreements;
  • It is considered "unusual" and "surprising" for parties to insurance contracts to intend issues of liability to be dealt with in a different forum (e.g., court) than issues of quantum (e.g., arbitration), as it is unusual for parties to establish separate and distinct procedures for resolving what are likely to be different aspects of the same dispute; and
  • If the parties intend for issues of liability and quantum to be dealt with in different forums under an insurance contract, the Court will expect this to be clearly spelt out in the arbitration clause/agreement.

On this basis, the Court interpreted the words "any difference shall arise as to the amount to be paid under this Policy" in the DR Clause as merely a way of incorporating both issues of liability and quantum into the scope of the DR Clause. Accordingly, the DR Clause was held to cover both the liability and quantum aspects of the Dispute.

For these reasons, the Court allowed a stay in favour of arbitration.

Comment

While contractual interpretation generally depends upon the specific facts of each case and the formulation of the contractual provision in question, the Court indicated that where a previous case can be identified with an identically worded arbitration clause in an identical type of contract, the Court will usually follow the construction and analysis of that decision.

Despite these statements, the authors respectfully submit that the Court may distinguish previous cases based on the factual matrix/surrounding circumstances considered in context, even if the arbitration clause and the type of agreement containing it, are identical to those addressed in a previous case. Parties seeking to present arguments based on the interpretation of arbitration clauses by previous case law should ensure that they take such contextual considerations into account.

This case also emphasised that, should parties wish specific disputes, or specific aspects of disputes (such as liability or quantum), to be adjudicated in different forums (e.g., Court or arbitration), \clear language is essential. This is particularly so given the presumption in favour of one-stop adjudication4, which, while this case does not refer to it, is likely to be relevant should this issue arise in future cases.

Footnotes

1 The Parties agreed that the correct test to determine whether a stay of court proceedings in favour of arbitration was set out in Tommy CP Sze & Li & Fung (Trading) Ltd & Others [2003] 1 HKC 418

2 See Lin Ming v Chen Shu Quan [2012] 2 HKLR 547, Astel-Peiniger Joint Venture v Argos Engineering [1995] 1 HKLR 300, William Co & Chu Kong Agency Company Limited [1995] 2 HKLR 139, Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd [2003] 3 HKLRD 440, and Tommy CP Sze & Li & Fung (Trading) Ltd & Others [2003] 1 HKC 418

3 Tommy CP Sze & Li & Fung (Trading) Ltd & Others [2003] 1 HKC 418

4 See Fiona Trust & Holdings Corpn v Privalov [2007] Bus LR 1719

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