When there is a dispute as to the validity of an arbitration clause, which authority should the party go to? The court or the arbitral tribunal? The Hong Kong Court of First Instance (the "CFI") has recently handed down a judgement, Bond Tak (Holdings) Ltd v King Fame Trading Ltd  HKCFI 1509, which gives useful insights on this issue.
In the Bond Tak case, the defendant applied to the CFI to dismiss or permanently stay the High Court action and the plaintiff's claim on the grounds that the dispute is subject to an arbitration agreement and should therefore be submitted to arbitration.
The plaintiff and the defendant are both companies incorporated in Hong Kong. The plaintiff was the 99.99% shareholder and beneficial owner of a company known as Bond Tak Properties Ltd ("Bond Tak") which had acquired rights to develop a project in Guangzhou (the "Project").
On 8 March 2010, the plaintiff and the defendant entered into a written agreement (the “Transfer Agreement“), whereby the plaintiff agreed to transfer to the defendant all its shareholding in Bond Tak, including the development rights, interests and liabilities in the Project for a consideration of RMB 112,864,000 payable in 5 instalments. The Transfer Agreement contains, inter alia, that "any dispute between the parties relating to this agreement shall be settled through friendly negotiation by both parties on the basis of making their best endeavor and sincere cooperation. If the friendly negotiation fails, the dispute may be submitted by either party to China Guangzhou Arbitration Commission for arbitration." (the "Arbitration Clause").
Subsequent to the defendant's payment of the first instalment under the Transfer Agreement, on 24 October 2012, parties entered into a written supplemental agreement (the "Supplemental Agreement") whereby the Transfer Agreement was amended and varied such that, inter alia, the consideration would be increased to RMB 121,494,000; and the balance of the consideration shall be payable by 3 further instalments: (a) RMB 30 million (the "Revised Second Instalment"); (b) RMB 30 million (the "Revised Third Instalment"); and RMB 31,494,000 (the "Revised Fourth Instalment").
Although the defendant duly paid the Revised Second Instalment, since the payment of the Revised Third Instalment was RMB 23 million short, on 10 March 2016, the parties entered into a further written agreement (the "Settlement Agreement") which contains, inter alia, that "Concerning the follow-up matters arising from the payment of the third instalment regarding the transfer of the interest of [the Project], Party A and Party B have reached the following Settlement Agreement" (the "Recital"), "any further disputes arising from [the Project] after Parties A & B have entered into this agreement shall be settled through friendly negotiation first. If the negotiation fails, the dispute may be submitted to the Court in Hong Kong for legal action" (the "Jurisdiction Clause") and "if there is any conflict between this agreement and the original contract or agreement, this agreement prevails" (the "Inconsistency Clause").
In the end, although the defendant duly completed payment of the Revised Third Instalment, it failed to pay the Revised Fourth Instalment. For this reason, the plaintiff started a claim in the CFI against the defendant for breach of the Supplemental Agreement.
In determining whether the action should be stayed in favour of arbitration, the issue is whether the Arbitration Clause in the Transfer Agreement is superseded by the Jurisdiction Clause in the Settlement Agreement.
The defendant placed strong emphasis on the Recital to argue that the Settlement Agreement is concerned only with disputes arising from the Revised Third Instalment which has been fully paid. Therefore, the Settlement Agreement, including the Jurisdiction Clause has no application to the plaintiff's claims in this action. Also, there is at least a prima facie case that the dispute in this action falls within the Arbitration Clause, which remains binding on the parties. Therefore, the court has no discretion but to refer the matter to arbitration pursuant to section 20(1) of the Arbitration Ordinance (Cap 609) (the "AO"). which states that "a court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed." It will then be for the plaintiff to raise the issue of jurisdiction in the arbitration and for the arbitral tribunal to rule on its own jurisdiction under section 34 of the AO.
The plaintiff contended that the Arbitration Clause was superseded by the Jurisdiction Clause and was therefore no longer valid or binding. The dispute was therefore within the jurisdiction of the CFI.
After considering cases such as Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd  3 HKLRD 440 and Private Company 'Triple V' Inc v Star (Universal) Co Ltd and Anor  2 HKLR 62 which should both be read together with PCCW Global Limited v Interactive Communications Service Limited  1 HKLRD 309, in deciding whether the CFI or the arbitral tribunal have jurisdiction over the dispute, the CFI held that the proper approach is to determine whether it is clear on the evidence and the construction of the agreements that the Arbitration Clause has been superseded by the Jurisdiction Clause.
If so, given that a decision by an arbitrator on his jurisdiction would still be open to challenge before the Court, it would be inappropriate for the Court to leave the matter to the arbitral tribunal, which would only result in unjustifiable delay and expense.
In contrast, if the matter is less than clear, fact sensitive or substantial extrinsic evidence have to be adduced in aid of construction, then the matter must be referred to the arbitral tribunal for determination, at least in the first instance in order to save time and costs to determine the question of jurisdiction. Whilst the court will consider any challenges as to jurisdiction on a de novo basis, it is well established that the court will be "cautious not to stray into the merits of findings of fact and law made by the tribunal, on issues unrelated to or not necessary for the question of jurisdiction".
At last, the CFI held that the defendant failed to establish a prima facie case that the Arbitration Clause remains valid and binding on the parties. The Jurisdiction Clause has clearly superseded the Arbitration Clause for, inter alia, the following reasons: (1) The Jurisdiction Clause provided that after the signing of the Settlement Agreement, any disputes arising from the Project shall first be resolved by negotiation, failing which, the parties may commence an action in the Hong Kong courts. The reference to any disputes arising from the Project is unequivocally referring to the Project as a whole and not disputes concerning the Revised Third Instalment or the Settlement Agreement; (2) The Recital cannot override the plain and unequivocal meaning of the Jurisdiction Clause; and (3) The Inconsistency Clause shows that in the event of inconsistency between the Settlement Agreement and the prior agreements, including the Transfer Agreement, the Settlement Agreement, including the Jurisdiction Clause therein, shall prevail.
When there is any dispute as to the validity of an arbitration agreement, parties shall decide whether they should go to the court or the arbitral tribunal by considering whether it is clear on the evidence and the construction of the agreements on the question of jurisdiction. If so, going to the court for resolving the question would likely save time and costs in determining the question of jurisdiction. If not, the question on jurisdiction shall be dealt with by the arbitral tribunal.
Furthermore, to prevent disputes on jurisdiction from the outset, before entering into any supplemental agreements, parties are reminded to carefully check the provisions of the original agreement and seek legal advice whenever necessary so as to ensure that any conflict with the supplemental agreement is sufficiently addressed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.