Hong Kong Court Confirms That the Governing Law of the Underlying Contract Will Apply Where the Dispute Resolution Clause Is Silent on the Choice of Law

In the recent decision of China Railway (Hong Kong) Holdings Limited v Chung Kin Holdings Company Limited [2023] HKCFI 132, the Hong Kong Court of First Instance (the CFI) followed the landmark English Supreme Court decision of Enka v Chubb (please see our article in June 2020) in holding that, if a dispute resolution clause does not specify a choice of law, the express choice of law clause of the underlying contract generally will apply to the dispute resolution clause as well.

Background

The dispute involved a series of agreements relating to a loan and the subsequent extension of repayment and security of the loan. The Plaintiff commenced an action in Hong Kong to recover the loan, and the Defendant applied to stay the proceedings in favor of the Court of Wuhan in the PRC, based on a jurisdiction clause to that effect.

The key issue was whether the dispute was subject to an exclusive jurisdiction clause. If so, then the CFI would stay the proceedings in favor of the Court of Wuhan. On the other hand, if the jurisdiction clause was non-exclusive, the burden would be on the Defendant (as the party seeking a stay of the Hong Kong proceedings) to show that Wuhan was clearly and distinctly the more appropriate forum.  

Three agreements were relevant to the overarching transaction, each with a different jurisdiction clause. Accordingly, the first question was which jurisdiction clause the CFI should apply. After that, the CFI had to determine the governing law of the relevant jurisdiction clause and whether it was exclusive or non-exclusive.  

Decision

The dispute involved several agreements, two of which the CFI considered relevant:

• An initial loan agreement (the “Initial Agreement”) with a jurisdiction/governing law clause providing that all disputes should be “resolved by local laws.” The CFI construed this clause to mean that the Initial Agreement was to be governed by Hong Kong law, as both the Plaintiff and Defendant were Hong Kong companies.
• A subsequent agreement under which the guarantor promised to provide security with respect to property in Wuhan (the “Repayment Agreement”). The jurisdiction clause provided the Plaintiff could elect for disputes to be resolved by an “arbitration committee” or could bring an action in the People’s Court where the guarantor was located (i.e., Wuhan). The Repayment Agreement was silent, however, on the governing law of the jurisdiction clause.

The CFI determined that the Initial Agreement, together with the subsequent agreement, formed one whole agreement, and the later jurisdiction clause in the Repayment Agreement should supersede the jurisdiction/governing law clause in the Initial Agreement. As such, the CFI held that the jurisdiction clause in the Repayment Agreement should apply. Because the Repayment Agreement did not specify the governing law (either generally or in the jurisdiction clause), however, the CFI had to decide what law governed the jurisdiction clause.

The CFI applied the English case Enka v Chubb and held that its task was to construe the governing law of the jurisdiction clause by context and the parties’ intentions. If the CFI could not determine the parties’ intentions, the governing law would be defined by the system of law having the closest and most real connection to the contract. In making this determination, the CFI held that an express choice of law clause governing the underlying contract generally also would apply to the jurisdiction clause.

The CFI found that the express governing law clause in the Initial Agreement (i.e., Hong Kong law) also applied to the Repayment Agreement. The CFI recognized that different governing laws can be chosen for different parts of the same contract. That said, consistent with Enka v Chubb, the CFI held that a court generally should assume that all terms of a contract are governed by the same law in order to avoid inconsistency and uncertainty. Having construed the Initial Agreement and the subsequent agreements as a single agreement with an express choice of law, the Court held that it should find that the parties had changed their minds about the law to govern their contracts only if there was clear indication to that effect. The CFI found no such indication.

Applying Hong Kong law, the CFI agreed with the Plaintiff that the jurisdiction clause was non-exclusive. The jurisdiction clause was designed to protect the Plaintiff’s interests as a creditor by granting it a right (rather than an obligation) to litigate in the PRC forum where the security was located, and no such right was conferred upon the Defendant. As such, the Defendant had the burden to show that Wuhan is clearly and distinctly the more appropriate forum. The CFI held that the Defendant failed to satisfy this burden.

Key Takeaways

Although this case involved a “jurisdiction clause” and not an arbitration agreement specifically, a Hong Kong court is likely to apply the same principles in determining the law of an arbitration agreement if the arbitration agreement is silent on the governing law.

From a drafting perspective, the decision in China Railway and the Singapore Court of Appeal decision in Anupam v Westbridge (please see our client alert in January 2023) underscore the importance of having a clearly drafted governing law provision in an arbitration agreement and/or a clear jurisdiction clause to ensure certainty. Where there is an express choice of governing law, the parties’ choice will likely be upheld.