Non-exclusive jurisdiction clauses in cross-border agreements
Hong Kong courts adopt robust approach to uphold parties' contractual bargain as to their choice of forum
In the recent case of Chinachem Financial Services Limited v Century Venture Holdings Limited(1) the Court of First Instance considered the effect of a non-exclusive jurisdiction clause in a cross-border agreement and refused an application to stay the Hong Kong proceedings, notwithstanding that parallel proceedings were underway in mainland China between the same parties. In reaching its decision, the court considered whether there were any exceptional circumstances to unseat Hong Kong as the jurisdiction chosen by the parties in the agreement.
The plaintiff was a Hong Kong company within the Chinachem group of companies. The defendant was a BVI company specialising in handling legal claims and debt disputes in mainland China.
In 2001 the plaintiff was sued in Beijing by a mainland Chinese company with respect to a commercial dispute. The plaintiff lost (but was able to obtain the return of a relatively small sum) and appealed to the Supreme People's Court in 2002. Following a substantial delay in the appeal, the plaintiff engaged the defendant in relation to the appeal in August 2009. The parties agreed to share equally any financial sum recovered in excess of the amount awarded at first instance. There was a time limit of six months for achieving the "Desired Second Instance Result" as defined in the agreement, failing which the plaintiff was entitled to terminate the agreement. The agreement contained a provision for the parties to submit to the non-exclusive jurisdiction of the Hong Kong courts (and Hong Kong law). Based on the defendant's recommendation, the plaintiff also instructed Dishi, a law firm in Beijing.
The plaintiff and the defendant entered into a supplemental agreement in late January 2010 to extend the time limit for 12 months. When, by early 2011, the appeal decision remained outstanding, the defendant prepared further draft agreements to extend the period for obtaining the "desired result". Those draft agreements were not signed by the plaintiff, but the defendant and Dishi continued to provide services based on alleged verbal confirmation by senior management of the plaintiff's group that they agreed to extend the period.
The appeal decision was finally handed down in October 2012 and the plaintiff obtained damages in excess of Rmb2 billion. Shortly thereafter, the defendant received a letter from the plaintiff's solicitors stating that the agreement had lapsed on February 25 2011 and, therefore, the defendant was not entitled to a 50% share of the damages. The defendant and Dishi commenced proceedings against the plaintiff in the Beijing Municipal Higher People's Court for its remuneration under the agreement and Dishi's legal fees.
About a month later, the plaintiff commenced a declaratory claim against the defendant (without joining Dishi as a party) in Hong Kong, seeking a declaration that the defendant was not entitled to any remuneration under the agreement. The plaintiff then also applied to the Beijing court for, among other things, a stay so that the dispute could be dealt with by the Hong Kong courts. That application was rejected by the Beijing court and the Supreme People's Court on appeal, both of which held that the mainland Chinese courts had jurisdiction over the claim which was not ousted by the non-exclusive jurisdiction clause. They also found that the mainland Chinese courts were a forum conveniens, given that there were various connecting factors making it more appropriate for the mainland courts to deal with the dispute.
Following the decisions of the mainland courts, the defendant applied to stay the Hong Kong action and argued that the mainland courts would be the more appropriate forum.
The Court of First Instance in Hong Kong considered the following key issues in the defendant's application:
- whether the doctrine of issue estoppel and/or res judicata was applicable, such that it was not open to the plaintiff in this case to challenge the decision by the Supreme People's Court that mainland China was the more convenient forum; and
- where the agreement contained a non-exclusive jurisdiction clause specifying Hong Kong as the chosen jurisdiction, whether the defendant had shown strong grounds to unseat the chosen jurisdiction.
In relation to the first issue, the court considered the Court of Final Appeal decision in First Laser Limited v Fujian Enterprises (Holdings) Company Limited,(2) which recognised the principle that a judgment of a foreign court of competent jurisdiction (eg, the Supreme People's Court) which was final and conclusive on the merits would be conclusive in Hong Kong proceedings if the parties were the same and the issues were identical.
In this case, however, the court found that the judgment of the Supreme People's Court on jurisdiction was not "a final and conclusive judgment on the merits on the questions as to whether the Hong Kong action… should be litigated in Hong Kong". In particular, the Supreme People's Court was concerned only with the issue of whether the mainland Chinese courts should exercise or decline jurisdiction – not what the Hong Kong courts should do. There was no ruling that the Hong Kong action should not proceed or that the Hong Kong courts were an inappropriate forum. On this basis, the decision of the Supreme People's Court did not give rise to any issue estoppel.
The starting point in relation to the second issue was the fact that the parties had contracted to submit to the non-exclusive jurisdiction of the Hong Kong courts. The court applied the approach in Noble Power Investments Limited v Nissei Stomach Tokyo Company Limited(3) – namely, that the party seeking a stay of the proceedings in the jurisdiction named in the agreement had a heavy burden to discharge. That party must show strong or exceptional grounds for unseating the named jurisdiction, since they were essentially seeking to avoid a forum to which they had agreed contractually to submit. An example of such grounds would be the existence of factors not contemplated by the parties at the time that the relevant agreement was made, or where there were already proceedings in a foreign country which involved overlapping issues, especially if they had been commenced by the same plaintiff. Furthermore, for such cases, it was not appropriate to embark on a Spiliada(4) balancing exercise and weigh up the connecting factors. It is only when the existence of connecting factors or the lack of them are so overwhelming that they go to a matter of justice or public policy that the non-exclusive jurisdiction clause will not be enforced.
The court went on to consider whether there were any strong or exceptional grounds for granting a stay. The following factors were considered:
- The court was not convinced that the plaintiff was abusing the court process by seeking negative declarations (ie, that it was not liable under the agreement) or making a deliberately engineered idle claim that was not foreseeable when the parties agreed to the non-exclusive jurisdiction clause. Accordingly, it was held that there was no unforeseen circumstance that would unseat Hong Kong as the named jurisdiction in the agreement.
- In respect of the undesirability of having parallel proceedings, which gave rise to potential injustice in the need to litigate the same issues in two different jurisdictions, the risk of inconsistent findings between the courts and the difficulty in enforcing the Hong Kong judgment in the mainland where the plaintiff's assets were located, the court found as follows:
- It was premature, at this stage, to say that the two sets of proceedings would necessarily raise the same issues, especially where the mainland action was still at an initial stage.
- The risk of inconsistent findings was not a strong factor and would have been in the defendant's contemplation when it commenced the action in the mainland. Besides, since the claims by the defendant and Dishi respectively against the plaintiff were to be tried by different courts in the mainland, such risk could not be eliminated even if the Hong Kong action was stayed.
- As regards enforcement, it was well within the parties' contemplation at the time of making the agreement that there would be such difficulty; hence, it was not an overwhelming reason for displacing the Hong Kong courts' jurisdiction.
- On the question of whether the nexus of contractual rights among the plaintiff, the defendant and Dishi required the dispute to be decided by the mainland courts, the court relied on the fact that Dishi was not a party to the Hong Kong action and the Supreme People's Court had decided to de-consolidate the proceedings by the defendant and Dishi into two separate actions. This indicated that the mainland courts also did not accept that the claims by those two parties were so closely connected that they had to be tried together.
- The court rejected the unavailability of the defendant's witnesses (who all resided in the mainland) and the mainland Chinese-related background as factors in favour of resolving the dispute in the mainland courts. The court pointed out that the defendant's witnesses were all Hong Kong permanent residents and the fact that they resided in the mainland would have been in the parties' contemplation when entering into the agreement. The Hong Kong courts were also well suited to deal with mainland Chinese-related disputes, especially in this case, where the governing law of the agreement was Hong Kong law.
Having considered these factors, the court concluded that the defendant had failed to discharge the burden of showing strong grounds to displace the jurisdiction of the Hong Kong courts in favour of the mainland courts and rejected the application to stay the Hong Kong action. This was notwithstanding that the court acknowledged that there might be inconvenience in allowing parallel proceedings to run in both Hong Kong and the mainland.
The decision illustrates that the Hong Kong courts will adopt a robust approach in order to uphold the parties' contractual bargain as to their choice of forum. It also highlights the difficulties in setting up an issue estoppel based on a foreign judgment, given that the Hong Kong courts may characterise issues in a different way to the overseas courts.
The decision also underlines that care must be taken when drafting commercial agreements, and the importance of parties understanding fully the effect and practical consequences of whatever jurisdiction clause they choose. A non-exclusive jurisdiction clause in favour of Hong Kong can leave the parties free to commence proceedings in the court of another country. However, it could give rise to a risk of concurrent proceedings in different jurisdictions. Such concurrent proceedings will inevitably increase costs and complexity. However, there may well be good reasons why a party may want to retain flexibility and non-exclusivity, particularly having regard to the location of assets and the ability to enforce foreign judgments in relevant jurisdictions.
As this judgment is likely to be the subject of an appeal, the case will be monitored for further developments.
For further information on this topic please contact Jonathan Cary.
(1) Unreported, HCA 410/2013,  HKEC 32.
(2) (2012) 15 HKCFAR 569.
(3)  5 HKLRD 631.
(4) Adopting the test as laid down in Spiliada Maritime Corp v Cansulex Ltd  AC 460.