Should Asymmetric Jurisdiction Clauses Be Used For Enforcement Purposes In Mainland China And Hong Kong?
Legal News & Analysis - Asia Pacific - Hong Kong - Dispute Resolution
27 May 2020
On 1 April 2019, the plaintiff ICBC bank obtained default judgment for the sum of more than HK$379 million and interest against the defendant Wisdom Top under a facility agreement dated 24 June 2013 with subsequent amendments. ICBC made an ex parte application to the registrar of the Hong Kong High Court pursuant to s.21 of the Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 597) (the Ordinance) and Order 71B, r.2 of the Rules of the High Court for a certified copy of the judgment and a certificate issued by the High Court for the purposes of enforcement in the Mainland. The Ordinance gave effect to the 2006 Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and the HKSAR (the 2006 Arrangement).
Under s.21(1)(a) of the Ordinance, the relevant judgment must be one from ‘the Court of Final Appeal or the High Court which is a chosen court’. A ‘chosen court’ was defined in s.2 of the Ordinance to mean ‘the court or any of the courts specified in a choice of Mainland court agreement or choice of Hong Kong court agreement, as the case may be, as the court to determine a dispute to which the agreement applies’.
In order for the application to be granted, the underlying contract should contain a ‘choice of Hong Kong court agreement’ pursuant to s.3(1) of the Ordinance. A ‘choice of Hong Kong court agreement’ was defined in s.3(1) of the Ordinance as ‘an agreement concluded by the parties to a specified contract and specifying the courts in Hong Kong or any of them as the court to determine a dispute which has arisen or may arise in connection with the specified contract to the exclusion of courts of other jurisdictions’.
The jurisdiction clause of the facility agreement, i.e. clause 34.1, provided, inter alia, the following terms:
‘(a) subject to paragraph (c) below, the courts of Hong Kong have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement) (a Dispute).
(b) The Parties agree that the courts of Hong Kong are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the contrary.
(c) This Clause 34.1 is for the benefit of the Lender only. As a result, the Lender shall not be prevented from taking proceedings relating to a Dispute in any other courts with jurisdiction. To the extent allowed by law, the Lender may take concurrent proceedings in any number of jurisdictions.’
After an oral hearing, the registrar dismissed the application. In the registrar’s view, a ‘choice of Hong Kong court agreement’ meant an exclusive jurisdiction clause in favour of Hong Kong with respect to both parties to the agreement. Since ICBC had the option to commence proceedings overseas rather than in Hong Kong by virtue of cl.34.1(c), cl.34.1 was not a ‘choice of Hong Kong court agreement’. Accordingly, the jurisdiction clause did not satisfy s.3(1) of the Ordinance.
ICBC subsequently brought an appeal against the decision of the registrar by way of a rehearing of the application. The sole issue was whether or not the jurisdiction clause was an exclusive jurisdiction clause that falls within s.3(1) of the Ordinance.
Au-Yeung J heard ICBC’s submissions and ultimately dismissed the appeal.
In order to reach the conclusion of her judgment, the judge considered the nature of the jurisdiction clause, the legislative scheme under the Ordinance, the corresponding provision under the Hague Convention on Choice of Court Agreement (the Hague Convention), the English authorities and applied the purposive construction to the Ordinance.
The judge noted that the jurisdiction clause in the present case was known as an asymmetric jurisdiction clause (AJC). An AJC was common in financial documents and its nature has been summarised in the case of Commerzbank Aktiengesellschaft -v- Liquimar Tankers Management Inc  1 WLR 3491, at paras. 40-41. In essence, an AJC ensured that a creditor can always litigate in a debtor’s home court while preserving its right to bring proceedings where the debtor’s assets may be located at the time a dispute arises. This increased the prospect of a creditor successfully recovering a debt owed to it, which in turn contributed to the readiness of the creditor to provide finance and reduced the costs of borrowing, by minimising the risk that a debtor’s obligation would be unenforceable (Etihad Airways PJSC -v- Prof Dr Lucas Flother  EWHC 3107, at para. 162, per Jacobs J).
Under cl.34.1, if Wisdom Top would like to sue ICBC, it must sue in Hong Kong, on which exclusive jurisdiction was conferred. ICBC could not challenge jurisdiction since by reason of cl.34.1(a) it has submitted to the jurisdiction of Hong Kong. On the other hand, if ICBC would like to sue Wisdom Top, it may bring claims not just in Hong Kong but also overseas in a court of competent jurisdiction (see Comerzbank para.40; Mauritius Commercial Bank Ltd -v- Hestia Holdings Ltd  2 Lloyd’s Rep. 121, paras. 37 and 40, per Popplewell J). If ICBC did so, it would still be subject to cl.34.1(b) which conclusively determined that the Hong Kong court was the most appropriate and convenient forum. ICBC would have to justify why the claim should be brought overseas rather than in Hong Kong. There may be justification if, e.g. the assets of Wisdom Top were overseas.
In construing the Ordinance, and to identify its purpose and the factual context in which it was enacted, reference may be made to extrinsic materials such as the explanatory memorandum to the bill and statements by the responsible official in relation to the bill in the Legislative Council of Hong Kong SAR (Export-Import Bank of China -v- Taifeng Textile Group Co Ltd & Anor  HKCFI 1840 para. 54(6), per L Wong J). According to the Report of the Bills Committee, the purposes of the 2006 Arrangement were to create a summary mechanism for reciprocal enforcement of judgments of the Mainland and Hong Kong courts, without having to commence a new action for debt recovery at each other’s court. The purpose of requiring an exclusive choice of court agreement was to minimise the risk of parallel proceedings being instituted in the courts of both places, i.e. the Mainland and Hong Kong. In addition, the Hague Convention had been made as reference when the Ordinance was drafted and under Article 1(1) of the Hague Convention, it applied to contracts with ‘exclusive choice of court agreements’ concluded in civil or commercial matters among member states. As noted by ICBC, an AJC was not an exclusive choice of court agreement within the meaning of Art. 3(a) of the Hague Convention, under which the ‘exclusive choice of court agreement’ was defined.
Upon taking into account the three English cases, including Commerzbank, Etihad Airways, and Clearlake Shipping Pte Limited -v- Xiang Da Marine Pte Ltd  EWHC 1536 (Comm), paras.62-64, per Bryan J, which were relied upon by ICBC to support its argument that an AJC was an exclusive jurisdiction clauses even though the creditor has the option of suing in a different overseas jurisdiction, the judge said that she was not able to accept ICBC’s contentions for the following reasons:
(1) As noted by Cranston J in Comerzbank, the English cases were decided in the context of the Brussels I Regulation recast (BIR recast) and the English court’s comments on the Hague Convention were obiter.
(2) Unlike the Hague Convention, BIR recast has no definition of exclusive choice of court agreement; specifically, the phrase ‘to the exclusion of other courts’ was missing.
(3) Context was very important as the scheme under the BIR recast was very different to the Ordinance. In the context of the BIR recast, there was every reason to recognise an AJC as an exclusive jurisdiction clause to determine which court has priority in seising of a matter. The authorities gave rise to certainty and quick resolution of which court should be seised of a matter. Art.3 of the Hague Convention and s.3 of the Ordinance did not purport to deal with the issue over which court has priority to be seised of a matter, but enforcement of a judgment already obtained.
(4) Even applying the obligation test established in Ethihad Airways (paras. 183-184, per Jacobs J, one asked: whose obligation? The more rational approach was to see whether ICBC, being the plaintiff of an action, had to choose Hong Kong as the exclusive jurisdiction. Here, the answer was a definite no.
The judge noted that when construing a statute, the modern approach was to adopt a purposive approach, having regard to the statute’s context and purpose (Export-Import Bank of China, at para.54). The purpose of the requirement of a choice of court agreement was to minimise the risk of parallel proceedings and to facilitate enforcement by a summary procedure. Despite that, the failure to use the word ‘exclusive’ in a jurisdiction clause was not fatal under s.3(1) of the Ordinance, the judge considered that cl.34.1(c) was inconsistent with the purpose of s.3(1) of the Ordinance. Where ICBC was to be the plaintiff, the jurisdiction was at large, depending on the choice of ICBC. It simply went against the spirit of the 2006 Arrangement when there was no certainty as to jurisdiction in such circumstances.
This was the first application in Hong Kong which was concerned with the interpretation of the meaning of ‘choice of Hong Kong court agreement’ and whether an AJC would be regarded as an exclusive jurisdiction clause under the Ordinance. The significance of this case, as mentioned in the judgment, is that an AJC is commonly adopted in financial documents and the financial institutions as lender would normally be given a flexibility under the AJC to bring proceedings against the borrower. This serves a helpful reminder that an AJC will not be effective under the current statutory regime. Thus, a judgment obtained under the AJC, either from Hong Kong or Mainland Chinese courts, may not be enforceable under the 2006 Arrangement.
Accordingly, it is sensible for the parties to all the financial documents to review if the jurisdiction clause contained therein is an AJC or not. In particular, if the assets of the borrower are mainly in Mainland China, then it is advisable for the lender to revise the AJC to an exclusive jurisdiction clause so as to ensure that a judgment obtained in Hong Kong can be effectively enforced in Mainland China under the 2006 Arrangement. As an alternative, arbitration in Hong Kong may be a more preferred dispute resolution mechanism for a China-related agreement especially because of the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and the HKSAR (the Interim Measures Arrangement). Under the Interim Measures Arrangement, a party to a Hong Kong-seated arbitration is entitled to seek interim measures, including assets freezing order, from the Mainland Chinese courts in aid of the arbitral proceedings in Hong Kong. A Hong Kong arbitral award can also be easily enforced in Mainland China under the Arrangement Concerning Mutual Enforcement of Arbitral Awards between Mainland and Hong Kong.
It is also worth noting that on 18 January 2019, Hong Kong and Mainland China signed a new document titled ‘the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Courts of the Mainland and of the Hong Kong SAR’ (the 2019 Arrangement). Under the 2019 Arrangement, there is no requirement of the ‘choice of court agreement’ and the establishment of the jurisdiction under the new regime is much easier, i.e. to show a connection between the dispute and the requesting place, such as place of the defendant’s residence, place of the defendant’s business or place of performance of the contract or tort etc, save for express or deemed agreement. Further, an express agreement in writing to submit to the jurisdiction of the requesting court or by participating in the proceedings in the defence without raising a jurisdictional challenge will also satisfy the jurisdictional test, provided that the requesting court must otherwise have connection with the dispute if both parties have residence in the territory of the requested court. The 2019 Arrangement has not come into effect yet and therefore, the 2006 Arrangement and the present case remain good law in Hong Kong for the time being.
For further information, please contact:
Edward Liu , Legal Director, Hill Dickinson Hong Kong