Hong Kong Court Stays Proceedings For Arbitration, Honouring Arbitration Agreement In Insurance Policy.
Legal News & Analysis - Asia Pacific - Hong Kong - Dispute Resolution
25 February 2021
The Hong Kong Court of First Instance stays third party proceedings commenced by an insured against an insurer, on the basis that the parties are bound by the arbitration clause contained in the insurance policy. Despite the outcome being that the main action and the third party proceedings will ultimately be pursued in different forums, by upholding the parties’ contractual agreement to arbitrate, the Court reinforces its pro-arbitration credentials and the principle of party autonomy.
On 22 November 2017, the plaintiff, a casual worker employed by the first defendant (D1), the sub-contractor, suffered bodily injury at work. As principal contractor, the second defendant (D2), was responsible for compensating the sub-contractor’s employees for work injuries. At the time of the accident, D2 was covered by an insurance policy (Policy) with Asia Insurance Co, Ltd (Insurer), in compliance with its obligation to obtain insurance cover under the Employees’ Compensation Ordinance. D2 accordingly made an insurance claim against Insurer on 27 November 2017, for compensation in respect of the plaintiff’s work injuries. On 30 April 2019, the Insurer repudiated its liability under the Policy, on the ground of D2’s alleged failure to submit relevant documents.
On 2 January 2020, the plaintiff commenced the present action against D1 and D2 for damages suffered as a result of the injury. D2 commenced the third party proceedings to enforce policy liability against the Insurer. Relying on the arbitration clause contained in the Policy, the Insurer applied to stay the proceedings for arbitration pursuant to section 20 of the Arbitration Ordinance.
Section 20 of the Arbitration Ordinance provides for a mandatory stay of legal proceedings in favour of arbitration where the action is the subject of (i) an arbitration agreement (ii) which is not null and void, inoperative or incapable of being performed, and there is (iii) a dispute/difference between the parties (iv) that is within the ambit of the arbitration agreement.
The Policy contained an arbitration clause which provides “[all] differences arising out of this Policy shall be determined by arbitration…”
Since the validity of the arbitration clause was not in dispute, the essence of the stay summons was whether there was any “difference” between D2 and the Insurer that would justify the mandatory stay in favour of resolving that “difference” through arbitration. In answering this question, the Court examined both the arbitration clause in question (particularly the word “differences”) and the wider public policy considerations.
The central question before the Court was whether there was any difference falling within the ambit of the arbitration clause. In this regard, the threshold test is uncontroversial – the court will be satisfied where there is a prima facie or plainly arguable case that there is such a difference.
In construing the arbitration clause, Marlene Ng J observed three guiding principles:
there is a prima facie assumption that contracting parties intend all disputes relating to a particular transaction to be resolved by the same tribunal;
arbitration clauses should be construed as broadly and liberally as possible and any doubts on the scope of arbitration should be resolved in favour of arbitration; and
each arbitration clause should be considered in its own context, and earlier decisions on the meaning of particular words or phrases may be persuasive depending on the similarity in contract and circumstances between such earlier decisions and the instant case.
With the above principles in mind, the Court’s analysis turned on the meaning of word “differences” in the Policy arbitration clause. Following Mimmie Chan J’s decision in VK Holdings (HK) Limited v Panasonic Eco Solutions (Hong Kong) Company Limited HCCT19/2014 (unreported), the Court confirmed that the word “differences” confers the widest possible jurisdiction. Significantly, the Court held that it is wide enough to cover a claim of repudiation. In reaching this conclusion, Ng J highlighted the distinction between repudiating a contract and a contractual liability. As per Lord Wright in Heyman & anor v Darwins Limited  AC 356, in repudiating policy liability, the insurers “do not repudiate the policy or dispute its validity as a contract; on the contrary they rely on it and say that according to its terms, express and implied, they are relieved from liability”. As such, the substantive difference in this case, being whether or not the Insurer has wrongfully repudiated the Policy, is a difference arising out of the Policy and falls squarely within the arbitration clause.
Further, the Court reiterated that it is concerned only with the existence of any difference and will not evaluate the merits of that difference. Ng J drew support from the remarks by Ma J (as he then was) in Dah Chong Hong (Engineering) Limited v Boldwin Construction Company Limited HCA1291/2002 (unreported) that “even an unanswerable claim will not mean that a dispute or difference does not exist unless there is a clear and unequivocal admission of liability and quantum”.
The Court went on to address whether the arbitration clause could extend to the present claim, which D2 argued to be a statutory claim rooted in the Employees’ Compensation Ordinance. D2 contended that the claim should be excluded from arbitration for public policy reasons.
At the outset, the Court pointed out that D2’s claim cannot be said to be a statutory claim. First, the plaintiff in the main action sought common law damages rather than damages under the Employees’ Compensation Ordinance. Second, in the third party proceedings, D2 similarly did not rely on the Ordinance but sought indemnity and contribution based on the Policy.
Nevertheless, the Court conducted a thorough review on principles concerning the arbitrability of statutory claims or claims based on statutory rights. The Court confirmed that:
in determining whether a dispute is arbitrable, the parties’ arbitration agreement is an important starting point, which the law should respect unless there are compelling reasons not to do so; and
save when the statutory provision reserves exclusive jurisdiction to the courts, in considering whether the arbitration should be precluded by public policy considerations, a high threshold is required given the countervailing policy considerations of party autonomy and compliance with international treaty obligations (such as the duty to recognise and enforce an arbitration agreement under the New York Convention).
Consistent with English law authorities, the Court clarified in dicta that, the facts that (i) relevant legislation is motivated by public policy considerations, (ii) there may be procedural complexity in referring the matter to arbitration, (iii) third parties may possibly be impacted, or that (iv) there may be limitation on the power of the arbitrator to give full remedies may not be sufficient to preclude arbitration.
In light of the foregoing, the Court decided that the present difference on policy repudiation was essentially a private matter which did not trigger wider public policy interests.
While the Court’s decision does not establish new law, it is a useful reminder of the mandatory nature of a stay of legal proceedings under section 20 of the Arbitration Ordinance. This is exemplified by the low threshold test adopted by the Court where a prima facie case would be made out so long as there is an assertion of a dispute or difference, even in circumstances where no valid defence may exist.
On the other hand, the case also illustrates that despite the one-stop-shop presumption, there is a real possibility that matters relating to the same underlying transaction may be tried at different forums. In this respect, the Court cautioned that the presumption would not be sufficient to defeat a mandatory stay in light of an unequivocal arbitration agreement. As such, if parties intend to exclude a certain subject matter of dispute from arbitration, such intention must be expressly incorporated into the arbitration clause. As demonstrated in the present case, the court will endeavour to hold parties to their contractual bargain as reflected in the arbitration clause.
For further information, please contact:
May Tai, Managing Partner, Greater China, Herbert Smith Freehills