Should an action based on an unpaid check be stayed because of an arbitration clause in the loan agreement?
In T versus W  HKCU 233, the Court of Appeal (the “California”) considered whether an action against an unpaid check should be stayed due to an arbitration clause in the underlying loan agreement between the parties, under which the check had been provided as a post-dated check for the repayment of the main.
By written agreement dated March 21, 2017, the Claimant agreed to loan HK$5 million to the Respondent for one year ending March 21, 2018, with interest payable monthly at the rate of 2.5% per month . The money was advanced and the defendant drew a post-dated check dated March 21, 2018 in the amount of $5 million for repayment of the principal.
The loan was not repaid and on April 20, 2018 the parties entered into a written agreement to extend the repayment date to March 21, 2019. The date of the post-dated check was also changed to March 21, 2019.
The loan was not repaid again in March 2019. On May 16, 2019, the parties reached another agreement to extend the repayment date, this time for six months, until September 21, 2019 (the “Loan agreement”). Defendant issued a new check in favor of Plaintiff for $5 million post-dated September 21, 2019 (the “Check”) for principal repayment.
The loan was still not repaid in September 2019. On March 10, 2020, the applicant presented the check in payment but it was refused. After giving notice of denial, the plaintiff issued a writ on March 19, 2020 merely pursuing the check. In response, the defendant asked the Court of First Instance to suspend all further proceedings in the action and to refer the parties to arbitration, based on the provision of the loan agreement that:
Under Section 20(1) of the Arbitration Ordinance (Cap 609), which gives effect in Hong Kong to Section 8 of the UNCITRAL Model Law, the Court must refer the parties to the arbitration if “an action is brought in a matter which falls within the subject matter of an arbitration agreement” and must make an order staying the action. Further, the general approach of the Court is that to Unless it is clear that the dispute in question does not fall within the scope of the arbitration agreement, the matter should be stayed in favor of arbitration, for the arbitral tribunal to decide on its own jurisdiction.
The CFI’s decision
Before the Court of First Instance (the “CFI“), the TPI judge noted that the Check was a separate contract from the Loan Agreement and that bills of exchange are generally considered to be the equivalent of cash. In addition, the Court of Appeal of CA Pacific Forex Ltd vs. Lei Kuan Ieong  1 HKLRD 462 (“CA Pacific”) held that there must be a clear manifestation in the arbitration clause that it must apply to bills of exchange if the presumption against the submission of bills of exchange to arbitration is to be rebutted.
Interpreting the loan agreement as a whole, the CFI judge concluded that the parties had intended the check to serve as security for the repayment of the loan when due and that the word “disputes” in the arbitration clause should be construed to mean disputes relating to the Loan Agreement and the claims and liabilities of the parties thereunder only. There was no sufficiently clear indication that the parties intended the arbitration clause to extend to claims under the check. The TPI judge dismissed the defendant’s request, and the defendant appealed the decision of the TPI judge to the BOD.
The board’s decision
The CA observed that under the doctrine of precedent it was bound by CA Pacific unless he is convinced that CA Pacific was obviously wrong. This requirement is not satisfied even when the CA considers that the arguments against a previous decision of this court are more substantial and convincing than the counter arguments in its favour, but only when the CA is satisfied that the arguments against its previous decision are so convincing that it can be shown to be manifestly wrong. Having considered subsequent developments in the law, the CA was not convinced that CA Pacific one could say that it is simply false.
The basis of the defendant’s argument was the subsequent decision in Fiona Trust and Holding Corp v Privalov  UKHL 40 (“Fiona’s Confidence”). There, Lord Hoffmann, with whom the other Law Lords agreed, considered that when businessmen have entered into an agreement with an arbitration clause, their purpose is to have disputes arising out of their relationship settled by a court that they have chosen. A proper approach to the interpretation of an arbitration clause requires the court to give effect, so far as the language permits, to its commercial purpose.
However, the AC noted that Fiona’s Confidence was not a matter of bills of exchange. A bill of exchange is a separate and distinct contract from the underlying transaction. An unliquidated counterclaim under the underlying agreement is not a defense to an action on the bill. An invoice is treated as the equivalent of cash and is generally considered as such. If it can be said that rational businessmen are likely to intend to have a single forum for the settlement of any dispute arising from the transaction they have entered into, it can also be said – and this was said in CA Pacific – that rational businessmen will not readily waive their rights to an unpaid check, including the right to sue for judgment. As a corollary, a party who has given a bill of exchange can generally be taken to acknowledge that its refusal may be actionable in separate proceedings independent of the underlying dispute.
The CA added that whether or not an action on a bill falls within the scope of an arbitration clause in the underlying written agreement is a matter of interpretation. The clause must be interpreted in the context of the agreement as a whole in relation to the factual matrix which includes all the relevant circumstances.
On the facts, the AC considered that the application of the CA Pacific case, there was no reason to interpret the arbitration clause as covering an action on the check alone. It was not necessary to address the issue of the scope and extent of the arbitration clause under the Fiona’s Confidence approach, which did not take place.
Accordingly, the CA dismissed the Respondent’s appeal.
In this case, the CA held that the action against the check should not be stayed simply because of the arbitration clause in the loan agreement. However, this does not necessarily reflect the intention of the parties when they entered into the loan agreement. It is therefore advisable to seek legal advice on the drafting of the relevant agreements as well as their dispute resolution clauses to ensure that the intention of the parties is correctly translated into appropriate legal terms.