Hong Kong Court Confirms Principles for Interim Injunction to Stay Arbitration

The Hong Kong Courts are usually reluctant to interfere in arbitrations. However, what if a settlement agreement (without an arbitration agreement) purports to finally settle all claims that could be made in an arbitration? The Courts confirmed the principles by which they would grant an interim injunction to stay an arbitration in such a situation, but ultimately refused to do so due to a lack of urgency on the particular facts of Atkins China Ltd v China State Construction Engineering (Hong Kong) Ltd [2020] HKCFI 2092.

Background

The Plaintiff (P), a design consultancy firm, entered into a design agreement (Design Agreement) with the Defendant (D), a main contractor, regarding the design of certain permanent structures for sections of a bridge, including reclamation works and the construction of a seawall (Project).

The Design Agreement contained a clause requiring the parties to refer disputes arising out of or concerning the Design Agreement to arbitration.

Thereafter, following the collapse of part of the seawall and disputes regarding variation works under the Design Agreement, the parties entered into a settlement agreement (Settlement Agreement) whereby D paid P approximately HK$10 million in "full and final settlement of all Variation Works claims, counterclaims, and contra-charges between [D] and [P] howsoever arising under the Design Agreement". The Settlement Agreement did not contain an arbitration clause.

Payment had been made to P under the Settlement Agreement. Seven months later, D (by its insurers (Insurers)) commenced an arbitration (Arbitration) against P, claiming approximately HK$240 million for P's alleged defective design under the Design Agreement which allegedly caused certain sections of the seawall to collapse.

P issued an originating summons (OS) seeking (i) declaratory relief that the Settlement Agreement covered all claims and counterclaims arising under the Design Agreement, and (ii) a final injunction restraining D from taking further steps in the Arbitration (Substantive Hearing).

On the same day the OS was issued, P also issued a summons for an interim injunction to restrain D from proceeding with the Arbitration pending the resolution of the OS at the Substantive Hearing (Summons). As the Summons was served less than two clear days before the hearing, it was treated as an ex parte application on notice even though D appeared by Counsel at the hearing for the Summons.

D asked for the Summons to be dismissed, on the basis that there was no urgency for granting interim injunction relief.

Relevant Legal Principles

The Court will exercise its discretion sparingly to grant an injunction to restrain arbitration proceedings, and upon consideration of both the standard requirements for the grant of injunctions found in the case of American Cyanamid v Ethicon Ltd ¹ and the following factors ²:

• The injunction does not cause injustice to the plaintiff in arbitration;
• The continuance of the arbitration would be oppressive, vexatious, unconscionable or an abuse of process; and
• Delay in making an application for injunction may be fatal to the application.

Decision

The Court found that:

• P had established that there was a serious issue to be tried ³: Whether the Settlement Agreement settled all disputes (including the negligence claim) between the parties regarding the Project so that nothing could be referred to arbitration.
• The Settlement Agreement and the Design Agreement were separate and distinct contracts. As the Settlement Agreement did not contain an arbitration clause, the Court, not an arbitrator, ought to resolve any dispute as to its validity or effect.
• If P establishes that the Settlement Agreement is valid and covers the subject matter of the arbitration, then D's actions may be considered vexatious and oppressive: P should not be asked to "incur endless time and costs" defending an arbitration which should never have been commenced and is abusive.
• P had not delayed in applying for an interim injunction.

However, the Court held that there was no urgency justifying the grant of an interim injunction on an ex parte with notice basis, such as to deprive D of (i) an inter parte hearing of the Summons, and (ii) filing evidence in opposition. Further, there would be little prejudice against P if the interim injunction were not granted which could not be compensated by costs or money. Accordingly, the Court refused to order the interim injunction, and adjourned the hearing of the Summons and granted leave to D to file and serve its evidence in opposition.

Comment

Despite ultimately not granting the injunction sought, the Court indicated that continuing arbitration proceedings where the claims in question are covered by a settlement agreement (without an arbitration clause) might be considered sufficient grounds to grant an injunction.

While this issue will be properly examined in due course, which may be the subject of a future update, this possibility should be noted by all parties drafting settlement agreements. An arbitration clause should be included in all settlement agreements if the parties wish to ensure that disputes about the settlement agreement (and any potential disputes remaining from the underlying agreement) are dealt with in arbitration and enjoy its benefits, e.g. confidentiality, industry expertise, expeditious resolution, or flexible procedure.

The case is also a timely reminder that interim injunctions will usually only be granted on an ex parte basis where there is urgency. 

¹ [1975] AC 396