The Court of First Instance (“CFI“) has recently decided in the case of Quaestus Capital Pte Ltd v Everton Associates Limited and another [2021] HKCFI 1367 on an interlocutory challenge to Hong Kong courts’ jurisdiction by a securities brokerage firm involved in a “non-recourse” loan scheme. The brokerage firm relied on an exclusive jurisdiction clause in favour of London courts in the relevant brokerage agreement to seek to set aside an order for serving the writ out of jurisdiction pursuant to Order 11 of the Rules of the High Court.

The CFI ruled that notwithstanding the existence of the exclusive jurisdictional clause, which was wide enough to cover the borrower’s claims,  there was strong cause to allow the proceedings to continue against the brokerage firm in Hong Kong.

Background

The borrower of the “non-recourse” loan was a private equity firm incorporated in Singapore who wished to obtain funds to finance its business operations. By ‘non-recourse’, it meant that the lender shall only look to the collateral security for repayment of the loan, and may not make any further claim against the borrower in case of a default.

Through an intermediary, the borrower was introduced to the lender, and entered into an “equity collateralised non-recourse non-title transfer term loan” by using the shares (“Shares“) in China Metal Resources Utilization Limited (a company listed on the Stock Exchange of Hong Kong) held by the borrower as collateral.

On 21 April 2020, the borrower and the lender entered into a loan agreement and a pledge agreement. The borrower was required by the agreements to transfer the Shares as collaterals into a brokerage account, which was specified in the loan agreement as Look’s Securities Limited (“Look’s“), a brokerage firm in Hong Kong nominated by the lender. The borrower, lender and Look’s entered into a collateral management agreement which governed the custodian arrangement of the collaterals. All agreements entered into were governed by Hong Kong law and provided for the non-exclusive jurisdiction for the Hong Kong courts. The agreements also made clear that there would be no change in beneficial ownership of the collateral except upon occurrence of an event of default.

On 1 June 2020, pursuant to the loan agreement, the borrower deposited 94 million Shares with Look’s. A few days later, the lender stated that there would be delay in the funding due to bank compliance issues, and requested the borrower to open an account with another brokerage, Axis Capital Markets Limited (“Axis“), where the lender had the funds immediately available. The borrower agreed and opened an account with Axis. In doing so, the borrower entered into a brokerage account control agreement (“Axis Agreement“) with the lender and Axis. The Axis Agreement contained an English choice of law clause and an exclusive jurisdiction clause in favour of courts in London.

However, even though no money was ultimately advanced by the lender to the borrower pursuant to the loan agreement, it transpired that the Shares were disposed of, without the borrower’s knowledge, through a hypothecation agreement entered into between the lender and a third party.

The borrower’s case was that the lender, Axis and the third parties involved in the disposing of the Shares were all part of a fraudulent scheme.

The exclusive jurisdiction clause

The Axis Agreement provided that:-

“Consent to Jurisdiction; Venue; Jury Trial Waiver. Each of the parties hereto hereby consents to the exclusive jurisdiction of the courts sitting in London, England, as well as to the jurisdiction of all courts from which an appeal may be taken from the aforesaid courts, for the purpose of any suit, action or other proceedings by any party to this [Axis Agreement], arising out of or related in any way to this [Axis Agreement], or any related document. Each of the parties hereto hereby irrevocably and unconditionally waives any defense of any inconvenient forum to the maintenance of any action or proceedings in any such court, any objection to venue with respect to any such action or proceeding and any right of jurisdiction on account of the place of residence or domicile of any party hereto.”

The borrower’s argument that Hong Kong courts ought to have jurisdiction to adjudicate the disputes involving Axis was threefold:-

• The borrower’s claims did not fall within the scope of the exclusive jurisdiction clause as its claims were formulated on the basis that the Axis Agreement did not represent a genuine transaction but was an instrument used in the fraud, and did not arise out of and did not relate to the Axis Agreement. Instead, its claims arose out of and were related to the fraudulent scheme in which Axis was involved.
• The exclusive jurisdiction clause in the Axis Agreement was part of the fraudulent scheme and therefore null and void.
• Even if the exclusive jurisdiction clause was valid, there was strong cause for the borrower to be allowed to continue its action against Axis in Hong Kong.

CFI’s ruling

The CFI held that the wording of the exclusive jurisdiction clause was drafted widely, and there was a presumption that the parties likely intended that any dispute arising out of the relationship they have entered into, whether arising in contract or in tort or as some other causes of action, to be decided by the courts in London. The borrower’s claim against Axis, whether for fraud or knowing receipt, arose out of Axis’ custody of the Shares which came about as a direct result of the Axis Agreement and their subsequent disposition. As such, the borrower’s claims were subject to the exclusive jurisdiction clause.

The CFI rejected the contention that since “fraud unravels everything”, the exclusive jurisdiction clause contained in the Axis Agreement would therefore be null and void. The CFI applied the doctrine of separability with respect to jurisdiction clauses, which would be viewed as a distinct agreement and can thus only be avoided on grounds which relate directly to the jurisdiction clause. In the absence of any suggestion that the borrower was not aware of the jurisdiction clause or was specifically misled into agreeing to give the English courts exclusive jurisdiction, the exclusive jurisdiction clause was not excluded from application to a dispute involving claims  that the agreement as a whole is vitiated (e.g. by fraud).

Having decided that the exclusive jurisdiction clause was applicable, the CFI was nonetheless satisfied that there was strong cause for not giving effect to the clause and exercised its discretion to refuse an order to set aside the service of the writ out of jurisdiction.

In allowing proceedings to be continued against Axis in Hong Kong, the CFI’s main consideration appeared to be to avoid multiplicity of proceedings. Given the fact that jurisdiction clauses in the loan agreement and pledge agreement between the borrower and the lender provided for the Hong Kong courts to have jurisdiction, and the jurisdiction clause in the Axis Agreement provided for the London courts to have jurisdiction, there would necessarily be two sets of proceedings, one in London and another in Hong Kong, if the borrower could not proceed with its claim against Axis in Hong Kong. The learned judge found it necessary to avoid a ‘disastrous’ situation where there are separate actions in different jurisdictions culminating in two separate trials and two judgments by two different tribunals, each based on incomplete materials, with a real risk of inconsistent findings.

Nevertheless, the learned judge left it open for Axis to claim damages for any loss it suffers as a result of the borrower’s breach of the exclusive jurisdiction clause (e.g. any additional expense incurred in having to litigate in Hong Kong as compared to London).

Takeaway

If contracting parties have agreed that a foreign court should have exclusive jurisdiction over disputes arising out of the contract, the court will ordinarily enforce the agreement by staying proceedings in Hong Kong. Nevertheless, the court has a discretion to refuse to stay proceedings brought in breach of such agreement if there is “strong cause” for doing so.

In the present case, the CFI was satisfied that the claimant has demonstrated that there was a “strong cause” for allowing proceedings to continue in Hong Kong in spite of an exclusive jurisdiction clause in favour of London courts, by reason of multiple parties being involved in a dispute arising out of the same facts, the fact that part of the dispute would be litigated in the Hong Kong courts, and there being a real risk that multiplicity of proceedings would give rise to inconsistent findings of facts by different tribunals.

One further point to note – in the present case, even though the borrower successfully resisted the jurisdictional challenge, the CFI refused to make any order as to costs due to material non-disclosure on the part of the borrower in its ex parte application to serve its writ of summons out of jurisdiction. The learned judge criticised the borrower for not making any reference in its affidavit in support to the need to show strong cause or strong reasons why the Hong Kong court should assume jurisdiction despite the exclusive jurisdiction clause in favour of London, and that no attempt was made to demonstrate such strong cause. This omission was exacerbated by the fact that Axis had already referred to principles surrounding exclusive foreign jurisdiction clauses in earlier interlocutory applications. It is therefore important to bear in mind the duty of full and frank disclosure in making ex parte application for service out of jurisdiction.