The validity of 'hybrid' jurisdiction clauses in loan documentation where enforcement may need to take place against a PRC party or party who has assets in mainland China, has been called into question by a recent Hong Kong court decision.
The ruling is thought to be the first in Hong Kong to address the validity of such jurisdiction clauses, which allow the lender to bring proceedings in any jurisdiction but restrict the borrower to seeking relief in Hong Kong, in the context of the requirements of the Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 597) (the "Ordinance").
Whilst hybrid jurisdiction clauses are generally valid and enforceable under Hong Kong law, banks and other financial institutions may need to reappraise how they structure client agreements involving PRC parties or parties with assets for enforcement on the mainland, especially since the wording in question is typical in loan documentation.
In Industrial and Commercial Bank of China (Asia) Limited v Wisdom Top International Limited (高慧國際有限公司) [2020] HKCFI 322, the Honourable Madam Justice Au-Yeung rejected an appeal by the plaintiff lender against the Registrar's refusal to issue a certified copy of a judgment and High Court certificate for the purposes of enforcement against the defendant borrower in mainland China.
The Court held that the wording used in the financing document, a 'hybrid' or 'asymmetric' jurisdiction clause, which obliged the borrower to use the Hong Kong courts in the event of any dispute whilst the lender was not so constrained, did not amount to an exclusive jurisdiction clause within the meaning of the Ordinance. The wording tracked that set out in the Asia Pacific Loan Market Association recommended form and is commonly used in loan documentation.
Judgment frustrated
On 1 April 2019, the plaintiff obtained default judgment for the sum of almost HK$380 million and interest against the defendant, under a facility agreement dated 24 June 2013, as amended subsequently (the "Facility Agreement").
The plaintiff made an ex parte application to the Registrar pursuant to s.21 of the Ordinance and Order 71B, r.2 of the Rules of the High Court for a certified copy of the judgment and a High Court certificate so that it could pursue enforcement on the mainland. Under s.21(1)(a) of the Ordinance, the relevant judgment had to be one from "the Court of Final Appeal or the High Court which is a chosen court."
A "chosen court" is 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."
A "choice of Hong Kong court agreement" is defined in s.3(1) 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." (underlining as added by the Court).
The jurisdiction clause contained within the Facility Agreement, read:
Jurisdiction of Hong Kong courts
(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.
So whilst the defendant borrower was restricted to using Hong Kong courts to enforce its rights under the Facility Agreement, the plaintiff lender was free to begin proceedings in any jurisdiction, including in the mainland against the defendant's assets, a so-called 'asymmetric jurisdiction clause' ("AJC").
The Registrar found accordingly that the clause was not a choice of Hong Kong court agreement and refused to issue the certificate and certified copy of the judgment.
Yes but, no but…
On appeal to the Court of First Instance, counsel for the plaintiff invited the Court to come to a different conclusion after considering the nature of the clause itself, the legislative purpose in Hong Kong behind the Ordinance, and English and international authorities.
The Court noted that an AJC is common in finance documents, its nature having been summarised in the English case Commerzbank Aktiengesellschaft v Liquimar Tankers Management Inc [2017] 1 WLK 3497.
As noted by the Court, an AJC "ensures that a creditor can always litigate in a debtor's home court whilst preserving its right to bring proceedings where the debtor's assets may be located at the time a dispute arises. This increases the prospect of a creditor successfully recovering a debt owed to it, which in turn contributes to the readiness of the creditor to provide finance and reduces the costs of borrowing."
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 "Arrangement"). The Arrangement created a summary mechanism for reciprocal enforcements of judgments of mainland China and Hong Kong without the need to start a new action for debt recovery in the courts of the other jurisdiction.
The purpose of requiring an exclusive choice of court agreement, according to Legislative Council papers at the time, was to minimise the risk of parallel proceedings being instituted in the courts of both places.
The Court declined to follow three English first instance cases which had held that an AJC is an exclusive jurisdiction clause, even though the creditor has the option of suing in a different overseas jurisdiction. The Court considered these decisions related to the interpretation of the recast Brussels Regulation (1215/2012/EU) and were of little relevance to Hong Kong.
The Court dismissed the argument that AJCs are widely used in international commercial documents, and that to exclude them from the ambit of the Ordinance would greatly restrict the scope of commercial agreements that could benefit from expedited enforcement between Hong Kong and mainland China. The fact they were widely used was simply not the test under the statutory regime in Hong Kong.
Time for review
The validity of AJCs in general has yet to be properly tested in Hong Kong, and it is unclear to what degree a Hong Kong court may find Commerzbank of persuasive value given that the reasoning was based on the Brussels Regulation.
The finding in Industrial and Commercial Bank of China (Asia) Limited v Wisdom Top International Limited provides guidance as to how the enforcement of Hong Kong judgments under the Ordinance concerning hybrid clauses in the underlying contract is meant to work in practice.
When settling finance documents, hybrid clauses may present problems for lenders wishing to enforce against PRC parties or parties with assets in the mainland and where enforcement will likely be sought on the mainland.
On 18 January 2019, the mainland’s Supreme People’s Court and Hong Kong SAR government signed a new Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and the Hong Kong Special Administrative Region. This will supersede the Arrangement and become effective on a date to be announced after both jurisdictions have completed the necessary procedures to enable implementation. It will apply to judgments made on or after the commencement of the new Arrangement. The exclusive jurisdiction requirement has been removed in the new Arrangement.
As the new Arrangement is not yet in force, lenders may wish to consider providing that in any dispute involving a PRC party (or party with assets in the mainland) arising out of or in connection with the relevant agreement, the jurisdiction clause shall apply equally to both parties, whereas in any other dispute between non-PRC parties (or where enforcement is not sought on the mainland), the hybrid clause will apply.
This may still present problems however if the counterparty has assets outside Hong Kong and mainland China in jurisdictions without reciprocal enforcement treaties with Hong Kong for the enforcement of court judgments with Hong Kong. Furthermore, assets that may be in Hong Kong or mainland China at the start of the transaction may not exist in those jurisdictions at the time of enforcement.
In such cases, lenders may wish to insert a clause referring disputes to arbitration, thereby taking advantage of the possibilities of enforcement through the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"), as well as the other recognised advantages of arbitration such as finality, confidentiality and neutrality. Recent measures such as those contained within the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the HKSAR are already allowing for interim orders in respect of Hong Kong-seated arbitrations concerned with the preservation of assets or evidence in the mainland.
Lenders should also note that a unilateral option to arbitrate clause – which gives only one of the parties the right to refer any dispute or difference to arbitration – is a valid and enforceable arbitration agreement under Hong Kong law (see the Hong Kong Court of Appeal decision in China Merchants Heavy Industry Co Ltd v. JGC Group [2001] HKLRD (Yrbk) 21 applying the English Court of Appeal judgment in Pittalis v. Sherefetin [1986] 1 QB 868). Under Hong Kong law, mutuality is not required.
However, split options to litigate and arbitrate which (i) provide for litigation and arbitration; or (ii) deprive one party's equal right to choose litigation or arbitration, are invalid and unenforceable under PRC law, due to lack of mutuality.
Although unilateral options to litigate and arbitrate are valid under Hong Kong, Singapore, and English law, there are real risks of obtaining a judgment or award rendered from such a clause if enforcement is sought on the mainland, as it is likely that the judgment or arbitral award would not be enforced by a PRC court.
For existing agreements, to the extent that the amendments relate to a facility agreement and are considered material, then any security and/or guarantee given to secure any outstanding amounts under such facility agreement may need to be reconfirmed or retaken subject to all applicable laws. This, of course, depends on a cost benefit analysis and the leverage and bargaining power enjoyed by the lenders and the borrower group respectively.
Authored by Jonathan Leitch and Nigel Sharman.
