Townsend Ventures , LLC v. Hybrid Kinetic Grp. Ltd., Civil Action No. GLR-17-130 (D. Md. Aug. 30, 2017) [click for opinion]

Defendants, Hybrid Kinetic Group Limited (“Hybrid Kinetic”) and Billion Energy Holdings Limited (“Billion”) (collectively with Hybrid Kinetic, “HKG”) are Hong Kong-based entities that manufacture a wide range of electric vehicles. Plaintiffs, Townsend Ventures LLC (“Townsend”), and its subsidiaries XALT Energy, LLC and XALT Energy MI, LLC (collectively with Townsend, “XALT”) are engaged in advanced lithium-based energy storage, and design, manufacture and service lithium energy storage products. After XALT brought suit against HKG, HKG filed a motion to stay the proceedings and to compel arbitration.

There were three agreements between the parties. First, XALT and HKG had entered into a Memorandum of Understanding to establish a strategic partnership where the parties would collaborate on the development of battery technology and HKG would utilize “all” XALT’s lithium battery capacity. The MOU did not contain an arbitration clause.

Second, HKG and XALT entered into a supply agreement where HKG would provide capital funding to XALT and XALT would manufacture and supply batteries to HKG. The arrangement was to be exclusive, such that XALT would provide batteries only to HKG, and HKG would purchase all batteries manufactured by XALT. This agreement, unlike to the MOU, did contain an arbitration provision, which provided that any dispute, controversy or claim relating to the supply agreement would be heard before the Hong Kong International Arbitration Center (the “HKIAC”).

Finally, the parties entered into a framework agreement that provided for HKG to purchase a subsidiary of XALT. The framework agreement did not include an arbitration clause.

In May 2015, the arrangements between XALT and HKG “began to unravel.” HKG notified XALT that capital contributions provided for in the supply agreement would be late and XALT informed HKG that late payment would cause XALT “to cease all activities on behalf of” HKG. XALT thereafter filed suit in federal court in Maryland against HKG, alleging fraud and breach of contract, and HKG responded by moving to stay the proceedings and compel arbitration.

The court explained that resolving a motion to compel arbitration typically involves a two-step inquiry: (1) the court must determine who decides whether a particular dispute is arbitrable: the arbitrator or the court; and (2) if the court concludes that it is the proper forum in which to adjudicate arbitrability, the court then decides whether the dispute is, in fact, arbitrable.

The court further explained that, while there is a general policy-based, federal presumption in favor of arbitration, that presumption is not applied to resolve questions of the arbitrability of arbitrability issues themselves. Unless the parties “clearly and unmistakably provide otherwise,” the court determines arbitrability. Moreover, clear and unmistakable evidence will not be found simply because an agreement contains a broad arbitration clause committing all interpretive disputes “relating to” or “arising out of” the agreement.

Here, however, the court found the “clear and unmistakable” standard was met, as the arbitration clause at issue was not only expansive, but incorporated a specific set of rules that authorized the arbitrators to determine arbitrability. Specifically, the parties had incorporated the HKIAC Rules, which provide that “[t]he arbitral tribunal may rule on its own jurisdiction under these Rules, including any objections with respect to the existence, validity or scope of the arbitration agreement[s].”

Because Hybrid Kinetic and Billion were foreign entities, the court also considered whether it could compel arbitration under the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “Convention“). The court found that it could do so because (1) the supply agreement was a written agreement under which the parties agreed to arbitrate; (2) the arbitration would occur at the HKIAC and the People’s Republic of China was a signatory to the Convention; (3) the supply agreement was commercial in nature; and (4) Billion, which signed the supply agreement, was a foreign entity. Further, XALT did not argue that the supply agreement was null and void, inoperative or incapable of being performed.

The court therefore stayed the proceedings and compelled the parties to arbitrate the matter before the HKIAC.

A version of this post originally appeared in the November 2017 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

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