The case of T v W[1] reinforces the important principle that bills of exchange have a legal life of their own, separate from the underlying contract. They usually do not fall within the scope of an arbitration clause in the underlying contract unless there is a clear and express indication that they do.

Factual background

Under a Loan Agreement, P agreed to lend D HKD 5 million. P advanced the money and D drew a post-dated Cheque for HKD 5 million in repayment of the principal. The Loan Agreement provided for resolution of disputes through arbitration in Hong Kong. D failed to repay the loan.[2]

When P presented the Cheque for payment in March 2020, the Cheque was dishonoured. P gave notice of dishonour and commenced an action in the Court of First Instance (CFI). P simply sued on the Cheque. D disputed the claim and applied to the CFI for an order to stay the action and refer the parties to arbitration, on the basis of the arbitration clause in the Loan Agreement.

Pursuant to section 20(1) of the Arbitration Ordinance (Cap. 609), which gives effect to Article 8 of the UNCITRAL Model Law, where a plaintiff brings an action in court which is the subject of an arbitration agreement, the court must refer the parties to arbitration, if a party so requests, unless the court finds that the agreement is null and void, inoperative or incapable of being performed. Unless the point is clear, the court will not decide the matter but stay it and refer the parties to arbitration, so that the tribunal can decide whether it has jurisdiction.

Decision of the Court of First Instance

In November 2020, the CFI dismissed the stay application on the basis that the Cheque was a separate contract from the Loan Agreement and that bills of exchange were generally regarded as the equivalent of cash.

The CFI considered itself bound by the Court of Appeal (CA) decision in Pacific Forex.[3]  In that case, the CA had held that to rebut the presumption against taking bills of exchange into arbitration, there must be a plain manifestation in the arbitration clause that it applies to bills of exchange. The CFI found that the parties had intended the Cheque to be a security for the repayment of the loan and that the term “disputes” in the arbitration clause meant disputes only relating to the Loan Agreement and the parties’ claims and liabilities thereunder. There was no sufficiently plain indication that the parties intended the arbitration clause to extend to claims under the Cheque. The CFI noted that there were good commercial reasons for the parties, as rational business persons, to agree that disputes in relation to the Cheque were not to be resolved by arbitration.

Decision of the Court of Appeal

On appeal, D invited the CA to find that Pacific Forex was either was plainly wrong or overtaken by the English House of Lord’s decision in Fiona Trust,[4] so as to allow the CA under the doctrine of precedent to depart from its earlier decision. The CA dismissed D’s appeal.

The CA first considered the House of Lords decision in Nova (Jersey) Knit[5] on which the reasoning in Pacific Forex was based. D argued that Nova (Jersey) Knit was a decision based on German law, but the CA rejected this argument pointing out Lord Russell’s consideration in that case of the English law position in relation to bills of exchange. Lord Russell noted that it was a deep rooted concept of English commercial law that a claim for unliquidated damages under a sales contract was no defence to a claim under a bill accepted by the purchaser, nor was it available as set-off or counterclaim. The bill was itself a contract separate from the sales contract. Its purpose was not only to serve as a negotiable instrument, but also to avoid postponement of the purchaser’s liability to the seller. While it was conceivable in theory that an arbitration clause in an underlying sales contract sufficiently clearly embraces liability under a bill of exchange, Lord Russell did not consider it easy to envisage a clause so inconsistent with the nature and function of such a bill.

Before the CA’s decision in Pacific Forex, two CFI judges very experienced in arbitration had already endorsed the English law position in Nova (Jersey) Knit,[6] emphasizing the strong commercial reasons underpinning the principle that bills are in a special category with a legal life of their own.

The CA then turned to the argument that Pacific Forex was overtaken by the Fiona Trust. D heavily relied on the presumption in Fiona Trust that parties, as rational business persons, were likely to have intended any dispute arising out of the relationship into which they had entered to be decided by the same tribunal unless the language made it clear that certain questions were intended to be excluded from the arbitration clause.

The CA also rejected this argument. Fiona Trust was not concerned with bills of exchange which are treated as the equivalent of cash subject to the competing presumption against taking bills of exchange into arbitration without sufficiently plain indication. While the “one-stop shop” presumption in Fiona Trust has been adopted and often applied in Hong Kong, the CA pointed out that it may also be said – and has been said in Pacific Forex – that rational business persons will not readily forgo their rights on a dishonoured cheque, which include the right to sue in court for judgment. That summary determination procedures were available under modern arbitration rules (e.g., the early determination procedure under the HKIAC Rules) did not change this. The CA also noted that Pacific Forex has been applied in Singapore where, like in Hong Kong, both the UNCITRAL Model Law and the Fiona Trust presumption have been adopted.[7]

Ultimately, whether an action on a bill falls within the scope of an arbitration clause in the underlying contract was a question of construction. Pacific Forex did not restrict the principle that the clause had to be construed in the context of the agreement as a whole against the factual matrix, including all relevant circumstances. Here, there was simply no basis to construe the clause as covering an action on the Cheque alone and the question of scope under the Fiona Trust approach did not arise.

[1] T v W [2022] HKCA 95, [2022] HKEC 161 (Court of Appeal); [2021] HKCFI 160, [2021] HKEC 162 (Court of First Instance).

[2] The loan transaction has been simplified for the purpose of this article.

[3] CA Pacific Forex Ltd v Lei Kuan Ieong [1999] 1 HKLRD 462.

[4] Fiona Trust & Holding Corporation & Others v Privalov & Others [2007] UKHL 40.

[5] Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713.

[6] E.g., York Airconditioning & Refrigeration Inc v Lam Kwai-hung trading as North Sea A/C Elect. Eng. Co. [1995] 2 HKLR 256 (Kaplan J).

[7] Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53.