The Hong Kong International Arbitration Centre (HKIAC) recently handled an arbitration between a US car distributor (claimant) and a Chinese automobile manufacturer, the manufacturer’s chief executive officer, and the manufacturer’s subsidiary (respondents). The dispute focused on a failed proposal to create a joint venture (JV) that was to manufacture cars in China and sell and distribute those vehicles in North America. Due to foreseeable complications in the operation of the arbitration clause contained in the underlying contracts, the parties agreed to submit to arbitration under the HKIAC administered arbitration rules after the commencement of the arbitration. The facts of the case are elaborate and the damages claimed amounted to over US$1.2 billion.
The dispute centred on two main contractual documents: a letter of intent (LOI) and a distribution agreement. The LOI was signed between the distributor and manufacturer, with both agreeing to establish a JV within China for the purpose of manufacturing and selling vehicles. The bulk of provisions in the LOI were not intended to be binding on the distributor or the manufacturer.
The distribution agreement was signed between the distributor and the manufacturer’s subsidiary, under which the distributor was granted the exclusive right to distribute the vehicles produced by the proposed JV to the North American market. The manufacturer’s subsidiary was to transfer its rights and obligations under the agreement to the JV, once the JV was set up.
A series of disputes, mainly revolving around the financing of the proposed JV, ensued between the parties. In the end, the JV was never formed and the US distributor pursued legal action against the respondents.
Originally, the distributor commenced proceedings in contract and tort against the respondents in a US district court. However, the respondents successfully brought a motion to stay the proceedings and compel arbitration in Hong Kong. This was based on arbitration agreements in the LOI and the distribution agreement providing for Hong Kong arbitration. The US district court’s ruling is consistent with the recognised, widespread practice of courts to stay their proceedings and decline to hear disputes where those disputes are covered by an arbitration agreement.
A peculiar issue was the presence of “hybrid clauses” in both the LOI and the distribution agreement. The arbitration clauses concerned provided for arbitration at the HKIAC, yet in accordance with the arbitration rules of another institution. Hybrid clauses such as these may pose difficulties, including issues of contractual interpretation, efficiency, time and cost. Fortunately enough, parties reached agreement as to the application of the HKIAC administered arbitration rules shortly after the notice was filed with the HKIAC, and thereby avoided unnecessary complications.
The claims involved in this case are representative of a major type of case profile at the HKIAC, given that disputes concerning parties from mainland China comprise approximately 50 per cent of the HKIAC’s fully administered caseload, and that a good portion of these cases stems from JV disputes. Regarding the procedural aspect of the case, the potential difficulty of enforcing the hybrid clause was avoided when parties reached post-dispute agreement on the application of the HKIAC rules. Nevertheless, if it is the intention of the parties to refer to institutional arbitration, they are strongly advised to stick with model clauses under a given set of rules, and not to experiment with mixed configurations.
The authors, Liu Jing and Guan Zhong, are deputy secretary-general and assistant counsel, respectively, at the HKIAC. They were assisted with research by Matthew Floro