Hong Kong Court refuses stay in favour of arbitration where settlement agreement disapplies arbitration clause in original contract (Kat Yue Construction v Fai Lee Construction)
Arbitration analysis: In Kat Yue Construction v Fai Lee Construction, the Hong Kong Court of First Instance refused leave to appeal against a decision declining to stay court proceedings in favour of arbitration. The dispute arose from a construction contract which contained an arbitration clause. The parties settled the initial dispute by entering into a Settlement Agreement that expressly provided that the arbitration clause ‘shall not apply’. When further disputes arose under the Settlement Agreement, the defendant applied to stay the proceedings in favour of arbitration, arguing that the plaintiff’s damages were based on the original contract and therefore fell within the arbitration clause. The court refused a stay and subsequently refused leave to appeal. The court held that the Settlement Agreement, rather than the original contract, was the ‘centre of gravity’ of the dispute. Although damages were assessed by reference to the original contract, the plaintiff’s right to relief depended on establishing a breach of the Settlement Agreement—which the court characterised as a ‘condition precedent’ to recovery. The court further noted that requiring arbitration would render the express exclusion clause otiose and lead to ‘fragmentation’ of proceedings. This decision illustrates that where related agreements contain conflicting dispute resolution regimes, the court will adopt the regime governing the agreement at the ‘centre of gravity’ of the dispute. It reinforces the principle that courts will not strain to bring disputes within an arbitration clause where parties have expressly agreed otherwise. Written by Paul Starr, partner, and John Law, associate, at King & Wood Mallesons.