In the English case Aiteo Eastern E&P Company Limited v Shell Western Supply and Trading Limited [2022] EEWHC 2912 (Comm), Mr. Justice Foxton rejected a jurisdictional challenge to two awards under section 67 of the Arbitration Act 1996, finding that in actively challenging the jurisdiction of a national court, a party had successfully exercised its right to refer the dispute to arbitration under a unilateral option clause. Actually commencing arbitration or providing an undertaking to do so was unnecessary.

In the recent Hong Kong decision China Railway (Hong Kong) Holdings Ltd v Chung Kin Holdings Co Ltd [2023] HKCFI 132, Master Alexander Tang found that the asymmetric jurisdiction clause – which gave the right to choose the forum only to the plaintiff – was valid. The court agreed that the purpose of the clause was to ensure that the position of the plaintiff as creditor was not compromised. The court rejected the defendant's arguments that the Wuhan courts were the more appropriate forum to hear the dispute.

Asymmetric / hybrid clauses

Asymmetric dispute resolution clauses may take one of two forms: (a) a unilateral right to arbitrate or litigate given to the party with the stronger negotiating power; or (b) a unilateral right to commence proceedings in one or more jurisdiction(s) given to the stronger party (limiting the weaker party to bringing proceedings in a particular jurisdiction). Lenders often seek to include such clauses in their agreements with borrowers because of the flexibility they provide.

Aiteo

The claimant in Aiteo challenged two partial awards under section 67 of the Arbitration Act 1996, the first in which the tribunal held that it had jurisdiction to determine the defendant's claims against Aiteo, rejecting Aiteo's challenge to the tribunal's jurisdiction, and the second in which the tribunal made an order for the consolidation of the arbitration with another arbitration.

The parties' disputes arose under the facility agreement pursuant to which Aiteo borrowed US$512 million from the defendant (SWST). The agreement was governed by English law. The agreement provided that SWST and other lenders (described as the "Finance Parties") "may elect to refer for final resolution any dispute arising out of or in connection with this Agreement", but Aiteo and other shareholders were excluded from the operation of the clause.

The agreement stated that before a Finance Party would submit a request for arbitration, the Finance Party "may by notice in writing to the Borrower require that all Disputes…be heard by a court of law". If that happened, then the courts of England were to have exclusive jurisdiction to settle the dispute. The clause in question was described as "for the benefit of the Finance Parties only'.

On 19 August 2019, SWST sent Aiteo a letter alleging that Aiteo had breached the terms of the facility. On 31 October 2019, Aiteo commenced proceedings against SWST before the Federal High Court of Nigeria and obtained a without notice interim injunction restraining the lenders from taking enforcement steps.

In response, on 12 November 2019, SWST applied for a stay of the proceedings. On 11 December 2020, SWST commenced what it considered to be a valid ICC arbitration against Aiteo. The lenders under also served a Notice of Arbitration, and also sought and obtained anti-suit relief.

The court considered what was required for SWST to exercise the election to arbitrate under the clause. Counsel for Aiteo argued it could only be exercised by (i) commencing an arbitration, or (ii) "at least an unequivocal and irrevocable commitment to arbitrate the relevant dispute(s) without delay".

Whilst Mr Justice Foxton accepted "that a dispute resolution clause could provide that an option to refer to arbitration a dispute which one party has brought to court can only be exercised by the commencement of an arbitration, in my view it would require clear words to achieve that outcome." The learned judge found that, on the construction of the clause alone, he was "not persuaded that anything more than an unequivocal statement by SWST requiring Aiteo to arbitrate an identified dispute is required."

Neither did the court find it was necessary for the defendant to seek a stay to exercise the election. "If a Finance Party has made an unequivocal statement that the dispute should be referred to arbitration, that as a matter of principle should be enough to exercise the election and bring the obligation to arbitrate into being. Provided the necessary unequivocal communication has occurred, the exercise of a contractual choice under English law does not generally require any further step to be taken...".

The court was satisfied that the Notice of Arbitration unequivocally required Aiteo to refer the disputes raised in the Nigerian Proceedings to arbitration, thereby placing Aiteo under the negative covenant implicit in their agreement.

China Railway

The defendants in China Railway applied to stay the proceedings in Hong Kong in favour of the Court of Wuhan. The original agreement between the parties, both Hong Kong companies, set out the terms for the financing of a construction of a hotel in Hong Kong. Successive debt repayment agreements were reached thereafter as to how the debt would be repaid and these included a repayment agreement, which contained no governing law clause.

The original agreement on 30 June 1995 contained a governing law and/or jurisdiction clause, which the plaintiff said in context must be construed as referring to Hong Kong law given that both parties were Hong Kong companies.

The clause in question stated: "本合同實施過程中，雙方如發生經濟紛爭，應通友好協商解決，如協商不成， 則循當地法律解決" (translated as "During the implementation of this contract, if there is an economic dispute between the two parties, it should be resolved through negotiation. If the negotiation fails, it should be resolved in accordance with local laws").

In a subsequent debt repayment agreement, it was noted that "Any disputes or disputes arising during the execution of this contract and relevant supplementary agreements may be resolved through negotiation. If the negotiation fails, [the plaintiff] has the right to apply for arbitration to the arbitration committee where [a third-party guarantor] is located or bring proceedings in the people's court where [the guarantor] is located")¹ .

The plaintiff said that the original agreement and the subsequent debt repayment agreements were intimately related to and amended the initial agreement, and there was therefore no reason why a different governing law should apply.

The court agreed with the plaintiff's line of reasoning and rejected the idea that the debt repayment agreement represented a "clean break" in terms of resetting the relationship of the parties. The task for the court as to "discover the governing law of the jurisdiction clause by construing it against its context and discovering the parties' intentions; only if such intentions could not be discovered would one resort to the closest connection test."

The general assumption was that "unless there are good reasons to conclude otherwise, all terms are governed by the same law, for it avoids inconsistency and uncertainty".²  Once the court had concluded that the various agreements had to be construed as a whole, "and therein contains an express governing law clause", the court would be slow to interpret that the parties had changed their minds unless such intention arises by clear (if not necessary) implication from the surrounding facts. The court therefore took the view that Hong Kong law governed the jurisdiction clause.

Construing the clause against the factual matrix, the court took the view that the repayment agreement was one designed to protect the interests of the plaintiff as creditor, by granting it a right (but not an obligation) to sue in the mainland where the security was located, should it so choose.

The clause was therefore non-exclusive and the burden rested on the defendant to show that the mainland courts were clearly and distinctly the more appropriate forum. In the judgment of Master Tang, the defendant had failed to satisfy the burden placed on it.

Cheer for creditors

In Hong Kong, the main authority on such clauses is China Merchants Heavy Industry Co Ltd v JGC Corp [2001] HKLRD (Yrbk) 21, which held that a clause giving one party a unilateral right to arbitrate falls within the meaning of art 8(1) of the UNCITRAL Model Law. The court will uphold an asymmetric clause as long as it is not "null and void, inoperative or incapable of being performed".

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, however, 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, 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 Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 597) – see our alert "All clauses are not equal – Hong Kong court rejects bank's application for enforcement of judgment debt in mainland China").

Where the wording is clear however – and the intentions of the parties can be clearly determined – it seems the courts are prepared to hold the parties to their bargain and uphold the validity of hybrid jurisdiction clauses to the benefit of the lender.

Health warning and conclusion  

Even though asymmetrical clauses – whether providing for the unilateral option to litigate or arbitrate, or the right to choose the litigation forum, in favour of one party - are valid and enforceable in Hong Kong and England & Wales, in principle, they are likely to be fact-specific and risks remain as to their validity in the place of enforcement. 

An arbitral award or judgment rendered from such a clause may be unenforceable in places such as mainland China, the UAE, and Russia as a matter of public policy due to the lack of mutuality and violation of principles of equality. 

The ultimate place of enforcement needs to be a consideration when drafting dispute resolution clauses.

Authored by James Kwan, and Nigel Sharman.