G. Stay of court proceedings in favour of arbitration
In Hong Kong, the stay of court proceedings in favor of arbitration is primarily governed by section 20 of the Arbitration Ordinance (Cap. 609), which gives effect to Article 8 of the UNCITRAL Model Law. The Hong Kong courts maintain a strong policy against intervening in arbitrations and generally lean in favor of enforcing the parties’ agreement to arbitrate, alongside a discretionary regime for specific categories like employment disputes.
Mandatory stay
Under section 20(1), if an action is brought before a court in a matter that is the subject of an arbitration agreement, the court must refer the parties to arbitration if a party so requests. Once a valid arbitration agreement is found to exist and the necessary conditions are met, the court has no residual discretion to refuse the stay.
To determine whether a mandatory stay should be granted, the court typically applies a four-question test:
- Is there an arbitration agreement between the parties?
- Is the agreement null and void, inoperative, or incapable of being performed?
- Is there in reality a dispute or difference between the parties?
- Is the dispute within the ambit (scope) of the arbitration agreement?
A mandatory stay should be granted where the answer to questions 1, 3 and 4 is yes, and the answer to question 2 is no.
Threshold and standard of proof
The party seeking the stay (usually the defendant) only needs to demonstrate a prima facie case that an arbitration agreement exists and covers the dispute. If the scope is unclear or fact-sensitive, the court will stay the proceedings and refer the matter to the tribunal to determine its own jurisdiction under the principle of competence-competence. Only where it is “clear beyond doubt” that the dispute is outside the ambit of the agreement will the court refuse a mandatory stay. Furthermore, even if a mandatory stay is unavailable, the court may still exercise its inherent jurisdiction to grant a discretionary stay.
A dispute is considered to exist unless the defendant has made an unequivocal admission of both liability and quantum. The court will not investigate the merits of the defence; that is a matter for the arbitral tribunal.
Mandatory refusal grounds
Refusal to stay court proceedings is mandatory if any of the following are established:
(i) Null and void
This ground refers to an arbitration agreement that, as a matter of law, never existed or was invalid from the outset. In other words, the agreement is treated as having no legal effect from the beginning, either because a valid arbitration agreement was never properly formed or because the agreement was affected by a fundamental legal defect.
This may arise where the parties never reached a definite agreement, for example because essential elements such as offer and acceptance were absent. It may also arise where the agreement is invalid due to factors such as misrepresentation, duress, unconscionable conduct, or mistake.
This ground may also apply where the arbitration agreement fails to comply with mandatory formal requirements, such as the requirement for writing under section 19 of the Arbitration Ordinance. Similarly, the agreement may be invalid if one of the parties lacked legal capacity to enter into it.
Finally, an arbitration agreement may be invalid if the dispute concerns matters that cannot be resolved by arbitration under Hong Kong law. Examples may include criminal prosecutions or certain family law proceedings. Likewise, the agreement may be invalid if giving effect to it would be contrary to public policy. For further information, please refer to “Scope of arbitration agreements”.
(ii) Inoperative
The agreement was validly formed but has ceased to have legal effect regarding the relevant dispute. This includes cases where the parties have expressly or impliedly terminated the agreement, a party has waived its right to arbitrate, or the specific matter does not fall within the terms of the arbitration agreement. For further information, please refer to “Scope of arbitration agreements”.
(iii) Incapable of being performed
The arbitration cannot effectively be set in motion, for example, because the arbitral institution named in the clause has ceased to exist, the terms are too vague, or there are inconsistent provisions that negate the intention to arbitrate. However, a reference to a non-existent arbitral institution or defunct rules does not necessarily make the agreement incapable of performance. If a clear intention to arbitrate exists, the court will uphold the clause as workable, and the HKIAC can fulfill the default appointment of an arbitrator to ensure performance.
Notably, the failure to comply with pre-arbitration procedures, or the existence of a limitation defence to the commencement of arbitration, does not make an arbitration agreement “inoperative” or “incapable of being performed”. These are matters for the arbitral tribunal to determine, and the court should stay the proceedings in favour of arbitration rather than resolve them itself.
(iv) Timing default
An application for a stay must be made no later than the submission of the first statement on the substance of the dispute. Certain protective steps, such as filing an acknowledgment of service, will not normally prevent a party from applying for a stay. By contrast, steps that show a commitment to litigation, such as filing a defence, a counterclaim, or an affidavit opposing summary judgment, will typically amount to a waiver of the right to arbitrate. However, a stay remains validly requested if it is filed at the same time as the defence.
(v) Non-existence of a “dispute”
If there is no reality of a dispute or difference, such as a clear and unequivocal admission of both liability and quantum, the court may refuse the stay and order summary judgment.
Discretionary stays and special categories
(i) Inherent jurisdiction
If a party has already submitted pleadings and cannot rely on section 20, the court may still exercise its inherent jurisdiction under the High Court Ordinance to grant a discretionary stay to avoid a multiplicity of proceedings or to uphold the spirit of the agreement.
(ii) Labour Tribunal claims
Under section 20(2), if a claim falls within the jurisdiction of the Labour Tribunal, the court has discretion rather than a mandate to stay proceedings. The court must be satisfied there is “no sufficient reason” to refuse the stay and that the applicant was “ready and willing” to arbitrate.
(iii) Admiralty proceedings
The court must stay the action but has the power to order that any property arrested (such as a ship) be retained as security for the satisfaction of the eventual arbitral award.
(iv) Winding-up petitions
A winding-up petition is not considered an “action” between parties but a class remedy, so the mandatory stay under section 20 does not automatically apply. The court generally stays or dismisses a petition in favor of arbitration if the underlying debt is subject to an arbitration clause, unless there are "strong reasons" or "wholly exceptional circumstances" to the contrary, such as the dispute being frivolous or an abuse of process.
(v) Consumer agreements
Under the Control of Exemption Clauses Ordinance (Cap. 71), arbitration agreements generally cannot be enforced against a consumer unless they consent in writing after the dispute has arisen or they initiate the arbitration themselves.
Parallel proceedings
Arbitration proceedings may be commenced or continued while the stay application is pending, and an arbitral award may even be issued before the court has determined the stay application. This prevents a recalcitrant party from using court litigation solely as a delaying tactic.
Costs
As to costs, where a stay is granted, the defendant will usually be awarded the costs of both the court action and the stay application. If a party raises an unmeritorious challenge to an arbitration agreement, the court may order indemnity costs against that party.
Appeals
A decision of the court to refer the parties to arbitration is not subject to appeal.
A refusal by the court to refer parties to arbitration may be appealed, but only with the leave of that court.
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