Applying Family-Mart in Hong Kong – DLA Piper's Successful Defence for a Respondent

In the recent case of PI 1 and PI 2 v MR [2025] HKCFI 1110, the Court of First Instance dismissed the Plaintiffs' application under section 34 of the Arbitration Ordinance to set aside the Tribunal's award on its own jurisdiction (the Jurisdiction Award). This is the first published judgment in Hong Kong which substantively considered the Privy Council's landmark ruling in Family-Mart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation [2024] Bus LR 190. Applying the Family-Mart case, the Court of First Instance clarified and defined the boundaries of a tribunal's jurisdiction and the relationship between arbitration and winding up petitions.

The Defendant, represented by our Litigation team in Hong Kong, led by Harris Chan (Partner) and supported by Desmond Cheung (Of Counsel) and Bryan Chan (Senior Associate), successfully dismissed the Plaintiffs' setting aside application and was awarded indemnity costs of the proceedings.

 

Background

The dispute arose from a series of transaction agreements (the Transaction Agreements) between the parties, including the Share Subscription Agreements and the Shareholders' Agreements, whereby the Defendant became a 40% minority shareholder of P1. These agreements contained identical arbitration clauses stipulating that "any dispute, controversy, difference or claim arising out of or relating to" the Transaction Agreements would be resolved by arbitration (the Arbitration Agreement).

P1 is a company incorporated in the Cayman Islands carrying on a business of acquiring land and developing and leasing science and industrial parks in Mainland China. P2 is a BVI company which holds 60% of the issued share capital of P1.

 

The Dispute

The Defendant initiated arbitration on 6 October 2023, alleging breaches of the Transaction Agreements by the Plaintiffs (the Arbitration). The claims include unauthorised remuneration, related-party transactions, failure to provide financial information, and other breaches of corporate governance provisions.

On 4 June 2024, the Plaintiffs challenged the Tribunal's jurisdiction, arguing that the Defendant's claims of unfair oppression and/or discrimination (the Oppression Claims) were not arbitrable as they fell within the exclusive jurisdiction of the Cayman Court and the Defendant's claims of loss of trust and confidence in P2's management of P1's affairs (the Loss of Confidence Claims) fell outside the scope of the Arbitration Agreement. The Tribunal dismissed the Plaintiffs' challenge in the Jurisdiction Award.

On 28 August 2024, the Plaintiffs applied to the Court for an order to set aside the Jurisdiction Award.

 

Court's Analysis

There were two issues for the Court to determine.

Issue 1: Arbitrability of the Oppression Claims

The Plaintiffs contended that the Oppression Claims were not arbitrable as the Oppression Claims had no utility other than to show that a ground had been established under the Cayman Islands Companies Act (Companies Act) for winding up P1. Hence, the determination of the Oppression Claims is tantamount to seeking an order or declaration from the Tribunal for P1 to be wound up on just and equitable grounds under the Companies Act, which falls within the exclusive jurisdiction of the Cayman Islands Court.

The Defendant contended that the Oppression Claims were arbitrable based on the clear guidelines laid down in the Privy Council's decision in the Family-Mart case.

The Court noted that the Family-Mart decision had clearly established that:

• matters which involve disputes between the parties as to whether one party has breached its obligations under an agreement made between them, or whether equitable rights arising out of the relationship between the parties have been disregarded, can be decided by the tribunal, even in the context of an application made to the court to wind up a company on the just and equitable ground, and even if these matters can be said to be “precursors” to the eventual question set out at (2) below.

• it is a decision for the Court to make, in the exercise of its discretion, whether it is just and equitable to wind up a company, and whether a winding up order should be made on that ground.

• whether it is just and equitable that the company should be wound up is a “threshold” question, to be answered before a petitioner can get access to any of the remedies available under section 95 of the Cayman Islands Companies Act.

There is nothing in the Family-Mart judgment which states that because a tribunal cannot decide the threshold question or the “cause of action” of “whether it is just and equitable to wind up a company”, the tribunal is for that reason precluded from deciding disputed questions of fact and law, that there are breaches of agreement or, as in this case, that there is oppressive or discriminatory conduct, which may in due course establish and support the ground of petitioning the Court to make an order to wind up a company because it is just and equitable to do so.

Issue 2: Whether the Loss of Confidence Claims are within the scope of Arbitration Agreement

The Plaintiffs further contended that the Loss of Confidence Claims fell outside the scope of the Arbitration Agreement, relying heavily on the decision in Dickson Holdings Enterprise Co Ltd v Moravia CV [2019] HKCLC 397.

In Dickson Holdings, the court determined that certain disputes arising from rights and obligations associated with the membership of a company that existed independently of the shareholders' agreement fell outside the scope of the arbitration clause in the shareholders' agreement. Specifically, the claims in Dickson Holdings involved issues such as the requirement for notice of meetings and the forfeiture of shares (which were breaches of the article of association and of the fiduciary duty of directors), yet neither of which were addressed by the shareholders' agreement in question.

However, the Court distinguished the present case from Dickson Holdings, noting that the Defendant's Loss of Confidence Claims relate "precisely" to obligations provided for and arising under the Transaction Agreements. Therefore, the claims made in the Arbitration are not independent of or separate from the Transaction Agreements and consequently fall within the scope of the Arbitration Agreement.

The Court further noted that the Arbitration Agreement in the present case is drafted more broadly than that in Dickson Holdings, covering tortious claims and other non-contractual obligations. This broad scope ensured that the disputes regarding breaches of the Transaction Agreements and the resulting loss of trust and confidence were within the Tribunal's jurisdiction.

 

Conclusion

The Court dismissed the Plaintiffs' application, affirming the Tribunal's jurisdiction over the Defendant's claims in the Arbitration. Additionally, the Plaintiffs were ordered to pay the Defendant's costs on an indemnity basis.

 

Legal Implications / Key Takeaways

This decision highlights two critical legal implications regarding the arbitrability of claims and the scope of arbitration agreement. The Court reaffirmed that while the exclusive jurisdiction to wind up a company lies with the court, an arbitral tribunal can still determine breaches of agreements and other factual and/or legal issues supporting an eventual winding up petition. The ruling also highlights the importance of careful drafting of arbitration clauses to ensure they cover all potential disputes arising from the agreements, as this will impact, and resist challenges to, the jurisdiction of the arbitral tribunal should disputes arise.

Overall, this ruling reinforces the role of arbitration in resolving complex corporate disputes and provides clarity on the role of arbitral tribunals and the scope of arbitration agreement.

Click here to see the full judgment.