Fifteen packages of micro-switches weighing 60 kgs suffered fire and water damage while being carried on the Qian Jin 57. William Co (the plaintiff) commenced proceedings to recover HKD 56,000. The claim was brought under the provisions of the Hague-Visby Rules, as Chu Kong Agency Co Ltd (the first defendant) had issued a bill of lading in Hong Kong for the cargo.

The bill of lading contained, among other things, these clauses:

2. If any loss and damages caused to the cargo due to default of the carrier during shipment, the maximum amount of compensation under this Bill of Lading will be RMB 200 per piece;

3. All disputes arising out of or in connection with this Bill of Lading shall, in accordance with Chinese Law, be resolved in the Courts of the People's Republic of China [or] be arbitrated in the People's Republic of China.

The defendants applied for a stay of proceedings in favour of arbitration in China; alternatively, for a stay on the ground of the Chinese exclusive jurisdiction clause and/or forum non conveniens.

The plaintiff argued that the choice of law and jurisdiction clause in the bill of lading should be declared null, void, and of no effect by reason of art 3.8 of the Hague-Visby Rules, since the effect of the clause was to lessen and/or exclude the first defendant's liability, otherwise than would be the case pursuant to the Hague-Visby Rules. The plaintiff's submission was that, on the evidence, the Chinese court or arbitral tribunal would be likely to give effect to the terms of the bill of lading and would not apply the Hague-Visby Rules. If the Hague-Visby Rules applied, the plaintiff's maximum claim would be worth USD 13,709. If the RMB 200 limit per piece was applied as per the bill of lading, the claim would be limited to USD 525.

The plaintiff therefore argued that there was an apparent conflict between the UNCITRAL Model Law on International Commercial Arbitration 1985 (the Model Law) and the Hague-Visby Rules. The Model Law would require the Court to stay these proceedings in favour of arbitration in China, whereas the Hague-Visby Rules (in particular, art 3.8) would require clauses in the contract of carriage lessening the carrier's liability for loss or damage to be held null and void and of no effect. The plaintiff referred to the following clauses in the bill of lading: first, the 'financial limitation clause'; second, 'the clause excluding the carrier's liability for fire damage'; third, 'a clause to the effect that the cargo owner shall be responsible for damage incurred in the course of transportation'. Article 8.1 of the Model Law provides as follows: 'A court before which an action is brought in a matter which is the subject of an arbitration agreement shall … refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.'

Held: The defendants' application for a stay is allowed.

The Court applied the obiter comments made by Lord Diplock concerning foreign arbitration clauses in the House of Lords decision of The Morviken [1983] 1 AC 565 (also known as The Hollandia) (CMI597). The Court noted that it is for the arbitrator to determine the proper law of the contract in accordance with accepted conflict of laws rules. The Court found that if the proceedings were stayed for arbitration in China, the Chinese arbitrators will have to decide what law to apply. In this regard, the Court found that it was not right to try and assess how the Chinese arbitrators would approach the task of choosing which law was to apply to the contract.

Further, the expert evidence on foreign law before the Court did not comply with the formal requirements under procedural rules, and did not reveal how Chinese arbitrators or courts would apply conflicts rules to resolve the issue of whether the terms of the bill of lading would apply over the Hague-Visby Rules or vice versa. Thus, there were two approaches that the Court could take: either reject the expert evidence and presume Chinese law to be the same as Hong Kong law; or accept the expert evidence and be in the position where it is uncertain what the Chinese arbitrators will do when deciding the applicable law. On the first approach, the Court was confident that the Chinese arbitrators would not give effect to the restrictive clauses if Chinese law were the same as Hong Kong law. On the second approach, if the Court could not be certain as to the decision of the Chinese arbitrators, it would not be right for the Court to pre-empt their decision.

In light of the above, and having found that there was a valid arbitration agreement which complied with the Model Law, the Court held that art 8 of Model Law required the Court to stay proceedings in favour of arbitration in China. Had the Court not been bound by art 8 of the Model Law, it would have exercised its discretion against granting a stay as there were substantial juridical disadvantages to the matter being tried in China.