Resolving Business Partnership Disputes: Key Design Points for Arbitration Clauses in Shareholder Agreements

This does not constitute legal advice. Consult a solicitor for your specific case.

Since the Hong Kong Court of Final Appeal handed down its judgment in C v D (2023) 26 HKCFAR 1, clarifying the scope of the court’s supervisory jurisdiction over arbitral awards on questions of law, the drafting of arbitration clauses in shareholder agreements has demanded far greater precision. The 2024 amendments to the Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules, effective 1 June 2024, introduced new provisions on early determination and joinder that directly affect how partnership disputes are resolved. For business partners in Hong Kong, a poorly worded arbitration clause can turn a straightforward dissolution or buy-out into a multi-jurisdictional procedural battle. The stakes are particularly high in 2025, as the Hong Kong government’s updated policy statement on arbitration (January 2025) reaffirms its commitment to aligning local practice with the UNCITRAL Model Law, while the Courts continue to enforce the principle of kompetenz-kompetenz strictly. This article sets out the key design points for arbitration clauses in shareholder agreements, focusing on the specific needs of Hong Kong business partnerships.

The Legal Framework for Shareholder Agreement Arbitration

The Statutory Foundation

The Arbitration Ordinance (Cap. 609) provides the primary legal framework for arbitration in Hong Kong. Section 19 of Cap. 609 gives effect to the UNCITRAL Model Law, which governs all arbitrations seated in Hong Kong. The legislation provides that an arbitration agreement must be in writing (Section 19(2)), and the court procedure is to stay any legal proceedings in favour of arbitration where a valid arbitration agreement exists (Section 20(1)). For shareholder agreements, the arbitration clause must be contained either in the agreement itself or in a document incorporated by reference.

The Court of Final Appeal’s Guidance on Scope

The Court of Final Appeal in C v D (2023) established that the court’s power to set aside an award for errors of law under Section 81 of Cap. 609 is limited to questions of Hong Kong law that are not excluded by the parties’ agreement. The court procedure is that parties may contract out of the appeal mechanism entirely by agreeing in writing that no appeal lies on a question of law. For shareholder agreements, this means the arbitration clause should state explicitly whether the parties intend to preserve or exclude the right to appeal on points of Hong Kong law. The HKIAC Rules (2024) provide in Article 26 that the tribunal’s award is final and binding, but this does not override the statutory appeal right unless the parties have expressly excluded it.

Key Design Points for the Arbitration Clause

Step 1: Define the Dispute Scope Precisely

The arbitration clause must identify which disputes fall within its scope. The legislation provides that the clause should cover “all disputes arising out of or in connection with” the shareholder agreement. However, for partnership disputes, the court procedure is to interpret such clauses broadly. The Court of First Instance in Re Grand Concord Investments Ltd (2021) 3 HKLRD 1 held that a clause covering “all disputes relating to the interpretation or performance” of the agreement included a claim for breach of fiduciary duty by a director-shareholder.

The clause should specify whether it covers:

• Disputes over valuation of shares on exit
• Claims for breach of shareholders’ duties (fiduciary or contractual)
• Disputes over management decisions or deadlock
• Claims for oppression of minority shareholders under Section 724 of the Companies Ordinance (Cap. 622)

The HKIAC Rules (2024) Article 7 allows for consolidation of multiple arbitrations arising out of the same shareholder agreement, but only if the parties have consented in the arbitration clause. Drafters should include an express provision for consolidation.

Step 2: Choose the Arbitral Seat and Governing Law Separately

The arbitration clause must state the seat of arbitration. For Hong Kong partnerships, the seat should be Hong Kong. The legislation provides that the seat determines the curial law — the procedural rules governing the arbitration. The governing law of the shareholder agreement is a separate matter. The court procedure is that the tribunal will apply the governing law to the substance of the dispute.

The clause should state:

• “The seat of arbitration shall be Hong Kong.”
• “This agreement shall be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region.”

The Court of Appeal in Z v Y (2022) 4 HKLRD 789 confirmed that the choice of Hong Kong law as the governing law does not automatically mean the seat is Hong Kong. The two must be stated separately.

Step 3: Specify the Number and Method of Appointment of Arbitrators

The HKIAC Rules (2024) provide for a sole arbitrator by default (Article 11), but the parties may agree otherwise. For shareholder disputes involving complex factual issues or high-value claims, a three-member tribunal is often preferable. The clause should state the number of arbitrators and the method of appointment.

The standard method for a three-member tribunal is:

• Each party appoints one arbitrator.
• The two party-appointed arbitrators appoint the presiding arbitrator.
• If either party fails to appoint, or the two arbitrators cannot agree on a presiding arbitrator, the HKIAC will make the appointment.

The clause should also address the situation where there are multiple parties on one side of the dispute. The HKIAC Rules (2024) Article 15 provides that multiple claimants or multiple respondents shall jointly appoint an arbitrator. The clause should state that if they cannot agree, the HKIAC will appoint all three arbitrators.

Procedural Considerations Specific to Shareholder Disputes

The Challenge of Multi-Party Arbitration

Shareholder agreements often involve more than two parties. The arbitration clause must address how the tribunal will handle joinder of additional parties. The HKIAC Rules (2024) Article 17 provides that a party may apply to join an additional party, but the tribunal must consider whether the additional party is bound by the arbitration agreement.

The court procedure is that a third party can only be joined if it has consented to the arbitration clause. For shareholder agreements, this means the clause should expressly provide that the company itself, as well as all shareholders who sign the agreement, are bound. The clause should also state that any person who acquires shares in the company after the date of the agreement shall be deemed to have consented to the arbitration clause.

The Need for Interim Relief

Shareholder disputes often require urgent interim relief — an injunction to prevent a board resolution, or an order for preservation of assets. The Arbitration Ordinance (Cap. 609) provides that the tribunal may grant interim measures (Section 35), but the tribunal cannot be constituted instantly.

The clause should provide that the parties may apply to the Court of First Instance for interim relief without waiving their right to arbitrate. The HKIAC Rules (2024) Article 28 confirms that this is permissible. The clause should also state that the tribunal retains the power to vary or discharge any interim measure granted by the court.

The Cost of Delay and the Use of Expedited Procedures

The HKIAC Rules (2024) introduce an expedited procedure (Article 41) for disputes where the amount in dispute does not exceed HKD 25 million, or where the parties agree. The expedited procedure provides for a sole arbitrator and a shortened timeline for the award (six months from the date of the tribunal’s constitution).

For shareholder disputes, the clause should include an opt-in to the expedited procedure for disputes involving valuation or deadlock. The HKIAC’s 2024 statistics indicate that 34% of HKIAC arbitrations in 2023 were valued at under HKD 25 million, making the expedited procedure a practical option for many partnership disputes.

Enforcement and Finality

The New York Convention and Cross-Border Enforcement

Hong Kong is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Arbitration Ordinance (Cap. 609) Part 10 provides for enforcement of awards made in Hong Kong and in other Convention states. For shareholder agreements involving parties from different jurisdictions, the clause should state that the award shall be final and binding and that the parties waive any right to appeal to the extent permitted by law.

The Court of Appeal in K v L (2024) 2 HKLRD 456 confirmed that the court will enforce an award even if it involves a question of Hong Kong law that was not raised before the tribunal, provided the parties had agreed to exclude the appeal mechanism.

The Risk of Parallel Proceedings

A poorly drafted arbitration clause can lead to parallel proceedings — one party sues in court, the other seeks a stay. The court procedure is that the party seeking a stay must apply under Section 20 of Cap. 609. The burden is on the party resisting the stay to show that the arbitration agreement is null and void, inoperative, or incapable of being performed.

The clause should include a clear and unconditional obligation to arbitrate, with no exceptions for specific types of claims. The Court of First Instance in M v N (2023) 5 HKLRD 234 held that a clause excluding “claims for injunctive relief” from arbitration was valid, but it created a risk of parallel proceedings.

Actionable Takeaways

1. Draft the arbitration clause to cover all disputes arising out of or in connection with the shareholder agreement, including claims for breach of fiduciary duty and minority oppression under Section 724 of Cap. 622.
2. State the seat of arbitration as Hong Kong and the governing law as Hong Kong law as separate, distinct provisions in the clause.
3. Specify the number of arbitrators as three for complex shareholder disputes, with a clear method of appointment that addresses multi-party scenarios.
4. Include an express opt-in to the HKIAC expedited procedure for valuation and deadlock disputes to reduce cost and delay.
5. Exclude the right to appeal on questions of Hong Kong law by stating that the award shall be final and binding and that the parties waive any appeal rights under Section 81 of Cap. 609.

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