CATHAY PACIFIC AIRWAYS LTD. v. HONG KONG AIR CARGO TERMINALS LTD.

HCA 6714/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6714 OF 2000

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J U D G M E N T

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Background

1. By writ issuing in the High Court, the plaintiff sues the defendant under various heads for damages arising from loss allegedly suffered when the defendant was providing to the plaintiff air cargo handling services.

2. The statement of claim is dated and was filed in June 2001. It states that the parties intended an ongoing contractual relationship whereby the defendant would provide cargo handling services to the plaintiff at the airport at Chek Lap Kok from when it was due to begin operating on 6 July 1998. To that end the parties began negotiating the terms of the contract in April 1998. By July there was no agreement between the parties and that persisted at all material times. Notwithstanding the defendant did provide cargo handling services to the plaintiff from time to time and in particular during the month of July after the airport opened for business. In the premise, there being no continuing agreement between the parties, there arose between the parties in respect of each transaction a contract of service containing, inter alia, implied terms under the Supply of Services (Implied Terms) Ordinance Cap. 457. In some instances the cargo was lost or damaged. The owners looked to the plaintiff for compensation and in the event the plaintiff met the claims. By its writ it seeks indemnity from the defendant in whole or in part.

3. The various heads under which its claims are made include a breach of the implied terms of contract, breach of a duty of care owed by a sub-bailee to a bailee, and negligence in tort by reason of a breach of the duty of care owed to the owners of the lost and damaged cargo.

4. The defendant has not filed a defence. Instead, by summons dated August 2001, it has applied under section 6 of the Arbitration Ordinance Cap. 341 for an order that the action be stayed to arbitration. That is the matter now before me.

5. The parties have respectively filed affidavits in support and in opposition. I come to consider the evidence next.

The Evidence

6. A preliminary affidavit dated August 2001 was filed in support. It was made by Anthony James Sherry (Mr Sherry) who is an employee of the defendant's solicitors having conduct of the case.

7. Dealing with the relationship between the parties that subsisted at the time the alleged mishandling of cargo occurred he stated at paragraphs 8 and 9:

"8. To the best of my knowledge, information and belief the parties were at all material times bound by the terms of a detailed agreement in writing pursuant to which the defendant at all material times provided cargo handling services to the plaintiff. The cargo handling services provided to the plaintiff by the defendant which are the subject to the plaintiff's claim in this proceeding, were governed by the terms and conditions of the said agreement. I make this statement based on the instructions given to me by Mr Kan Kam Chan Patrick, the financial director of the defendant, and based on my examination of a copy of the said agreement provided to me by Mr Kan.

9. A copy of the said agreement is now produced and shown to me marked "AJS-2" ("the Main Agreement")."

8. The exhibit he refers to is a document in printed form headed 'Ground Handling Agreements'. It contains eleven clauses called articles which are broken down into sub-clauses. It purports to bind parties called respectively 'Carrier' and 'Handling Company' but whose names are missing. It refers to Annexes A and B but these are absent. It provides for signatures but there are none. It provides for a date but there is no date.

9. Article 9 is headed Arbitration. 9.1 states:

"ARTICLE 9

ARBITRATION

9.1 any dispute or claim concerning the scope, meaning, construction or effect of this Agreement or arising therefrom shall be referred to and finally settled by arbitration in accordance with the procedures set forth below and, if necessary, judgement on the award rendered may be entered in any Court having jurisdiction thereof:

(1) If the Parties agree to the appointment of a single arbitrator the arbitral tribunal shall consist of him alone. The arbitrator may be appointed either directly by the Parties or, at their request, by the IATA Director General.

(2) If they do not so agree to the appointment of a single arbitrator, the arbitral tribunal shall consist of three arbitrators appointed as follows:

(a) If only two Parties are involved in the dispute each Party shall appoint one of the three arbitrators. Should either Party fail to appoint his arbitrator such appointment shall be made by the IATA Director General;

(b) if more than two parties are involved in the dispute they shall jointly agree on the appointment of two of the arbitrators. Failing unanimous agreement thereon, such appointment shall be made by the IATA Director General;

(c) the two arbitrators appointed in the manner provided above shall appoint the third arbitrator, who shall act as chairman. Should they fail to agree on the appointment of the third arbitrator, such appointment shall be made by the IATA Director General.

(3) The IATA Director General may, at the request of any Party concerned, fix any time limit he finds appropriate within which the Parties or the arbitrators appointed by the Parties, shall constitute the arbitral tribunal. Upon expiration of this time limit, the IATA Director General shall take the action prescribed in the preceding paragraph to constitute the tribunal.

(4) When the arbitral tribunal consists of three arbitrators, its decision shall be given by a majority vote.

(5) the arbitral tribunal shall settle its own procedure and if necessary shall decide the law to be applied. The award shall include a direction concerning allocation of costs and expenses of and incidental to the arbitration (including arbitrator fees).

(6) the award shall be final and conclusively binding upon the Parties."

10. Mr Sherry went on to state that the parties having a dispute arising out of the so-called Main Agreement, the parties are bound to resolve it by arbitration. It is for this reason that I should grant the stay.

11. A second affidavit in support was filed in October 2001. That was made by Ko Kai Wai (Mr Ko) who at the material time was employed by the defendant as its Planning Manager. Though he began by confirming the truth and accuracy of Mr Sherry's affidavit, his account was somewhat different.

12. He said at paragraph 6:

"6. In early April 1998, the plaintiff and the defendant commenced negotiations on the terms of a ground handling agreement for the provision of air cargo handling services by the defendant for the plaintiff at the Hong Kong International Airport at Chek Lap Kok ("the Agreement"). The Agreement consists of three parts, namely, the Main Agreement, Annex A and Annex B. A copy of the Main Agreement part of the Agreement has been exhibited to the Affidavit of Anthony James Sherry filed herein and marked 'AJS-2'."

13. He then produced the form of agreement, which he referred to as 'the defendant's agreement'. The so-called Main Agreement part was similar in format to that exhibited by Mr Sherry (which Mr Sherry had deposed at paragraph 9 was binding on the parties) but was by no means identical; for instance, the clause dealing with arbitration stated:

"9.5 Arbitration

Any dispute, controversy or claim arising out of or relating to this Ground Handling Agreement (which for the purposes of this subclause 9.5 shall be deemed to include Annexes A and B but shall not include Annex C), or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force and as may be amended by the following provision of this subclause:

(a) The appointing authority shall be Hong Kong International Arbitration Centre.

(b) The place of arbitration shall be in Hong Kong at the Hong Kong International Arbitration Centre ("HKIAC").

(c) There shall be only one arbitrator.

(d) Any such arbitration shall be administered by HKIAC in accordance with the HKIAC Procedures for Arbitration in force at the date of this Ground Handling Agreement including such additions to the UNCITRAL Arbitration Rules as are therein contained."

14. He went on to state that the proposed form of agreement which he called for the purpose 'the defendant's agreement' was submitted by the defendant's solicitors to the plaintiff's solicitors for approval on 1 April 1998. It was not approved. On 22 April the plaintiff's solicitors responded with comments. Then in June 1998 the plaintiff through its solicitors proposed its own terms in a form he referred to as 'the plaintiff's agreement'. The format was similar in many respects to those already exhibited and referred to by Mr Sherry as the Main Agreement and by Mr Ko as the defendant's agreement. That relating to arbitration was at clause 9 and stated as follows:

"Arbitration

9.1 This Agreement (Including the Annexes) is governed by and will be construed in accordance with Hong Kong Law.

9.2 Any dispute or claim concerning the scope, meaning construction or effect of this Agreement or arising therefrom shall be referred to and finally settled by arbitration at Hong Kong International Arbitration Centre in accordance with the procedures set forth below and, if necessary, judgement on the award rendered may be enforced in any Court having jurisdiction thereof;

(1) If the Parties agree to the appointment of a single arbitrator the arbitral tribunal shall consist of him alone. The arbitrator may be appointed either directly by the Parties or, at their request, by the IATA Director General.

(2) If they do not so agree to the appointment of a single arbitrator, the arbitral tribunal shall consist of three arbitrators appointed as follows:

(a) If only two Parties are involved in the dispute each Party shall appoint one of the three arbitrators. Should either Party fail to appoint his arbitrator such appointment shall be made by the IATA Director General;

(b) if more than two parties are involved in the dispute they shall jointly agree on the appointment of two of the arbitrators. Failing unanimous agreement thereon, such appointment shall be made by the IATA Director General;

(c) the two arbitrators appointed in the manner provided above shall appoint the third arbitrator, who shall act as chairman. Should they fail to agree on the appointment of the third arbitrator, such appointment shall be made by the IATA Director General.

(3) The IATA Director General may, at the request of any Party concerned, fix any time limit he finds appropriate within which the Parties or the arbitrators appointed by the Parties, shall constitute the arbitral tribunal. Upon expiration of this time limit, the IATA Director General shall take the action prescribed in the preceding paragraph to constitute the tribunal.

(4) When the arbitral tribunal consists of three arbitrators, its decision shall be given by a majority vote.

(5) The arbitral tribunal shall settle its own procedure and apply Hong Kong law. The award shall include a direction concerning allocation of costs and expenses of and incidental to the arbitration (including arbitrator fees).

(6) the award shall be final and conclusively binding upon the Parties."

15. Although not expressly stated, there is no denial in Mr Ko's affidavit that as at 3 July 1998 when services were scheduled to be provided by the defendant to the plaintiff and were in fact provided no form of agreement had been signed. But he concluded his affidavit at paragraph 16, as follows:

"16. The dispute between the parties in this action arises in respect of matters which are the subject of the arbitration provisions and which fall within the scope of either the arbitration provisions of the Main Agreement, the plaintiff's agreement, or the defendant's agreement. The dispute arose before the commencement of the action, and concerns fit and proper matters to be referred to arbitration and there is no reason why they should not be so referred and decided."

16. The third and final affidavit filed by the defendant came from Mary Chan Sheung Pui (Miss Chan) another solicitor employed by the defendant's solicitors. She affirmed that the defendant was at all material times and remains ready to submit to arbitration.

17. For the plaintiff the first affidavit was filed by Yen Chen Pei (Mr Yen) a partner of the plaintiff's solicitors having conduct of the action. He said that although the parties were in the course of negotiating a handling agreement from April 1998, at the material time they had not reached an agreement. He said on instruction the form of agreement exhibited by Mr Sherry which he called the Main Agreement and bound the parties was not, in fact, an agreement to which the parties were committed. Furthermore, there were material differences between the forms of agreement called the defendant's agreement and the plaintiff's agreement, lending support to the plaintiff's assertion that the parties were only negotiating with no agreement reached.

18. The second and remaining affidavit for the plaintiff came from Huen Yuen Hung (Mr Huen) the Cargo Services Manager and by such office engaged in the negotiating of a contract with the defendant. He confirmed the contents of Mr Yen's affidavit.

The Law

19. Arbitration in Hong Kong is subject to the provisions of the Arbitration Ordinance, Cap 341 (AO), under whose clause 6(2) this application has been brought.

20. Clause 2AA AO sets out the objectives and principles:

"2AA. Objective and principles of Ordinance

(1) The object of this Ordinance is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense.

(2) This Ordinance is based on the principles that -

(a) subject to the observance of such safeguards as are necessary in the public interest, the parties to a dispute should be free to agree how the dispute should be resolved; and

(b) the Court should interfere in the arbitration of a dispute only as expressly provided by this Ordinance."

21. Clause 2 AO defines an arbitration agreement as having the same meaning as in article 7(1) of the UNCITRAL Model Law (UML).

22. Article 7(1) UML states:

"Article 7. Definition and form of arbitration agreement

(1) "Arbitration Agreement" is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement."

23. Clause 2AC AO states an arbitration agreement has to be in writing. It says in part:

"2AC. Arbitration agreement to be in writing

(1) An agreement is not an arbitration agreement for the purposes of this Ordinance unless it is in writing.

(2) An agreement is in writing for the purposes of subsection (1) if -

(a) the agreement is in a document, whether signed by the parties or not; or

(b) the agreement is made by an exchange of written communications; or

(c) although the agreement is not itself in writing, there is evidence in writing of the agreement; or ......"

24. Clause 6(2) AO (under which this application has been made) states in part:

"6. Court to refer matter to arbitration in certain cases

(2) ....., if a party to an arbitration agreement that provides for the arbitration of a dispute involving a claim or other matter that is within the jurisdiction of the Labour Tribunal or a person claiming through or under such a party, commences legal proceedings in any court against any other party to the agreement or any person claiming through or under that other party, in respect of any matter agreed to be referred, and any party to those legal proceedings applies to that court after appearance and before delivering any pleadings or taking any other step in the proceedings, to stay the proceedings, the court or a judge of that court may make an order staying the proceedings, if satisfied that -

(a) there is no sufficient reason why the matter should not be referred in accordance with the agreement; and

(b) the applicant was ready and willing at the time the proceedings were commenced to do all things necessary for the proper conduct of the arbitration, and remains so."

25. Clause 8 AO states:

"8. When reference is to a single arbitrator

Unless a contrary intention is expressed therein, every arbitration agreement shall, if no other mode of reference is provided, be deemed to include a provision that the reference shall be to a single arbitrator."

26. An arbitration agreement is a distinct and separate agreement even if part and parcel of a contract between two parties. Thus its validity or existence or effectiveness is not affected by the fact that the contract is invalid or did not come into existence or has become ineffective. The editors of Chitty on Contracts 28th edition at paragraph 16.019 state that as a result of this proposition:

"Two consequences follow. First, since the arbitration clause is separable from the contract in which it is contained, then the logical question is not whether the issue goes to the validity of the contract but whether it goes to the validity of the arbitration clause. Thus the clause may be valid and binding even if, for example, the contract is void, voidable for fraud or misrepresentation, or if it has been discharged by breach, frustration or supervening illegality. Of course, there will be cases in which a claim that no contract came into existence between the parties necessarily entails a denial that there was any agreement to arbitrate. Cases of non est factum and mistake as to the person provide instances. But the initial invalidity or illegality of the contract will not necessarily involve these consequences unless it is such as directly to impeach the arbitration agreement itself. ....."

27. For a stay such as this to succeed it is not necessary for the claimant to prove that there is an arbitration agreement. It is sufficient for the court to be satisfied there is a plainly arguable case that there is one; that is because Article 16(1) states:

"CHAPTER IV. JURISDICTION OF ARBITRAL TRIBUNAL

Article 16. Competence of arbitral tribunal to rule on its jurisdiction

(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause."

28. Judicial support for this proposition is found in Pacific International Lines (PTE) Limited and another v Tsin Lien Metals and Minerals Co. (HK) Limited [1993] 2 HKLR 249; per Kaplan J at p. 255.

The Defendant's Case

29. The defendant's case as put by Mr Cooney representing it is that the form of agreement called the defendant's agreement was an offer made to the plaintiff. This included an offer to submit all disputes to arbitration. The plaintiff's counter proposal did not reject the notion of arbitration; indeed it incorporated a like obligation. Both parties evinced a clear intention to submit future disputes, if any, to arbitration. Any differences went to procedure; that was capable of resolution under clause 8 AO. This coupled with the parties' subsequent conduct in respect of which the defendant provided services to the plaintiff amounted to an arbitration agreement separate from the contract the parties were looking to commit to and was not impeached by the status of that.

30. And the defendant not having pleaded to the plaintiff's case and at all times and now being ready to submit to arbitration, has complied with section 6(2) AO.

The Issue

31. There is a single issue and it boils down to the answer to a single question; has the defendant demonstrated there is an arguable case that there is an arbitration agreement?

32. I come now to consider that.

The Outcome

33. Section 2AC AO already reproduced sets out what constitutes an arbitration agreement. It does not vary or limit the classic essentials of what constitutes an agreement - offer and acceptance. Notwithstanding the somewhat contrary evidence of Messrs Sherry and Ko, it is apparent that the defendant made an offer. The plaintiff then made a counter offer. There was no acceptance; there was no contract. Each offer and counter offer incorporated arbitration provisions. That did no more than evince an intention. Overlooking for the moment that the proposed conditions of arbitration did not tally the parties could not be bound by these terms when free to walk away from the negotiating table without any obligation at all. And the fact that the conditions did not tally is indicative that there was not a meeting of the minds and thus no agreement on how the arbitration was intended to be undertaken. How can there be an agreement, when the terms are not agreed?

34. Section 8 AO on its ordinary reading does not assist.

35. I conclude that the defendant has not satisfied me that there is a plainly arguable case that there is an arbitration agreement. The answer to the question posed is 'No, it has not'. Thus there is no contractual or other impediment to the plaintiff's right to proceed with its action.

36. The application for a stay is declined.

37. Costs (nisi at first instance) are to the plaintiff taxed if not agreed.