VK HOLDINGS (HK) LTD v. PANASONIC ECO SOLUTIONS (HONG KONG) CO LTD

HCCT 19/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 19 OF 2014

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D E C I S I O N

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Background

1. This is an application by the plaintiff, VK Holdings (HK) Limited (“VK”) under s 34 of the Arbitration Ordinance, Cap 609 (“Ordinance”) for the Court’s decision on the jurisdiction of an arbitrator appointed to determine the dispute between VK and Panasonic Eco Solutions (Hong Kong) Co Ltd (“Panasonic”) under an agreement made between the parties on 1 April 2005 (“Agreement”).  By his interim award dated 18 March 2014, as amended on 23 May 2014, the arbitrator made a preliminary ruling that he does have jurisdiction.  It is against such preliminary ruling that VK requests the court to decide the jurisdiction of the Arbitrator under s 34 (1) (3) of the Ordinance.

2. VK is a company which trades in parts of electric products, which it obtains from different suppliers, for sale to Panasonic.  VK and Panasonic commenced their business dealings in about May 2001.  On 1 April 2005, VK and Panasonic entered into a Purchase Agreement for sale and purchase of electric products, which were to be procured and supplied by VK in accordance with specifications set by Panasonic.  The pertinent terms of the Agreement are as follows.

3. By Article 1, the scope of the Agreement is defined and it reads:

“This Agreement shall stipulate the terms and conditions in relation to the sale and purchase of the Products (as defined in Article 2 hereof) between (Panasonic and VK) and shall be applied to an individual purchase contract of the Products between (Panasonic and VK) made from time to time during the term of this Agreement.”

4. Article 2 provides as follows:

“The “Products” shall mean such products as specified in the Exhibit attached hereto.  Upon mutual written agreement, certain product(s) may be added to or deleted from the Products.”

5. The Exhibit attached to the Agreement (“Exhibit”) sets out the products referred to in Article 2, and states:

“The Products are as follows:	GOA 561E 00001 (PI10A- 561K- VK)
	PI 10A- 102K-VK
	ISO 3219E”

6. In laymen’s terms, the products set out in the Exhibit (“Products”) are (for the first 2 items) coils, and (for the last item) LCD or liquid crystal displays, for use in electronic products.

7. It is not disputed that the form of the parties’ purchase and sale of the Products followed the procedure set out in Article 3 of the Agreement, by way of Panasonic’s issue of confirmed order sheets, VK’s issue of order acceptance sheets within 2 business days thereafter, either by fax or by electronic data interchange message (“EDI”) as set out in Article 3 (3).  Pursuant to Article 4 of the Agreement, the prices of the Products were to be determined by the parties, based upon quotations of VK for Panasonic’s acceptance.  A Price Confirmation would be issued by Panasonic after the prices were agreed, for mutual confirmation.

8. Under Article 11 of the Agreement, VK warrants that each Product complies in all respects with the purchasing specifications of Panasonic for a period of either 12 or 15 months, as specified in the Article.  Due date for payment is as specified in the price quotation or as may be separately agreed.

9. VK is entitled under Article 18 to subcontract the manufacture of the Products.

10. Under Article 23, the Agreement is stated to be the entire agreement between the parties with respect to the subject matter, and no modification, change and amendment is binding except by mutual expressed consent in writing of the parties.

11. The term of the Agreement remains in force and continues after the initial period of one year, unless terminated or amended by mutual agreement in writing at least 60 days prior to the initial or any extended period.  The Agreement may further be terminated by either party giving written notice to the other upon the occurrence of specified events, which include the event of the prices of the Products not being agreed upon by Panasonic and VK (Article 27 (1) (g)).

12. Finally, Article 20 of the Agreement provides for arbitration of “any and all disputes, controversies or differences arising out of or in connection with the Agreement”.

The Arbitration

13. On the evidence, it is clear that there was a course of dealings between Panasonic and VK after the date of the Agreement, whereby different kinds of electronic parts were ordered by Panasonic for supply by VK, which orders were all accepted by VK, either by fax or adopting the EDI procedure set out in Article 3 of the Agreement. 

14. In 2009 and 2010, VK supplied to Panasonic, pursuant to orders placed by Panasonic, electronic parts known as 7 segment LED (light emission diodes) and identified in the contract documents as Part No B3BA4Y000001 (“Item 1”) and Part No B3BA4Y000002 (“Item 2”).  Claims were made by Panasonic that Item 1 and Item 2 (collectively “Parts”) were defective and that VK was in breach of the Agreement in having changed its manufacturing subcontractor for the Parts without Panasonic’s consent.  These claims are disputed by VK. 

15. On 11 March 2013, Panasonic referred its claims to HKIAC for arbitration (“Arbitration”) pursuant to the arbitration clause in the Agreement.  On 8 May 2013, Mr Christopher To (“Arbitrator”) was appointed as the sole arbitrator.  By letter dated the 13 June 2013, VK stated that it had no objection to the Arbitrator’s appointment, but contended that the dispute submitted by Panasonic (“Dispute”) was outside the scope of the Agreement, since the Parts are not the Products defined in the Exhibit to the Agreement. 

16. There is no dispute that the Exhibit was never amended to refer or include any item other than the Products.  Nor is it in dispute that there were in fact orders and other documents in writing to evidence VK’s supply to Panasonic, and Panasonic’s acceptance and purchase, of electronic parts other than the Products.  Panasonic claims that the supply and purchase of these parts are all under and pursuant to, and subject to the terms and conditions set out in the Agreement, which is an umbrella or framework agreement extending to the parties’ dealings in all these electronic parts, other than the Products specified in the Exhibit.

17. On the other hand, VK maintains that the Agreement only governs the sale and purchase of the Products, and not any other goods, and disputes that the Agreement was an umbrella or framework agreement as Panasonic claims to cover all the dealings between VK and Panasonic.

18. On 19 August 2013 the Arbitrator ordered that the question as to whether he had jurisdiction to determine the Dispute in relation to the Parts be determined as a preliminary issue.  On 18 March 2014, the Arbitrator published an interim award, which decided the preliminary issue in favor of Panasonic, by finding that he had jurisdiction to deal with the Dispute and with the claims made by Panasonic.  On 16 April 2014, VK applied to the court to set aside the interim award (as amended on 23 May 2014 to deal with some clerical errors).

19. The parties do not dispute that the hearing under s 34 is a hearing de novo.

Whether mutual written agreement to add to the Products

20. I will first dispose of the question of whether the Parts have been added to the Products by “mutual written agreement” within the meaning of Article 2.

21. Whereas there were orders in writing or written specifications and invoices for goods other than the Products to be supplied by VK to Panasonic, I agree with Mr Li SC that there is no evidence of any written agreement, or even acknowledgment or evidence in writing, that the orders for any goods other than the Products were subject to and governed by the Agreement, or would be included as Products supplied under the Agreement, or that the terms and conditions of the Agreement would govern the supply of such goods.  The orders, specifications or invoices may be evidence in writing of the parties’ agreement for the sale, supply and purchase of the Parts, or goods other than the Products, but there is no agreement, or even acknowledgment, in writing (as required by Article 2) that the Parts, or other goods apart from the Products, would be added to the Exhibit, or to the definition of the Products in the Agreement. 

The scope of the arbitration clause

22. That, however, does not in my view dispose of the question on the Arbitrator’s jurisdiction.  The determination on whether the Arbitrator was invested with jurisdiction over the Dispute turns on whether the parties’ Dispute over the alleged breach of the Agreement, and the alleged defects in the Parts supplied by VK, can fall within the arbitration clause on a proper construction of Article 20, notwithstanding the fact that the Products have not been extended or amended in writing. 

23. An arbitrator derives his jurisdiction from the agreement of the parties at whose instance he is appointed.  He has such jurisdiction as they agreed to give him under the agreement.  When the question arises as to whether a certain dispute falls within an arbitrator’s jurisdiction, the court’s task is to consider the dispute in question, to elicit from the arbitration agreement the parties’ intentions concerning the jurisdiction to be conferred on the arbitrator, and to decide whether the parties did, or did not, intend a dispute of the kind in question to be resolved by the arbitrator.  Put succinctly by Viscount Simon LC in Heyman v Darwins (1942) 72 Ll L Rep 65, at p 67:

“The answer to the question whether a dispute falls within an arbitration clause in the contract must depend on (a) what is the dispute and (b) what disputes the arbitration clause covers.”

24. Each arbitration clause must be construed in the context of the contract as a whole, and the meaning of a particular formula may be broader or narrower depending on the nature of the transaction, the circumstances in which the arbitration clause came into existence, and the other provisions of the contract (Mustill & Boyd: Commercial Arbitration 2^nd Edition, p 118).  As the learned authors of Mustill & Boyd: Commercial Arbitration state (at p 118), and as the courts have readily accepted (see, for example, Premium Nafta Products Ltd v Fili Shipping Co Ltd [2007] UKHL 40) there is a prima facie assumption that parties to a contract intended that all disputes relating to a particular transaction should be resolved by the same tribunal, and that by agreeing to arbitrate, they have prima facie chosen arbitration as the appropriate tribunal.

25. The parties are not in serious dispute as to the law and principles applicable to the construction of contracts.  The construction of a document is an attempt to discover what a reasonable person would have understood the parties to mean, having regard not merely to the individual words used, but to the agreement as a whole, the factual and legal background against which it was concluded, and the practical objects which it was intended to achieve (Jumbo King Limited v Faithful Properties Limited [1999] 4 HKC 707, at 726E to F).

26. In most commercial contracts, the fundamental terms concern the obligation to be performed, the period for performance and the price, which are usually stipulated with some particularity.  However, it is not unusual to find elements of fluidity in a contract, and this is particularly common in building and construction contracts, which enable (inter alia) the variation of work and recalculation of the contract price.  It is pertinent in my judgment to note that the Agreement between the parties contains a similar element of fluidity.

27. The recitals to the Agreement refer to the parties’ intention to sell and purchase “parts for electric products” in accordance with specifications set by Panasonic.  Article 1 of the Agreement makes it clear that the Agreement is to set out the terms and conditions for the sale and purchase of the Products between Panasonic and VK, and that the Agreement and the terms and conditions “shall be applied to an individual purchase contract of the Products” “made from time to time” during the term of the Agreement.  The parties clearly intended that there would be separate individual purchase contracts or transactions, and that such contracts for purchase and sale would be made from time to time during the term, which is a continuous one.  Article 2 specifies the Products as those in the Exhibit, but it envisages variations to be made to the Products covered by the Agreement during the term, by way of additions to or deletions from the definition of the Products.

28. The structure provided under the Agreement for the placing of orders; acceptance of orders; and for the prices of the Products to be by mutual confirmation, with possible review of the prices as a result of alteration of the factors for price calculation; all contemplate changes to and variations of the Agreement by mutual consent. 

29. The recitals to the Agreement refer to the parties’ intention to buy and sell “parts in electronic products”.  The items supplied by VK and purchased by Panasonic during the term of the Agreement and in their course of dealings were all electronic parts, such as coils and liquid crystal displays (ie the Products) and light emitting diode displays (ie the Parts).  The liquid crystal displays and the light emitting diode displays perform substantially the same if not identical functions.  I cannot see, and VK has not pointed to, any real difference in the parties’ trading in the light emitting diode displays and their dealings in the liquid crystal displays, to justify any distinction which has to be made between the Parts and the liquid crystal displays of the Products.  The difference in costing and pricing (if any) can be dealt with under the mechanism provided for in Article 4.  As Mr Man for Panasonic pointed out, the documents show that the prices in the quotations for goods to be sold may specify a certain validity period.  If the parties cannot mutually agree on the price for whatever reason, whether by virtue of the warranty for the Parts or otherwise, the Agreement can in the extreme case be terminated.  I do not agree that it would not make commercial sense to extend the Agreement to the Parts or other goods in addition to the Products.

30. Turning to the words used in the arbitration clause contained in Article 20, it refers to “any and all” “disputes, controversies or differences” “arising out of or in connection with” the Agreement.  All these phrases have been considered to confer the widest possible jurisdiction and a wide meaning (Mustill & Boyd: Commercial Arbitration 2^nd Edition, p 118 para 11(a) , (b) and (d), p 118 to 120, and the cases cited).  Of course, they are to be construed by reference to the subject matter of the contract in which the words are contained, but a dispute “arising out of” the contract has been held to cover every dispute except a dispute as to whether there was ever a contract at all (HE Daniel Ltd v Carmel Exporters and Importers Ltd [1953] 2 Lloyd’s Rep 103).  A dispute “in connection with” the contract was held to be wide enough to include claims for rectification, which may lead to a contract different from that contained in the contract, on the basis of mistake or misrepresentation inducing the contract (Ashville Investments Ltd v Elmer Contractors Ltd [1988] 2 Lloyd’s Rep 73). 

31. I bear in mind the useful reminder made by the learned authors of Mustill & Boyd that any decision by the courts on a particular form of words in one contract is no sure guide to its meaning in another, as each arbitration clause must be construed in the context of the contract as a whole, and the meaning of a  particular formula may be broader or narrower depending on the nature of the transaction, the circumstances in which the arbitration clause came into existence, and the other provisions of the contract.  Nevertheless, it seems clear that words of broad import, such as “in connection with this contract”, are to be given the natural meaning in the context in which they are found, and that they are capable of bearing a meaning which embraces any dispute other than one which is “entirely unrelated to the transaction covered by the contract”.  This was so accepted by Hon Ma J (as he then was) in Getwick Engineers Limited v Pilecon Engineering Limited HCA 558/2002.

32. In gist, the present Dispute or difference between the parties goes to whether the parties had intended their Agreement to extend to the Parts, whether the Parts supplied by VK to Panasonic come within the definition of “Products” in Article 2 of the Agreement, and whether VK was accordingly in breach of the conditions of the Agreement by virtue (inter alia) of its supply of defective Parts. 

33. As Lord Hoffman pointed out in Jumbo King Ltd v Faithful Properties Ltd (1999) HKCFAR 279, the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean.  The test is not what either VK or Panasonic subjectively intended the Agreement to mean.

34. Given the very broad terms used in Article 20, and bearing in mind that on the particular facts of this case, the nature and function of the Products and Parts supplied by VK to Panasonic are substantially similar if not identical, I consider that there is a sufficiently close connection between the Dispute and the Agreement, to bring the difference and the claims made by Panasonic in the Arbitration within the arbitration clause of the Agreement.  The relationship between the parties, and their transactions for the supply of the Parts are so closely linked and related to their relationship and the transactions for the supply of the Products that, judged objectively, it cannot reasonably be said that Panasonic and VK could not have intended, at the time when the Agreement was entered into, that any disputes relating to VK’s supply of the Parts would not be included in the Agreement.  In my judgment, it can be reasonably assumed in this case that Panasonic and VK could not have intended and agreed either to have a separate tribunal to resolve their Dispute relating to the Parts, or to have a different manner of resolving any dispute relating to the supply of the Parts, than as provided for in Article 20.  It certainly cannot be said that the Dispute is entirely unrelated to the Agreement, or to the transaction of the purchase and supply of electronic parts under the Agreement.

The scope of the reference or submission to arbitration

35. As for the claim that the Arbitrator had exceeded the scope of the reference to Arbitration, and had no jurisdiction to deal with Item 1 of the Parts, this can be simply dealt with. VK claims that Panasonic’s Form 1, ie the Application to HKIAC for appointment of an arbitrator, refers to the Request for Arbitration (“Request”) and the Request only refers to Panasonic’s orders for Item 2 of the Parts. As such, it was argued that the Arbitrator had no jurisdiction to decide on the claims made in relation to Item 1.

36. As Mr Man for Panasonic highlighted, Form 1 refers to details of the Agreement and describes the Dispute as arising from breaches of the Agreement by reason of VK’s supply of defective goods and VK changing its manufacturing subcontractor without Panasonic’s consent. It was a broad claim for breach of the Agreement.

37. More significantly, when the parties submitted the matter to the Arbitrator for his preliminary determination leading to the Interim Award, the parties clearly identified the question to be addressed by the Arbitrator on the question of his jurisdiction as being whether the Arbitrator had jurisdiction to determine the disputes between the parties relating to the supply of Item 1 and Item 2 of the Parts. This is clearly set out in the letters to the Arbitrator, dated 26 June 2013 and 12 July 2013 respectively, from the solicitors acting for Panasonic and VK. Submissions were thereafter made by both parties on this issue of whether the Agreement extends to Item 1 and Item 2 of the Parts, which are not within the definition of the Products in the Agreement. Both Panasonic and VK filed evidence to deal with the Parts, and whether they are covered by the Agreement.

38. In these circumstances, I agree that the parties had expressly agreed and submitted to the reference to the Arbitrator for determination of his jurisdiction over Panasonic’s claims in respect of both Item 1 and Item 2 of the Parts.

Conclusion

39. In conclusion, therefore, I agree with the Arbitrator’s ruling that he has jurisdiction over the Dispute, and jurisdiction to rule whether the Parts fall within the definition of Products under the Agreement, whether the terms and conditions of the Agreement extend to VK’s supply of the Parts, and whether VK was in breach of the Agreement.  How he finds on these matters go to the merits and are beyond the scope of the Court’s decision in this matter.

40. I accordingly dismiss VK’s application to set aside the Amended Interim Award, and make an order nisi that the costs of the application are to be paid by VK to Panasonic, on an indemnity basis (A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389.