E. BON BUILDING MATERIALS CO. LTD. v. CHINA STATE CONSTRUCTION ENGINEERING CORPORATION

DCCJ 15011/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15011 OF 2001

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DECISION

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INTRODUCTION

1. The plaintiff has commenced legal proceedings claiming against the defendant for the sum of HK$ 562,562.00, being the price of goods sold and delivered. The plaintiff is a building materials supplier and the defendant is a building work contractor. The goods in question were delivered to the defendant at different sites on various occasions during the period from December 2000 to June 2001.

2. In the present hearing, the defendant applies for a stay of all proceedings in this action and asks the matter be referred to arbitration pursuant to Section 6 of the Arbitration Ordinance and /or under the inherent jurisdiction of the court.

3. The goods forming the plaintiff's claim could be divided into two groups; one group being delivered pursuant to purchase contracts issued by the defendant which were signed by both parties whilst the other group were governed by purchase contracts which were unsigned. The purchase contracts were all of the same form and on the back of each purchase contract, there were printed the same terms and conditions including an arbitration clause.

4. At the hearing, the plaintiff no longer argued against the existence of an arbitration agreement between the parties and conceded that the governing contract between them was the purchase contract issued by the defendant whether singed or unsigned and the arbitration clause was one of the terms of their agreement. And the plaintiff further conceded that the new Section 6 of the Arbitration Ordinance as amended in 1996 is mandatory in nature.

EFFECT OF ARTICLE 8

5. Section 6 of Arbitration Ordinance governs the court's power to refer matter to arbitration in certain cases, subsection (1) reads: " Subject to subsection (2) and (3), article 8 of the UNCITRAL Model Law ( Arbitration agreement and substantive claim before court) applies to a matter that is the subject of a domestic arbitration agreement in the same way as it applies to a matter that is the subject of an international arbitration agreement." Subsections (2) and (3) are not relevant to our present consideration. The new Section 6 has adopted article 8 of the UNCITRAL Model Law as part of the law. The relevant part of the terms of article 8 is that: " A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed." Comparing with the old Section 6, the new section uses the word " shall", by virtue of the terms in article 8, instead of "may" as in the old section for the court to make an order staying the proceedings.

6. In view of the amendment made to Section 6 by adopting article 8 of the UNCITRAL Model Law, in my view, the court would now be more readily in holding the parties to their bargain by referring the dispute to arbitration once the court is satisfied that there is a written clause evidencing the parties' intention to refer their dispute to arbitration unless the party seeking a stay of proceedings has admitted the claim or the party opposing the stay could show that the arbitration agreement is null and void, inoperative or incapable of being performed.

POWER OF COURT TO GIVE RELIEF WHERE THE DISPUTE INVOLVES QUESTION OF FRAUD

7. Section 26(2) of Arbitration Ordinance provides that " where an agreement between the parties provides that disputes which may arise in the future between them shall be referred to arbitration, and a dispute so arise involves the question whether any such party has been guilty of fraud, the Court shall, so far as may be necessary to enable that question to be determined by the Court, have power to order that the agreement shall cease to have effect and power to give leave to revoke the authority of any arbitrator or umpire appointed by or by virtue of the agreement."

8. This is the ground, in fact the sole ground, relied upon by the plaintiff in opposing the defendant's application. The plaintiff argued that as the defendant has made allegation of fraud against the plaintiff, the court should refuse a stay pursuant to Section 26 of the Arbitration Ordinance and allow the matter go to trial so that its name could be cleared in public. The plaintiff submitted that the defendant had made allegation of fraud against the plaintiff by alleging that the Bonco products supplied by the plaintiff were fake in that they were not from a source of origin from Japan. The basis for the plaintiff's contention is that in the affirmation of the defendant witness, Miss Hilda Wong, she said that :

" para.35- In or about early April 2001, the Hong Kong Housing Authority, which was the employer for the Tseung Kwan O project, suspected that some of the Bonco products supplied by E Bon ( the plaintiff) did not have a source of origin from Japan. This was inconsistent with all the purchase contracts and inconsistent with the sample provided by E Bon.

Para.36- On 17 April 2001, there was a newspaper report stating the there were fake Bonco products which did not have a source of origin from Japan and that there were investigations by the ICAC against E Bon and /or its associated companies.

Para.37- Accordingly, during the period from 25 April to 13 July 2001, China State ( the defendant) wrote 5 letters to E Bon to confirm that all Bonco products supplied by E Bon had a source of origin from Japan, otherwise China State would reject all Bonco products ( which would include removal of all Bonce products installed), in which case China State would hold E Bon liable for all loss and damages caused to China State as a result."

LEGAL PRINCIPLES REGARDING OPERATION OF

PROVISIONS OF SECTION 26

9. Madam Justice Kwan in Wan Chung Construction Co. Ltd. V Lingnan University & Another HCCT 43/ 2001 ( Unreported) has summarised the legal principles regarding the operation of the provisions of Section 26 of Arbitration Ordinance as follows;

(1)- For the court's power to be invoked under these provisions, it is necessary that the dispute involves the question whether any party to the arbitration agreement has been guilty of fraud. To satisfy this requirement, a " concrete and specific issue of fraud" must be raised. There must be " sufficient prima facie evidence of fraud" with " convincing evidence to support the allegations", not a mere bandying about of allegations.

(2)- If the stay of proceedings to arbitration is opposed by the party charged with the fraud, then almost as a matter of course the court will refuse a stay so that the matter can proceed to trial. This is a reflection of the view that when an allegation of fraud is made against a person, he is entitled to have that issue heard in public, so that his name may be cleared in public.

(3)- Where the party making an allegation of fraud opposes a stay of proceedings to arbitration and wishes the action to proceed in the court, the court has a discretion to refuse or grant a stay of proceedings. Whether it does so or not will depend on all the circumstances of the case.. the court's normal approach is to grant a stay of proceedings to arbitration, when the " sole matter relied upon is the charge of fraud". Even if there is a strong prima facie case of fraud in specific respects made out, that is not by itself enough to warrant refusing a stay.

THE PLAINTIFF'S CASE

10. The plaintiff argued that their case fell within the situation as described in paragraph (2) above, here the plaintiff was the party charged with fraud, it was therefore entitled to clear its name in public. The court should as a matter of course refuse a stay.

11. In my judgment, whether the party charged with fraud or the party making an allegation of fraud, the party concerned must show that their dispute involves question of fraud and have to pass the test as set out in Paragraph (1) above by showing sufficient prima facie evidence of fraud with convincing evidence to support the allegations. The defence put forward in the present case does not, in my view, amount to any allegation of fraud. What the defendant was saying in effect is that the Bonco products supplied by the plaintiff were not corresponding to the samples as provided. The fact that the defendant mentioned about the investigations by ICAC into the plaintiff's supply of alleged fake Bonco products in the newspapers, in my view, it was only given as the reason why the defendant would write to the plaintiff asking for proof of source of origin. The defendant did not allege that the Bonco products were fake, it simply said that they were not from Japan, and thus they were not the same kind of products as defendant had contracted for.

CONCLUSION

12. For the reasons given, I conclude that the dispute between the plaintiff and the defendant involves no question of fraud and since parties had provided for arbitration in their contract, I therefore grant the defendant's application for a stay of all further proceedings in this action.

COSTS- INDEMNITY BASIS

13. Regarding the question of costs, the defendant has asked for costs on an indemnity basis on the grounds that the plaintiff have pursued a hopeless case. The court of Appeal in Choy Yee Chung v Bon Star Development Limited H.K.L.R.D. 1327 has summarized the law relating to the award of indemnity costs as follows: " A taxation of the successful party's costs on an indemnity basis could properly be ordered where the proceedings were scandalous or vexatious or had been initiated or prosecuted maliciously or for an ulterior motive or in an oppressive manner. The circumstances in which an indemnity award might properly be made were not restricted to circumstances such as those described." In Glyne Investments Ltd. V Hill Samuel Life Assurance Ltd., June 17, 1997 ( unrep.), the English court said that where the court found that the conduct of the litigation was deserving of moral condemnation an order for costs on the indemnity basis was appropriate. In the present case, parties were just arguing on different interpretation of the law, I see no reason to award indemnity costs. I therefore refuse to grant such costs.

14. Costs of this action including the costs of and occasioned by this application be to the defendant on a party to party basis, to be taxed if not agreed. I shall make it an order nisi, it is to be made absolute at the expiration of 14 days from the date of handing down decision.