XCHRX JIALING (HONG KONG) CO. LTD. v. J.A. MOELLER (HONG KONG) LTD. and Another

THE JUDGE HAS AUTHORISED PUBLICATION OF THIS JUDGMENT

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H E A D N O T E

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Arbitration - domestic - application for a stay of proceedings under s.6 of the Arbitration Ordinance - whether filing 2 affidavits in opposition to Ord. 14 summons before issue of application for a stay constitutes a step in the action.

1993, No. AS581

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. There is before the court an application by the 1st defendant for a stay of these proceedings brought under s.6 of the Arbitration Ordinance, Cap. 341. The point at issue is whether the filing of an affidavit seeking leave to defend in opposition to a summons under O.14 is a step in the action for the purposes of s.6 of the Arbitration Ordinance.

2. On 4th July 1991, the plaintiff and the 1st defendant entered into an agreement by which the plaintiff agreed to sell and the 1st defendant agreed to buy, 20,500 KB of a chemical substance for US$51.50 per KB net, CIF Hong Kong. The payment provision was D/A 120 days through the Bank of East Asia Ltd., Hong Kong.

3. Clause 18 of this contract provided that;

"Should any dispute arise between the sellers and the buyers which they themselves are unable to settle amicably, such dispute may be referred to arbitration and the filing of the arbitrator or arbitrators shall be binding on both parties."

4. Also, on 4th July 1991, the 1st defendant signed a document headed "Letter of Guarantee" in favour of the plaintiff which provided that;

"We hereby guarantee the payment of 20,500 KB DHS at US$51.50 per KB for US$1,055,750.00 to be paid at maturity through our banker - the Bank of East Asia Ltd., Hong Kong - on the basis of D/A 120 days."

5. The 2nd defendant also signed a Letter of Guarantee in identical terms. The 2nd defendant was not a party to the Contract of Sale and thus has never agreed on arbitration.

6. Disputes unfortunately arose and the very brief chronology is as follow;

7. It is perfectly plain that, when on 22nd October 1993, the 1st defendant filed the affidavits of Mr. Rigg and Mr. Cheung;

(1) a summons for a stay had not been issued;

(2) neither the topic of arbitration nor a stay had been adverted to in either affidavit.

8. What in fact happened was that Mr. Mallard, the solicitor acting for the defendants at the O.14 hearing, appeared before the Master and showed him a draft summons for a stay which he said was just about to be issued and on that basis the Master adjourned the O.14 summons.

9. Mr. Kenneth Chan who appeared for the plaintiff took two main points as to why the summons for a stay should be dismissed.

10. Firstly, he submitted that the dispute, the subject matter of this action, is not a claim within C1. 18 of the contract. He submits that the claim is a claim against the 1st defendant based on the guarantee and not on the Contract of Sale. As there is no arbitration clause in the guarantee, there is nothing to stay, so runs the argument.

11. In my judgment, this argument is quite unsound. The guarantee signed by the 1st Defendant refers to the identical obligation to pay as that contained in the Contract of Sale. I do not think that it is possible to say that the claim is based on the guarantee when it is in fact identical to the primary obligation contained in the Contract of Sale. In effect the guarantee is a mere repetition of the obligation contained in the Contract of Sale and in my judgment adds nothing to it. I am satisfied, therefore, that the claim is one within the terms of Clause 18. No other arguments were addressed to me concerning the construction of Clause 18.

12. Mr. Chan's second point is the main and most interesting point in this matter. As is well known, s.6 provides that a party is disentitled to a stay if he has taken a step in the action before seeking a stay. As I said in Euro-American Insurance Ltd. v Lite Best Co. Ltd. [1993] 1 HKLR 217, it is not always easy to ascertain from the authorties what is and what is not a step in an action.

13. In Euro-American, the defendant not only put in an affidavit in opposition to an O.14 summons before issuing a summons for a stay but he also appeared at the O.14 hearing itself. I had no difficulty in that case, following Pitchers Ltd. v. Plaza (Queensbury) Ltd. [1940] 1 AER 151 in deciding that the defendant had taken a step in the action and was thus disentitled to a stay.

14. The difference, so it is said by Mr. Barlow, between the present case and Euro-American, is that in the present case, Mr. Mallard did not appear to argue the O.14 summons before the Master. He appeared to have it adjourned until after the determination of a summons which he told the Master he was about to issue but had not yet issued. Does this make any difference given that the two affidavits were filed 3 days previously and were totally silent on the topic of arbitration and dealt only with the merits.

15. I think it may be helpful to start by seeing how this topic is dealt with by the 20th edition of Russell on Arbitration and the 2nd edition of Mustill and Boyd on Commercial Arbitration.

16. At page 173, in Russell, one finds a clear statement that "Appearing before the Master and asking for leave to defend" is a step in the proceeding. Authority for this proposition is rightly said to be Pitchers Ltd. v Plaza (Queensbury) Ltd. [1940] 1 AER 151. The next paragraph states the following;

"The filing of an affidavit, on a summons for judgment under O.14, disputing the claim and asserting a right to submit the dispute to arbitration, is probably a "step in the action"; so that if this is done, a summons to stay ought to be taken out at the same time."

17. There is only reference to footnote 51 which states;

"Such filing held to be a "step" in Carbide Trading Co. Ltd. v. Charles Bingham and Co., 15th April 1915, unreported; dicta in Allied Artists Corporation v Jacobson [1922] (unreported) to the contrary disapproved by Lord Goddard L.J. in Pitchers Ltd....."

18. In Pitchers, Goddard L.J. (as he then was), referred to the 1940 Annual Practice, page 2502 and noted that it stated as follows;

"In Allied Artists Corporation v Jacobson, it was held that where, on a summons for judgment under RSC Ord. 14, the defendant had filed an affidavit disputing the claim and claiming the right to submit the dispute to arbitration, he had not taken a step in the action, but as the defendant had alleged fraud in his affidavit, a stay was refused."

19. Goddard L.J. made the following observations on that passage;

"For myself, I should say that that is a somewhat dangerous passage to follow. In the first place, as the stay was refused on the ground that the defendant had alleged fraud, any view which the judge may have expressed as to whether or not the affidavit was insufficient to justify a stay is in the nature of an obiter dictum. The position was that, as the defendant alleged fraud, a stay had been refused. For myself, I am not at all satisfied that, if the defendant filed an affidavit in answer to an application for judgment under RSC, Ord.14, although he may raise the arbitration clause, it may not be said that he has taken a step in the action unless at the same time he has taken out a summons to stay the action." (emphasis added)

20. At page 473 of Mustill and Bloyd, one finds the statement;

"Filing an affidavit and asking for leave to defend application for summary judgment under O.14 is a step unless at the same time an application is made for a stay."

21. There was also a footnote which refers to Pitchers Ltd. and to a few other cases including Turner and Goudy v McConnell [1985] 1 WLR 898.

22. On page 472, the learned authors made the following comments;

"The reported cases are difficult to reconcile, and they give no clear guidance on the nature of a step in the proceedings. It appears, however, that two requirements must be satisfied. First, the conduct of the applicant must be such as to demonstrate an election to abandon his right to stay in favour of allowing the action to proceed. Second, the act in question must have the effect of invoking the jurisdiction of the court. An extra-judicial proceeding in the action, such as obtaining by correspondence a consent to the enlargement of time for delivery of pleadings, is not sufficient."

23. Reference is made to a number of cases referred to in the footnote, one of them is Turner and Goudy and the footnote states "This does not mean that the defendant must himself have made a substantive application to the court. It is sufficient if he concurs in an application made by the plaintiff." Before turning to consider Turner and Goudy, which I have found by far the most helpful case, I think I should just mention County Theatres and Hotels v. Knowles [1902] 1 KB 480. In that case, the defendant attended at Chambers on the hearing of a summons for directions taken out by the plaintiffs on which an order was made that the plaintiff and defendant should respectively make discovery of documents The defendant subsequently applied for a stay under the Arbitration Act but it was held by the Court of Appeal, per Collins M.R. that the defendant had taken a step in the proceedings, and was, therefore, not entitled to a stay.

24. In a very short judgment, the Master of the Rolls said this;

"The parties appear before the master with, as it were, a blank sheet on which he may make this inclusive order. When he does so, with the acquiescence of both parties, there is just as much a step in the proceedings by each of the parties as if an order had been made on his separate application. The defendant might have objected to the making of the order on the ground of the agreement to refer differences; but he did not do so, and he is not in a position to ask for a stay under s.4 of the Arbitration Act."

25. In Turner and Goudy, the plaintiff applied for summary judgment in relation to sums due under a Building Contract. The defendants, who had acknowledged service of the writ, had stated their intention to defend the action and filed an affidavit stating their reasons for contesting the plaintiff's claim. The affidavit also referred to an arbitration clause in the contract and invited the court to consider whether arbitration would be a more appropriate course. On the first return date of the O.14 summons, the defendants' solicitors appeared before the Master, who, having read the defendants' affidavit, adjourned the application for a private room appointment in Counsel's List because it was in an opposed matter. Some weeks later, the defendants applied to stay the proceeding for arbitration pursuant to s.4 of the Arbitration Act 1950. The Master granted the application. The plaintiffs unsuccessfully appealed to the judge in Chambers. On appeal by the plaintiffs, held by Dillon L.J. and Mustill L.J., allowing the appeal, "that the defendants had taken a step in the proceedings by filing an affidavit showing cause why summary judgment should not be entered against them and by appearing before the Master, thereby causing judgment to be deferred by an adjournment; and that, therefore, it was too late to apply under s.4 of the Arbitration at 1950 for the action to be stayed so that the arbitration clause could be invoked." In coming to this decision, the Court of Appeal applied the County Theatres case and the Pitchers case above referred to.

26. In a very helpful judgment Dillon L.J. made two preliminary points. Firstly, he referred to Parker. Gaines and Co. v Turpin [1918] 1 KB 358 and stated that this case supports the proposition that a defendant is prevented from applying for arbitration if he takes a step in the action before applying for arbitration, "even though at the time he took that step in the action, he did not realize that there was an arbitration clause, and so did not realize that there was any possibility of applying for a stay of proceedings."

27. Dillon L.J. went on to make this observation;

"It seems to me that the principle of that case necessarily covers the situation where the defendants or their advisers, although knowing that there is an arbitration clause, do not appreciate that application for a stay for arbitration has to be made promptly before any step in the action is taken by the defendants. Therefore any ignorance by the defendants' solicitors of the need to act timeously cannot avail the defendants."

28. Dillon L.J. then went on to point out that it was clearly established by authorities that the step in the action which will preclude an application for a stay does not have to be the positive institution of an application to the court by the defendant; it is sufficient if the defendant concurs in an application to the court which is made by the plaintiff. (see County Theatres and Hotels above).

29. Reference was also made to Zalinoff v Hammond [1898] 2 Ch. 92 which was an action for dissolution of a partnership. There immediately followed a Notice of Motion for the appointment of a receiver on the grounds of misconduct on the part of the defendant. That Motion was adjourned to enable the defendant to file evidence upon it, and the defendant did file affidavits in answer to the charges made against him by the plaintiff. However, before the substantive hearing of the Motion, he issued the cross motion for a stay under the Arbitration Act as the Arbitration Agreement contained an arbitration clause. Stirling J. held that the filing of the affidavit in opposition to the motion for a Receiver was not a step in the action, and that therefore it was appropriate and permissible to grant a stay.

30. Dillon L.J. said this about that decision;

"If the basis of that decision is that the step in the action has to be a substantive application to the court initiated by the defendant, it plainly cannot stand in the face of the decisions in County Theatres and Hotels ....; Richardson v Le Maitre [1903] 2 Ch. 222 and Pitchers Ltd..."

31. In my judgment, it is necessary to start by looking at the obligation which the terms of O.14 place upon a defendant. A defendant would be most unwise (save in the most exceptional case) not to put in any evidence in opposition to an O.14 application (see China Kong v Uniden, 1991 A8146, 3rd June 1992). The reasons for this is that provided the application is one within the terms of O.14, there is a clear onus upon a defendant to show cause as to why judgment should not be entered against him. This has to be done by affidavit or otherwise. In most cases, it is done by affidavit. In the present case, it was done by two affidavits, one by Mr. Rigg and one by Mr. Cheung. Up until the moment when Mr. Mallard appeared before the Master the position was quite clearly that the defendants were seeking to discharge the onus which O.14 places upon them. There was no mention of arbitration in either affidavit. As far as I am aware, there was no correspondence prior to the hearing before the Master where the arbitration clause was even adverted to. The affidavits did not state that the contentions in relation to the application for summary judgment were made without prejudice to the 1st defendant's right to seek arbitration. The affidavits filed were simply limited to setting out why the 1st and 2nd defendants considered the judgment should not be entered against them. The Master adjourned the O.14 summons but ordered that the stay application should come on before me as soon as possible, which it did a few days later.

32. One can see by the language of Dillon L.J. in Turner and Goudy how relevant that case is to the present. He said this;

"Their position that they were opposing the application was maintained by the presence of the solicitor for the defendants before the master on 3rd May, and it was because of the contentions put forth in the affidavit, and not withdrawn, that the master necessarily adjourned the proceedings to a more appropriate date. ..... They have, therefore, in my judgment, taken a step in the action by filing the affidavit to show cause why judgment should not be entered against them and by appearing before the master on 3rd May with the consequence that judgment was deferred by the adjournment, and, in my judgment, it is too late for them in June to decide that they want to apply for a stay for arbitration."

33. It seems to me that the decision in Turner and Goudy is dispositive of this point. It is very clear decision and fits in nicely with the references to Mustill and Bloyd referred to above. I am satisfied in this case that the conduct of the 1st defendant is such as to demonstrate a clear election to abandon their right to a stay, and I am satisfied that the act in question did have the effect of invoking the jurisdiction of the court because the affidavits were filed in an attempt to discharge the onus placed upon the 1st defendant by the terms of O.14.

34. Although neither counsel referred me to Turner and Goudy, I did cause my clerk to refer the case to them and invited any written submissions they wished to make. Both provided short written submissions. However, even before Mr. Barlow had been referred to Turner and Goudy he had made the following submissions which he said justified the grant of the stay on the facts of this case. Firstly, he said that an affidavit is a signal that a step might be taken in the future but it is not actually a step that has been taken. I think the submission means no more than his contention that the mere filing of an affidavit is not tantamount to the submission of evidence. Mr. Barlow referred me to a number of rules of the Supreme Court which related to the filing of affidavits. These were O.32 r. 17, O.41 r.10, O.53 r.6(4), O.59 r.10(2).

35. Mr. Barlow went on to argue that it could not be said that a step had been taken in the action unless the affidavit had been read. I reject all Mr. Barlow's submissions on this point. First of all, I would be surprised indeed (although there was no evidence about it), if the Master had not read the affidavits before the O.14 summons came on for hearing. It would certainly be my practice to look at the affidavits before an O.14 application was opened and I have no reason to believe that the Master would not do likewise. The affidavits were terribly short and the point at issue very clear and simple. I do not think Mr. Barlow is right to argue that the relevant test is the submission of evidence, namely, the putting in of the affidavit at the O.14 hearing. Mr. Barlow referred to Dean Witter v Same Fair (HCA 6063 of 1983, 3rd September 1993) but in that case the filing of the affidavit was in a case when there were concurrent proceedings for a stay. In the present case when the affidavits were filed there was no such application.

36. It seems to me that what the court must look at is the intention behind the act of filing the affidavit. I am quite satisfied that the conduct of the first defendant in filing two affidavits in opposition to an O.14 application without reference to the arbitration clause, and without prejudice to any application for a stay, shows quite clearly that the 1st defendant must have demonstrated an election to abandon his right to stay in favour of allowing the action to proceed. Both in Euro-American and in Pitchers Ltd. it was made clear that a defendant who is faced with an O.14 application, where there is also an agreement to refer disputes to arbitration, should immediately issue a stay application before filing any evidence. Alternatively, he may put in an affidavit in opposition to the O.14 making it clear that this is without prejudice to the application for a stay provided the application for stay is issued at that time.

37. What a defendant faced with this situation cannot, in my judgment, do is what the 1st defendant did. There was no reference to arbitration in any correspondence prior to proceedings or after the institution of the proceedings or at any rate none were shown to me. Both affidavits were put in without any reference to the arbitration clause or to the intention of the 1st defendant to issue an application for a stay. The solicitor for the 1st defendant attended before the Master at a time before he had issued an application for stay although he did say that he was about to issue one. The affidavits were solely directed to whether or not leave to defend should be given to the 1st defendant. It seems to me clear on this scenario that the plaintiffs must have been taken to assume that the 1st defendants were abandoning any right they had to refer this dispute to arbitration. Their conduct was quite inconsistent with their reliance upon the arbitration clause.

38. It seems to me that the present case is so similar to Turner and Goudy that it is not possible to distinguish that case. Whereas the text books and some earlier cases refer to the filing of an affidavit and the attendance before the Master on an O.14 summons as being sufficient together to justify the refusal of an application to stay, nevertheless, I think that the decision in Turner and Goudy is clear enough to support the proposition that the mere filing of an affidavit which sets forth the reasons why it was contended that judgment should not be entered against the 1st defendant was sufficient, in itself, to justify the refusal of a stay.

39. Mr. Barlow made some play of the fact that the O.14 application was not listed before me and I was only charged with deciding whether or not a stay should be granted. That is true, but in my judgment irrelevant. What is clear, was that the O.14 summons was before the Master, and in fact it was the only summons that could have been before the Master. At that hearing, the 1st defendant appeared through his solicitor and as a result, no doubt, of his reference to the proposed application for a stay and the existence of the two affidavits in opposition to the O.14 summons, the application for summary judgment was adjourned. I think Mr. Barlow was treading on very thin ice when he finally submitted to me that the 1st defendant had not submitted to the jurisdiction although contrary indications had been given by the filing of affidavits. That, in my judgment, is what is not permitted and that is what clearly comes within the meaning of taking a step in the action.

40. In view of my clear view that the 1st defendant has taken a step in the action and thus is disentitled from applying for a stay under the Arbitration Ordinance it is not necessary for me to consider Mr. Chan's third point, namely, that the O.14 summons ought to be heard before the application for a stay.

41. I therefore dismiss the summons for a stay, not based on any discretionary ground, but based upon the jurisdictional point that the 1st defendant is precluded from applying for a stay by reason of having taken a step in the action.