ERROL INTERNATIONAL LIMITED v. LEIGHTON (ASIA) LIMITED

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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REASONS

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1. By this summons the defendant seeks a stay of proceedings on the ground that

"the parties [have] agreed in writing that any dispute arising between [them] in relation to Schedule 1 of [their] agreement of 31st May 1984 should be referred to an independent review body in accordance with Clause 8 of that Schedule".

2. The agreement referred to form the basis of the plaintiff's action. It was a share sale agreement under which the plaintiff was the vendor and the defendant the purchaser of 50% of the shareholding in Ipco Marine Limited ("Ipco"). The price to be paid had two elements , a "Base Price" and an "Adjustment". The Base Price was the par value of the shares. The adjustment was an amount which became payable if Ipco's profit in  respect of either of the years ending 30 June 1985 or 30 June 1986 exceeded the target figure stipulated in the agreement. Schedule 1 ("the Schedule") contained an elaborate formula for calculating what Ipco's profit was for the purpose of determining whether a deferred payment was due and, if so, its amount. For the purpose of determining whether a deferred  payment was due two amendments had to be made to the profit shown in the audited accounts for the year in question. For the purpose of the first amendment the parties had to agree three figures : one representing the extent to which Ipco contracts were complete; another representing the value of any claims to be included in estimating the final profit in respect of uncompleted contracts; and a third representing their estimate of the final profit or loss on each of those contracts. Clause 4(A) of the Schedule deals with that third figure. Its terms, which are important in connection with this application, are as follows :-

                 "Contract Profit at Completion

At June 30, 1985 and June 30, 1986, a detailed  statement of estimated revenue and costs at completion is to be compiled to estimate the final profit or loss at completion for each contract. These results will be agreed by Vendor and Purchaser."

 

3. For the purpose of the second amendment the Schedule fixed "target assessments" in respect of five specified Ipco contracts. It also provided that if before 30 June 1986 the actual cash receipts in respect of those claims exceeded the target assessments then the excess was to be "included in the profit" of Ipco "in the accounting year of actual receipt".

4. If in any relevant year the Ipco profit "adjusted" by those amendments exceeded the stipulated target then, subject to certain limitations of no concern for present purposes, 20% of the excess amount had to be paid to the plaintiff at or before the end of the next October.

5. An adjustment was payable and duly paid in respect of the year ending 30 June 1985.

6. The audited accounts for the year ended 30 June 1986 were signed by the directors on 23   July 1986 and a copy of them forwarded to the plaintiff in September 1986. They showed a profit considerably in excess of the target. Consequently, unless the figure agreed pursuant to the terms of Clause 4(A) of the Schedule represented a loss greater than that excess, an Adjustment was payable in respect of that year. However, no statement as required by Clause 4(A) was compiled, none of the amendment figures have ever been agreed and no payment has ever been made.

7. The exhibited communications between the parties reveal no dispute before 7 November 1986. On 6 October 1986 the plaintiff informed the defendant that the plaintiff had calculated an Adjustment of US $1,224,604 based on the audited accounts. On 30 October 1986 the plaintiff gave the defendant written confirmation of a telephone conver-sation regarding details of the bank account to be credited with payment of that Adjustment. On 4 November 1986 the plaintiff informed the defendant  that if payment was not received within seven days it would "take formal steps to recover the monies due". On 7 November 1986 the  defendant sent the following telex to the plaintiff :-

"We ........ cannot accept that any sum was due by us on or before 31st October since the amount of the Adjustment (if any) had not then been determined in accordance with the schedule, and still remains to be determined. We agree that the audited figures for the year to 30 June 1986 are the starting point for calculating the Adjustment, but these figures are themselves subject to specific adjustment as set out in paragraph 4 of the schedule which requires agreement between yourselves and ourselves on a number of points.

 

We have in recent weeks been considering in some detail a number of problems on various contracts of [Ipco] which will affect the amount of the Adjustment ............."

8. The plaintiff replied on 12 November 1986 requesting the defendant to supply in writing the basis on which the defendant could adjust the audited accounts "by reference to the terms of the agreement". On 25 November 1986 the plaintiff, having received no reply from the defendant, then sought access to Ipco's books of account. The parties then began an unresolved dispute as to how this should be done. On 27 November 1986 the defendant's solicitors wrote to the plaintiff's solicitors indicating disagreement with the plaintiff's interpretation of the agreement in relation to calculating the Adjustment and on 28 November 1986 the plaintiff replied expressing disagreement with the defendant's interpretation. On 10 December 1986 the defendant's solicitors wrote to the plaintiff's solicitors as follows :-

"It is .... now clear that a dispute has arisen between our respective clients as to the quantum of the profit of [ Ipco ] for the year ending 30th June 1986 calculated in accordance with Clauses 4 and 5 of Schedule 1 to the Share Sale Agreement for the purposes of making the second and final share price adjustment.

 

In accordance with Clause 8 of Schedule 1, our clients wish to refer this matter in dispute to the independent review body to be constituted under that Clause. Please accept this letter as constituting the notification  required by that Clause."

9. Clause 8 of the Schedule reads as follows :-

"In the event of any dispute arising between the parties in relation to this Schedule, either party may notify the other party that it wishes to refer the matter in dispute to an independent review body constituted as follows. Within 30 days of any such notice, each party shall appoint a representative to sit on the review body acting as expert not arbitrator and shall notify the other party of such appointment. The two representatives so appointed shall appoint a third representative to sit on the review body acting as expert not arbitrator and shall notify the parties of such appointment. If either party fails to appoint a representative, or the two duly appointed representatives fail to appoint a third representative, within the 30 day period, the review body shall proceed as constituted and shall give a written decision within 60 days of the original notice. The decision of the review body shall be final, conclusive and binding and the parties hereto agree to submit to its decision. The costs of any such independent review shall be shared equally by the parties hereto. Nothing in this Clause shall delay or prevent payment being made ....... of any sums not the subject of a dispute."

10. On 8 January 1987 the plaintiff issued the writ herein. The plaintiff's solicitors also wrote to the defendant's solicitors as follows :-

"We ..... enclose herewith by way of service a Writ which we have today issued out of the Supreme Court.

 

........ It is our contention that in the circumstances of the dispute that has arisen between our clients, the provisions of Clause 8 of Schedule 1 are of no application or suitability to the present matter. You will see that it is alleged by our clients in the proceedings commenced today that yours have acted in repudiation of the Share Sales Agreement and that, accordingly, the obligations imposed thereunder have come to an end. Moreover, it is our view that even if the Agreement has not come to an end by virtue of your client's conduct, the provisions of Clause 8 are totally inapplicable to the present circumstances. Inter alia, we do not consider that it can be said that there is any genuine justification for your clients' failure to pay US$1,224,604. Moreover, the required procedures of discovery, inspection of documents, examination of witnesses under oath etc. are not available to such a body."

11. In addition to the allegation of repudiation the plaintiff avers, inter alia, in the Statement of Claim that

"Wrongfully and in breach of the express terms of the Agreement the Defendant failed to compile and deliver to the Plaintiff the ... detailed statement of revenue and costs referred to in Clause 4(A) ......."

and claims, inter alia,

"All necessary accounts and inquiries and an order for payment of  any sum found due on the taking of such account ....."

12. Mr. Fisher, for the defendant, submits that the proceedings should be stayed so that the review body can resolve the dispute in accordance with the terms of the agreement.

13. Mr. Stone, for the plaintiff, submits that there can only be statutory exceptions to the rule that a clause ousting the court's jurisdiction is void and unenforceable; that the only statutory exception relates to arbitration clauses; and that, as Clause 8 is not an arbitration clause, it cannot restrict the plaintiff's right to have the dispute resolved by a court particularly where, as is the case here, a court is the only forum capable of ensuring that all the evidence relevant in resolving the dispute is available for that purpose.

14. Mr. Fisher concedes that Clause 8 is not an arbitration clause but contends that the court has an inherent jurisdiction to stay the proceedings not as a denial of the plaintiff's right to resort to the courts but by way of ensuring that the parties resolve their disputes by agreed methods before resorting to the courts. Broadly, his submission is that since the parties have agreed to refer their disputes over matters contained in the Schedule to an independent body for determination the court should make the plaintiff abide by that agreement unless the plaintiff can show cause why the court should interfere with the contractual position. In support of his submission he relies on the following statement of principle in Wilson v. Compagne Des Messageries Maritimes (1) :-

"The learned judge by whom the summons was heard dismissed  it. He took the view, and in our opinion rightly so, that the jurisdiction which he was being asked to exercise was derived, not from the Arbitration Act, but from an inherent power in the Court to require the parties, in a proper case, to abide by their contract, this being effectuated by refusing to entertain a claim which they had agreed should be decided by some other tribunal. Numerous English decision had attributed the jurisdiction of the Court in relation to other similar claims to the powers conferred by the Arbitration Acts of 1889 and 1950, but the true position would seem to have been set out by McKinnon L. J. in Racecourse Betting Control Board v. Secretary for Air (2). Referring to the power of the  Court to stay an action in similar circumstances, his Lordship said :-

15. Although Wilson's Case and the cases McKinnon L. J. had in mind were all concerned with agreements to submit disputes to a foreign court, Mr. Fisher contends that the principle is not restricted to that form of agreement as demonstrated by the following extract from the judgment of Goff J. in Leigh v. Nat. Union of Railwaymen (3) :-

"........ it was submitted on behalf of the defendants that the plaintiff is not entitled to relief because he has not exhausted or, indeed, embarked upon the domestic remedies afforded by the rules. On this point I extract from White v. Kuzych (4), in the Privy Council, and Lawlor v. Union of Post Office Workers (5), in this court, two propositions. The first is that even where there is an express provision in the rules that the plaintiff must first exhaust his domestic remedies, the court is not absolutely bound by that because its jurisdiction cannot be ousted , but the plaintiff will have to show cause why it should interfere with the contractual position. This is consonant with the rule in the case of a submission to arbitration where the court always has a discretion whether to stay an action but cause must be shown why it should not. The second proposition is largely the converse of the first, namely, that in the absence of such a provision the court can readily, or at all events more readily, grant relief without prior recourse to the domestic remedies, but may require the plaintiff to resort first to those remedies."

16. If the parties were in dispute through disagreement over any of the matters earlier mentioned as requiring consensus for the purpose of determining the Adjustment, then a body appointed under Clause 8 would be capable of resolving  the dispute. In that event the court could require the plaintiff to resort first to such a body by staying proceedings until that remedy was exhausted. The parties are not, however, in disagreement over any such matter. It is true, as alleged in the defendant's solicitors' letter dated 10 December 1986 that the parties have not yet reached agreement regarding "the quantum of the profit of [ Ipco ] for the .... purpose of making the ....... Adjustment".  But the reason behind the failure to reach agreement as to that figure is the absence of the detailed statement required by Clause 4. Without that statement there is no basis recognized by the agreement for making the estimates required by that clause. The absence of that detailed statement means that a preliminary step, essential in the process of reaching agreement about the Adjustment, has not been taken. It also means that there has been a failure to comply with a term of the agreement. Both in correspondence and in the Statement of Claim the plaintiff alleges that the agreement imposes on the defendant the obligation to compile that statement. If that contention is correct then the defendant is in breach of the agreement. Any relief to which the plaintiff may be entitled as a result of that breach is solely within the power of a court to grant and not within the power of an "expert". As there is no difference of opinion to be resolved by a final, conclusive and binding decision of an expert there is no matter on which he could assist the court adjudicating the plaintiff's claim. If the defendant disputes the plaintiff's allegation then the dispute can only be resolved by construing the agreement, a task within the competence of a court but beyond the powers of an expert.

17. In my view, the dispute between the parties cannot be resolved by appointing a body under Clause 8. The nature of the dispute is such that it can only be satisfactorily resolved by allowing the plaintiff's action to proceed. The defendant's summons is dismissed.

(1)    (1954) 54 S. R. (N. S. W.) 258.

(2)    (1944) Ch. 114, 126.

(3)    [1970]1 Ch. 326, 334.

(4)    [1951] A. C. 585.

(5)    [1965] Ch. 712.