NEO INTELLIGENCE HOLDINGS LTD v. GIANT CROWN INDUSTRIES LTD AND OTHERS

HCA 1127/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1127 OF 2017

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JUDGMENT

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PROCEDURAL BACKGROUND

1.  This action was commenced by writ of summons issued on 12 May 2017 and amended on 13 June 2017.

2.  The 1^st to 4^th defendants issued a summons seeking a stay in favour of arbitration on 17 July 2017.  Directions for filing of evidence in connection therewith was ordered by Master M Wong on 21 July and the summons was adjourned.

3.  The plaintiff is a BVI company and an indirect wholly-owned subsidiary of Neo Telemedia Limited, a company listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong.  The 1^st defendant is a Hong Kong company.  The 2^nd defendant is the sole director and a shareholder of the 1^st defendant.  The 3^rd and 4^th defendants are shareholders and directors of Ace International Electronics Limited (“Ace”), another Hong Kong company.

4.  By an agreement dated 19 June 2015 (“the June Agreement”), the plaintiff as purchaser, the 2^nd, 3^rd and 4^th defendants together as sellers, and the 1^st defendant agreed inter alia to negotiate for the acquisition by the plaintiff of an 80% shareholding of and in the 1st defendant and Ace from the 2^nd, 3^rd and 4^th defendants.  The parties entered into a further agreementdated 30 November 2015 (“the November Agreement”) which supplementedand varied the June Agreement.  It is the relationship of these two agreements which gives rise to this application.

THE STAY APPLICATION

5.  The defendant seeks the customary stay under section 20 of the Arbitration Ordinance (Cap 609) which gives effect to Article 8 of the UNCITRAL Model Law, which states:

“ A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requestsnot 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.”

6.  The plaintiff’s case is that the arbitration agreement in question contained in the June Agreement was amended and/or superseded by the November Agreement and is therefore inoperative.

LEGAL PRINCIPLES

7.  The principles applicable to a stay application are well established and uncontroversial; they are helpfully summarized at Hong Kong Civil Procedure 2017 U1/20/2 and are not in dispute.

8.  In determining whether to grant a stay the questions for the court are whether:

(1) there was an arbitration agreement between the parties;

(2) the clause in question was capable of being performed;

(3) there was in reality a dispute or difference between the parties; and

(4) such dispute or difference fell between the ambit of the arbitration agreement.

(Tommy CP Sze & Co v Li & Fung (Trading) Ltd & others [2003] 1 HKC 418, per Ma J (as he then was) at §§18 – 23)

9.  The onus is on the applicants for a stay to show that there is a prima facie, or plainly arguable case that the parties are bound by an arbitration clause.  Unless the point is clear, the court should not resolve the issue, and the matter should be stayed in favour of arbitration for the arbitral tribunal to determine its own jurisdiction: PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, per Tang VP (as he then was) at §§49–51, 60.

10.  The rationale of this approach is that the arbitral tribunal is empowered to rule on its own jurisdiction pursuant to section 34 of the Arbitration Ordinance giving effect to Article 16 of the UNCITRAL Model Law.

FACTUAL BACKGROUND

11.  The June Agreement contained at Clause 8.1 an arbitration clause in the following terms:

“ This Letter of Intent shall be governed by the laws of Hong Kong Special Administrative Region. Any dispute arising from this Letter of Intent or in connection therewith shall first be resolved by consultation and negotiation among the parties, failing withany party may submit the dispute to arbitration in accordance withthe UNCITRAL Arbitration Rules then enforce at the Hong Kong International Arbitration Centre in Hong Kong. The award of the arbitration panel shall be final and binding upon the parties.”

12.  The November Agreement which amended the parties’ obligations under the June Agreement contained at Clause 4.1 a jurisdiction clause in the following terms:

“ 4.1 The conclusion, the validity, interpretation of performance of this Supplemental Letter of Intent and [any] dispute arising therefrom shall be governed by the laws of the Hong Kong Special Administrative Region of the People’s Republic of China, and the parties agree to submit to them on exclusive jurisdiction of the Hong Kong Special Administrative Region.”

THE PARTIES’ SUBMISSIONS

The June Agreement was amended and/or superseded by the November Agreement

13.  The parties have drawn my attention in particular to the following clauses in the November Agreement (translated by the plaintiff, and agreed by the defendant):

“1. INTERPRETATION

Unless otherwise defined or context suggests otherwise, the same term(s) in this Supplemental Letter of Intent has the same meaning(s) and be interpreted in the same way(s) as the Letter of Intent; references to this Supplemental Letter of Intent, or contractual documents shall be construed as references to this Supplemental Letter of Intent or contractual documents as amended, changed updated or supplemented.

2. EFFECT

2.1 As from the date of this Supplemental Letter of Intent, the Letter of Intent shall be amended or supplemented in accordance with clause 3 herein.

2.2 With respect to any references to any clauses in the Letter of Intent or any reference in other related document, such clauses in the Letter of Intent unless otherwise defined or context suggests otherwise, they should be construed as such clauses as amended, or as amended or supplemented from time to time by this Supplemental Letter of Intent.

2.3 As from the date when this Supplemental Letter of Intent is signed and takes effect, this Supplemental Letter of Intent shall be regarded as part of the Letter of Intent, and this Supplemental Letter of Intent and the Letter of Intent shall be construed as the same document, and govern the rights and duties of all parties under the Letter of Intent. Unlessotherwise provided for in this Supplemental Letter of Intent the Letter of Intent has full force in accordance with its content.

3. AMENDMENT

3.1 Clause 2 of Section 2 ‘method of payment’ shall be deleted and be replaced by the Clause 2 as amended below:-

[The long stop date was amended to 31 March 2016]

3.2 Clause 1 and 3 of Section 5 ‘the due diligence of the target company and the execution of the Shares Transfer Agreement’ shall be deleted and be replaced by the clauses as amended below:-

[The deadline to complete the due diligence exercise and the deadline before which the parties shall exercise their best endeavor to execute the Shares Transfer Agreement were both amended to 31 March 2016]

3.3 Clause 3 of Section 8 ‘other clauses’ shall be deleted and be replaced by the clause 3 as amended below:

3. If the parties fail to sign the Share Transfer Agreement on or before 31 March 2016 (or an extended date agreed by the parties in writing), the Letter of Intent shall be terminated automatically (except that the transferor shall refund the whole sum HK$20,000,000 refundable deposits to the transferee) or any other person specified by the transferee (and clause 6)) as from the date of signing the Share Transfer Agreement,the Letter of Intent (except clause 6) shall be terminated automatically.

4. APPLICABLE LAW

4.1 The conclusion validity interpretation and performance of this Supplemental Letter of Intent and any dispute arising therefrom shall be governed by the laws of the Hong KongSpecial Administrative Region of the People’s Republic ofChina, and the parties agree to submit to the non‑exclusive jurisdiction of the Hong Kong Special Administrative Region.”

14.  It is the plaintiff’s case that the dispute before the court is for the breach of the June and November Agreements taken together and in interpreting those agreements that one needs to have regard to the intention of the parties, a point on which the parties are agreed.

15.  The effect of the November Agreement was to extend the time for performance for certain acts under the June Agreement.

16.  It is the plaintiff’s submission that it is clear from Clause 2 that it has equal, if not superior, status over the June Agreement by its use of phrases such as “amended” or “supplemented”. Furthermore the fact that the long stop date was amended is evidence that the parties’ obligations had been substantially changed.  Further the inclusion of the jurisdiction clause at Clause 4 must mean that if there are further breaches the dispute would no longer be governed by the Arbitration Agreement because it had been superseded.  It is submitted that this interpretation is supported by an ordinary reading of the November Agreement, such that there could be no other meaning and is predicated on the basis that the only purpose of the November Agreement is to postpone the June Agreement, and it is difficult to imagine that the jurisdiction clauses were referable to anything other than the consequences of breach of the obligations as amended.  

17.  It is the defendant’s case that Clause 8.1 of the June Agreementwas not an amendment referred to in the November Agreement.  Clause 2.3 of the November Agreement makes it plain that it was never intended to supersede the June Agreement as a whole, but only to supplement and amend it to the extent set out in Clause 3.  The fact that the Clause 3.3 specifically refers to the deletion and substitution of Clause 8.3 in the June Agreement adds weight to the argument that Clause 8.1 was never intended to be amended or superseded.

18.  Accordingly, the defendant’s submission is that Clause 4.1 of the November Agreement is not an amendment to the June Agreement since it was not addressed in Clause 3; rather it is a governing law clause which sits happily, and can operate in parallel, alongside the Arbitration Agreement in Clause 8.1 of the June Agreement.  

19.  This is an argument that in similar circumstances found favourwith Mimmie Chan J in Bluegold Investment Holdings Limited v Kwan ChunFun Calvin (unreported, HCA 1492/2015, 4 March 2016).  She there relied on a judgment of Steyn J who held that an English law clause whereby the parties submitted to the exclusive jurisdiction of the English courts was not inconsistent with the Arbitration Clause in the same agreement in that the jurisdiction clause specified the law governing the arbitration: Paul Smith Ltdv H&S International Holding Inc [1991] 2 Lloyd’s Rep 127.  Similarly in AXA Re v Ace Global Markets Ltd [2006] EWHC 216 (Comm), Gloster J held that a clause providing for English law to be the governing law and for any dispute thereunder to be referred to the jurisdiction of the English courts operated in parallel with the arbitration provisions of the agreement by fixing the supervisory court of the arbitration.

THE COURT’S DECISION

20.  It is clear that the parties did not intend the November Agreement to replace the June Agreement.  It is explicitly provided in Clause 2 of the November Agreement that it is an agreement which amends or supplements the June Agreement and as from its date the November Agreement is to be regarded as part of the June Agreement and they shall beviewed as the same document, and govern the rights and duties of all parties under the June Agreement.

21.  It is also explicitly stated that unless otherwise provided the June Agreement has full force in accordance with its content.

22.  The only argument for suggesting that the arbitration clause in 8.1 of the June Agreement has no effect is that Clause 4.1 of the November Agreement post-dated it and is inconsistent with it and so it must have been the parties’ intentions to waive prior agreement to arbitrate no longer valid.

23.  I am unable to conclude that that is necessarily the case given the differing scopes of the two clauses in question.

24.  Clause 8.1 is a detailed dispute resolution clause specifying the procedures which shall be followed in the event of a dispute arising which includes a stepped process of consultation and negotiation first and only if that fails submission to arbitration.

25.  Clause 4.1 on the other hand is a simple jurisdiction clause albeit it might be said to be otiose to the extent that Clause 8.1 is still valid as that already provides for Hong Kong law to be the governing law.  It seems to me that the drafters had in mind merely making it clear beyond peradventure that the November Agreement was also governed by Hong Kong law and for this purpose added a provision for submission to the non‑exclusive jurisdiction of the Hong Kong courts.

26.  In seeking to reconcile two clauses such as this with an express choice of English law both in the jurisdiction clause and in the arbitration clause Gloster J in AXA Re v Ace Global Markets (at §32) had no difficulty in finding there was no inconsistency:

“I accept Mr Berry’s submission that the fact that there are two clauses,with an express choice of English law, both in the jurisdiction clause and in the arbitration clause, does not result in any inconsistency. I accept Mr Berry’s submission that Mr Green’s arguments are, in effect, based on a so‑called presumption against surplusage in acontract. However, it is well recognised that there is no presumption against surplusage in a commercial contract and no conclusions can be drawn from the presence of two express choices of Englishlaw. In my judgment, in a commercial contract such as this, one should not be surprised to see parties stating clearly in a belt and braces way, the intention that English law is to apply.”

27.  Nor do I find the inclusion of a non‑exclusive submission to the Hong Kong courts, which could be as the lex arbitri or for the purposes of post arbitral enforcement, as amounting to a sufficiently clear and unequivocal indication of waiver of the arbitration clause in the June Agreement.

28.  Absent overwhelming evidence of an unequivocal waiver, a stay in favour of arbitration should be ordered since to do otherwise would be to usurp the function of the arbitration tribunal which is empowered by Article 16.1 of the UNCITRAL Model Law to rule on its own jurisdiction including any objection as to the existence or validity of the Arbitration Agreement and as to whether disputes had arisen concerning the contracts: Paladin Agricultural Ltd v Excelsior Hotel (Hong Kong) Ltd [2001] 2 HKC 215.  

29.  I cannot accept the plaintiff’s submission that there was an unequivocal agreement to disregard the arbitration agreement in this case.  The precise wording of Clause 4 in the November Agreement does not make it plain that there is an abandonment or waiver of the Arbitration Agreementand I accept the submission by the defendants that Clause 4 can be read as ajurisdiction clause which can sit, even if not wholly happily, in parallel with the Arbitration Agreement.

30.  Thus I am satisfied that the defendant has established a prima facieor plainly arguable case that the parties are bound by an arbitration clause and that a stay of proceedings is justified.  I accordingly make an order in terms of the defendant’s summons issued on 17 July 2017.

31.  I further make an order nisi that the plaintiff should pay the defendant’s costs of the summons.