GOSSIP DAILY LTD v. NEXT MEDIA MAGAZINES LTD AND OTHERS

HCA 305/2018

[2018] HKCFI 1951

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 305 OF 2018

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DECISION

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The application

1.  This is the defendants’ application by summons of 10 April 2018(the “Summons”) for (a) under paragraph 1 thereof, a stay of all proceedingsin this action pending arbitration (the “Arbitration Proceedings”) pursuant to the arbitration clause (the “Arbitration Clause”) in the Share and Asset Sale and Purchase Agreement dated 25 August 2017 (the “SPA”); or alternatively (b) under paragraph 2 thereof, to the extent of any claim advanced by the plaintiff not falling within the Arbitration Clause, a stay of those claims pending the final resolution of the Arbitration Proceedings.

The plaintiff’s pleaded case

2.  On 5 February 2018, the plaintiff took out a generally indorsedWrit against the defendants.  The Statement of Claim was filed on 15 March 2018.  The general indorsement in the Writ was subsequently amended on 10 April 2018.

3.  The 3^rd defendant is a public company.  Its shares are listed on the Main Board of the Stock Exchange of Hong Kong.  Through its subsidiaries, it carried on magazine and advertisement businesses in Hong Kong and Taiwan.

4.  In about April 2017, representatives of the plaintiff and the 3^rd defendant commenced discussion on the proposed purchase by the plaintiff of some of those businesses of the 3^rddefendant.  The core publications included in the proposed transaction were the Next Magazine in Hong Kong and its counterpart in Taiwan of the same title (the “Business”).

5.  Such discussions led ultimately to the SPA.  The plaintiff was the buyer.  The 1^st and 2^nd defendants were the sellers.  They were to sell their shareholding in Next Magazine Advertising Ltd (“NMAL”) and Next Media Publishing Ltd (“NMPL”), the corporate entities through which the Business was conducted in Hong Kong and Taiwan.  The 3^rd defendant was the guarantor who was to secure the due and punctual performance by the 1^st and 2^nd defendants of the obligations under the SPA.

6.  The SPA contained the Arbitration Clause, the material parts of which are as follows:

“ 19. Governing law and dispute resolution

19.1 This Agreement and any Claim[1], dispute, controversy or difference arising out of or relating to this Agreement, including the existence, validity, interpretation, performance, breach or termination of it, or any dispute regarding non-contractual obligations arising out of or relating to it, (a ‘Dispute’), is governed by and shall be construed in accordance with the Laws of Hong Kong.

19.2 (a) Subject to Clause 19.2(b), any Dispute shall be finally resolved by arbitration administered by the HKIAC under the HKIAC Administered Arbitration Rules in force when a party submits the Dispute for arbitration with notice to the other parties (a ‘Notice of Arbitration’). The place of arbitration shall be Hong Kong.

(b) The number of arbitrators shall be three ….

(c) The award of the arbitration tribunal shall be final and binding upon the parties, and the winning party may,at the cost and expense of the losing party, apply to any court of competent jurisdiction for enforcement of such award.

19.3 It is the express intention of the parties that, subject to the terms and provisions of this Agreement, particularly the limitations on termination of this Agreement, the arbitrators be authorized and empowered to award any and all relief,at law or in equity, that could be granted by a court of competent jurisdiction with respect to the claim or claims being asserted …”

7.  The precise manner in which the SPA was intended to be completed was quite complicated.  One aspect features prominently.  It is called “Safe-Harbour Completion” by the parties.  It related to the completion of the sale and purchase of shares and assets which did not conflict with any outstanding governmental clearance.  The completion of the balance is called “Final Completion”.  Ultimately, the sale and purchase contemplated by the SPA fell through.  That was because the wire transfer of certain completion payments linked to the Safe-Harbour Completion could not be effected.  I refrain from saying that the Safe-Harbour Completion did not take place, because whether it did is in issue.  The stance of the plaintiff appears to be that the Safe-Harbour Completion did take place, despite the fact that those payments had not been effected, as those payments were merely “post-completion” payments.

8.  Principally on the basis of the above, the plaintiff claims that the defendants have breached the SPA.  The parties call these aspects of the plaintiff’s case the “Contractual Claims”.  They are pleaded in paragraphs 22 to 23 of the Statement of Claim.  The plaintiff accepts that the completion payments did not come through.  It however avers that the wire transfer of those payments was subject to various obstacles which wereout of its control.  The plaintiff further avers that despite its good faith effortsin effecting payments under the SPA to the defendants, the defendants evinced an intention not to perform the SPA and committed repudiatory breaches of the same.  In its Amended Writ, the plaintiff seeks inter alia a rescission of the SPA.

9.  The defendants do not accept that it was in breach of the SPA.  On 9 April 2018, they commenced the Arbitration Proceedings at the HKIAC by filing a Notice of Arbitration and an Arbitration Statement of Claim.  Its stance, in gist, is that despite repeated requests and demands, the plaintiff willfully breached the SPA in failing to meet the outstanding completion payments.

10.  In addition to the Contractual Claims, the plaintiff also makes a number of tortious claims against the defendants (the “Tortious Claims”).  They are pleaded in paragraphs 24 to 29 of the Statement of Claim.  They fall into two broad categories: (1) defamation and malicious falsehood; and (2) causing loss by unlawful means:

(a)  In respect of defamation and malicious falsehood, and as summarized by Mr Chang, counsel for the plaintiff:

“ … the plaintiff’s pleaded case is that the defendants on divers dates published the following statements which were false and defamatory to the plaintiff, namely:-

(1) the plaintiff failed to proceed to Safe-Harbour Completion under the SPA…when the assignment of intellectual property rights…and the information technology…infrastructure support arrangements were not finalized at the time which were required to be finalized before Safe-Harbour Completion could take place;

(2) the plaintiff misrepresented at a meeting on 2 January 2018 that the defendants would receive on 3 January 2018 the completion payments in the total amount of $140 million;

(3) Safe-Harbour Completion did not take place, which was contrary to the 3^rd defendant’s own Stock Exchange announcement;

(4) the Hong Kong business (under…NMAL) remained a member of the defendants’ group in a memo to NMAL employees and was widely reported in the media; and

(5)   the plaintiff broke its promise to pay the defendants in order for Safe-Harbour Completion to take place.”

(b)  In respect of causing loss by unlawful means, and also as summarized by Mr Chang:

“ The plaintiff’s case is that the defendants had caused economic losses to the plaintiff by the following unlawful means:-

(1) restricting the plaintiff’s staff, personnel and representative from accessing NMAL’s premises and using its properties or assets for normal business and operational needs;

(2) wrongly asserting to NMAL staff that NMAL is still a subsidiary of the defendants’ group, thus instructing the staff not to follow any further instructions and directions from the plaintiff;

(3) terminated the publication of ‘Gourmet Traveller’ (being part of the Hong Kong business) and relieved freelance contributors to ‘Next Magazine Hong Kong’ from their services; and

(4) terminated about 10 employment staff of NMAL and changed 7 staff to ‘part-time’ employment terms.”

Submissions

11.  On behalf of the defendants, Mr Ho submits that the scope of the Arbitration Clause is wide.  That is particularly so when it is read in conjunction with the definition of “Claim” in the SPA, and with the term of art “obligations” contained therein properly understood.  He submits that the criteria for a mandatory stay under section 20 of the Arbitration Ordinance, Cap 609 are all satisfied.  He seeks an order that the proceedings herein be stayed in favor of the Arbitration Proceedings commenced by the defendants.

12.  On behalf of the plaintiff, Mr Chang accepts that the Contractual Claim set out in paragraphs 22 to 23 of the Statement of Claim fall within the Arbitration Clause and should be stayed for arbitration.  In respect of the Tortious Claims, he submits that they do not satisfy either limb of the so-called close connection test explained by Ackner LJ in The Playa Larga [1983] 2 Lloyd’s Rep 171 at 182, and therefore do not fall within the ambit of the Arbitration Clause and should not be stayed.

Relevant legal principles

13.  The starting point is section 20(1) of the Arbitration Ordinance, Cap 609, which incorporates Article 8 of the UNCITRAL Model Law.  It stipulates 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 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.”

14.  The approach to be adopted when considering an application for a stay under section 20(1) was explained by Mimmie Chan J in Polytec Overseas Ltd v Grand Dragon International Holdings Co Ltd [2017] 3 HKLRD 258, at paragraphs 23 to 25, that:

“ 23. As the court set out in Tommy CP Sze v Li & Fung (Trading) Ltd [2003] 1 HKC 418, the four questions for the court are: (1) Is there an arbitration agreement between the parties? (2) Is the clause in question capable of being performed? (3) Is there in reality a dispute or difference between the parties? (4) Is the dispute or difference between the parties within the ambit of the arbitration agreement.

24. The onus is on LHK and X as the applicants for stay to show that there is a prima facie or plainly arguable case that the parties are bound by an arbitration clause, and unless the point is clear, the court should not resolve the issue, and the matter should be stayed in favor of arbitration for the arbitral tribunal to determine its own jurisdiction (PCCW Global Ltd v Interactive Communications Services Ltd [2007] 1 HKLRD 309).

25. For the stay to apply, the action before the court must be ‘in the same matter’ that is the subject of the arbitration agreement, and not purely ‘related’ to it or ‘involved’ in it (HM Holtzmann & J Neuhaus, A Guide to the UNCITRAL Model Law).  In ascertaining the ‘matter’, the court should consider the substance of the controversy as it appears from the circumstances and evidence, and not just the particular terms in which the claimant has sought to formulate its claim in court (Merkin, Arbitration Law, para.8.20 and the cases cited therein).  The focus is on the substance of the dispute, and not the pleadings.”

15.  Once the criteria stipulated in section 20(1) of the Arbitration Ordinance have been satisfied, the Court “shall…refer the parties to arbitration” — see section 20(1) itself.  In other words, it is in those circumstances mandatory for the Court to order a stay — see Polytec at paragraph 56, per Mimmie Chan J.

16.  In construing an arbitration clause:

(a)  The court seeks to give effect to the parties’ intention to refer disputes to arbitration.  There is no presumption either in favour of or against arbitration.  In each case it is a matter of the proper construction of the parties’ agreement—Russell on Arbitration (24^th ed), at paragraphs 2-077 and 2-078;

(b)  That the question is one of construction was explained by Mimmie Chan J in L v M HCCT 16/2016 (unreported, 10 August 2016), at paragraph 53, that:

“ Whether or not there is a legal presumption in favor of arbitrability and the ‘one-step’/’one jurisdiction’ approach, I agree that it is a useful starting point in the construction of the agreements in question. The aim and the principles of interpretation of a commercial contract are to objectively ascertain the intention of the parties as reasonable commercial men at the time when they made the contract, giving the words they used their natural and ordinary meaning in the context of the agreement itself, the commercial purpose of the agreement, the parties’ relationship, and the relevant facts surrounding the commercial transaction so far as known to the parties.”

(c)  Mr Chang submits that “The test for determining whether a tortious claim is within the ambit of an arbitration clause is the two-limb close connection test in The ‘Playa Larga’…per Ackner LJ, namely: (1) the resolution of a contractual issue is necessary for a decision on the tortious claim; or (2) the contractual and tortious disputes are so closely knitted together on the facts that an agreement to arbitrate on one can properly be construed as covering the other.  It is thus not enough that the plaintiff’s tortious claims may have something to do with the SPA to bring such claims within the scope of the arbitrationclause.”  He further submits that the close connection test was followed by Deputy Judge To in Xu Yi Hong v Chen Ming Han & Ors HCA 1109/2005 (unreported, 3 October 2006);

(d)  In so far as it is postulated that there is a separate rule or test for deciding whether a tortious claim is within the ambit of an arbitration clause, I reject the submission.  Whether a tortious claim is within the ambit of an arbitration clause remains one of construction.  If the terms of an arbitration clause show clearly that the parties intended it to cover a tortious claim, there can be no room for the application of the so-called “close connection rule test” to exclude the same.  It is only when the intention of the parties is not clear that the “close connection test” could be used as a construction aid.  That was what happened in The Playa Larga, where the arbitration clause concerned was in the less than clear terms of “Any controversy that might arise from this contract…”  Similarly, in Xu Yi Hong, the arbitration clause before Deputy Judge To was less than clear, namely “If a dispute arises because of this agreement….”

(e)  That there is no such a separate rule is quite clear when the judgment of Ackner LJ in The Playa Larga is properly analyzed.  At page 182, the learned Lord Justice reproduced part of the judgment of Mustill J under appeal, that:

“ It seems to me that the claimant must show either that the resolution of a contractual issue is necessary for a decision on the tortious claim…or, that the contractual and tortious disputes are so closely knitted together on the facts that an agreement to arbitrate on one can properly be construed as covering the other…”

The learned Lord Justice then set out his understanding of Mustill J’s decision, before highlighting that the question remained one of construction, that (at pages 182 to 183):

“ Mr Hallgarten submits that the two propositions are not reconcilable. We do not agree. To our minds the learned Judge having concluded that Iansa had failed to show that the resolution of a contractual issue was necessary for a decision on the tortious claim, was nevertheless satisfied that they had passed the alternative test, namely that they had established that the contractual and tortious disputes were so closely knitted together on the facts, that an agreement to arbitrate on one can properly be construed as covering the other. If that was his view,we agree with it.

It is of course axiomatic that an arbitration clause is a written submission, agreed to by the parties to a contract, and like other written submissions to arbitration, must be construed according to its language and in the light of the circumstances in which it was made…. The question is one of construction.”

(Emphasis added.)

17.  I apply the legal principles discussed above to the facts of the present case as follows.

Discussions

18.  It is not in dispute that there is an arbitration agreement between the parties.  There is no suggestion that the Arbitration Clause is incapable of being performed.  There is further no dispute that there is in reality a dispute or difference between the parties.  That leaves only the fourth question—whether the dispute or difference between the parties are within the ambit of the Arbitration Clause.

19.  The plaintiff accepts that the Contractual Claims are within the scope of the Arbitration Clause and should be stayed.  The remaining issue for the Court is whether the Tortious Claims also fall within the ambit of the Arbitration Clause.  

20.  The Arbitration Clause in the present case is in stark contrast with those found in cases like The Playa Larga and Xu Yi Hong.  The Arbitration Clause is in detailed terms.  It covers not only:

(a)  “ any Claim, dispute, controversy or difference arising out of or relating to this Agreement, including the existence, validity, interpretation, performance, breach or termination of it”,

but also,

(b)  “ any dispute regarding non-contractual obligations arising out of or relating to it”   (emphasis added).

21.  In respect of the meaning of the word “obligations”, Mr Ho submits that it is a legal term of art, referring to the private law of obligations in contradistinction to proprietary claims.  He submits further that in common law, the “private law of obligations” refers generally to contract and tort law—see Farley v Skinner [2002] 2 AC 732 at 746D, and The Conflict of Laws in Hong Kong (3^rd ed) at paragraph 5.001.  I agree with those submissions.

22.  I have set out the nature of the Tortious Claims above.  They concern what the defendants did upon non-payment of the completion payments linked to the Safe-Harbour Completion.  They arose from and related to the Contractual Claims — see in this regard also Ecobank Transnational Inc v Tanoh [2015] 1 WLR 2231, per Clarke LJ at paragraphs 74 to 77.

23.  In my view, the Tortious Claims are clearly within the ambit of the Arbitration Clause according to the intention of the parties objectively ascertained.

24.  Mr Chang submits that the arbitration agreement did not use clear language to suggest that the plaintiff would have forgone its right to a jury trial for defamation claims, or to have such claims adjudicated upon in open court.  That might be so, but in my view, these considerations are not sufficient to displace the intention of the parties that can objectively be gleaned from the wording of the Arbitration Clause.

25.  I find that for resolution of the Summons, given the clear wording of the Arbitration Clause, there is no need for the Court to refer to the so-called “close connection test”.  In any event, I agree with Mr Ho’s submissions that the Tortious Claims also pass the “close connection test”.  As Mr Ho has submitted, if the plaintiff (as opposed to the defendants) is the one found by the arbitral tribunal to be in repudiatory breach of the SPA (in failing to effect the completion payments):

(a)  the defendants would not be liable for defamation or maliciousfalsehood, on the ground of justification and qualified privilege; and

(b)  the defendants would not be liable for causing loss to the plaintiff by unlawful means, as there is no unlawfulness in the defendant’s actions.

I agree with those submissions.  On the other hand, and with respect, I find Mr Chang’s submissions that the Tortious Claims can be adjudicated upon without consideration and resolution of issues central to the Contractual Claims (and in particular issues like which party was in repudiatory breach and when) imaginative but artificial, which submissions I reject.

Disposal

26.  For the above reasons, I order a stay of all further proceedings in this action in terms of paragraph 1 of the Summons.  I make no order in respect of paragraph 2 thereof.

Costs

27.  I make an order nisi that the costs of and occasioned by the application be paid by the plaintiff to the defendants on an indemnity basis, to be taxed forthwith if not agreed.  Should the defendants intend to seek summary assessment of their costs, I direct that:

(a)  the defendants to lodge and serve its written submissions on costs together with all supporting documents and statements within 14 days from the date hereof;

(b)  the plaintiff to lodge and serve its written submissions in opposition within 14 days after being served with the defendants’ written submissions;

(c) any reply submissions by the defendants to be lodged and servedwithin 7 days after receipt of the plaintiff’s written submissions; and

(d)  the matter will be dealt with on paper, unless a further hearing is directed by this Court.