ZPMC-RED BOX ENERGY SERVICES LTD v. PHILIP JEFFREY ADKINS AND OTHERS

HCA 1510/2020

[2021] HKCFI 3501

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1510 OF 2020

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J U D G M E N T

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Introduction and Background

1.  There is before this court the 2nd and 3rd Defendants’ application by Amended Summons dated 8 December 2020 (“Amended Summons”) to stay all further proceedings in this action against them pending arbitration pursuant to the arbitration agreements between the parties dated 23 April 2014 under section 20 Arbitration Ordinance, Cap 609 (“AO”).

2.  The Plaintiff is a joint venture company incorporated in Hong Kong on 26 March 2014 by ZPMC Offshore Services Co Ltd (“ZPMC”), Lihua Logistics Company Limited (“Lihua”) and the 3rd Defendant (“Shareholders”). The Plaintiff is involved in the business of chartering and sub-chartering ocean-going vessels for inter alia international trade and offshore and onshore oil and gas projects.

3.  The 1st Defendant (“Mr Adkins”) was and is a director of the Plaintiff and was the Chief Executive Officer (“CEO”) of the Plaintiff until 14 February 2017 when his employment was terminated by the Board.

4.  Mr Adkins controls the 2nd and 3rd Defendants through a corporate vehicle viz Orcana Holdings Limited (“Orcana”) which is the sole shareholder of the 2nd Defendant.  Orcana also holds 53.15% shareholding in the 3rd Defendant.

5.  On 23 April 2014, the Shareholders entered into a Shareholders Agreement in relation to the Plaintiff (“SHA”).  Clause 3.6 provides:

“3.6 On the Completion Date[1], [D3] shall procure:

(a) [D2] … to enter into a service agreement with the Company under which an individual acceptable to the Board will provide certain services to the Company (Newco Service Agreement) in the agreed form with effect from the Completion;

(b) the individual referred to in Clause 3.6(a) will enter into a separate contract of employment with the Company in the agreed form under which he will be employed as its CEO, which shall set out among other things the CEO’s roles and responsibilities as the CEO, in addition to the Newco Service Agreement;” (emphasis added)

6.  Under Clause 4.2(b), it was disclosed that Mr Adkins “has given certain undertakings to a third party under which he will not be able to engage in the provision of marine heavy transport business prior to 1 July 2014.”

7.  Clause 6.2 provides that the Plaintiff’s Board shall consist of seven directors, comprising (i) four directors appointed by ZPMC; (ii) one director appointed by Lihua; and (iii) two directors appointed by the 3rd Defendant.  Mr Adkins is one of the directors appointed by the 3rd Defendant.

8.  Clause 6.17(a) provides that the CEO is part of the Executive Management of the Plaintiff and has the overall responsibility of the Group’s day-to-day business.

9.  Clause 31.1 provides that the governing law of the agreement shall be Hong Kong law. 

10.  Clause 31.2 provides:

“31.2   In the event a dispute, controversy or claim arises out of or in connection with this Agreement, including any dispute regarding its breach, termination or invalidity (Dispute), the Parties will attempt in the first instance to resolve the Dispute through friendly consultations in good faith. If the Dispute is not resolved in this manner within thirty (30) Business Days following the date on which a party has served notice on the other parties requesting such consultations and stating the nature of the Dispute, then the Dispute will be referred and submitted to the HKIAC and finally settled by arbitration in accordance with the UNCITRAL Arbitration Rules in effect at the time of such submission to arbitration …” (“SHA Arbitration Agreement”) (emphasis added)

11.  On 23 April 2014, the Plaintiff executed a Deed of Adherence by which it undertook to be bound by the SHA as if it were a party to it.

12.  Also on 23 April 2014, the Plaintiff entered into a service agreement with the 2nd Defendant (“FSA”).

13.  As stated in recitals B and C, Mr Adkins is an employee of the 2nd Defendant and the 2nd Defendant undertakes that it will provide the full time services of Mr Adkins exclusively to act as the CEO of the Plaintiff and to provide consulting services to the Plaintiff.

14.  Clause 2 describes the “Services” to be provided by the 2nd Defendant:

“2 Services

2.1 Subject to the terms and conditions set out in this Agreement, Fathomless Advisory will provide to ZPMC-RB the services outlined in the attached ‘Job Description’ (‘Management Services’) and consulting services relating to the sales and marketing of the services and products of ZPMC-RB and its subsidiaries as may be required from time to time by the board of directors of ZPMC-RB (‘Consulting Services’) (the Consulting Services and the Management [sic] collectively shall be referred to as the ‘Services’).

2.2 ZPMC-RB covenants with Mr. Adkins that he will be given the full authority to perform the Management Services in accordance with the terms set out in Appendix 1.

2.3.  All Services will be performed by Mr. Adkins.”

15.  Clause 3.1 provides that, with effect from 1 April 2014, the Plaintiff shall pay the 2nd Defendant a service fee of HK$5 million per year for the provision of the Services, comprising a fee of HK$4 million per year as consideration for the Consulting Services and a fee of HK$1 million per year for the Management Services.  It further provides that if the Management Services are terminated pursuant to clause 6.1(a), the Plaintiff will not be obligated to pay to the 2nd Defendant the HK$1 million fees in relation to the Management Services. 

16.  Clause 6 provides for the Term and Termination of the FSA as follows:

“6.1 This Agreement is entered into for a definite period of time, commencing on 1 April 2014, and will terminate:

(a) with respect to all provisions relating to the Management Services, on 1 July 2014 when Mr. Adkins will enter into an employment agreement to act as CEO of ZPMC-RB (‘CEO Employment Agreement’); and

(b) with respect to all provisions relating to the Consulting Services, on 1 July 2019 (the ‘Termination Date’) upon ZPMC-RB giving a written notice to Fathomless Advisory not less than six months prior to the Termination Date (‘Cancellation Period’).”

17.  Clause 11.6 provides:

“This Agreement shall be governed by the laws of the [sic] Hong Kong. Parties submit to the exclusive jurisdiction of the competent Hong Kong Courts. In the event a dispute, controversy or claim arises out of or in connection with this Agreement, including any dispute regarding its breach, termination or invalidity (Dispute), the Parties will attempt in the first instance to resolve the Dispute through friendly consultations in good faith. If the Dispute is not resolved in this manner within thirty (30) days following the date on which a party has served notice on the other parties requesting such consultations and stating the nature of the Dispute, then the Dispute will be referred and submitted to the HKIAC and finally settled by arbitration in accordance with the UNCITRAL Arbitration Rules in effect at the time of such submission to arbitration …” (“FSA Arbitration Agreement”) (emphasis added)

(The SHA Arbitration Agreement and the FSA Arbitration Agreement will collectively be referred to as “Arbitration Agreements”.)

18.  Subsequently, the Plaintiff and Mr Adkins entered into a “Chief Executive Officer Employment Agreement” (“CEO Contract”) with a commencement date of 1 July 2014.

19.  Clause 1.3 provides:

“1.3 Duties. Mr. Adkins shall devote his best efforts and his full business time and attention to the business and affairs of the Group and shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. In the performance of his duties hereunder, Mr. Adkins shall at all times report and be subject to the lawful and reasonable direction of the Board and perform his duties hereunder subject to and in accordance with the resolutions or any other determinations of the Board, the articles of association of ZPMC-RB and applicable laws.” (emphasis added)

20.  Under Clause 2, the Plaintiff agrees to pay Mr Adkins a salary of HK$1 million per year and reasonable expenses incurred in relation to his duties as CEO.  The salary of HK$1 million is equivalent to the fee payable to the 2nd Defendant for the Management Services provided for in the FSA. 

21.  Clause 3.1 provides that the agreement is for a definite period of time, commencing on 1 July 2014 and will terminate on 1 July 2019 upon delivery by the Plaintiff of a written notice to Mr Adkins at least 6 months prior to the termination date.  However, Clause 3.3(ii) gives the Plaintiff the option to terminate the CEO Contract without paying any compensation to Mr Adkins in the event that the reason for termination is the gross misconduct or criminal misconduct committed by him or material financial loss to the Plaintiff caused by him.

22.  Importantly, Clause 10.5 provides “[T]his Agreement shall be governed by the laws of the Hong Kong.  Parties Submit to the exclusive jurisdiction of the competent Hong Kong courts”.  There is no arbitration clause in the CEO Contract. 

23.  As pleaded in the Amended Statement of Claim, on 14 February 2017, the Plaintiff’s Board resolved by a majority that Mr Adkins’ employment as CEO be terminated with immediate effect on grounds of gross misconduct and of causing material financial loss to the Plaintiff (“14 February Resolution”).  The CEO Contract was terminated on 16 February 2017.

24.  Despite the 14 February Resolution and the termination of the CEO Contract, Mr Adkins continued to act in defiance by holding himself out as the Plaintiff’s CEO and by obstructing the Plaintiff’s Board from adopting the interim management measures set out in the 14 February Resolution.  In light of the aforesaid, on 24 February 2017, ZPMC obtained an injunction in HCMP 426 of 2017 (“HCMP426”) restraining Mr Adkins from inter alia holding himself out as CEO and involving himself in the day-to-day management of the Plaintiff.  Subsequently, the injunction was continued until further order. 

25.  Mr Adkins was well aware of the injunction but continued to hold himself out as CEO and continued to involve himself in the day-to-day management of the Plaintiff.  On 26 April 2017, the Plaintiff’s Board passed a further resolution to reaffirm the 14 February Resolution.

26.  In this action, the Plaintiff claims against Mr Adkins for breach of fiduciary duties, contractual duties and/or breach of trust for making unauthorised payments during the financial years ended 31 December 2017 and 31 December 2018 to:

(1)  The 2nd Defendant totalling US$2.338 million as management fees and reimbursement of expenses purportedly for services provided by him as CEO of the Plaintiff;

(2)  The 3rd Defendant totalling US$1.177 million purportedly as reimbursement of legal and professional fees.

27.  The Plaintiff therefore claims against Mr Adkins for repayment of a total sum of US$3,516,164.  The Plaintiff further claims that the 2nd and 3rd Defendants are liable as constructive trustees for knowing receipt of the above payments and seeks repayment from them.

Deliberation

28.  It is not in dispute that, on an application for stay under section 20 AO, 4 questions need to be answered:

(1)  Is the arbitration clause an arbitration agreement?

(2)  Is the arbitration agreement null and void, inoperative or incapable 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?

Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418 at [19]-[22]; Chu Kong v Lau Wing Yan [2019] 1 HKLRD 589 at [11].

29.  In a stay application, the proper approach is for the court to determine these questions on a prima facie basis.  The onus is on the applicant: PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309 at [49]-[51]. 

30.  In the present case, the difference between the parties is in relation to the 4th question ie whether the present disputes between the Plaintiff and the 2nd and 3rd Defendants fall within the ambit of the Arbitration Agreements. 

31.  In the recent decision of Mimmie Chan J in Houtai Investment Holdings Ltd v Leung Yat Tung & Ors [2021] HKCFI 1504 at [19] - [21] the learned Judge set out the approach to the construction of an arbitration agreement as follows:

“19. … The scope of an arbitration clause is to be construed and interpreted in the context of the agreement made by the parties in each particular case, and the exercise of construction is one of ascertaining objectively the intention of the parties at the time when the agreement was made. As Lord Hoffman illustrated in his judgment in Fili Shipping Co Ltd and others v Premium Nafta Products Ltd [2007] BUS LR 1719 (at 1724), it may be artificial and futile to draw distinction between linguistic nuances.

20. The modern approach to the construction of arbitration agreements is the presumption in favour of arbitrability and the ‘one stop’ adjudication approach (Fili Shipping Co Ltd and others v Premium Nafta Products Ltd [2007] BUS LR 1719), at least as a useful starting point. In Fili Shipping, Lord Hoffman referred to the construction of an arbitration clause as ‘starting from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship in which they have entered or purported to enter to be decided by the same tribunal’. There are of course reminders from the courts that the presumption may be rebutted and would not be applicable in particular cases, where the parties have entered into different interlinked agreements, relating to different aspects of an overall and often complex commercial transaction, and where there are differently expressed choices of jurisdiction and/or law in different agreements providing for different manner of resolution of disputes. The Fiona Trust presumption and principles are always subject to consideration of the presumed intention of the parties, and what is required in each case is a careful and commercially minded construction of the agreement in question.

21. Where there are multiple related commercial agreements, each dealing with different aspects of the parties’ relationship and dealings, and each containing its own provision for expressed choices of jurisdiction, law and/or mode of dispute resolution, the proper test in ascertaining the parties’ intention on how the dispute should be dealt with is to identify the nature of the claim, and the agreement which has the closest connection with such dispute and claim (the agreement ‘at the centre of gravity of the dispute’, as referred to in Trust Risk Group SpA v Amtrust Europe Ltd [2017] 1 CLC 456, …” (emphasis added)

32.  Trust Risk Group SpA v AmTrust Europe Ltd [2017] 1 CLC 456 is a case concerning (i) a business agreement between the claimant and the defendant which was subject to English law and jurisdiction and (ii) a subsequent framework agreement between the two which contained an Italian arbitration and choice of law clause.  At [46]-[48], Beatson LJ summarized the court’s approach as follows:

“ 46. Where the overall contractual arrangements contain two or more differently expressed choices of jurisdiction and/or law in respect of different agreements, however, the position differs in that one does not approach the construction of those arrangements with a presumption[2]. So, the 14^th edition of Dicey, Morris and Collins on the Conflict of Laws stated (para. 12-094):

‘the decision in Fiona Trust has limited application to the questions which arise where parties are bound by several contracts which contain jurisdiction agreements for different countries. There is no presumption that a jurisdiction (or arbitration) agreement in contract A, even if expressed in wide language, was intended to capture disputes in contract B; the question is entirely one of construction ...’

…

47. In Deutsche Bank AG v Sebastian Holdings Inc [2010] EWCA Civ 998; [2010] 2 CLC 300, a case involving a complex series of eight agreements, Thomas LJ referred with approval (at [42] and [49]) to the passages from Dicey, Morris and Collins and the judgment of Rix J I have set out. He summed up the position as follows:

‘… [I]n construing a jurisdiction clause, a broad and purposive construction must be followed’: see [39];

‘… [A]n agreement which [is] part of a series of agreements [should be construed] by taking into account the overall scheme of the agreements and reading sentences and phrases in the context of that overall scheme’: see [40];

‘It is generally to be assumed … that just as parties to a single agreement do not intend as rational businessmen that disputes under the same agreement be determined by different tribunals, parties to an arrangement between them set out in multiple related agreements do not generally intend a dispute to be litigated in two different tribunals’: see [41]; but

‘… [W]here there are multiple related agreements, the task of the court in determining whether the dispute falls within the jurisdiction clauses of one or more related agreements depends upon the intention of the parties as revealed by the agreements as against these general principles’: see [42].

48. The current (16th) edition of Dicey, Morris and Collins states (at para. 12-110) that:

‘Where a complex financial or other commercial transaction is put in place by means of a number of interlinked contracts, and each has its own provision for the resolution of disputes, the point of departure will be that it is improbable that a jurisdiction clause in one contract, even expressed in ample terms, was intended to capture disputes more naturally seen as arising under a related contract. … Even if the effect is that there will be a risk of fragmentation of the overall process for the resolution of disputes, this is not by itself sufficient to override the construction, and consequent giving of effect to the complex agreements for the resolution of disputes which the parties have made.’

In short, what is required is a careful and commercially-minded construction of the agreements providing for the resolution of disputes. This may include enquiring under which of a number of inter-related contractual agreements a dispute actually arises, and seeking to do so by locating its centre of gravity and thus which jurisdiction clause is ‘closer to the claim’. …” (emphasis added)

33.  At paragraph 5 of his skeleton submissions, Mr Lee submits that the stay application should be granted because:

(1)  First, the Plaintiff’s claims against Mr Adkins arise out of or in connection with the SHA and the FSA.  They are intimately connected with the affairs of the Plaintiff as governed by those agreements and by the Plaintiff’s Articles of Association (“Articles”). 

(2)  Second, this case is not just about whether, following the termination of the CEO Contract, Mr Adkins wrongfully caused payments to be made to the 2nd and 3rd Defendants.  This case is one part of a bitter struggle for control of the Plaintiff between the Plaintiff’s majority shareholders on the one hand and all 3 Defendants on the other. 

(3)  Third, the claims against the 2nd and 3rd Defendants for knowing receipt will mean proving, as against them, breaches of obligations owed by Mr Adkins under the SHA, the FSA and the Articles.  These are disputes or differences arising under the SHA and the FSA and, as against the 2nd and 3rd Defendants, must be referred to arbitration. 

(4)  Fourth, the allegations of failure to perform obligations under the SHA and FSA do not merely form the backdrop to the claims against all the Defendants.  They go to the heart of the controversy and are matters to be determined in the proceedings which, as against the 2nd and 3rd Defendants, must be referred to arbitration. 

34.  With respect, this court cannot agree.

35.  First, it is true that at paragraph 11 of the Amended Statement of Claim, it is pleaded that, as CEO of the Plaintiff, Mr Adkins did not conduct himself in accordance with the expectations of the Plaintiff’s Board and sought to run the Plaintiff as though it were his own empire, going beyond the powers of the CEO to the exclusion of the proper function of both the Plaintiff’s Board and the Shareholders, and acting contrary to the SHA, the Articles and the CEO Contract.

36.  But it is reasonably clear that the reference to the SHA is a slip on the part of the pleader of the Amended Statement of Claim. The simple fact is that Mr Adkins is not a party to the SHA and therefore could not be held liable for having acted in breach of it.  As for the Articles, they have effect only as a contract under seal between the Plaintiff and each member and between the members inter se: section 86 Companies Ordinance, Cap 622.  Mr Adkins could be held liable for having acted in breach of them only by virtue of the clauses in the CEO Contract, particularly Clause 1.3.

37.  In any event, for the stay to apply, the action before the court must be “in the same matter” that is the subject of the Arbitration Agreements and not purely “related to” or “involved in” it.  In ascertaining the “matter”, the Court should consider the substance of the controversy - the focus is on the substance of the dispute, not the pleadings: Polytec Overseas Ltd v Grand Dragon International Holdings Co Ltd [2017] 3 HKLRD 258 at [25].

38.  In the present case, the substance of the present disputes is concerned with Mr Adkins’ breaches of fiduciary duties, contractual duties and/or breach of trust qua director, CEO and purported CEO of the Plaintiff.  These duties arise from his position as a director and former CEO of the Plaintiff who has continued to exercise control over the day-to-day management of the Plaintiff and its assets.  The claims arising from Mr Adkins’ personal duties towards the Plaintiff do not fall within the Arbitration Agreements.  In fact, Mr Adkins is not a party to the SHA or FSA and hence either of the Arbitration Agreements.  On the other hand, the CEO Contract does not contain an arbitration clause.

39.  Mr Man SC submits that, as far as the SHA is concerned, the SHA Arbitration Agreement does not cover all disputes between the parties to the agreement about the affairs of the Plaintiff.  This court agrees.  In Dickson Holdings Enterprise Co Ltd v Moravia CV [2019] 3 HKLRD 210 at [40], G Lam J (as he then was) observed that:

“… It has to be borne in mind that the arbitration clause in this case applies to disputes arising out of or relating to the Shareholders Agreement or the breach, termination or invalidity thereof, not arising out of or relating to any affairs of the Company. If the parties had intended otherwise, they could have easily devised an arbitration clause that expressly applied to any dispute between them relating to any affair of the Company. …”

40.  The same point can be made in this case with respect to the SHA in that the SHA Arbitration Agreement only covers “a dispute, controversy or claim arises out of or in connection with this Agreement, including any dispute regarding its breach, termination or invalidity” and not any dispute relating to any affairs of the Plaintiff. Since Mr Adkins is not a party to the SHA, it is difficult to see how the Plaintiff’s disputes with Mr Adkins can arise out of or in connection with it. 

41.  The above observation applies mutatis mutandis to the FSA.

42.  Second, whether or not this case is one part of a bitter struggle for control of the Plaintiff between the Plaintiff’s majority shareholders on the one hand and all 3 Defendants on the other is irrelevant to whether the disputes between the parties are within the ambit of the Arbitration Agreements.  Even if there is an on-going struggle for control of the Plaintiff, as depicted in the Affirmation of Mr Rattigan at paragraph 13, that struggle and the animosity among the Defendants and the majority shareholders of the Plaintiff at most forms part of the “general background”[3] of this case.  As stated earlier, the substance of the present disputes is concerned with Mr Adkins’ breaches of fiduciary duties, contractual duties and/or breach of trust qua director, CEO and purported CEO of the Plaintiff.  The motives behind the Plaintiff (or its majority shareholders) launching the present action against the Defendants do not assist in ascertaining the ambit of the Arbitration Agreements.

43.  Third, this court does not agree that the claims against the 2nd and 3rd Defendants for knowing receipt will mean proving, as against them, breaches of obligations owed by Mr Adkins under the SHA, the FSA and the Articles.  For reasons already explained, Mr Adkins had no contractual obligations under the SHA or the FSA.  As a matter of legal analysis, what the Plaintiff has to do to make good its claims against the 2nd and 3rd Defendants for knowing receipt is to establish Mr Adkins’ breaches of fiduciary duty and/or breach of trust. 

44.  As Mr Lee acknowledges in paragraph 34 of his skeleton submissions, liability for knowing receipt is established by the plaintiff proving the following elements: (1) property was received by the defendant; (2) the property was impressed with a trust or fiduciary duty; (3) the receipt was in breach of trust or fiduciary duty; and (4) the defendant knew that the receipt was in breach of trust or fiduciary duty: Predicine Holdings Ltd v Bianchi (Hong Kong) Ltd & Ors unrep, HCA 1195 of 2020, 18 January 2021, Coleman J at [79]; Goff & Jones The Law of Unjust Enrichment (9th ed) para 8-196.

45.  Lastly, the nature of the Plaintiff’s claims against the 2nd and 3rd Defendants is not that they have committed any breaches of the SHA or the FSA as such.  The nature of their liability is one of secondary/accessory liability for knowing receipt which is dependent on the Plaintiff establishing Mr Adkins’ primary liability.  This is accepted, correctly, by Mr Lee at paragraph 37 of his skeleton submissions where he submits “[P]roving that D1 was in breach is a condition precedent to proving knowing receipt by D2 and D3.” In these circumstances, it seems to this court that the agreement at the “centre of gravity” of the present disputes is plainly the CEO Contract which established Mr Adkins’ engagement as the CEO of the Plaintiff, with all the duties associated with that position. 

46.  In so far as the parties’ intention is concerned, they have made a deliberate choice of omitting an arbitration clause from the CEO Contract.  This is to be contrasted with both the SHA and the FSA which do contain references to arbitration but only in relation to dispute, controversy or claim which arises out of or in connection with them.  If so, the intention of the parties, ascertained objectively, must be that Mr Adkins’ primary liability towards the Plaintiff on the facts of this case shall be determined by the Court of Hong Kong.  It therefore makes perfect commercial sense that the 2nd and 3rd Defendants’ secondary/accessory liability should also be determined by the same Court. 

47.  As Mr Man SC puts it, the effect of the stay sought by the 2nd and 3rd Defendants is that the same “condition precedent” ie Mr Adkins’ breaches of duties will be decided in parallel proceedings governed by two inconsistent dispute resolution provisions ie the Arbitration Agreements and the Hong Kong exclusive jurisdiction clause in the CEO Contract.  No sensible or rational business people would have intended such an outcome.

Disposition and costs order nisi

48.  The Amended Summons is hereby dismissed.

49.  There shall be an Order nisi that costs of and occasioned by the Amended Summons be to the Plaintiff, to be taxed if not agreed, and paid by the 2nd and 3rd Defendants forthwith, certificate for leading counsel.