GIORGIO ARMANI SPA AND OTHERS v. ELAN CLOTHES CO LTD f/k/a DALIAN LES COPIOUS CLOTHES CO LTD

HCCT 71/2018

[2019] HKCFI 2983

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 71 OF 2018

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J U D G M E N T

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Background

1.  These proceedings were commenced by the 1^st Plaintiff, Giorgio Armani SPA (“SPA”), in October 2018 against the Defendant (“Elan”). By order made on 27 February 2019, leave was granted to add as 2^nd to 4^th Plaintiffs Giorgio Armani (Shanghai) Trading Co Ltd (“Shanghai”), Giorgio Armani Hong Kong Ltd (“HK”) and Mr Giorgio Armani himself (“GA”) as parties.

2.  The facts of the underlying dispute between the parties have been set out in detail in the Judgment of Deputy High Court Judge Field dated 27 February 2019, and will not be repeated here.  Suffices it to say that a Master Agreement (“MA”) was entered into between SPA and Elan in December 2014, under which Elan was appointed as an authorized retailer with the right to open and operate single brand stores on the Mainland, to sell products under the label of at least one of the Armani Marks which were defined in the MA (“Products”). Elan purchased the Armani Products from HK and Shanghai, which are authorized distributors under the MA.

3.  The MA provides for the laws of Hong Kong to be the governing law, and clause 13 of the MA provides as follows:

“13.1 Any dispute, controversy or claim deriving from, arising out and/or regarding this Agreement, including any dispute regarding the validity, interpretation, construction, performance, breach and termination thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force and as may be amended by the rest of this clause. The appointing authority shall be Hong Kong International Arbitration Centre (HKIAC). The place of arbitration shall be in Hong Kong at Hong Kong International Arbitration Centre. The number of arbitrators shall be three. The arbitrator’s [sic] decision shall be final and binding and may be enforced by any court of competent jurisdiction.

13.2  Nothing in this article 13 shall be construed as preventing any Party from seeking conservator or other interim relief and remedies, in relation to which the arbitration committee is not competent pursuant to mandatory provisions of law, in any court of competent jurisdiction.”

4.  Disputes arose as a result of a rebranding exercise announced by SPA in February 2017 (“Rebranding”), whereby products sold under some Armani Marks were rebranded and sold under another Armani Mark.  SPA relies on the fact that it has complete control over its Armani Marks and their rebranding under the MA.  On its part, Elan claims that such Rebranding of the Products sold under the Armani Marks caused it to sustain significant losses, and as a result, it stopped paying royalties and advertising contributions under the MA.  This led to SPA serving notice of termination of the MA and, pursuant to clause 13 of the MA, SPA commenced arbitration in Hong Kong against Elan on 5 June 2018 (“Arbitration”), seeking a declaration that it had validly terminated the MA, and orders for damages and injunctive relief.  In its Response to the Notice of Arbitration, Elan denied the valid termination of the MA and reserved the right to counterclaim for breach and repudiation.  The arbitral tribunal (“Tribunal”) has been constituted, as confirmed by the letter dated 31 July 2018 from the HKIAC.

5.  On 2 August 2018, Elan commenced legal proceedings against SPA, Shanghai, HK and GA in Shandong (“Shandong Proceedings”).  In its Statement of Claim which was served on Shanghai on 22 October 2018, Elan claims that SPA’s and GA’s discontinuance or cancellation of products under two of its brands infringed Elan’s interests, and that Shanghai and HK are jointly liable. Shortly after the commencement of the Shandong Proceedings, on 18 September 2018, Elan applied to the Shandong Court for preservation of Shanghai’s assets up to a limit of RMB 600 million.  Assets of Shanghai were frozen by the Shandong Court, subsequently released only upon Shanghai’s provision of a bank guarantee to cover the preserved assets (“Guarantee”).

6.  On 25 October 2018, SPA commenced these proceedings in Hong Kong for an anti-suit injunction against Elan.  By its Originating Summons (“OS”), SPA sought a declaration that Elan’s conduct of commencing the Shandong Proceedings was a breach of the MA and the arbitration clause; permanent injunctions against Elan to require it to discontinue the Shandong Proceedings, and to restrain Elan from commencing or pursuing any proceedings other than in accordance with the arbitration clause in the MA; and interim injunctions and interim measures pending the final determination of the Arbitration. 

7.  On the same day, SPA obtained an interim injunction from the Court (“Injunction”), which restrained Elan from taking any further step in the Shandong Proceedings. The Injunction was continued on 2 November 2018.

8.  On 27 February 2019, after hearing substantive arguments, DHCJ Field continued the Injunction until final determination of these proceedings, ordering Elan to procure the release of the Guarantee, and allowing the joinder of Shanghai, HK and GA as plaintiffs (“Field Judgment”). 

9.  SPA, Shanghai, HK and GA all submitted jurisdictional challenges to the Shandong Court.  On 10 July 2019, the Shandong Court handed down its judgment (“Shandong Judgment”), which allowed the Plaintiffs’ jurisdictional challenge and dismissed Elan’s claims against SPA, Shanghai, HK and GA.  Elan has appealed against the Shandong Judgment.

10.  The claims made by the Re-amended OS issued in these proceedings were heard on 21 November 2019.  This hearing took place before the hearing scheduled for the Tribunal to hear the application by SPA for the joinder of Shanghai, HK and GA as parties to the Arbitration.

11.  Elan’s defence to the claims made in these proceedings are that HK, Shanghai and GA are not parties to the MA.  They are therefore not bound by the arbitration agreement contained in clause 13 of the MA, and there is no basis for the Plaintiffs to restrain Elan from pursuing the Shandong Proceedings against HK, Shanghai and GA.  Elan claims that it is not precluded from raising this defence by the Field Judgment which was interlocutory in nature, and was not a final determination of the rights of the parties to the MA.

12.  Elan further claims that this Court should not determine the claims made by the Plaintiffs in the OS, as this would preclude and preempt the Tribunal’s decision on the issue of the joinder of HK, Shanghai and GA to the Arbitration, and may lead to a risk of inconsistent decisions.

13.  There is no dispute, that HK is wholly owned by SPA, that Shanghai is wholly owned by HK, and that GA controls and is the Chairman of the board of SPA.

14.  According to Elan, its claims in the Shandong Proceedings are tortious in nature under PRC law, and are not contractual.  Its cause of action is that the Plaintiffs had jointly committed a tort in violation of the PRC Tort Liability Law, whereby Elan’s property rights, commercial reputation and anticipated operation benefits had been infringed.  Elan claims that the only signatories to the MA were SPA and Elan, and that Shanghai, HK and GA were not parties to any arbitration agreement.  The Arbitration was concerned only with a dispute over royalties claimed to be due under the MA, and did not cover the cancellation of the relevant Armani Marks of which Elan complains.  Accordingly, Elan denies that it had acted in breach of the arbitration clause, at least with respect to Shanghai, HK and GA.

Parties to the MA and the scope of the arbitration agreement

15.  The MA is expressed to the made “by and between” SPA “together with its branch offices and Affiliates”, and Elan.  Each of SPA and Elan is referred to in the MA as a “Party”, and together as the “Parties”.  “Affiliate” is defined in clause 1.6 of the MA as a person “directly or indirectly through one or more intermediaries, Controls, is Controlled by, or under common Control with, the specified person”.  “Control” is defined to mean having the power to direct the affairs of a person, by reason of the appointment of a majority of the governing body of such person, owning or controlling the right to vote a majority of the voting shares of such person, ownership of 50% or more of the equity capital, or the right to direct the general management of the affairs of such person. 

16.  The description of the parties to the MA, and of SPA as a Party “together with its Affiliates”, is clear indication that SPA, Shanghai, HK and GA are all included as parties to the agreement.  The wide definition of “Affiliates” in the MA includes HK which is wholly owned by SPA, Shanghai which is wholly owned by HK, and GA who controls the board and management of SPA.

17.  The body of the MA includes references to Affiliates, when obligations imposed and rights conferred on the Parties are set out in the provisions of the MA.  I have carefully reviewed the Field Judgment, and in particular paragraphs 49 to 52 thereof, and respectfully agree with the analysis made by DHCJ Field of the provisions and effect of the MA.  It is clear from the overall review and construction of the MA that the parties to the MA include not only SPA, but Shanghai, HK and GA as Affiliates, and that the MA was intended to benefit the Affiliates as well.

18.  Of particular importance in the construction of contracts including arbitration clauses, are the commercial considerations highlighted by Lord Hoffman in Fiona Trust & Holding Corp v Privalov [2007] 4 All ER 951. The assumption is that as rational businessmen, parties are likely to have intended any dispute arising out of the relationship in which they had entered or purported to enter to be decided by the same tribunal.  An arbitration clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.  The courts have emphasized that if any businessman did want to exclude disputes about the validity of the contract, or disputes of a particular type, it would be comparatively easy for them to say so expressly.  Otherwise, having gone to the trouble of agreeing that their disputes would be heard in the courts of a particular country or by a tribunal of their choice, they could not rationally have expected that time and expense would be taken in lengthy argument about the nature of particular causes of action, and whether any particular cause of action comes within the meaning of a particular phrase they have chosen in their arbitration clause.

19.  Clearly, the relationship created under the MA is for Elan to be supplied with Products bearing the Armani Marks for sale by Elan on the Mainland, on the terms set out in the MA.  The Products were contemplated to be supplied by SPA and its Affiliates which were the authorized distributors.  Shanghai and HK are such authorized distributors.  Disputes as to Elan’s right to be supplied with and to sell and distribute the Products bearing the Armani Marks on the Mainland, and its obligations to make payments thereunder, all arise out of, derived from and relate to the MA, and the relationship created thereunder between the parties.  As rational commercial businessmen, it must have been contemplated and intended by them that all such disputes relating to the supply, sale and distribution of the Products bearing the Armani Marks on the Mainland should be decided by one tribunal, in the manner chosen and expressly provided for in clause 13.1 of the MA, namely by arbitration in Hong Kong.

20.  Even if Shanghai, HK and GA are not parties to the MA, it is clear in my judgment that from the language of clause 13.1, used in the commercial sense, and construed in the modern trend of presumption in favour of one-stop arbitration, clause 13.1 must extend to claims against and disputes with Shanghai, HK, GA and other entities within the wide definition of “Affiliates”, such as those which were made by Elan in the Shandong Proceedings. These claims relate to Elan’s damage allegedly sustained as a result of the Rebranding, and the termination of supply of Products bearing the AJ and AC Armani Marks, which clearly fall within the wide scope of clause 13.1 of the MA.  Whether the claims are contractual made under the MA, or are tortious in nature as Elan claims, make no difference: when they derived from, arise out of and/or are regarding the MA, and constitute a dispute regarding the performance, breach and termination of the MA - within the scope of clause 13.1.  The claims certainly cannot be said to be “entirely unrelated to” the MA and the relationship created between the parties thereunder (Getwick Engineers Ltd v Pilecon Engineering Ltd HCA 558/2002).

21.  In my view, by instituting the Shandong Proceedings against SPA, Shanghai, HK and GA, there is breach by Elan of the arbitration agreement contained in the MA.

Relevance of section 45 (4) of Arbitration Ordinance

22.  On behalf of the Defendant, it was argued that the Court should not be considering the relief sought by the OS, since the Arbitration is in place and the Tribunal will, on 8 January 2020, determine SPA’s application to join Shanghai, HK and GA in the Arbitration.  The Court should not pre-empt the decision of the Tribunal on substantially the same issue of parties to the MA and the Arbitration, as it is more appropriate, in accordance with section 45 (4) of the Arbitration Ordinance (“Ordinance”), for the Plaintiffs’ claims for the declaration and injunctions to be dealt with by the Tribunal.

23.  The substance of the claims made in these proceedings is for an anti-suit injunction against Elan, to restrain it from commencing and pursuing the Shandong Proceedings, the appeal against the Shandong Judgment, and any other proceedings, otherwise than by the Arbitration and in accordance with clause 13 of the MA.  It is clear that the Court has jurisdiction to do this, under section 21L of the High Court Ordinance and/or its inherent jurisdiction, in accordance with the principles clearly set out in The Angelic Grace [1995] 1 Lloyd’s Rep 87, and Donahue v Armco [2002] 1 Lloyd’s Rep 425.  The justification for such an injunction is that it should be granted to restrain foreign proceedings in breach of an agreement “on the simple and clear ground that the defendant has promised not to bring them”.  In AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] 1 WLR 1889, the English Court was dealing with its general jurisdiction to grant injunctions and relief under the Senior Courts Act 1981, and Lord Mance observed that orders restraining the actual or threatened breach of the negative aspect of an arbitration agreement (not to bring proceedings other than by way of arbitration) enforce the negative right not to be vexed by foreign proceedings.

24.  An injunction to restrain foreign proceedings brought in breach of an arbitration agreement, in the interim of an award by the arbitral tribunal in an arbitration, may also be a type of interim measure which the Court may grant under section 45 of the Ordinance (GM1 & GM2 v KC [2019] HKCFI 2793, 14 November 2019).  However, in this case, I do not agree that the Court is not able or should hesitate to grant the Injunction as “final” relief at trial.

25.  Section 45 (4), when it applies, does not prohibit the Court from granting relief falling within the scope of “interim measures”.  The section only states that the Court “may” decline to grant such interim measure, if it considers it more appropriate for the interim measure to be dealt with by the tribunal.  Section 45 (3) of the Ordinance expressly states that the powers conferred by the section may be exercised by the Court irrespective of whether or not similar powers may be exercised by an arbitral tribunal under section 35 in relation to the same dispute.

26.  At the foremost, the Injunction sought in these proceedings is not currently “an interim measure which is the subject of the Arbitration”.  SPA did not seek the Injunction from the Tribunal.  It only seeks to include Shanghai, HK and GA as parties to the Arbitration, for the Tribunal to deal with the claims made by SPA and its Affiliates, and the defence and claims which may be made by Elan by way of counterclaim in the Arbitration, in relation to their mutual dealings which arise out of the MA.  It is open to the Tribunal to decide whether Shanghai, HK and GA can, and should, be added, which will of course involve the question of whether the Tribunal has jurisdiction to do so under the arbitration clause. 

27.  As explained in the preceding paragraphs, SPA and Shanghai, HK and GA if they are parties to the MA are entitled to be protected by an anti-suit injunction, and the OS is for the purpose of seeking the Court’s determination of whether there is an arbitration agreement, and breach or threatened breach thereof, to justify the grant of the injunction in the exercise of its discretion.  The questions to be finally resolved by the Court at the substantive hearing of the OS are the existence or otherwise of a valid agreement to arbitrate, whether there is breach thereof, and the enforcement of the rights of the parties to such agreement, not to be vexed by proceedings instituted and pursued in breach of the promise to arbitrate.  It is the determination of a contractual claim and its enforcement. 

28.  The relief sought in these proceedings commenced by the OS is not confined to relief pending the determination of the Arbitration, as it includes a claim for a permanent injunction to restrain Elan from commencing or pursuing on the Mainland or anywhere in the world any court or other proceedings relating to disputes, controversies or claims deriving from or arising out of or regarding the MA, otherwise than in accordance with the arbitration clause in the MA, as well as a declaration that Elan was in breach of the contract to arbitrate.  The subject matter and relief sought in the Arbitration may overlap with the subject matter and relief sought in the OS, but appropriate relief such as a declaration of breach and a permanent injunction to enforce and protect the rights of the parties to an agreement may and should be granted by the Court, if it is just and convenient to do so.  Repeating the rationale adopted by the Court in The Angelic Grace, unless good reason can be shown why the Court should not exercise its discretion, the injunction should be granted on the simple and clear ground that the defendant had promised not to bring proceedings otherwise than by way of arbitration in Hong Kong.

29.  In this case, the Defendant does not dispute the existence and validity of the MA, which this Court finds extends to Shanghai, HK and GA as parties. I cannot see why it would be more appropriate for the Tribunal to deal with the relief sought by the Plaintiffs, and no other good reason has been advanced by the Defendant as to why the declaration and injunction should not be granted by the Court.  If the Tribunal agrees that Shanghai, HK and GA are parties to MA, there is no inconsistency between its finding and the finding made by this Court. If the Tribunal should take the view that there was no arbitration agreement between Elan, Shanghai, HK and GA, I would make it clear that I am prepared to grant the permanent injunction and declaration sought by the Plaintiffs on the basis that it would be unconscionable to allow Elan to pursue the Shandong Proceedings on the Mainland, for the reasons set out below.

Vexatious and oppressive proceedings

30.  I accept the submissions made by Leading Counsel on behalf of the Plaintiffs, that in any event, the Shandong Proceedings are oppressive, vexatious, brought for the purpose of frustrating and obstructing the Arbitration and to exert pressure on the Plaintiffs.  Elan does not dispute that it is a party to the MA with SPA, and that it is bound thereby.  On the facts, the claims made by Elan against the Plaintiffs in the Shandong Proceedings clearly relate to and arise out of its commercial relationship and dealings with SPA under the MA, and the parties’ dispute thereunder in relation to Elan’s sale of the Products bearing the relevant Armani Marks.  There is no good explanation to justify the need to commence and pursue the Shandong Proceedings, after the Arbitration was commenced, and after Elan had participated in the Arbitration.  The claims made by Elan, even if tortious in nature, clearly fall within the ambit of clause 13 of the MA, and the damages alleged to have been suffered by Elan as a result of the Rebranding can be made and pursued in the Arbitration, on the basis of the alleged breach of the MA. 

31.  Whether the Shandong Court has jurisdiction under PRC law to determine the tortious claims made by Elan is not relevant, when the essential question is that since Elan had agreed to the arbitration clause, it should not be allowed to invoke any other jurisdiction (Tamil Nadu Electricity Board v ST-CMS Electric Company Private Ltd [2007] EWHC 1713 (Comm), OT Africa Line Ltd v Magic Sportswear Corporation & Ors [2005] EWCA Civ 710). 

32.  In any event, it is clear from the Shandong Judgment that the Shandong Court regarded the dispute between Elan and the Plaintiffs to be contractual in nature, and that the parties’ liabilities should be governed by contract law and not the law on tortious liability.  The Shandong Court also considered the facts alleged by Elan in the Shandong Proceedings to be related to the performance of the MA, resulting in the Shandong Court’s allowance of the jurisdictional challenge made by the Plaintiffs and the dismissal of Elan’s claims against the Plaintiffs.

33.  In my view, the steps taken by Elan on the Mainland by instituting the Shangdong Proceedings against SPA and extending the claims to Shanghai, HK and GA all of which are closely associated, are vexatious attempts to bypass the arbitration agreement, and to subject the Plaintiffs to duplicative costs and inconvenience in parallel proceedings on the same issues.  It would be unconscionable for this Court to allow Elan to pursue its claims against SPA and its associates on the Mainland, when such claims fall within the scope of the arbitration clause in the MA (BNP Paribas SA v Open Joint Stock Company Russian Machines & Anor [2011] EWHC 308 (Comm)).  It is no less unconscionable of Elan to make a claim against Shanghai, HK and GA otherwise than through arbitration, than it would be for Elan to make a claim against SPA, when the true substance of its claim arises under and derived from the supply and sale of the Products bearing the Armani Marks under the MA, and the relationship created under the MA.

Disposition

34.  For all the above reasons, I am prepared to grant the declaration and the permanent injunction sought by the Plaintiffs, in terms of paragraphs 1 and 2 of the Re-amended OS.  I also grant the interim measures in terms of paragraph 3 of the Re-amended OS, pending the final determination of the Arbitration and further orders of the Tribunal.

35.  The costs of the action are to be paid by Elan to the Plaintiffs on indemnity basis (including all costs reserved), with certificate for 2 counsel.