GUO XIN INTERNATIONAL LTD v. CHEUNG PING KWONG AND ANOTHER

HCA 973/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 973 OF 2010

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REASONS FOR DECISION

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Introduction

1.  On 17 September 2010, I heard an application in these proceedings by the defendants for an order that the proceedings be stayed and referred to arbitration.  Having heard from counsel, I made that order and now give my reasons for their decision.

The Consultancy Cooperation Agreement

2.  On 11 August 2007, the plaintiff and Mr Cheung entered into an agreement described as a Consultancy Cooperation Agreement (CCA).  The document refers to Mr Cheung as being the owner of the 2^nd defendant, Guangdong Idea Valley Group Company Ltd[1] (GIVG), although that company is not described as a party to the CCA, nor is it a signatory to that document.

3.  The CCA contained two significant clauses. 

4.  By clause 3, of the CCA, the plaintiff was to negotiate with a Singaporean group of companies, described in the agreement as Hong Leong Management, a cooperation agreement under which the two defendants and Hong Leong Management would set up a joint-venture holding company in which Hong Leong would own 60% of the shareholding and the Mr Cheung and GIVG would own 40% of the shareholding. 

5.  By clause 4 (1) of the CCA it was agreed that in consideration of the plaintiff’s services, and upon the signing of an investment strategic cooperation agreement between the two defendants and Hong Leong, the two defendants would transfer to the plaintiff 10% of their interest in the joint-venture holding company to be formed.  The CCA described the proposed joint-venture as a company to be formed called Hong Kong Hong Leong Idea Valley Holdings Company Ltd, which was called “the Holdings Company” in the CCA.

The Strategic Cooperation Agreement

6.  On 27 September 2007, Millennium & Copthorne Hotels New Zealand Ltd and Tai Tak Industries Pte Ltd entered into an agreement called a “Strategic Cooperation Agreement” with Guangdong Idea Valley Group Co Ltd and a Mr Zhang Bingguang, whom I understand to be Mr Cheung.  The case for the plaintiff is that that agreement represents the fulfilment of its obligations under the CCA.

The Agreement for Equity Recognition and Rights Recognition

7.  Subsequently, on 30 December 2007, an agreement in Chinese was made and signed by GIVG, in the agreement described as the Confirming Party, and the plaintiff in these proceedings as the Confirmed Party.  The document was described as an Agreement for Equity Recognition and Rights Recognition, (AER).  Also named in the AER as a Confirming Party, but not obviously an independent signatory of the document, is Mr Cheung.

8.  The recitals to the AER recorded that Summit Million Ltd, (SML), was a BVI company incorporated by GIVG, which owned 100% of the equity in SML.  The recitals record that First Sponsor Capital Ltd (FSC) was a BVI company incorporated by Millennium & Copthorne Hotels New Zealand Ltd and Tai Tak Industries Pte Ltd, and that together, SML and FSC had incorporated Idea Valley Investment Holdings Ltd, owning 40% and 60% of the equity therein respectively.

9.  A further recital is in the following terms:

“(7) According to the Consultancy Cooperation Agreement signed on 11^th August 2007, (the 1^st defendant) and Idea Valley Group agreed and undertook to transfer 25% of their 100% equity of SML (including 25% of the right of SML to the Overseas Receipts) to the Confirmed Party or to its specified third party, and transfer 25% of the realized and to be realized Local Receipts of Idea Valley Group to the Confirmed Party. The Confirmed Party is willing to accept the above-mentioned equity, the Local Receipts and the Overseas Receipts, and to deem that (Mr Cheung) and Idea Valley Group have fulfilled all the obligations under the Consultancy Cooperation Agreement.”

10.  That agreement contained the following provisions:

“3.1 Since the Confirmed Party has performed its obligations under the Consultancy Cooperation Agreement, the closing date of the Target Equity should be the same as the date of formation of SML as agreed in the Strategic Cooperation Agreement.

3.2    From the Target Equity Closing Date, the Confirmed Party is entitled to 25% of the equity of SML (including 25% of the Overseas Receipts of SML through SML by holding those equities and 10% equity of the whole overseas group owned indirectly through SML).  Those equity rights include but are not limited to the sharing of profits of SML and Overseas Group corresponding to the shares (including the undistributed profits before the signing of this Agreement), transfer or increase of share capital, investment, participation in the distribution of the remaining assets, and other rights conferred by law, regulations and the Articles of Association, but not including any form of debts or litigations not disclosed to the Confirmed Party.”

11.  The AER contained, in clause 12, a reference to arbitration in the following terms:

“Any dispute arising from the making or enforcement of this Agreement should first be resolved through friendly consultation. If both parties are unable to reach a consensus, either party shall have the right to submit the dispute to Hong Kong International Arbitration Centre (HKIAC) for arbitration in Hong Kong. The arbitration decision is final and legally binding on both parties of this Agreement. Unless otherwise stated in the arbitration decision, the arbitration related costs (including but not limited to the arbitration fee, legal fee, preservation costs and enforcement fee) should be borne by the losing party.”

12.  Now the plaintiff sues the defendants seeking (effectively although not in terms) specific performance of Clause 3.2 of the AER and other orders.  The plaintiff on 6 August 2010, issued a summons under O 14 for summary judgment, and the defendants, on 26 August 2010, issued a summons seeking a stay on the reference of the matter to arbitration pursuant to clause 12 of the AER.

13.  The matter of the O 14 summons came before Yam J on 7 September 2010, when he adjourned that summons to be heard by me following the hearing of the defendants summons for stay.

The law

14.  It is established beyond argument that any application for a stay, whether under s 6 Arbitration Ordinance, or Article 8 of the Model Law, four questions must be asked: see Tommy C P Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418 at 425.  They are:

(a)     Is the clause in question an arbitration agreement?

(b)    Is the arbitration agreement null and void, inoperative or incapable of being performed?

(c)     Is there in reality a dispute or difference between the parties?

(d)    Is the dispute or difference between the parties within the ambit of the arbitration agreement?

Discussion

15.  Mr Lam accepted that the clause in question was an arbitration agreement.  He did not seek to contend that the arbitration agreement was null and void, inoperative or incapable of being performed.  He accepted that if there was a dispute or difference between the parties, it would fall to be within the ambit of the arbitration agreement.

16.  The centre of his argument was a contention that there was no real dispute between the parties, because, as recorded by clause 3.1 of the AER, in GIVG acknowledged that the plaintiff had performed its obligations under the Consultancy Cooperation Agreement.

17.  It is necessary to note the following:

(i) GIVG, the Confirming Party, was not, on its face, a party or a signatory to the CCA;

(ii) Mr Cheung is not, on its face, a signatory to the AER;

(iii) the consideration payable by Mr Cheung to the plaintiff pursuant to clause 4 (1) of the CCA was 10% of the interests of Mr Cheung and GIVG in the Holdings Company, not an interest in a company wholly owned by GIVG;

(iv) the corresponding benefit to Mr Cheung was the plaintiff's effort in assisting in the establishment of the Holdings Company;

(v) the obligation under the AER is upon GIVG to transfer to the plaintiff 25% of GIVG’s interest in SML, and 25% of SML’s interest in the Local Receipts and Overseas Receipts;

(vi) on its face, there is no corresponding benefit to GIVG in response to its transfer of that interest to the plaintiff;

(vii) there does not appear to be any obligation upon Mr Cheung in the AER;

(viii) the concept of “Local Receipts” and “Overseas Receipts” did not form part of the consideration to the CCA.

18.  Mr Hingorani pointed out that in order for clause 3.2 to be enforced it would be necessary to establish that there had been an agreement, supported by proper consideration, between Mr Cheung, a party to the CCA, but not on the face of it a party to the AER, and GIVG, a party to the AER, but not on the face of it a party to the CCA, and the plaintiff, substituting for the obligation on the part of the Mr Cheung under the CCA, to transfer 10% of the interest of himself and GIVG in the Holdings Company, an obligation upon GIVG to transfer to the plaintiff 25% of GIVG’s interest in SML, and 25% of the rights of SML to the Overseas Receipts and the Local Receipts.  That agreement, he said, was quite a distinct agreement from that contained in the CCA.

19.  It may well have been intended, as Mr Lam argued, that recital (7) of the CCA was intended to reflect an agreement on the part of the plaintiff to accept the 25% interests in SML and the Receipts in consideration for forgoing its right to enforce the obligation contained in the CCA on the part of the defendants transfer to the plaintiff 10% of the defendants interest in the Holdings Company. 

20.  But that is not what the recitals say.  Mr Lam was not able to point to any other document which might record that apparently essential step.  It may well be that the value represented by the two different obligations are approximately equal.  But that does not advance the position of the plaintiff.  The obligations under the two agreements are quite distinct, and it must be arguable at least that in the absence of a further agreement there is no consideration for the AER.

21.  In those circumstances I am satisfied that there is a genuine dispute or difference between the parties as to whether or not there is consideration for the AER.

22.  Mr Lam sensibly did not seek to contend that, in the event of being such a dispute, it would not be a matter for the arbitrator to determine the issues between the parties, including the issue of whether or not the AER constituted an agreement enforceable in law.

23.  In those circumstances I made an order staying the proceedings and referring the issues to arbitration pursuant to Clause 12 of the AER. 

24.  Mr Lam properly accepted that upon an order for stay, he could not pursue the application for summary judgment.  No order need be made on that application at the present time, which is stayed with the remainder of the proceedings.

Costs

25.  Mr Lam accepted that the proper order for costs on the application of stay was costs to the defendants on  party and party basis. Having heard argument on the question of costs on the summary judgment application, I reserved those costs in the cause in the proceedings.  I ordered that there be a certificate for two counsel on both summonses.