HANNICE INDUSTRIES LTD v. ELITE UNION (HONG KONG) LTD AND ANOTHER

HCA 1876/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1876 OF 2011

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D E C I S I O N

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1.  By this summons the defendants seek an order that HCA 1876/2011 be stayed, pursuant to section 20 of the Arbitration Ordinance, Cap 609 or, alternatively, a declaration that the case should, on the grounds of forum non conveniens, be conducted in Fujian Province PRC.

Background

2.  In 2004 the parties entered into a Shares Transfer Agreement which provided for the transfer of ownership of a company called L&F Dyeing & Finishing Co. Ltd from the plaintiff to the defendants.  For the purposes of this summons, the terms of payment and shares transfers are not important.

3.  What is important is that the terms of the agreement were not complied with.  Thereafter, for reasons which are not apparent, 6 or more years went by without any proceedings being commenced.  The plaintiff acknowledges that any cause of action it may have arising out of the 2004 agreement became time barred.

4.  However, it is the plaintiff’s case that on or about 8 April 2010 the same parties reached a settlement agreement, referred to in the pleadings as ‘the Acknowledgment agreement’.

5.  The Statement of Claim, dated 3 November 2011 is a 3‑page document.  By way of background in paragraphs 1‑4, it refers to the 2004 agreement, the allegation that it was not complied with and the admission that the plaintiff is time barred from instituting any proceedings under it.

6.  Paragraph 5 pleads the 2010 settlement agreement.  Paragraphs 6‑10 plead the terms of the settlement agreement, the alleged breaches of the settlement agreement and the unanswered demands under the settlement agreement.  There is no claim for specific performance of the 2004 agreement, it is purely a claim for the money promised at the settlement agreement meeting.

7.  The 2004 agreement contained an arbitration clause, the 2010 agreement did not.

Defendants’ submission

8.  The primary argument, advanced by Mr Eric Chow, counsel for the defendants, is that the 2004 agreement contained an arbitration clause which is not null and void, inoperative or incapable of being performed and therefore, as the defendants have taken no steps to defend the High Court writ, the matter should, by virtue of section 20(1) Cap 609, be referred to arbitration.

9.  Mr Chow submits that the existence of the underlying 2004 agreement still applies in HCA 1876/2011 even though no claim is being made for breach of the 2004 agreement and regardless of the fact that, if it was, it would be doomed to failure by virtue of the Limitation Ordinance, Cap 347.  He submits that the underlying facts of the case concern the 2004 agreement and the existence of an arbitration clause in that agreement indicates an intention of both parties to submit to arbitration in the event of a dispute.  That intention should, he submits, prevail in this action.

10.  It is correct to state that an arbitration clause continues to exist regardless of a time bar frustrating a cause of action flowing from a contract which contains such a clause.  However, that principle is not relevant to and does not answer the issue in this application.

11.  In my judgment the answer to the primary issue in this application is that advanced by Mr Paul K N Wu, counsel for the plaintiff.  He submits, and I agree, that there is nothing to stay because the agreement being sued upon in HCA 1876/2011 contains no arbitration agreement.  A compromise settlement agreement is a separate contract.  The terms of a settlement agreement invariably differ, to a greater or lesser extent, from the terms of the underlying contract, the breach of which led to the settlement. What the parties might have intended in 2004 cannot be unilaterally imposed on the parties in 2010 when entering into a different agreement.

12.  The defendants’ case for a stay falls at the first fence and will be dismissed.

The 2004 clause

13.  For the sake of completeness it is worth considering the terms of the clause upon which Mr Chow relied.  I do so because even if the clause had any application to the 2010 settlement agreement, the plaintiff has a strong argument that, because of its terms, it would not have been sufficient to cause this court to stay the proceedings in any event.

14.  It is clause 7 of the 2004 agreement and provides as follows:

“(a) PRC law can apply to all provision/terms of the Shares Transfer Agreement/PRC law is applicable to all provisions/terms of the Shares Transfer Agreement

(b) If any dispute occurs between the contracting parties, the parties shall first seek to resolve the dispute by amicable negotiation, if negotiation is unsuccessful parties may apply for arbitration.”

15.  The question arises, what is the effect of, “the parties may apply for arbitration”?  Is it permissive and thus does it merely provide an option to arbitrate?  Or is it binding so that the parties must arbitrate if “amicable negotiations” break down?

16.  Mr Chow relies on Kaplan J’s remarks in China State Construction Engineering Corporation Guangdong Branch v Madiford Ltd [1992] 1 HKC at 325 where he said:

“The fact that the permissive word ‘may’ was used does not in the end detract from this agreement. It seems to me that once one party or the other has opted for arbitration (as by taking out this application for a stay) the other party is obliged to honour the agreement to arbitrate. It follows, of course, that if both parties agreed not to arbitrate but to litigate, they would be perfectly free to do so, but I do not think the word ‘may’ in the context of this clause entitles the plaintiffs to negate the defendants’ wish to arbitrate by the issue of court proceedings. At the end of the day, it seems to me clear that this is one of those cases where the word ‘may’ in effect means ‘shall’. I do not think that the defendants are prevented from insisting upon arbitration merely because the plaintiffs issued their proceedings before any steps could be taken by the defendants to commence the arbitration.”

17.  Other authorities support the argument that if the words in the clause demonstrate an intention of both parties to arbitrate, then the courts should give effect to that intention (Guangdong Agriculture Co. Ltd v Conagra International (Far East) [1993] 1 HKLR 113 and Lucky-Goldstar International (HK) Ltd v Ng Moo Kee Engineering Ltd [1993] 2 HKLR 73).

18.  Mr Wu, for the plaintiff, has drawn the court’s attention to the more recent decision of Le Pichon JA in Thorn Security (HK) Ltd v Cheung Kee Fung Cheung Construction Co. Ltd [2005] 1 HKC.  At p 259 she said:

“Notice to Refer to Arbitration. The first matter to note is the wording used, viz that the contractor or subcontractor ‘may require the dispute to be referred to arbitration’. It is not expressed in mandatory terms: rather, it is framed as an option. Moreover, there is a time limit stipulated for invoking this procedure: under para (a), that has to be done within 28 days of receipt of the contract manager’s decision or his notice of inability to make a decision in respect to a Notice of Dispute. …

and later

“ I cannot agree that whenever the word ‘arbitration’ is mentioned in any provision, it necessarily has to be interpreted as meaning an arbitration agreement. There is no bar that I can see to parties agreeing to an option to arbitrate which is exercisable only within certain time limits without necessarily creating an arbitration agreement. In such a situation, the option must be exercised in accordance with its terms.”

19.  What is apparent from all these cases is that each clause must be read and considered in the context of the contract to which it relates.  Kaplan J was making this point when he said “At the end of the day, it seems to me clear that this is one if those cases where the word “may” in effect means “shall”.”

20.  In the present case, had I been required to do so, I would have concluded that because of the brevity of the clause, the use of “may” in context and the lack of any terms defining the proposed arbitration (time limits, applicable law, venue etc.) Le Pichon JA’s approach would have been the more preferable.  Thus, because clause 7 provides for no more than a mere option I would have refused the application for a stay.  Such an option only becomes a reality if it is consensual.  It seems to me that such an interpretation naturally flows from the words “the parties may apply …”.

Forum non conveniens

21.  As an alternative Mr Chow submits that Fujian Province PRC is the natural and appropriate forum for the trial of this action.

22.  At the outset it is important to remember that the question relates to HCA 1876/2011 and not to a non-existent time-barred action arising out of the 2004 agreement.

23.  Having said that the background concerning the 2004 is of some relevance to the forum non conveniens issue.  The court in the present claim arising out of the settlement agreement will have to decide whether the parties came to any agreement at all.  The defendants will deny that they did.  Therefore, the underlying dispute which, it is said, was settled will be relevant.

24.  The principles to be applied (as per Cheung JA in Pei Zheng Middle School & others v China Pui Ching Education Foundation Ltd & other, CACV 2005) ARE:

“1. The single question to be decided is whether there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of an action i.e. in which the action may be tried more suitably for the interests of all the parties and the ends of justice?

2. In order to answer this question, the applicant for the stay has to establish that first, Hong Kong is not the natural or appropriate forum (‘appropriate’ in this context means the forum has the most real and substantial connection with the action) and second, there is another available forum which is clearly or distinctly more appropriate than Hong Kong. Failure by the applicant to establish these two matters at this stage is fatal.

3. If the applicant is able to establish both of these two matters, then the plaintiff in the Hong Kong proceedings has to show that he will be deprived of a legitimate personal or juridical advantages if the action is tried in a forum other than Hong Kong.

4. If the plaintiff is able to establish this, the court will have to balance the advantages of the alternative forum with the disadvantages that the plaintiff may suffer.  Deprivation of one or more personal advantages will not necessarily be fatal to the applicant for the stay if he is able to establish to the court’s satisfaction that substantial justice will be done in the available appropriate forum.”

25.  Mr Chow relies heavily on the Fujian connections with the 2004 agreement.  The defendants’ case is that it was negotiated and signed in Fujian Province (whereas the plaintiff claims was negotiated, signed and concluded in Hong Kong).  The factory, L&F Dyeing Co., is in Fujian and is subject to PRC law.  The money to be transferred was RMB.  Also, the plaintiff’s allegations surrounding the failure of the agreement relate to activities in the PRC.

26.  Mr Wu, on the other hand, submits that much of the above are background matters which have varying degrees of relevance to the issues in HCA 1876/2011.  The key features of the plaintiff’s claim are that the plaintiff is a H.K. company, the 1^st defendant is a H.K. company and the 2^nd defendant, is a H.K. citizen, (albeit the bulk of her business and travels are in the PRC, as is her prime residence).

27.  The plaintiff further alleges that the settlement agreement has been, partly, complied with by a payment of money to the plaintiff’s Hong Kong bank account.  The subject matter of the claim is not the PRC factory; it is a monetary claim in Hong Kong.  The fact that some relevant documents may be in Fujian or that a witness may have to travel from China to Hong Kong is not unusual and not a determining factor in this particular application.

28.  Ultimately it is a question of balance.  In all the circumstances I am not persuaded that Fujian Province is the natural and appropriate forum to determine whether or not the settlement agreement was even concluded and if so, on what terms.

29.  The defendants’ summons is dismissed.  I also make an order nisi that the costs be to the plaintiff to be taxed if not agreed.