PALADIN AGRICULTURAL LTD AND ANOTHER v. THE EXCELSIOR HOTEL (HONG KONG) LTD

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.8552 OF 2000

-----------------

-----------------

DECISION

-----------------

1. There are two summonses before the court. The first is an application to transfer the action to the Construction and Arbitration List. The defendant, who makes the application, accepts this is not a construction case, however, it is necessary to transfer it into this court's list purely for the purpose of making the second application before the court, namely an application for a stay of proceedings in favour of arbitration. I grant this application without further comment. I will deal with costs at the conclusion of the judgment.

2. By the defendant's second summons, it seeks, inter alia, the following:-

3. By a letter dated 19 October 2000, the defendant's solicitors clarified their intention with regard to paragraph 2 above. To formalize that clarification, I granted an amendment by adding the following words after "stayed" ---- "pending the publication of the Final Award on the arbitration between the 1^st plaintiff and the defendant". In other words, the defendant is not seeking a stay of the 2^nd plaintiff's action in favour of arbitration but merely a stay to await the arbitration it seeks between itself and the 1^stplaintiff.

A. BACKGROUND

4. On 10 October 1997, the 1^st plaintiff entered a sub-tenancy agreement with the defendant for part of the 1^st floor of the Excelsior Hotel for three years. In outline, the agreement included obligations on the 1^st plaintiff to pay rent, to keep the premises free of pests and vermin, to indemnify the defendant against claims brought against it which were the fault of the 1^st plaintiff and not to permit use or occupation for rent by anyone else. Standard obligations were also imposed on the defendant.

5. Pursuant to the agreement, the 1^st plaintiff also procured a guarantee of its obligations under the tenancy agreement from its parent company, Paladin Limited.

6. The agreement between the defendant and the 1^st plaintiff contained the following arbitration clause:-

"If any dispute or difference shall arise between the parties hereto touching or concerning these presents or any matter to be done or omitted or alleged to have been done or omitted hereunder, the same shall be referred for determination by a single arbitrator to be appointed by the Chairman for the time being of the Hong Kong International Arbitration Centre, such arbitration to be conducted in accordance with its Rules for Domestic Arbitration."

7. The premises commenced operations as a restaurant in the name of the 2^nd plaintiff, in spite of a term in the tenancy agreement not to permit use or occupation for rent or other consideration by anyone else. In any event, the restaurant closed in April 2000 partially because of a dispute concerning the presence of vermin in the premises. The dispute escalated and on 14 August 2000, the defendant commenced proceedings against the 1^st plaintiff's parent company under the Guarantee ("the guarantee action"). On 25 August 2000, the 1^st plaintiff and the 2^nd plaintiff served a writ on the defendant (this action) followed by a Statement of Claim. This was the first occasion that the 2^nd plaintiff appeared as a separate legal entity. There is no contractual relationship between the defendant and the 2^nd plaintiff and, accordingly, no arbitration clause.

8. On 14 September 2000, the 1^st plaintiff was joined as a defendant in the guarantee action. Finally, on 9 October 2000, the defendant in this action served on the 1^st plaintiff a notice of dispute and commenced the reference under the arbitration clause, seeking a stay of the action in favour of arbitration.

B. THE STAY APPLICATION

9. This is opposed on the following grounds.

1. Recission

10. The 1^st plaintiff submits that the arbitration clause had been rescinded in correspondence between the parties' solicitors in June and July 2000. The relevant parts of that correspondence are as follows :-

".... We reiterate our client's demands in the last two paragraphs of our previous letter dated the 1^st June 2000. In case the matter cannot be amicably settled, our client has no objection to your suggestion of referring the matter to the jurisdiction of High Court of the HKSAR." (emphasis added)

"We are aware of the exchange of correspondence between your goodself and Messrs. Liu, Chan & Lam (which firm previously advised Paladin Agricultural Ltd) and the agreement to resolve the dispute under the Sub-Tenancy Agreement by legal (rather than arbitration) proceedings."

11. Further correspondence continued primarily concerning the relationship between the parallel actions, namely the guarantee action and this action.

12. On 9 October 2000, the defendant's solicitors wrote as follows to the 1^st plaintiff :-

and as follows to their solicitors :-

13. The issue therefore arises ---- was the arbitration clause rescinded by this correspondence?

14. The parties submit differing interpretations should be placed on what was said. There is no dispute as to what was in fact said, it is all in black and white. The issue concerns the intention of the parties. The 1^st plaintiff maintains it should be construed as a clear unequivocal intention to rescind the arbitration clause by the defendant. Thus there is no arbitration clause which binds the parties. The defendant maintains, at its highest, it was an inquiry made to the 1^st plaintiff's former solicitors which they (the former solicitors) referred to as a "suggestion". This has been, it is argued, wrongly converted into an "agreement" by the 1^st plaintiff's new solicitors.

15. It seems to me that, at least, the defendant has a prima facie case that there was no binding agreement to rescind the arbitration. May be more. If there was no recission, the clause subsists and a stay is mandatory (subject to other objections taken by the 1^st plaintiff).

16. In support of its contention that there was an agreement to rescind, the 1^st plaintiff also points to the conduct of the defendant's solicitors after the letter of 30 June 2000 as being consistent with an agreement to rescind. This may be true but it does not dilute the defendant's prima facie argument. Once a prima facie case has been made out, it is for the arbitrator to determine the issue of his own jurisdiction. In Star (Universal) Co. Ltd v. Private Company Triple V Inc [1995] 2 HKLR at page 65, Litton VP said this (first quoting the judge at first instance) :-

          " The judge said this :

'There is prima facie evidence of a dispute between the Plaintiff and D1 in relation to contract 93RV-1034HK and an arbitrator ought to be appointed to arbitrate their dispute. It will be for the arbitrator to decide the effect, if any, of the alleged subsequent agreement cancelling the contract.'

          I agree. If the judge were to go into the matter more deeply, he would in effect be usurping the function of the arbitrator. Whilst, clearly, the judge had to make a judgment as to whether there existed an underlying agreement to arbitrate, he could do no more than to form a prima facie view. Here, in exercising his jurisdiction under Article 11(3), Leonard, J. in effect asked himself whether it was arguable that Contract No.1034HK still subsisted, despite the existence of the subsequent agreement. This seems to me the correct approach. Here, as I have said, the second agreement is, on its face, a very odd document. It's legal effect is not wholly self-evident. I make no comment on the hypothetical situation, posed in argument, where the evidence is overwhelming that an agreement to arbitrate has been abrogated. This in my judgment is not such a case."

17. Applying the same approach to the facts of this case, I do not find that the evidence in support of the alleged recission of the arbitration agreement to be overwhelming. It is plainly arguable. Put simply the defendant has succeeded that, prima facie, a valid arbitration clause exists between the parties on the basis that there was no unequivocal agreement to terminate it. Both counsel, Mr Nigel Kat for the defendant and Mr Colin Wright for the plaintiffs, have helpfully referred the court to a number of authorities and enlarged their submissions on this issue. In my judgment, the issue is resolved, without further complication, in the manner outlined above.

2. Earlier first statement on the substance of the dispute

18. The 1^st plaintiff also submits that the mandatory stay should not apply, even if there has been no recission, because the defendant falls foul of Article 8(1) :-

" (1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not 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."

19. The 1^st plaintiff relies on two events which, it is submitted, constitute "statements on the substance of the dispute" which occurred before the defendant's "notice of dispute" letter on 9 October 2000. They are the service of proceedings against the 1^st plaintiff's parent company under the guarantee on 14 August 20000 and the joining of the 1^st plaintiff is that guarantee action on 14 September 2000. When it joined the 1^st plaintiff as a defendant in the guarantee action, a detailed Amended Statement of Claim was also served.

20. The 1^st plaintiff submits that as soon as that Amended Statement of Claim was served in that action, it was entitled to assume that no application for a stay would be made in this action. The right to apply for a stay should be treated as having been waived.

21. I do not accept this submission. The words of Article 8(1) envisage, in my judgment, the "statement" being a statement in the "action" referred to in the opening words of Article 8(1). In our case, that means the arbitral process available to the defendant in this action and not the guarantee action. The 1^st plaintiff was not even a party to the litigation order the original Statement of Claim was served. Its parent company was the original sole defendant. The mere act of adding the 1^st plaintiff to those proceedings cannot be regarded as a positive election by the defendant to abandon its right to arbitrate on this action. I glean support for this view from two authorities. In Hanjin Shipping v. Grand King Shipping [1999] 2 HKC 423, a plaintiff successfully applied to stay its own proceedings in Hong Kong which had been brought solely for the purpose of obtaining a Mareva injunction. Arbitration proceedings were later commenced in London. The right to arbitrate remained. The Mareva proceedings were not held to amount to an election to litigate so as to preclude a mandatory stay.

22. A commentary on the Canadian case of Bab Systems v. McLurg in 1994 is also on the point and prayed in aid by Mr Kat :-

" The defendant argued that the court should not stay the judicial proceedings under the Ontario equivalent of Art. 8(1) MAL because the application for stay had been made after the plaintiff had submitted its 'first statement on the substance of the dispute' by filing an application with the court. The court held that the word 'statement' in Art. 8(1) MAL meant the first statement in the arbitral process, as distinct from the litigation process."

23. Mr Wright, for the 1^st plaintiff, makes two further complaints. Firstly, that the disputes between the parties were not sufficiently identified in the defendant's reference to arbitration. Secondly, that the defendant has not taken any active steps to pursue the arbitration proceeding and this is consistent with its alleged election to waive its rights to arbitrate.

24. Both points can be dealt with quite shortly. As to the first matter, I consider that the 1^st plaintiff would be in no doubt what the issues and disputes were having received the notice of dispute letter itself (9 October 2000) and previous correspondence. As to the second matter, again I find it to be without substance. The defendant had done as much as it could reasonably be expected to have done in the circumstances. A notice of dispute letter had been sent, a referral to the HKIAC had been made and the appointment of an arbitrator had been sought and a summons for a stay had been made. The 1^st plaintiff's opposition to the stay was immediately apparent. In such circumstances, the only sensible thing for the defendant to do was to await the outcome of the stay proceedings before incurring any further costs in the arbitration.

25. In conclusion, in relation to paragraph 1 of the defendant's summons, at each turn the court is faced with the mandatory nature of Article 8(1). I am satisfied that no bar to its mandatory implementation arises in this case. A stay will be granted.

C. THE 2^ND PLAINTIFF

26. Once the action between the 1^st plaintiff and the defendant has been stayed in favour of arbitration, the question arises ---- what should happen to the 2^nd plaintiff's claim? Mr Wright argues that it is entitled to pursue its claim regardless; why should it have to wait for its money? The issues are not identical and so the risk of duplication of proceedings and inconsistent verdicts does not arise.

27. Mr Kat invites the court to exercise its inherent discretionary jurisdiction to stay the 2^nd plaintiff's claim until after the final award has been made in the arbitration.

28. In the exercise of my discretion to order a stay as requested by the defendant, I take into account the following factors :-

29. These factors are not of equal weight. However, taken together and applying the principle set out in the Supreme Court Practice at page 1647 :-

"If there are two courts faced with substantially the same question or issue, it is desirable that that question or issue shall be determined in only one of those two courts. If by that means justice can be done and the courts will of necessary stay one of the action. The same principle applies to proceedings other than actions ..."

30. I am satisfied the discretion should be exercised in the defendant's favour. I am satisfied that to do so will "prevent unnecessary expense, trouble and anxiety to the parties" and that it is "just and convenient to do so". I have weighed in the balance the 2^nd plaintiff's desire to pursue its claim and the fact that the issues in the two claims are not identical, albeit they are, in reality, largely the same.

31. Finally, having acceded to the defendant's applications in respect of both the 1^st plaintiff and the 2^nd plaintiff, it is noted that the defendant has undertaken to take no further steps in the guarantee action, where it is the plaintiff, also until the conclusion of the arbitration (and for the same reasons). This is clearly the correct thing to do.

32. Both counsel were invited to address the court on costs. I therefore make this final order.