CHU KONG v. LAU WING YAN AND OTHERS

CACV 105/2018

[2018] HKCA 1010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 105 OF 2018

(ON APPEAL FROM HCA 226/2017)

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J U D G M E N T

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Hon Poon JA (giving the Judgment of the Court) :

1.  This is an appeal against the order of Deputy High Court Judge Le Pichon (“the Judge”) dated 30 October 2017, refusing the 4^th defendant’s application to stay the action against it pending arbitration pursuant to section 20(1) of the Arbitration Ordinance, Cap 609.

BACKGROUND

2.  The action below is a multiple derivative action brought by the plaintiff on behalf of the 7^th defendant (“the Company”).

3.  The plaintiff is the ultimate owner and indirect shareholder (through the 5^th defendant and 6^th defendant) of 40% of the Company.  The 1^st defendant is an indirect shareholder of 40% of the Company and 80% shareholder of the 2^nd defendant.  The 3^rd defendant is the Company’s sole director.

4.  The Company entered into a Bareboat Charter dated 24 November 2013 with the 4^th defendant, agreeing to buy a vessel owned by the latter for US$25 million (“the Contract”).  The 1^st instalment by way of a non-refundable deposit of 10% of the price, that is, US$2.5 million, was payable on or before 26 November 2013.  70% of the price was payable on or before 28 March 2014 and the remaining 20% on the 1^st anniversary of the actual delivery of the vessel.  Clause 30(a) of the Contract contained an arbitration clause stipulating that “any dispute arising out of or in connection with this Contract shall be referred to arbitration in London in accordance with the Arbitration Act 1996”.

5.  On 28 March 2014, the 3^rd defendant, on behalf of the Company, entered into a supplemental agreement with the 2^nd defendant and the 4^th defendant whereby the 2^nd defendant substituted the Company as the buyer of the vessel from the 4^th defendant (“the Supplemental Agreement”).  The Supplemental Agreement provided that the Company had paid the 4^th defendant the first instalment and deposit of US$2.5 million on behalf of the 2^nd defendant.  It further provided that the balance of the price shall be paid by the 2^nd defendant to the 4^th defendant on or before the delivery of the vessel.  Relevantly, clause 4 of the Supplemental Agreement expressly incorporated the arbitration clause of the Contract, rendering it applicable to the Supplemental Agreement “as if [it] were set out in full”.

6.  At the commencement of the action below, the sale and delivery of the vessel to the 2^nd defendant had already been completed.

PROCEEDINGS BELOW

7.  The plaintiff commenced this multiple derivative action on behalf of the Company, alleging that in causing the Company to enter into the Supplemental Agreement, the 3^rd defendant had committed breaches of fiduciary duties and/or breach of trust and/or breach of duty of fidelity and good faith she owed to the Company as its director; that the plaintiff had no prior knowledge of the Supplemental Agreement and had never consented to it; and that the 1^st and 2^nd defendants were complicit with the 3^rd defendant in the misappropriation of the Company’s assets.

8.  In neither the statement of claim or affirmations filed in opposing the 4^th defendant’s stay application did the plaintiff raise any allegation of wrongdoing against the 4^th defendant.  The plaintiff said the 4^th defendant was joined so that it would be bound by the outcome of the action.  Significantly, the plaintiff sought against both the 2^nd defendant and the 4^th defendant a declaration that the Supplemental Agreement is void and unenforceable.

9.  For the reasons set out in the Decision dated 30 October 2017, the Judge refused to stay the action against the 4^th defendant.  In brief, the Judge found that there was no substantive dispute between the plaintiff/the Company and the 4^th defendant because the 4^th defendant was joined essentially as a nominal defendant.  She further held that it is impermissible for the plaintiff to commence arbitration proceedings against the 4^th defendant derivatively on behalf of the Company.

DISCUSSION

10.  Pursuant to section 20(1) of the Arbitration Ordinance, 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.  The requirement to stay for arbitration under section 20(1) is mandatory.

11.  In approaching a stay application under section 20(1), the court asks four questions :

(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?

See Tommy CP Sze & Co v Li & Fung (Trading) Ltd & Others [2003] 1 HKC 418, per Ma J (as the Chief Justice then was) at [19] – [22].

12.  Here, there is no dispute that the arbitration clause incorporated into the Supplemental Agreement is an arbitration agreement, that the arbitration agreement is valid and operative, and that the validity of the Supplemental Agreement falls within its ambit.  The main issues on which the plaintiff and the 4^th defendant disagree are :

(1)  Is there a substantive dispute between the plaintiff/the Company and the 4^th defendant?

(2)  Is the arbitration agreement incorporated in the Supplemental Agreement incapable of being performed?

13.  On the first issue, Mr Maurellet, SC (with Mr Michael Lok and Ms Jasmine Cheung) for the plaintiff submitted that in reality there is no substantive dispute between the plaintiff/the Company and the 4^th defendant.  He supported the Judge’s observation that the plaintiff’s complaints against the 1^st to 3^rd defendants did not concern the 4^th defendant and that in granting relief the court would ensure that the effect on the 4^th defendant would be neutral.  He placed particular reliance on the fact that all that the plaintiff sought is a declaration that the Supplemental Agreement is void and unenforceable and no consequential relief is sought against the 4^th defendant.  With respect, we disagree.

14.  In determining if the declaration sought against the 4^th defendant should be granted on the basis that the Supplemental Agreement is void and unenforceable via-s-via the 4^th defendant, two questions are inevitably engaged : (1) whether there was absence of actual or apparent authority on the part of the 3^rd defendant to bind the Company to the Supplemental Agreement; and (2) whether the 4^th defendant had knowledge of the 3^rd defendant’s want of actual authority and could not legitimately rely on her apparent authority as the Company’s director.  These are fact sensitive questions which can only be resolved with evidence from all the protagonists, including the plaintiff/the Company and the 4^th defendant.  In the circumstances, the 4^th defendant is definitely not a nominal party.  The disputes between the plaintiff/the Company and 4^th defendant are real and substantive.

15.  On the second issue, Mr Maurellet relied on what Ma J said in Tommy CP Sze & Co at [38] :

“ In essence, before any dispute or difference is referred to arbitration, the court must be sure that this is a viable option; in other words, that an arbitration can take place to resolve the relevant disputes or differences.”

16.  Mr Maurellet submitted that as the law in Hong Kong now stands, the plaintiff cannot commence an arbitration derivatively on behalf of the Company.  The 4^th defendant would take issue with the plaintiff’s locus if he were to do so.  So, counsel reasoned, arbitration is not a viable option to resolve the parties’ disputes.  Again, we respectfully disagree.

17.  Firstly, the reference to “viable option” in Tommy CP Sze & Co must be understood against the statutory framework.  Under section 20(1), the court must stay the action unless it finds the arbitration agreement to be void, inoperative and incapable of being performed.

18.  Secondly, if, after the action against the 4^th defendant is stayed, the plaintiff were to commence arbitration against the 4^th defendant on behalf of the Company concurrently with the present action, and the 4^th defendant were to raise the question of the plaintiff’s locus in bringing the arbitration, then this issue will eminently be a matter falling within the disputes between the parties covered by the arbitration agreement.  The fact that the plaintiff might have difficulty on the locus issue will not render the arbitration agreement incorporated into the Supplemental Agreement incapable of being performed.

19.  In passing, as we pointed out in the course of submissions, there are alternative remedies open to the plaintiff to address the issue of his locus.  For example, it is open to the plaintiff to claim in the action an order compelling the Company to commence arbitration against the 4^th defendant, or an order directing the 2^nd defendant to re-assign the vessel to the Company. Mr Sussex also suggested the possibility of invoking the court’s admiralty jurisdiction through an action in rem targeting the vessel.  After all, the plaintiff’s major complaint is that the Company has been wrongfully deprived of the vessel, its only valuable asset.  It would appear there is no need, at least at this stage, to involve the 4^th defendant, whether in any litigation or arbitration.

20.  For the reasons set out above, we are of the view that the 4^th defendant’s application for a stay pending arbitration should be granted, and that the appeal should be allowed.

CONCLUSION

21.  We allow the appeal, set aside the Judge’s order, and order the plaintiff’s action against the 4^th defendant be stayed pending arbitration.  Costs should follow event.  Further, we see no basis to depart from the usual principle in applications for stay pending arbitration that the 4^th defendant should be awarded its costs on indemnity basis. Accordingly, we make an order nisi that the plaintiff pays the 4^th defendant the costs below and on appeal with a certificate for 2 counsel, to be taxed on indemnity basis if not agreed.