GLENCORE INTERNATIONAL A.G. v. BRIGHT CHINA INTERNATIONAL LTD. AND OTHERS

1997, No.CL166

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST

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J U D G M E N T

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1. I have before me two summonses for decision : first, the Plaintiff's application dated 19th December 1997 that paragraphs 26 and 27 of the 2nd Defendant's counterclaim be stayed pursuant to Part IIA Section 34 of the Arbitration Ordinance and Article 8 of the Uncitral Model Law on International Commercial Arbitration, the Plaintiff and the Defendant having, by an agreement dated 4th July 1997, agreed to refer to arbitration the matters pleaded in these paragraphs; and second, the 2nd Defendant's application, dated 15th April 1998, seeking the adjournment of the Plaintiff's application pending the 2nd Defendant's application to stay arbitration proceedings between the same parties which are presently ongoing in London. This adjournment application was mounted some three days in advance of the hearing of the Plaintiff's stay application; in the event, for reasons to which I shall advert, this application was itself adjourned to the substantive hearing of the Plaintiff's summons.

2. This, then, is the judgment consequent upon these two applications.

Background Facts

3. This dispute is larded with considerable detail, albeit the bare bones are now tolerably clear, and in this regard I am grateful for the helpful and detailed chronology submitted by Mr Shieh, who appears on behalf of the Plaintiff in both applications.

4. The matter has its origins in two contracts for the sale of aluminium ingots : first, a contract dated 18th April 1997 ("the April contract") between the Plaintiff and the 1st Defendant for the sale of 6,000 metric tonnes of ingots by the Plaintiff to the 1st Defendant in three 2,000 metric tonne shipments, in June, July and August 1997 respectively; second, a contract dated 4th July 1997 ("the July contract") between the Plaintiff and the 2nd Defendant for the sale of 18,000 metric tonnes of ingots by the Plaintiff to the 2nd Defendant, consisting of six shipments, in 3,000 metric tonne tranches, from July to December 1997.

5. Thereafter, three significant events occurred. The first was that on about 28th August 1997, the 2nd Defendant opened three L/Cs, namely 16595506, 97081536 and G-46-P-06682. Second, by the beginning of September 1997, the 1st Defendant had defaulted upon payment of the balance of the July shipment under the April contract between the Plaintiff and the 1st Defendant, amounting to US$392,478.04. And third, in early September 1997, a vessel named the "M.V. Kovalchuk" discharged its cargo of ingots in Hong Kong, part of which, the Plaintiff asserts, was shipped by the Plaintiff under the August shipment under the April contract and pursuant to which, the Plaintiff says, the three L/Cs had been opened by the 2nd Defendant, on the 1st Defendant's behalf, and which covered the purchase price for this August shipment; hence, asserted the Plaintiff, the "Kovalchuk" cargo was available for Mareva relief.

6. What followed then was that proceedings were taken out in both United Kingdom and in Hong Kong. A Mareva injunction was obtained on 15th September 1997 in London restraining the disposition of the bundles of ingots discharged from the vessel, and a day later a similar injunction was obtained in Hong Kong. On 26th September 1997, the High Court in this jurisdiction discharged the Mareva injunction and ordered the sale of the ingots and payment of the proceeds into Court (amounting to the sum of US$376,268.34), and on 28th October 1997 default judgment was entered against the 1st Defendant for damages to be assessed.

7. So far as the Hong Kong proceedings were concerned, the Plaintiff was prepared to discontinue against the 2nd and 3rd Defendants if they confirmed that they had no right or interest in the ingots, and on 3rd November 1997 the Plaintiff applied for an Order that the 2nd and 3rd Defendants (which, for present purposes, I understand, can be effectively regarded as one entity) state their case as to any claimed interest in the ingots or the proceeds of sale. In the meantime, on 5th November 1997, the Plaintiff had commenced arbitration proceedings in London against the 2nd Defendant wherein it claimed damages for breach by the 2nd Defendant of the July contract.

8. Three days later, on 8th November 1997, the 2nd Defendant filed an affidavit in the Hong Kong proceedings asserting title to the ingots. In a nutshell, its case was that the ingots which had been sold (and which were now represented by the monies in Court) were not referable to the April contract between the Plaintiff and the 1st Defendant; rather, they were referable to the August shipment of the 2nd Defendant's own July contract with the Plaintiff. These ingots had been paid for by one of the three L/Cs issued by the 2nd Defendant, and hence the 2nd Defendant claimed full interest in the ingots and in the proceeds of sale.

9. Battle therefore was clearly joined. The Plaintiff's Statement of Claim in Hong Kong (paragraph 17 of which assumes prominence in this application) was filed on 25th November 1997, with a Defence and Counterclaim (paragraphs 26 and 27 of which forming the subject matter of the Plaintiff's present application) on 10th December 1997.

10. Meanwhile, in the London arbitration commenced between the Plaintiff and the 2nd Defendant on 5th November 1997 in respect of the July contract, Points of Claim were served on 3rd March 1998, and on 1st April 1998 the 2nd Defendant applied to the London arbitrators to stay the London arbitration in favour of the Hong Kong proceedings. This application, I understand, has now been confirmed to be heard before the learned arbitrator on 13th May 1998 in London.

11. It is against this factual background, therefore, that I turn now to consider the present applications.

(a) The Plaintiff's stay application

12. The Plaintiff seeks to stay paragraph 26 (and in so far as it be referable thereto, part of paragraph 27) of the 2nd Defendant's Defence and Counterclaim in favour of the London arbitration. Paragraph 26 of the Counterclaim reads as follows :-

"In breach of the July Contract, the Plaintiff has failed to make delivery of the balance August shipment and wrongly maintained the 3 said Letters of Credit were for shipment made under the 1st April Contract. By reason of the Plaintiff's breach of the July Contract, the 2nd Defendant has suffered loss and damage in the sum of US$2,140,927.89 particulars of which are set out in Schedule B herewith."

13. Its import, says Mr Shieh, is clear; damages are sought for breach of the July contract, itself the subject of the London arbitration proceedings between the Plaintiff and the 2nd Defendant, and which proceedings, he says, properly represent the litigation focus of this dispute. Indeed, Mr Shieh asserts that the point of continuing with the 2nd and 3rd Defendants in the present Hong Kong action is essentially negative, namely, to eliminate the 2nd and 3rd Defendants from any interest in the monies presently in Court; there is in this action judgment against the 1st Defendant, and absent the 2nd Defendant's declared interest in such sum, the default judgment could be executed against the monies presently standing in Court.

14. Equally, says Mr Shieh, the law is clear. Article 8 of Uncitral provides for a mandatory stay of proceedings, subject to specific exceptions; Uncitral being part of Hong Kong law, there is no scope for any residual judicial discretion to refuse a stay, so that discretionary considerations, such as the overlapping of issues and the possibility of inconsistent findings of fact, do not enter the picture, so to speak. I am satisfied that this is a correct statement of the law, although I am constrained to say that I regret that this should be the case. That, however, is nothing to the point. The legislature has seen fit to impose the statutory constraint, and I must apply the law as it stands.

15. Mr Shieh points out also that there is no suggestion that the arbitration agreement was null or void or inoperative or incapable of being performed. Accordingly, the sole outstanding issue in this case is whether the Plaintiff is barred from making the application because it has failed to apply for a stay "not later than when submitting his first statement on the substance of the dispute".

16. For his part, Mr Law, who appeared for the 2nd Defendant, agreed with Mr Shieh's exposition of general principle. Importantly, and, if I may say so, entirely correctly, Mr Law abandoned the suggestion made at the initial hearing of his adjournment application with regard to the existence of an element of residual discretion, which was the line of argument, albeit undeveloped, which had caused the adjournment of the adjournment application to the hearing of the Plaintiff's substantive application. In any event, mature consideration had clearly persuaded Mr Law that this argument was untenable. Accordingly, the only remaining string to his bow was to join battle on the "first statement" point. To this end, he invited my attention to paragraph 17 of the Plaintiff's Statement of Claim in these proceedings, which, he asserted, constituted precisely such a 'first statement'. Paragraph 17 of this Statement of Claim reads as follows :-

"The Second and Third Defendants have at all material times from 5th September 1997 onwards claimed an interest in the aforesaid ingots and/or Bill of Lading 386 relating thereto and have asserted that the letters of credit referred to in paragraph 12 above were opened for the purpose of contract 162-97-18729-S concluded between the Plaintiffs and the Second Defendants, and not for the aforesaid contract no. 162-97-15400S. The Second and Third Defendants have particularised their contentions in an affirmation by Mr Lam Ngar Yan filed on behalf of the Second and Third Defendants on 8 November 1997 in which the aforesaid Defendants have claimed that Letter of Credit no. G-46-P-06682 was issued by the Second Defendant pursuant to contract no. 162-97-18729-S concluded between the Plaintiff and the Second Defendant on 4 July 1997 for the delivery of 18,000 metric tons of aluminium in 6 shipments of 3,000 metric tons each monthly from July to December 1997, as part payment for the August shipment under such contract; that after the letter of credit was negotiated to the credit of the Plaintiff, bill of lading no. 386 was released to the Second Defendant on trust from the banker; and that the Second Defendant accordingly has full interest in the ingots and after the sale in the proceeds. These assertions are disputed by the Plaintiff which relies inter alia on the facts set out in paragraphs 12-14 above and on the Second and Third Defendants' statements and representations to it in August and September 1997 that they had made application for the opening of a letter of credit for 1,500 metric tons as the balance of the August shipment under contract no. 162-97-18729S to, successively, Sin Hua Bank, Bank of East Asia, and Sin Hua Bank (again), and the opening of letter of credit no. G-46-P-06902 by the latter bank on 5 September 1997 for the aforesaid quantity, albeit with unworkable shipment dates."

17. The law on the 'substance of the dispute' point has, in my view, been set out clearly in the judgment of Waung, J. in Louis Dreyfus Trading Ltd v. Bonarich International (Group) Ltd [1997] 3 HKC 597 at 606, where, inter alia, the learned judge observes as follows :-

"... Article 8(1) requires the act of such defendant to be :

(1) a statement;

(2) a statement which is submitted to the court by the defendant;

(3) a statement which is on the substance of the dispute;

(4) a statement which is a first statement on the substance of the dispute.

For the sake of convenience I have italicised the four separate essential aspects of the bar. In my judgment what art 8(1) has provided for as a bar to mandatory stay is some formal document (probably first in a series) specially submitted by a party to the court which contains what that party says on the substance of the dispute. A document which readily comes to mind as being such a document under art 8(1) would be the defence and counterclaim of a defendant in an action. ..."

18. Neither Counsel, I think, differs from this succinct expression of the legal position. However, where the difference does arise is in the conclusion to be drawn from the application of those principles to this case.

19. Mr Shieh says that the analytical key is the identification of what is the "dispute" between the Plaintiff and the 2nd Defendant to which reference is being made. Disputes cannot exist in the abstract, he says - the "dispute" envisaged by Article 8 must mean a dispute of the claim of the party whose claim is being stayed. Here, in paragraph 26 of the 2nd Defendant's Counterclaim, the "dispute" is centred upon the 2nd Defendant's breach of contract claim against the Plaintiff for breach of the July contract, as formulated in that paragraph and in the accompanying Schedule B. For its part, the Plaintiff disputes the 2nd Defendant's claim in this regard, and has asserted its own claim for breach of contract against the 2nd Defendant in the London arbitration, which, says Mr Shieh, should hear and determine the matter.

20. Paragraph 17 of his own pleading, he says, cannot constitute the Plaintiff's first statement on the substance of that dispute within the meaning of the relevant article. In this context, he makes two points. First, it is very difficult to see how the Plaintiff has or can have filed its first statement of case prior to the 2nd Defendant stating its own case on the very dispute the subject of the claim; and second, the fact that the existing Statement of Claim has addressed the issue of the three L/Cs in question does not mean that the Plaintiff has put in a statement of the substance of its case on the dispute between the Plaintiff and the 2nd Defendant.

21. In fact, he says, there are in this case two disputes between the Plaintiff and the 2nd Defendant, in two quite different contexts :-

(i) in the context of the Plaintiff's claim against the 1st Defendant based on the April contract, there is a dispute between the Plaintiff and the 2nd Defendant as to title to the money in Court; and

(ii) in the context of the 2nd Defendant's claim against the Plaintiff based on the July contract, there is a dispute as to who had breached the July contract by non-payment or non-delivery.

22. These disputes, said Mr Shieh, are in effect linked by a common issue, namely the issue of the "appropriation" of the three L/Cs, that is, whether the 2nd Defendant had opened the three L/Cs in purported performance of the Plaintiff/1st Defendant April contract or in purported performance of the Plaintiff/2nd Defendant July contract. So that in addressing the first dispute, the Plaintiff necessarily had had to state its position on the common issue of the three L/Cs. This however did not mean that the Plaintiff had thereby stated the substance of its case on dispute (ii).

23. This is a powerful argument, but Mr Law, on behalf of the 2nd Defendant, was undeterred. He accepted the legal requirement with regard to the first statement on the substance of the dispute, but strongly maintained that the Plaintiff had grossly oversimplified the matter of the L/C allocation as constituting merely "a common issue" in the two disputes. The reality, he said, is that the seeking of declaratory relief in the Amended Writ and/or in paragraph 17 of the Statement of Claim was referable to the substance of the dispute between the Plaintiff and the 2nd Defendant - that is, which party was in breach of the July contract in respect of the allocation of the three L/Cs in question. He submitted that the main dispute between the Plaintiff and the 2nd Defendant remained in relation to the breach of the July contract, and that the Statement of Claim would require the Court to determine that dispute, and not otherwise. Moreover, said Mr Law, the Plaintiff obviously knew in advance and should have anticipated the nature of the 2nd Defendant's counterclaim; accordingly, its pleading in the Writ and Statement of Claim amounted to a 'first statement on the substance of the dispute' under the July contract and, as such, a mandatory stay should not be granted.

24. The reflection afforded by the brief adjournment has, I confess, not served to alter my instinctive reaction to the arguments so cogently presented. In reaching the determination as to whether an otherwise mandatory stay is precluded by the "first statement" argument, I must, I think, have regard to all the circumstances of the case - indeed, this is precisely the approach which was adopted, in my view entirely correctly, by Waung, J. in the Louis Dreyfus case, op.cit. And having duly considered all the circumstances, and after reviewing the arguments which have been placed before me, I am unable to conclude that the pleading in this case did in fact amount to a "first statement on the substance of the dispute". I should, I confess, like to have found otherwise, because as I have earlier observed, I view the current statutory constraints and the removal of the element of judicial discretion less than warmly.

25. Be that as it may. I grant a stay of proceedings in terms of paragraph 1 of the Plaintiff's application dated 19th December 1997, and I will hear the parties as to the precise form of the Order in due course. As to the costs of and occasioned by the application, it must follow, I think, that the Plaintiff is to have its costs, to be taxed if not agreed, and I make an Order nisi in those terms.

(b) The Defendant's adjournment application

26. As I have indicated earlier in this judgment, the 2nd Defendant's adjournment application was stood down to the hearing of the Plaintiff's summons by reason of an argument mooted, but thereafter abandoned, by Mr Law. It is right to record, however, that at the conclusion of argument upon the Plaintiff's summons, Mr Law renewed the adjournment application on the basis that the Court ought to defer consideration or determination of the Plaintiff's present application by reason of the effect that any adverse determination might have upon the 2nd Defendant's forthcoming stay application in the London arbitration proceedings, now scheduled for 13th May 1998.

27. Mr Shieh resisted this further application. Nothing would be gained by such an adjournment, he said. The short point was that the Plaintiff in this jurisdiction maintained, and would continue to maintain, its stay application irrespective of what occurred in London, and in this regard the mandatory requirement of a stay, absent fulfilment of any of the statutory preclusions, was the analytical key.

28. Once again I have weighed all the circumstances in the balance. I am far from convinced, in any event, that it is or would be appropriate in the present circumstances to defer decision of the Plaintiff's present (and prior) application in favour of the 2nd Defendant's supervening application in another jurisdiction, and Mr Shieh's argument serves only to reinforce that instinctive view. Accordingly, whilst I cannot pretend that I regard the current existence of parallel proceedings with any degree of enthusiasm, I am not minded to exercise my discretion and to grant the adjournment sought. I bear in mind, further, that there has been no application by the 2nd Defendant to stay the present Hong Kong proceedings, and also, as suggested by Mr Shieh, that there are perhaps sensible alternative ways of dealing with the present situation, particularly in terms of the monies presently standing in Court, which might serve to advance the legitimate interests of all parties. But I say no more.

29. The 2nd Defendant's application for an adjournment is dismissed. I make an Order nisi that the costs of and occasioned by the 2nd Defendant's summons dated 15th April 1998 be to the Plaintiff, to be taxed if not agreed.

30. I thank both Counsel for their assistance.