J AND L MEDICAL AND SCIENTIFIC CO. LTD. v. LKB-PRODUKTER AB

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is an appeal by the Defendant against a Master's decision refusing to stay further proceedings pursuant to section 6 of the Arbitration Ordinance (Cap. 341).

2. By an agreement made on the 10th March 1983 ("the original agreement"), the Defendant, a Swedish manufacturer of medical equipment, appointed the Plaintiff as sole distributor in Hong Kong and Macau. The agreement was not for any fixed term and by Clause 12 it could be terminated by 60 days' notice given not before the 31st December 1983. It also provided in Clause 15 that :

"All disputes arising in connection with the present agreement and anything connected therewith shall not be submitted to a Court of Law but shall be finally settled under the rules of conciliation and arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the rules. The arbitration shall be held in Stockholm, Sweden. ...."

3. By letter dated the 6th March, the Defendant gave notice terminating the Plaintiff's appointment as sole distributor with effect from 15th May 1985. Thereby more than the requisite 60 days' notice was given and that period was, in any case, extended by a further 3 months.

4. On the 14th October 1986 the Plaintiff issued the writ in these proceedings alleging that in or about January 1984 it was inter alia agreed between it and the Defendant that -

5. The Plaintiff alleges that it suffered loss, damage and expense and makes the following claims:

6. First, loss of earnings in the estimated sum of $750,000, full particulars thereof to be served after discovery.

7. Second, rental of extra office space in the sum of $60,000 at the monthly rental of $3,000 for the period 1st May 1985 to 31st December 1986.

8. Third, damages for loss of reputation.

9. Fourth, payment for services rendered by the Plaintiff to the Defendant at the Defendant's request during the currency of the distributorship as per invoice No. IN0282/85 for HK$180,000.

10. Although the Master purported to dismiss the application under the discretionary provisions of section 6 of the Arbitration Ordinance, it is not disputed that the matter falls to be determined under the mandatory provisions of section 6A of the Ordinance as the agreement provides for arbitration in Stockholm, and the Defendant is a body corporate which is apparently incorporated in Sweden and whose centre of management and control is, in any case, exercised in Sweden. Section 6A(1) provides as follows:

"6A. (1)    If any party to an arbitration agreement to which this section applies, or any person claiming through or under him, commences any legal proceedings in any court against any other party to the agreement, or any person claiming through or under him, in respect of any matter agreed to be referred, any party to the proceedings may at any time after appearance, and before delivering any pleadings or taking any other steps in the proceedings, apply to the court to stay the proceedings; and the court, unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings."

11. As I have said it is not disputed that section 6A applies to the subject agreement; nor has any suggestion been made that the agreement is null and void, inoperative or incapable of being performed, the onus of establishing which in any case would rest upon the Plaintiff. The question therefore for determination is whether the four claims made by the Plaintiff, all of which are contested, are "disputes arising in connection with the present agreement and anything connected therewith".

12. I will begin with the 1st and 3rd claims since they appear, as submitted by Mr. Westbrook for the Defendant, to relate to the termination of the sole distributorship under the original agreement. It is quite obvious that any dispute about termination or modification of the distributorship or of the original agreement is a dispute that arises in connection with the original agreement; indeed Mr. Dufton the Plaintiff's solicitor does not seriously seek the dispute that. But what he does submit is that all the loss of earnings under the 1st claim and all the damages for loss of reputation under the 3rd claim need not necessarily flow from termination of the distributor-ship or the original agreement and might well be the result of pre-mature termination of the unconnected Regional Base and services. I shall return to the question of connection, but I think that on the evidence Mr. Dufton is right and that the possibility of such losses cannot be excluded.

13. I proceed then to the 2nd and 4th claims. Mr. Westbrook for the Defendant submits that these are clearly related to the original agreement and the sole distributorship. He submits first of all that there is no evidence at all to support the existence of any agreement other than the original agreement. In relation to the additional space rented, that is not entirely so for in one of the Defendant's affidavits there is a reference to an agreement to rent a small amount of office space from the Plaintiff albeit for no fixed period; there is also a reference to office and storage space being rented by the Defendant on an informal basis on the understanding that it could rent the space for as long as it wished. However that may be, it seems to me that what I am concerned with is not whether the disputed claims can be substantiated or have any merit, but whether they are disputes which arise in connection with the original agreement or are connected therewith.

14. Mr. Westbrook also submits that it could have been because the Plaintiff was the sole distributor that it was asked to let additional space within its premises to the Defendant, and to provide certain services to the Defendant; that the demonstration room and equipment and the service engineers accommodated in the space let must have been of considerable advantage in advancing the sole distributorship business of the Plaintiff under the agreement; that therefore there was a connection. As against that, the agreement makes no mention whatsoever about additional space being provided or indeed about the Plaintiff providing any services of the nature of those for which payment is claimed. On the contrary it provides that the distributor shall provide full technical services for instruments sold by the distributor and that the distributor's service personnel must be fully qualified to take care of required installation of the products and to repair faults that may arise. It also provides that the agreement does not authorise the distributor in any manner to act as agent for or to incur any obligations whatsoever on behalf of the Defendant. Finally particulars in the invoice relating to the fourth claim suggest that it was the distributor which provided engineers to assist the Defendant rather than the other way round. While it is perfectly true that the Defendant would naturally tend to use its sole distributor in Hong Kong to arrange for services, accommodation and, by the same token all manner of other matters, I do not think these could be said to be connected with the agreement. Moreover to disgress, if I were to look beyond the actual words of the arbitration clause, to the nature of the agreement, it was simply a distributorship or exclusive sale agreement, and while the parties may well have envisaged and intended all disputes arising in connection with the distributorship to be resolved by arbitration in Stockholm, I find it difficult to accept that purely local matters not arising out of the sole distributorship should simply because the Plaintiff was the other party, have also to be resolved in Stockholm. In my view the coincidences, of which there are more than one, e.g. the coin-cidence of identical parties, and possibly that of contemporaneous termination, do not establish a true connection between the present claims and the original agreement.

15. In my finding therefore the four claims made by the Plaintiff are not matters that have been agreed to be referred to arbitration except insofar as they relate to termination or modification of the tenure of the sole distributorship. Nonetheless the result is that notwithstanding that a substantial or major portion of the claims may not be matters agreed to be referred, I am bound under section 6A to stay proceedings relating to that portion that it has been agreed is to be referred to arbitration. If the proceedings could be appropriately severed, that would secure to the Defendant its right to arbitration of disputes arising in connection with the original agreement, and to the Plaintiff its right to have its claims under the alleged new agreement resolved by the courts of Hong Kong. That moreover would not necessarily preclude the subsequent determination of all the parties disputes in a single venue if for whatever reason they should by mutual agreement wish so to do. But in the present form of the statement of claim, the first and third claims flow from both disputes that arise in connection with the original agreement and those that do not, and accordingly do not lend themselves to severance. The only sensible and just course therefore seems to me to afford the Plaintiff a reasonable opportunity to excise any claim that constitutes a dispute that is to be referred to arbitration. If it is unable or unwilling to do so I shall have to stay the entire action. I will now hear submissions on the order I should make and unless it is mutually desired to defer them, also upon costs.