NEW SOUND INDUSTRIES LTD v. MELIGA (HK) LTD

CACV 63/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 63 OF 2004

(ON APPEAL FROM HCA NO. 3050 oF 2003)

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REASONS FOR JUDGMENT

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Hon Woo VP (giving the reasons for judgment of the Court):

Introduction

1. This is an appeal by the plaintiff against the order dated 13 February 2004 made by Deputy High Court Judge Muttrie staying all further proceedings in the action by reason of the fact that the plaintiff and the defendant have by agreement agreed to refer to arbitration matters in respect of which the action was commenced. 

2. The appeal relates to a neat question of whether the subject matter of the action is the subject of an arbitration agreement between the parties. 

3. After hearing Mr Shum, counsel for the plaintiff, we dismissed the appeal with costs.  Our reasons appear below.

Background

4. The plaintiff carried on business as a manufacturer and supplier of watch cases, watch bands and other components.  The defendant was a watch supplier; its business included the assembly of watches.  By a written agreement dated 24 September 1998 (“the First Agreement”), the plaintiff appointed the defendant as its sole distributor for various countries in respect of all products manufactured by the plaintiff in its factories in China.  Clause 11 of the First Agreement, which is the arbitration agreement relied on by the defendant, provides:

“This agreement is governed by the law of Hong Kong. 

All disputes are to be settled in an amicable way.  If this proves to be impossible any dispute is to be settled by an arbitral tribunal.  The regulation for the arbitration will be laid down in a separate agreement.”

5. A separate collateral written agreement, also dated 24 September 1998, made provisions for the mechanism of arbitration.  

6. On 23 March 2001, another agreement in writing (“the Second Agreement”) was entered into between the parties.  In the preamble, it was recited that the plaintiff had asked the defendant to amend the First Agreement, which according to clause 11 of the Second Agreement, was “suspended”.  Clause 8 of the Second Agreement provided that the agreement could not be terminated until 31 December 2005 and that the agreement was automatically prolonged for subsequent periods of three years, unless 12 month’s prior notice of termination was given.  Clause 10 repeated the words of clause 11 of the earlier agreement.  The defendant also relies on this clause 10.  A separate collateral agreement dated the same date of 23 March 2001 provided for the mechanism of arbitration.

7. According to the Statement of Claim and the affidavit evidence filed on behalf of the plaintiff, on 20 July 2001, the plaintiff commenced an action in the High Court, HCA 3278/2001, against the defendant for about $4 million, alleged to be the price of the goods sold and delivered by the plaintiff to the defendant pursuant to the First Agreement and the Second Agreement.  The amount claimed comprised the sums of 202 invoices that the defendant failed to settle under the First Agreement and the sums of about 321 invoices that the defendant failed to settle under the Second Agreement.

8. After the issue of the writ in HCA 3278/2001, the parties together with a third party, Fossil East Limited (“Fossil”), entered into a verbal agreement, apparently partly evidenced by some correspondence, to make arrangements for the plaintiff to be paid the debts owed by the defendant (“the Tripartite Agreement”).  There seems to be some disagreement between the parties as to the exact terms of this agreement and as to the date when it was made, but these have little relevance for the purposes of this appeal.  As the defendant has not specified all the terms of the Tripartite Agreement that it alleges, we shall simply set out the plaintiff’s version of the terms of this agreement which are pleaded in the Statement of Claim, as follows:

(a)  There were certain types and quantities of watch components in the warehouse of the defendant.  The plaintiff should take them to fulfil certain purchase orders (“the Purchase Orders”) that Fossil had placed with the defendant to supply certain quantities of watches. 

(b)  The plaintiff should supply the watch cases and watch bands necessary to fulfil the Purchase Orders.

(c)  The plaintiff should purchase any outstanding watch components from outside sources at its own cost.

(d)  The plaintiff should send all the watch bands, watch cases and other watch components necessary to fulfil the Purchase Orders to a company designated by the defendant, ie Fortunia Ltd (“Fortunia”), to assemble watches to fulfil the Purchase Orders.

(e)  The plaintiff should pay the charges of Fortunia direct.

(f)   Fossil and Fortunia should arrange among themselves how to take delivery of the completed watches.

(g)  The defendant would invoice Fossil for the watches delivered and on the invoices, it would order Fossil to pay to the plaintiff.

(h)  Fossil would arrange payment of the said invoice to the plaintiff directly and such payments should be used to set off the outstanding sum owed by the defendant to the plaintiff.

(i)   The Tripartite Agreement applies to all the Purchase Orders.

9. The basis of the plaintiff’s claim against the defendant in the present action is that in respect of five invoices, as revised, issued by the defendant to Fossil, the defendant had not marked on them its order for the price thereunder to be paid to the plaintiff direct.  Despite demands, the defendant has still failed to include the said order or similar instructions in the invoices, resulting in Fossil refusing to pay the price of the invoices in the total sum of US$100,910 to the plaintiff.  The plaintiff therefore claims that it is entitled to payment of the five invoices and seeks a declaration from the court that the defendant should mark the order for payment direct to the plaintiff on the invoices.  In the alternative, the plaintiff claims against the defendant for the said sum of US$100,910 by way of damages, together with interest. 

10. Although the defendant has not filed any Defence, according to the affidavit evidence filed on its behalf, its defence is that all the payments due to the plaintiff as owed by it had been settled in accordance with the arrangements under the Tripartite Agreement, as a result of which it had instructed Fossil not to make any payment under the five invoices to the plaintiff.  

11. There is also evidence, in the form of a letter dated 15 August 2001 written by the defendant’s solicitors and addressed to those acting for the plaintiff in HCA 3278/2001, that the defendant disputed the claim of the plaintiff in that action.

The parties’ cases on arbitration

12. The judge summarised the parties’ cases on the defendant’s application for a stay of proceedings on the basis of arbitration succinctly, as follows:

“12. The defendant’s case on its application is that the First Agreement, and the Second Agreement which was substituted for it, were intended to regulate the business relationship of the parties.  That relationship is ongoing.  The present dispute is a dispute arising from the business relationship and is therefore subject to the arbitration agreement.  The Tripartite Agreement does not discharge the earlier agreements.  It is only a new arrangement for fulfilling the original payment obligations of the defendant under them.

 13.  The plaintiff’s case on the application is that the First and Second Agreements were terminated on 28 June 2001 as a result of non-performance and repudiation by the defendant, which the plaintiff accepted, and which led to the commencement of the First Action [ie HCA 3278/2001].  The Tripartite Agreement is a separate agreement entered into after that termination.  It is self-contained, different in nature, and involves an additional party.  Even if it is intended to settle the dispute between the plaintiff and the defendant arising out of the First and Second Agreements, it is still separate and distinct from them.  It contains no provision for arbitration; and such provisions must be in writing, by section 2AC of the Arbitration Ordinance, Cap. 341.”

Is the judge’s decision correct?

13. The judge’s decision that the subject matter of the present action is the subject of an arbitration agreement was reached after he had considered the relevant law in the factual context of this case.  The correctness or otherwise of his decision will be examined below.

14. Section 6 of the Arbitration Ordinance, Cap 341 provides:

“6.  Court to refer matter to arbitration in certain cases

(1) Subject to subsections (2) and (3) [not relevant for present purposes], article 8 of the UNCITRAL Model Law (Arbitration agreement and substantive claim before court) applies to a matter that is the subject of a domestic arbitration agreement in the same way as it applies to a matter that is the subject of an international arbitration agreement.”

15. Article 8 of the UNCITRAL Model Law provides:

“Article 8.  Arbitration agreement and substantive claim before court.

(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.

(2)   Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”

16. In his ruling, the judge referred to the relevant authorities, which can be summarised as follows:

(a)   On an application for a stay in favour of arbitration, the onus is on the applicant to demonstrate a “good prima facie case” or a “plainly arguable case” that an arbitration agreement existed and bound the parties; Pacific Crown Engineering Ltd v Hyundai Engineering and Construction Co Ltd [2003] 3 HKC 659, at 662C, 663B.

(b)   In Re Hohenzollern A.G. (1886) 54 LT 596, the term “all disputes” was interpreted by Lord Esher MR as meaning “all disputes which may arise between the parties in consequence of this contract having been entered into”. 

(c)   The reference to “all disputes” in the arbitration agreement is equivalent to a clause containing such words as “all disputes in relation to” or “in connection with” the contract.  In Getwick Engineers Ltd v Pilecon Engineering Ltd, HCA No. 558 of 2002, at paragraph 23(2), Ma J (as he then was) said:

“Where the words ‘in connection with’ are used, while every contract must of course be construed in accordance with its ordinary and natural meaning (and arbitration agreements are no exception), it seems to me that they are wide in nature.  They would in general cover all disputes other than one entirely unrelated to the transaction covered by the contract in question: see Mustill & Boyd: Commercial Arbitration, 2^nd Edition, at 119.”

(d)        Evans J in Overseas Union Insurance Ltd v AA Mutual International Insurance Co Ltd [1988] 2 QB 63 at 66 remarked that the question to be decided was always one of construction, and that,

“This means in turn that reported decisions in earlier cases, even of high authority, cannot necessarily be binding in later cases, unless exceptionally the relevant words and all the relevant circumstances are the same in both cases.  Even then, the binding nature of the earlier decision would only become relevant if the Court in the later case, if unaided by authority would reach a contrary conclusion as to the natural and proper meaning of the words in question.”

(e)         An arbitration clause will bind the parties even if one of them asserts that circumstances have arisen which discharges one or both parties from subsequent liability under the contract, such as repudiation by one party accepted by the other: Heyman & Another v Darwins Ltd [1942] AC 356 (HL)(E), at p 373.

17. Having referred to the legal principles stated above, the judge conducted the following analyses of the relevant facts:

“34. I think the facts have to be viewed in this way.  The defendant owed the plaintiff money.  It did not have money, but it did have watch components.  So it gave the plaintiff the components so that the plaintiff could make up watches, sell them direct to the defendant’s customer, and take the proceeds in settlement or part settlement of the defendant’s debt to it.  But on the defendant’s case the debt has been settled by this means.

35.  It will be impossible for the court to decide whether or not the defendant should arrange for Fossil to pay the five invoices to the plaintiff, without deciding first what, if anything, the defendant still owes to the plaintiff for the supply orders issued under the First and Second Agreements.  This will require an examination not only of what invoices were outstanding but also what was the value of the watch components which the defendant handed over to the plaintiff and how much the plaintiff put in, to make the watches for which Fossil was invoiced.  The whole dispute in this action seems to me to be very closely connected with the two Agreements and indeed to arise out of those two Agreements.  It seems to me to arise as a consequence of those two agreements having been entered into.”

18. Mr Shum did not dispute the principles of law referred to by the judge.  However, he argued that the plaintiff’s claim for US$100,910.00 under the Tripartite Agreement is not subject to the arbitration clauses under the First and Second Agreement, for the following reasons:

(a)   The Tripartite Agreement is a separate and distinct agreement and was entered into after the termination of the First and Second Agreements.

(b)   The Tripartite Agreement dealt with the supply of assembled watches to Fossil while the First and Second Agreements dealt with the supply of watch components to the defendant.

(c)   Under the Tripartite Agreement, the plaintiff had the obligation to pay Fortunia and to supply assembled watches to Fossil.  But under the First and Second Agreements, the plaintiff’s obligations were only to the defendant and not to Fortunia and Fossil.

(d)   Under the Tripartite Agreement, Fossil would be the one paying the plaintiff.  But under the First and Second Agreements, it was the defendant who was responsible for paying the plaintiff.

(e)   The Tripartite Agreement involved an additional party Fossil.

(f)    There is no provision in the Tripartite Agreement stating that any dispute arising from it would be subject to arbitration, and the arbitration clause had not been incorporated into the Tripartite Agreement.

(g)    If the Tripartite Agreement were subject to the arbitration clause under the Second Agreement, it would mean that any dispute involving Fossil would also have to go to arbitration.  This would be absurd as Fossil was not a party to the First or the Second Agreement.

19. All the above points made by Mr Shum cannot detract from the fact that the Tripartite Agreement arose out of the debts owed by the defendant to the plaintiff under the First Agreement and the Second Agreement.  The amount of such debts is apparently in dispute.  The Tripartite Agreement was to make arrangements agreed by the parties as to how such debts were to be settled.  As Mr Shum accepted, it could not have been the case that the Tripartite Agreement would continue to operate once the debts had been fully settled through the arrangements or repaid.  There does not appear to be any dispute that Fossil refused to pay for the five invoices.  It was only that the parties put Fossil into a dilemma as to whom it should make the payment. 

20. Fossil, as a party to the Tripartite Agreement but not a party to the First and Second Agreement, does not seem to be bound by the arbitration agreement, even if it has obligations towards the plaintiff and/or the defendant under the Tripartite Agreement.  However, whether the plaintiff and the defendant are bound by the arbitration agreement depends on the circumstances involving them, regardless of the position of Fossil in that regard.  Even where Fossil is not bound by the arbitration agreement, that is not a sufficient basis for extricating the plaintiff from being bound by the arbitration agreement.  At any rate, Fossil is not a party in the present action. 

21. In our judgment, the judge’s application of the relevant principles and his analyses of the facts could not be faulted.  In particular, it cannot be disputed by the plaintiff that the arrangements provided for in the Tripartite Agreement were for the purpose of enabling the defendant to pay the plaintiff the amounts (whatever those might be) that the defendants had failed to pay the plaintiff under the First and Second Agreements.  The amounts are apparently disputed by the parties, and they are doubtless a matter in dispute under the First and the Second Agreements.  The obligation of the defendant under the Tripartite Agreement to instruct or order Fossil to pay the amounts under the five invoices to the plaintiff must be dependent on the amounts owed by the defendant to the plaintiff, to be ascertained.  Whether the defendant is so obliged is obviously a dispute under the First and the Second Agreements, which is clearly subject to the arbitration agreement contained in clause 11 of the First Agreement and clause 10 of the Second Agreement.  

Conclusion

22. In the circumstances, we are of the view that the judge’s decision is correct, and the appeal must be dismissed with costs.