SESDERMA, S.L. v. SEEKY INTERNATIONAL LTD AND ANOTHER

HCA 1815/2021

[2023] HKCFI 1619

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1815 OF 2021

_____________

_____________

_____________

D E C I S I O N

_____________

Background

1.  This is an application made by the 2^nd Defendant (“G”) to stay this action to arbitration in accordance with an arbitration clause contained in a Distributorship Agreement made between G and the Plaintiff (“S”) dated 1 October 2018 (“2018 Agreement”).

2.  The background of the parties’ dealings and contracts is not disputed, and has been set out in various Decisions of the Court in proceedings between G and S.

3.  Essentially, S and G entered into an agreement on 20 July 2017 (“2017 Agreement”), whereby S appointed G to be the exclusive distributor of S’s products on the Mainland. On 1 October 2018, the parties entered into a new agreement (“2018 Agreement”), under which the territory for G’s distributorship of the S brand of products (“Products”) was extended to include the Mainland, Hong Kong, Macau, South Korea and Japan (“Territory”), for a term commencing 1 October 2018 until 31 December 2023. G was authorized under the 2018 Agreement to have exclusive use of S’s trademarks for the distribution and sale of the Products in the Territory. The 2018 Agreement sets out the rights and obligations of the parties in connection with S’s ownership and G’s use of S’s trademarks and intellectual property rights, and S’s supply of the Products for G’s sale during the term of the 2018 Agreement.

4.  Specifically, G as distributor acknowledged in the 2018 Agreement that S is the exclusive owner of the trademarks and all other intellectual property rights incorporated into or used in connection with the Products, and agreed not to apply for or seek registration of or in any way use any trademark, trade name or logos in any manner in unfair competition with S and/or its intellectual property rights.

5.  G and S agreed, under clause XIV of the 2018 Agreement, that (according to the English version of the clause) in the event that any dispute arises between the parties “out of or in relation to the 2018 Agreement, including any dispute regarding its breach, termination or validity”, the dispute shall be settled by CIETAC arbitration on the Mainland.

6.  Under the Chinese version of the clause, the parties agreed to arbitrate any dispute arising out of “the making or performance” of the 2018 Agreement (“因訂立或執行本協議而產生的任何爭議”). However, clause XVI of the 2018 Agreement expressly provides that in the event of any discrepancy between the English and the Chinese version of the 2018 Agreement, the English version shall prevail.

7.  There have in fact been several arbitrations conducted between S and G on the Mainland. Arbitration 1 was commenced by S against G on 8 April 2019, by which S sought termination of the 2018 Agreement, for amounts due under 2 purchase orders issued to G dated October and November 2018, and damages for breach of the 2018 Agreement. Arbitration 2 was commenced by G against S on 17 April 2019, whereby G sought a declaration that S was in fundamental breach of the 2018 Agreement, specific performance of the 2018 Agreement, and damages in respect of S’s late shipment or short delivery of the Products under purchase orders issued under the 2017 Agreement and the 2018 Agreement.

8.  The same tribunal made awards for Arbitration 1 and Arbitration 2 on 3 July 2020. It held, in respect of the claims made in Arbitration 1, that G should pay S a total sum equivalent to $16,395,041, in respect of the price due for the Products supplied under the 2018 Agreement. The tribunal did not award any damages to S, as it found that the 2018 Agreement was not terminated as a result of any fundamental breach on G’s part.

9.  In relation to the claims made in Arbitration 2, the tribunal held in favour of G, that S was in breach of the 2018 Agreement, that S should continue to perform its obligations thereunder, and should pay to G a sum equivalent to $4,754,153 by way of marketing costs incurred under the 2017 Agreement, and provide G with EUR 890,833.27 worth of sample products, or pay the equivalent amount to G.

10.  The Hong Kong Court granted leave for enforcement of both Award 1 and Award 2 as judgments of the Court.

11.  On 13 July 2020, S served a further notice of termination of the 2018 Agreement, on the basis of what it claimed to be G’s multiple breaches of the 2018 Agreement, including G’s contravention of provisions of the 2018 Agreement which govern S’s ownership of and rights in its trademarks. On G’s part, it commenced Arbitration 3 against S on 10 September 2020, claiming damages for S’s breach of clause 7.5 of the 2018 Agreement, under which G was entitled to continue to sell Products until stocks were depleted.

12.  On 2 December 2021, S commenced these court proceedings against Seeky International Limited (“Seeky”), a company incorporated in Hong Kong and which S claims is connected with G. G was joined as 2^nd Defendant in September 2022, and S claims in these proceedings that Seeky and G had engaged in unlawful interference in S’s business, by seeking to register S’s trademarks on the Mainland without the knowledge or permission of S. It is also claimed that Seeky had engaged in tortious interference with the contractual relations between S and G, by facilitating G to breach the 2017 Agreement and/or the 2018 Agreement, under which G had acknowledged S as the exclusive owner of its trademarks, and had undertaken not to apply for or seek registration or use any trademark or logo in unfair competition with S. The Statement of Claim refers to and relies on a list of applications which had been made by Seeky for registration of the trademarks “SESDERMA”, “sesderma”, “MEDI+DERMA” and “medi+derma” on the Mainland (“TM Applications”). The TM Applications were made between 9 August 2017 and 3 January 2020.

13.  In these proceedings, S claims a mandatory injunction to require Seeky to withdraw all its pending TM applications, and damages of EUR 55.98 million from each of Seeky and S.

14.  On 9 August 2022, the tribunal issued Award 3 in favour of G in Arbitration 3.

15.  On 3 November 2022, G applied under section 20 of the Arbitration Ordinance (“Ordinance”) to stay these proceedings for arbitration pursuant to the 2018 Agreement, and alternatively on the ground that the action should be tried in the People’s Court of Beijing City Xicheng District, Hong Kong not being the forum conveniens.

The application for stay under section 20 of the Ordinance

16.  The legal principles are settled, and need not be repeated here. If the applicant can show that the action before the Court is in a matter which is the subject of an arbitration agreement, a stay of proceedings is mandatory under section 20, unless the Court finds that the arbitration agreement is null and void, inoperative or incapable of being performed. The onus on the applicant for stay is only to show, by cogent and arguable, and not dubious or fanciful evidence, that there is a prima facie or plainly arguable case that the parties are bound by an arbitration clause. Unless the point is clear, the action should be stayed for the tribunal to decide for itself whether it has jurisdiction over the dispute (PCCW Global Ltd v Interactive Communications Services Ltd [2007] 1 HKLRD 309.

17.  There can be no doubt that the 2018 Agreement contains an arbitration clause. According to S, however, the present dispute is covered by the exclusive jurisdiction clause contained in clause XIV of the 2017 Agreement, and not the 2018 Agreement. On behalf of S, it was contended that the claims made in this action concern the conduct of G acting in conjunction with third parties, in what is referred to as “trademark squatting”, namely G and Seeky unlawfully seeking registration, in Seeky’s name and for the benefit of G and Seeky, of trademarks which are the property of S, as G well knew and had acknowledged in both the 2017 Agreement and the 2018 Agreement. It was argued that these tortious and unlawful acts of interference with the business of S, and unlawful interference of S’s contract with G, have nothing to do with claims of contractual payment and performance obligations under the 2018 Agreement, and do not fall within the scope of the arbitration clause contained therein. S claims that the tortious claims which are the subject matter of the action are within the exclusive jurisdiction clause under the 2017 Agreement, which entitles S to issue legal proceedings against G in respect of any dispute arising out of or in relation to the 2017 Agreement, and for such dispute to be settled by the courts in Hong Kong.

18.  S has not raised any issue as to G’s application for a stay of its claims against Seeky, and S’s opposition to the stay application is only on the basis of its entitlement to rely on clause XIV of the 2017 Agreement with G. Nor has G raised any issue before the Court as to whether S should be distinguished from Seeky. It may be that all regard G and Seeky to be one and the same.

19.  It can well be appreciated that S considers, and had throughout considered, that G had acted in blatant breach of its contractual covenants and its acknowledgment of S’s intellectual property rights, by the surreptitious and what it regarded as G’s dishonest and fraudulent acts of applying or causing Seeky to apply for registration of S’s trademarks. S had been persistent and consistent in seeking protection of its rights by the commencement of Arbitration 1 to terminate the 2018 Agreement, and in its defence of the claims made by G in the arbitrations G commenced, by claiming that G had been in breach of its duties under the 2018 Agreement in making the TM Applications, and that S was justified to terminate the 2018 Agreement by reason of G’s acts of “fraud, dishonesty and unfair commercial practice”. However, I cannot agree that S is now entitled to deny that there is a valid arbitration agreement contained in the 2018 Agreement which is binding on the parties, or that it has accepted and treated the 2017 Agreement as having been terminated and replaced by the 2018 Agreement, which binds S to refer disputes to CIETAC arbitration on the Mainland.

20.  It is pertinent that in Arbitration 1, S claimed payment of amounts which were due under purchase orders issued in October and November 2017 – after commencement of the 2018 Agreement. As apparent from Award 1, in support of the claim that it was entitled to a statutory and contractual right of termination of the 2018 Agreement, S had argued and relied upon G’s breaches of the 2018 Agreement, including trademark squatting by G’s affiliates in breach of clause X of the 2018 Agreement. The focus of Arbitration 1 was whether the 2018 Agreement had been terminated, or whether G was entitled to termination of the same. On the face of Award 1, there had been no argument that the 2017 Agreement was still in place, and had not been replaced by the 2018 Agreement, or that S had claims under the 2017 Agreement.

21.  Likewise, in Arbitration 2, in defence to G’s claim that S was in fundamental breach of the 2018 Agreement, S had claimed that the 2018 Agreement had been lawfully terminated due to G’s breach thereof. It appears from Award 2 that S had argued that its notice of termination of 21 January 2019 was to terminate “the entire contractual relationship that had existed between the parties”, including the 2018 Agreement, but the claims were that the TM Applications constitute G’s breach of the 2018 Agreement.

22.  In both Award 1 and Award 2, the tribunal had rejected S’s claim that it was entitled to terminate the 2018 Agreement, as the tribunal considered that G’s default or delay in payment of the purchase orders in question did not constitute fundamental breach, and that it was S which was in fundamental breach of G’s exclusive distributorship rights in the Territory.

23.  According to S, it is not precluded by virtue of any of the 3 Arbitrations to rely now on the jurisdiction clause in the 2017 Agreement to commence proceedings against G on the basis of the TM Applications. S contends that its claims in these court proceedings are not inconsistent with its stance in the Arbitrations. In the Arbitrations, S relied on its right under clause VI.2 (i) (c) of the 2018 Agreement, to terminate the 2018 Agreement for “fraud, dishonesty or unfair commercial practice” before the expiration of the term of the 2018 Agreement (which was from 1 October 2018 to 31 December 2023).

24.  Mr Payne argued that despite the parties’ consensus that the 2017 Agreement had been terminated by consent, as clause VI.3 of the 2017 Agreement provides that its termination would not relieve the parties of their post-termination obligations, and the dispute resolution clause XIV is one on post-termination obligations (governing how disputes are to be resolved), clause XIV could not have been objectively intended to have been replaced retrospectively by the 2018 Agreement, particularly in respect of trademark squatting activities involving third parties.

25.  On G’s part, Counsel argued that S is barred from so arguing that the arbitration agreement in the 2018 Agreement had not superseded the jurisdiction clause in the 2017 Agreement, by virtue of this Court’s decision in G v S [2021] HKCFI 1461, 24 May 2021 (“Decision”). That related to S’s application to set aside the enforcement order for Award 2 for (inter alia) specific performance of the 2018 Agreement, on the ground that enforcement would be contrary to the public policy of Hong Kong, and that there was no valid arbitration agreement between the parties to confer jurisdiction on the tribunal and to form the basis of the orders made in Award 2.

26.  In dismissing S’s application, this Court made findings on the existence and scope of the arbitration agreement contained in the 2018 Agreement. The Court found that in the 2018 Agreement, the parties had clearly acknowledged their intention to expand the scope of the 2017 Agreement, and had recited their agreement to terminate the 2017 Agreement. The Court considered the 2018 Agreement and found that it was clear that S and G had intended the 2018 Agreement to supersede and replace the 2017 Agreement, and to extend and expand the terms and scope of the parties’ cooperation, in the manner set out in the 2018 Agreement. By the Decision of 24 May 2021, the Court confirmed the correctness of the tribunal’s conclusion on its jurisdiction, that the parties had intended under the 2018 Agreement to arbitrate any disputes as to their rights and liabilities under their distributorship in accordance with the arbitration clause in the 2018 Agreement.

27.  In the proceedings before this Court in February 2021, for setting aside the enforcement order in respect of Arbitration 2, S never claimed that G remained liable to S in any way under the 2017 Agreement, or that there were claims which were subject to and to be determined under the 2017 Agreement. This was despite the fact that by then, S was already aware of the TM Applications (it claims it made the discovery in July 2020).

28.  I accept the submissions made for G, that the Decision is a final decision which disposes, once and for all, the fundamental matter of the existence and effect of the 2017 Agreement and the 2018 Agreement, and the arbitration agreement contained in the latter. It was made in an action to which S and G were parties, and they are bound thereby (Spencer Bower and Handley: Res Judicata, 5^th ed para 1.01, cited in Re GW Electronics Company Ltd [2021] HKCFI 1869). The issue of the 2018 Agreement replacing the 2017 Agreement was determined as an essential step in the reasoning for the dismissal of S’s application to set aside the order for leave granted by the Court to enforce Award 2 as a judgment of the Court, on the basis of the absence of an arbitration agreement. Issue estoppel bars S from raising in subsequent proceedings the question of whether the 2017 Agreement and the exclusive jurisdiction clause it contains remains in existence and of valid effect between S and G. The scope of issue estoppel extends to bar the raising in subsequent proceedings of points which were not raised in the earlier proceedings, but could with reasonable diligence and should have been raised (such as whether there were claims being subject to the 2017 Agreement and clause XIV thereof even after termination), and of points which were raised, but unsuccessfully (see paragraph 18 of the judgment in Re GW Electronics Company Ltd, and the reference to the cases cited).

29.  As Counsel for G pointed out, Award 2 included orders for payment of marketing costs which extended to costs payable under the 2017 Agreement, and for provision of samples which should have been provided under purchase orders placed under the 2017 Agreement. The dispute in Arbitration 2, and determined in Award 2, therefore included matters which arose prior to the making of the 2018 Agreement, and prior to the term of the 2018 Agreement which commenced on 1 October 2018.

30.  In my view, S is clearly bound by the Decision and the findings made therein that the 2017 Agreement had been replaced and superseded by the 2018 Agreement, and it is not necessary to make further findings as to whether S is estopped from advancing a position inconsistent with the position it had adopted in the Arbitrations, on the ground of abuse of process.

31.  It is G’s further submission, that apart from the fact that the parties are bound by the Court’s finding in the Decision, even if the matter is considered afresh, the present dispute falls within the scope of the arbitration clause in the 2018 Agreement made between the parties.

32.  The 2018 Agreement is governed by PRC law for arbitration on the Mainland, and in the absence of any exceptional circumstances, the arbitration agreement should likewise be governed by and construed in accordance with PRC law. In this regard, G has adduced expert opinion to the effect that under PRC law, the present dispute over the claims made by S as to trademark squatting arose “out of or in relation to” the 2018 Agreement, concerned the breach of the 2018 Agreement, and accordingly falls to be determined by arbitration in accordance with clause XIV (or at least the English version of the clause which prevails over the Chinese version).

33.  On behalf of S, it was submitted that the expert evidence was not analyzed and was unsatisfactory, and should not be relied upon. However, even if (as S submits) the Court should apply Hong Kong law, I am satisfied that the disputed claim of tortious interference with contract and business falls within the scope of clause XIV of the 2018 Agreement, as properly construed.

34.  First, tortious claims can be arbitrated and fall within the broad ambit of the current clause which refers to any disputes “arising out of or in relation to” the 2018 Agreement (Xu Yi Hong v Chen Ming Han & ors HCA 1109/2005, 3 October 2006). The claim of trademark squatting also relates to and is closely connected with S’s claim of G’s alleged breach of clause X of the 2018 Agreement, whereby G agreed not to apply for or seek registration of any trademark or logo in any manner in unfair competition with S. Even if the 2018 Agreement only relates to matters occurring after the commencement of the term of the 2018 Agreement on 1 October 2018, and even if the dispute resolution clause in the 2017 Agreement can extend to the TM Applications which were made before 1 October 2018, there can be no dispute that G’s role in the continued prosecution or pursuit of any application made before 1 October 2018 can still be regarded as breach of G’s agreement not to “seek registration of” a trademark, trade name or logo, in any manner, in unfair competition with S. It cannot be said that G has no prima facie or plainly arguable case that the TM Applications complained of are related to the question of any breach of clause X of the 2018 Agreement.

35.  Second, as Counsel for G pointed out, and as held by this Court in Giorgio Armani SpA v Elan Clothes Co Ltd (No 2) [2019] HKCFI 2983, on the construction of the arbitration clause in the 2018 Agreement, the Court should start with the assumption that as rational businessmen, parties are likely to have intended any dispute arising out of the relationship in which they had entered or purported to enter to be decided by the same tribunal (the Fiona Trust presumption). An arbitration clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.

36.  There is nothing in clause XIV of the 2018 Agreement to suggest that any matter concerning intellectual property rights, or breach of G’s duty under clause X, should be excluded from the manner of settlement of disputes as stipulated. S’s trademarks were used on the Products which were supplied to G under the 2018 Agreement, and G was authorized to use the trademarks under and for the purpose of the relationship of exclusive distributorship between S and G created under the 2018 Agreement. When the parties agreed, by consent, to terminate the 2017 Agreement and to expand the scope of their distributorship relationship by the 2018 Agreement, and further agreed to arbitrate their disputes under the 2018 Agreement, it would have been natural, and totally reasonable for S and G to have intended the arbitration clause in the new 2018 Agreement to govern and apply to any and all disputes between them thereafter, including in relation to the manner of use or unauthorized use of the trademarks, and any dispute as to the alleged breach of Clause X. There was no good reason to carve out those disputes from the dispute resolution regime agreed.

37.  In any event, a prima facie case is all that is required as to the existence of a valid arbitration agreement, and unless the point is clear that there is no such agreement, or that any arbitration agreement is invalid, inoperative or incapable of being performed, the matter should be referred to the tribunal for decision as to its own jurisdiction. There is no suggestion that the arbitration agreement in the 2018 Agreement is in any way invalid, inoperative or incapable of performance.

38.  I accordingly find that a mandatory stay should be granted under section 20 of the Ordinance.

39.  In the premises, it is not necessary to decide on the alternative ground of forum non-conveniens.

Disposition

40.  It follows from my finding on the stay granted that the costs of, occasioned by and incidental to the summons for stay (including any costs reserved) are to be paid by S to G, with certificate for Counsel. An order nisi is made to such effect, to be made absolute unless application for variation is made within 14 days.