NEW SOUND INDUSTRIES LTD v. MELIGA (HK) LTD

HCA3050/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3050 OF 2003

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RULING

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1.  The defendant applies for the action to be stayed in favour of arbitration on the ground that the parties have by agreements agreed to refer to arbitration the matters in respect of which this action is commenced.

2.  This action relates to an agreement made on about 24 July 2001 (“the Tripartite Agreement”) between the plaintiff, the defendant and one Fossil East Ltd (“Fossil”). The plaintiff seeks, inter alia, specific performance of this agreement. The plaintiff and the defendant had earlier entered into two agreements containing arbitration clauses. The question to be decided in this application is whether the subject matter of the dispute in this action falls within the ambit of those arbitration clauses.

3.  The background is as follows. The plaintiff carried on business as a manufacturer and supplier of watch cases and watch bands. The defendant was a watch supplier; its business included the assembly of watches. The parties signed a written agreement dated 24 January 1998 (“the First Agreement”) under which the plaintiff appointed the defendant as its sole distributor in Switzerland, Italy, Japan and the U.S.A for all products manufactured by the plaintiff in its factories in China. Clause 11 thereof 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.”

4.  This was followed by another agreement dated 23 March 2001 (“the Second Agreement”). It recites in a preamble that the supplier, i.e. the plaintiff, has asked the distributor, i.e. the defendant to amend the contract dated 24 September 1998 and provides by clause 11 that that contract is “suspended”. By clause 8 it provides that the agreement cannot be terminated until 31 December 2005 and further provides that the agreement is automatically prolonged for subsequent periods of three years, unless 12 month’s prior notice of termination is given. Clause 10 repeats the words of clause 11 of the earlier agreement.

5.  In each case, a separate collateral written agreement provides for the mechanism of arbitration.

6.  A letter dated 23 March 2001 from the defendant to the plaintiff confirms that the First Contract is terminated with effect from 1 April 2001 and that “you are free now to acquire customers in Switzerland”.

7.  On 28 June 2001 Messrs Robertsons, the plaintiff’s then solicitors, wrote to the defendant referring to “an Agreement between our client and yourselves dated 24 September 1998” and intimating the plaintiff’s claim for payment for goods sold and delivered in the sum of $4,041,100.90. The letter continued:

“Despite repeated demands made by our client, you have still failed to settle the same. As you are in fundamental breach of the Agreement, our client has considered that you have wrongfully repudiated the Agreement and it is therefore no longer bound by the same without prejudice to its right to claim damages against you. In order to mitigate its loss arising from your wrongful repudiation, our client will ship goods ordered to you direct to the eventual customers”.

8.  Then on 20 July 2001, the plaintiff initiated proceedings in High Court Action No. 3278 of 2001 (“the First Action”) against the defendant for $3,978,638.40, being the price of goods sold and delivered.

9.  In brief the plaintiff’s case in the present action is as follows. The parties entered into negotiations to withhold proceedings in the First Action. On about 24 July 2001 they entered into the Tripartite Agreement. The other party to it, Fossil, had ordered watches from the defendant. The Tripartite Agreement required the plaintiff to take watch components from the defendant’s warehouse, itself supply its own watch cases and watch bands and obtain any other necessary watch components at its own cost, and deliver all of these to a company designated by the defendant. That company would assemble the components, at the plaintiff’s cost, into the watches ordered by Fossil. The watches were to be delivered to Fossil; the defendant would invoice Fossil for them, using invoices marked with the words “Please pay to New Sound Industries Ltd.”; Fossil would pay the plaintiff direct. The payments so received would be set off against the sum sued for in the First Action.

10.  The plaintiff now claims that on five revised invoices, the defendant in revising them deliberately and in breach of the Tripartite Agreement omitted the words requesting payment to the plaintiff, and further that it requested Fossil to pay the sums invoiced to it. Fossil has refused to settle the invoices, in the total sum of US$100,901.00 with the plaintiff and is withholding the sum invoiced. Now the plaintiff claims against the defendant for a declaration that it is entitled to payment for the revised invoices, or in the alternative for an order that the defendant mark the invoices as payable to the plaintiff, or in the further alternative for damages in the sum of US$100,901.00.

11.  The defendant has not yet filed any defence but its case appears from an affidavit sworn by its director, Mrs Beate Hildegard Göbel on November 2003. She does not deny that the Tripartite Agreement came into being but she says that it was not a three-cornered agreement but rather an arrangement for payment of some outstanding supply orders made by the defendant to the plaintiff under the two earlier agreements, and was in effect an assignment of debt in which the defendants’ obligations to pay were passed on to Fossil. The business and contractual obligations between the plaintiff and the defendant were not altered. As to the invoices referred to in the Statement of Claim, it was found out that all the payments due to the plaintiff had been settled in accordance with the new payment arrangement, so the defendant instructed Fossil not to make any further payment to the plaintiff.

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. The Tripartite Agreement is a separate agreement entered into after 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.

14.  The defendant’s application was supported by an affirmation by its solicitor. Later, and in reply to the affirmation by the plaintiff’s director, Mr Ng Lik Man, Mrs Göbel’s affidavit was filed. It is convenient to deal with the plaintiff’s evidence first.

15.  According to Mr Ng, the Tripartite Agreement was reached on about 24 July 2001 and was in these terms:

a) The defendant’s warehouse contained certain types and quantities of watch components. The defendant agreed that the plaintiff could take these components to fulfil the purchase orders.

b) The plaintiff would supply additional watch cases and watch bands necessary to fulfil the purchase orders.

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

d) The plaintiff would send all the watchbands, watch cases and other watch components necessary to fulfil the purchase orders to a company designated by the defendant, namely Fortunia Ltd to assemble watches to fulfil the purchase orders.

e) The plaintiff was to pay Fortunia directly for the assembly charges.

f) Fossil and Fortunia should arrange among themselves the delivery of completed watches.

g) The defendant would invoice Fossil for the watches delivered and was required to state on the invoices that payment was to be made to the plaintiff directly.

h) Fossil would arrange payment of the said invoices to the plaintiff directly, with the said payments to be used to set off all outstanding payments owed by the defendant to the plaintiff.

i) The Three Parties Agreement applies to all the purchase orders.

16.  In support, Mr Ng exhibits a letter from the defendant dated 12 July 2001 which contains the following:

“You are not willing to deliver goods ordered by us unless the payments of your invoices are made. The goods are needed to assemble watches for our customer Fossil.

1. We therefore propose that you take all the components from our warehouse which are necessay to complete the watches.

2. After having completed the watches they will be delivered to Fossil and invoiced by us. On the invoice we will order Fossil to pay to you.

3. After having received the payments, you will pay the components to us and we will pay the supplier of the components.

4. The remaining money will be used for outstanding invoices, i.e. will be paid to you.”

17.  He also exhibits a letter of 24 July 2001 from the defendant to Fossil containing the following:

“New Sound Industries will co-operate with us to finish your outstanding PO’s. New Sournd will produce and assemble the watches and we will do after the production the final QC so that you can be sure to receive the quality as before.

We will right (sic) the invoices to you and mark on each invoice to whom you should give the cheque for payment. This will be only New Sound for the outstanding orders which we have today.”

18.  There is also exhibited a letter from Fossil to the defendant dated 15 November 2001 containing the following:

“We refer to your correspondence …… requesting assistance in obtaining payment from us covering watches that were assembled on your agreement by New Sound.

As you are aware a verbal agreement was entered into by Fossil East, Meliga and New Sound that New Sound would assemble the watches that were contracted by us with you and make delivery directly to Fossil East. This arrangement required us to make payment directly to New Sound.

This verbal agreement re payment was confirmed in writing by you as per your letter dated July 24^th 2001 which clearly stated the following:-

‘We will right the invoices to you and mark on each invoice to whom you should give the cheque for payment. This will be only New Sound for the outstanding orders which we have today.’

In view of these clear instructions and to protect our interest we now need a letter from Meliga countersigned by New Sound or a letter from New Sound authorising us to make payment of all outstanding to Meliga (H.K) Ltd.”

19.  According to Mrs Göbel the plaintiff wrongfully claimed for payment of some of the defendant’s supply orders by issuing the writ for the purpose of withholding some of the watch bands and watch components which the defendant needed for completing the purchase orders from Fossil. In fact the plaintiff all along wanted to trade directly with many of the defendant’s customers, including Fossil.

20.  The defendant instructed its solicitors to invite the plaintiff to refer the claim in the First Action to arbitration. It was agreed that the action should be stayed. In the meantime the defendant sought to make alternative payment arrangements. The defendant proposed these in the letter dated 12 July 2001. She says that it was quite clear from that letter that what the defendant proposed was an arrangement for payment of some of its supply orders to the plaintiff.

21.  Mrs Göbel also exhibits the defendant’s letter to the plaintiff dated 11 September 2001 which reads:

“We refer to the discussions and meetings during the last days and agree to settle the problems between our companied without any prejudice but in trying to reach an amicable solution as follows:

1. You are allowed to deliver all goods ordered by Fossil according to the attached list directly to Fossil and invoice also directly to Fossil.

2. After delivery of all these goods and receiving the payment from Fossil there are no more financial claims of your side against us as per today. The pending court case, where you claim (unjustified) about 4 mill. HKD is withdrawn; we do not bear any cost.

3. You delcare hereby to fulfil all outstanding SO-s [supply orders] and the duties resulting out of our contract without any delay. We have got the approval of Fossil and we are in negotiations with other customers as well.

4. We see you in a clear breach of our contract; but we try an amicable solution in order to avoid damages Our efforts do not mean that we waive compensations for damages.”

22.  This letter is said to record the agreement although its terms rather appear to record an offer by the defendant to settle.

23.  In addition she exhibits a letter from the defendant to Fossil dated 10 September 2001 in which the defendant asks for direct payment of the disputed invoices totalling US$100,910. It is to be noted that these invoices are all dated between 10 August and 27 August 2001.

24.  According to both sides therefore it seems that the Tripartite Agreement (if such it was) came into being after its subject matter had been dealt with.

25.  Section 6 of the Arbitration Ordinance 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."

26.  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.”

27.  The question here is whether the subject matter of the dispute in this action, i.e. the performance of the Tripartite Agreement, falls within the ambit of the arbitration agreement in the two earlier contracts. It is not in dispute that 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. So the defendant must demonstrate a good prima facie case or plainly arguable case that the performance of the Tripartite Agreement, falls within the ambit of the arbitration agreement. This is a matter of construction.

28.  Looking at the Second Agreement as a whole (for it is not necessary to look at the First Agreement, which was superseded by it) that is a contract by which the plaintiff is to manufacture “all products usually manufactured by [the plaintiff] in its factories in China, mainly watchbands and watchcases” for the defendant, and the defendant is to buy those products in “priority” to those of any other supplier except in certain restricted circumstances. These are provisions for payment on 40 days’ credit. There is a provision already noted for the term of the agreement. The rest is concerned with the minutiae of matters like quality control and labelling.

29.  The arbitration agreement in clause 10 is simply that “all disputes” are to be referred to arbitration if they cannot be amicably settled. This is very wide. In Re Hohenzollern A.G (1886) 54 LT 596, Lord Esher M.R. interpreted “all disputes” as meaning “all disputes which may arise between the parties in consequence of this contract having been entered into”. I think it is equivalent to a clause containing such words as “all disputes in relation to” or “in connection with” the contract. Ma J, as he then was, in Getwick Engineers Ltd v. Pilecon Engineering Ltd, HCA No. 558 of 2002, unreported, at para. 23(2) 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.”

30.  Counsel referred me to various cases in which e.g. a new contract between the same parties had been held to be subject to arbitration provisions in an earlier contract (Faghirzadeh v. Rudolf Wolff (SA) (Pty) Ltd [1977] 1 QB 630) or a clause providing for arbitration of “any dispute arising during execution of this charterparty” was held to cover a claim for damages in tort arising out of the arrest of the vessel after the execution of the charterparty where there was sufficiently close connection between that claim and the contractual dispute (Astro Vencedor Compania Naviera S.A v. mabanaft G.m.b.H [1970] 2 QB 267. But as Evans J pointed out in Overseas Union Insurance Ltd v. AA Mutual International Insurance Co. Ltd [1988] 2 QB 63 at 66, the question is always one of construction, giving the words of the arbitration clause their natural and proper meaning in the circumstances of the case, and

“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 circumstance sare 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.”

31.  In the instant case the Tripartite Agreement arose after the plaintiff had, through solicitors, purported to accept the defendant’s wrongful repudiation of the Second Agreement. Reference is made to the First Agreement but I accept that the solicitors must have meant the Second Agreement which superseded it. The Tripartite Agreement was oral though evidenced by some correspondence. There is no provision for arbitration, which would have to be in writing in any event, though the parties, in making the First and Second Agreements without the benefit of legal advice, had manged to include arbitration clauses.

32.  An arbitration clause will still 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 (H.L.)(E.). But that must necessarily apply to a dispute which arises in respect of or with regard to, or under the contract.

33.  It is true that Tripartite Agreement was made, not for the supply of watch cases and watch bands by the plaintiff to the defendant but was for the plaintiff to make up watches, partly at its own expense and partly at that of the defenant, in that some of the latter’s components were to be used. The watches were to go to the third party in satisfaction of its orders to the defendant and the plaintiff was to get the price of them. The exercise was intended to provide some reduction of the defendant’s indebtedness to the plaintiff (under both the First and the Second Agreements, or so it appears from the schedule to the solicitors’ letter) though it is not clear whether it was intended to cover that indebtedness completely.

34.  I think the facts have to be viewed in this way. The defendant owned 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.

36.  It follows that this action should be stayed in favour of arbitration. There will be an order in terms of the defendant’s summons. Since this ruling is to be handed down the costs order will be nisi.