XCHRX COMTEC COMPONENTS LTD. v. INTERQUIP LTD.

HCA 5749/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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1. This is an application by the defendant for an order that the proceedings be stayed in favour of arbitration.

2. In May 1989, the defendant entered into a joint venture contract with others. The rights of these others were, according to the plaintiff, assigned to it. There were disputes arising out of this contract, and these were referred to arbitration. This arbitration did not proceed. On 4 September 1995, a second contract was entered into. The defendant was a party to this contract, and, according to the plaintiff, it was also a party. In any event, rights under this second contract were, it is said by the plaintiff, assigned to it.

3. The second contract provided that the earlier disputes under the first contract would return to arbitration if the second contract was not fulfilled. This second contract also provided that these earlier disputes or "Any despute, controversy or claim arising out of or relating to this [second] contract . . . or the breach, termination or invalidity there of shall be settled by arbitration in Hong Kong . . ." The arbitrator was to be appointed by the Hong Kong International Arbitration Centre.

4. Disputes did arise about breaches of both the first and second contracts. The plaintiff sought to refer these disputes to arbitration, but the defendant opposed this move. On 14 May 1996, it wrote to the HKIAC arguing that the second contract "was not operative". This letter was written on behalf of the defendant by Dr WD Beaver. The HKIAC declined to make an appointment because "we are not satisfied that prima facie the parties have signed a contract with an Arbitration clause."

5. The plaintiff issued a writ on 14 April 1998. On 27 May 1998, the defendant issued a summons seeking a stay in favour of arbitration. The affidavit on behalf of the defendant supporting the summons is by Dr WD Beaver. For reasons similar to those that he advanced to the HKIAC in support of the argument that the contract was "not operative", Dr Beaver says that the second contract is not binding on the parties. But, he says, if it is binding, there is an arbitration agreement.

6. Article 8 of the Model Law says -

"(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."

7. Mr Coleman says that the effect of this Article is that the court has no discretion. He adopts the received wisdom on the interpretation of this provision: If there is an arbitration agreement, the court must refer the parties to arbitration, and, as night follows day, a stay of the court proceedings must follow. Mr Graham says this wisdom is wrong. He argues that, although the provision requires the court to refer the parties to arbitration, it says nothing about ordering a stay of the court proceedings. So, Mr Graham submits, the court should refer the parties to arbitration, but may allow a plaintiff to continue the court proceedings. He points to paragraph (2) in support. In fact, this provision does not support him. It says that, while "the issue" is pending before the court, the arbitration may proceed. It does not say that, while the arbitration is proceeding after the court has referred the parties to this process, the court litigation may proceed. It would, of course, make an absolute nonsense of an arbitration agreement and the court's duty under Article 8 if it allowed parallel arbitral proceedings and litigation to proceed simultaneously. The whole purpose of Article 8, and the philosophy behind it, is to oblige the court to enforce arbitration agreements. It cannot possibly have been envisaged that this end would be achieved by allowing different procedures to be used to resolve the same issues, with the possibility that this course may throw up different results.

8. But this is not Mr Graham's main point. This is that Article should not be applied because the arbitration agreement is "incapable of being performed". This is because, he argues, the HKIAC has declined to appoint an arbitrator, and nothing can be done about this.

9. The provisions of Article 11 of the Model Law as read with section 34C of the Arbitration Ordinance (Cap.341) do not envisage the possibility that the HKIAC might decline to make an appointment. I understand why the HKIAC thought that it should not make an appointment because they were "not satisfied that prima facie the parties have signed a contract with an Arbitration clause." That decision was contained in a latter dated 5 August 1996. At that time, in the context of this case, it is probably right that it was necessary that the agreement be contained in a document signed by the parties. But section 2AC of Chapter 341 says that it is no longer necessary that the parties should have signed a contract with an arbitration clause, although it does seem, on the face of it, that both the plaintiff, as "confirming party", and the defendant signed the second contract. By section 18 of the 1996 Ordinance, the new provision applies to this agreement. There does not seem to be any dispute between the plaintiff and the defendant that the second contract is contained in a written document, that this governs their relationship, and that it contains an arbitration clause. There is no reason to believe that, under the new law, the HKIAC would regard an agreement signed by the parties as necessary.

10. In any event, I do not believe that the initial refusal by the HKIAC to make an appointment makes the arbitration agreement incapable of being performed. The parties are free to agree on an arbitrator. If they cannot do so, they should approach the HKIAC once more; it may be persuaded to reconsider its attitude in the light of the changed law. This is especially so now that an arbitrator has the power to rule on his own jurisdiction, including in respect of the existence and validity of the agreement. In the last resort, this court, I believe, has a residuary jurisdiction to make an appointment to implement the intention of the parties that their disputes should be resolved by arbitration.

11. Mr Graham last defence to an order for a stay is that Dr Beaver's letter of 14 May 1996 amounts to some kind of estoppel, waiver or repudiation so that the defendant can no longer enforce the arbitration agreement. I do not accept that this is so. The defendant's attitude, through Dr Beaver, has been consistent. He maintains now, as he said to the HKIAC, that the agreement is not binding, but, if it is, he accepts that it contains an arbitration clause. And, of course, the basis on which the HKIAC declined to make an appointment was not on the ground urged by Dr Beaver, but on its understanding of the law at the time. The defendant was entitled to take this attitude, and will be entitled to take the same attitude in the arbitration proceedings. The defendant has never suggested that, if the agreement is binding, it will not insist on arbitration as agreed. And, in any event, the plaintiff has not altered its position on the basis of anything done by the defendant. It seems that the plaintiff commenced court proceedings because the HKIAC declined to make an appointment, and that was many months after the HKIAC decision, by which time the law had changed.

12. In the result, I find there is no basis upon which I can avoid referring the parties to arbitration, and I do so. As I have said, in my view, a stay of the court proceedings must follow, and I so order.

13. I have heard no argument on costs, but it seems on the face of it that there is no reason why costs should not follow the event. I make an order nisi that the plaintiff pay the costs of the defendant's application and the plaintiff's action.