CHINA TRADE-OMNI DEVELOPMENT CENTRE LIMITED AND OTHERS v. RAMADA INTERNATIONAL INC. AND ANOTHER

1988, No. A5341

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

------------------

-----------------

JUDGMENT

------------------

1. On the 29th July, 1986 a writ of summons was taken out against the two defendants by three plaintiffs named as the China Trade-Omni Development Centre Ltd (the 1st plaintiff), Youth Association of Guangxi Zhuang Autonomous Region (the 2nd plaintiff) and Guilin Garden Hotel (the 3rd plaintiff), which was amended on the 3rd August with regard to the address of the 2nd defendant, seeking in the indorsement of claim as against the 1st defendant :

"(a) a declaration that a Management Agreement made between the 1st and 2nd plaintiffs in the name of the 3rd plaintiff dated 15th April, 1986 has been terminated by the wrongful repudiation of the 1st defendant; (b) damages for breach of the said Management Agreement; (c) a declaration that the 1st defendant do indemnify the 1st plaintiff against any claim of the 2nd defendant in relation to the Loan Agreement referred to in paragraph 2 below ";

"(a) a declaration that a Loan Agreement dated 30th May, 1986 between the 1st plaintiff and the 2nd defendant has been terminated by the wrongful repudiation of the 2nd defendant; (b) damages for wrongful breach of the said Loan Agreement; (c) a declaration that the 2nd defendant do indemnify the 1st, 2nd and 3rd plaintiffs against any claim of the 1st defendant in relation to the said Management Agreement. "

2. The defendants acknowledged service on the 16th August and indicated their intention to contest the proceedings.

3. There then followed a spate of various applications made by the parties, which briefly were the following :

4. These four applications were returnable before the Master on the 15th September, and he referred the four summonses to a judge in chambers on a date to be fixed, granting leave for the filing of affirmations in opposition and reply.

5. Since the Master's order and these summonses coming before me on the 29th November, various documents and affirmations were filed by both sides in support and in opposition. Also filed were :

6. These matters coming up before me on the 29th November, I made the following orders :

7. It might be appropriate if I were to deal first with a submission made by Mr Ho for the plaintiffs to the effect that the 1st defendant was barred from applying for a stay under the provisions of s. 6A(1), Arbitration Ordinance, because he had taken some other steps before making the application to stay. He argued that, although the summons to stay was issued on the 26th August, and there was an appointment to appear before a Master, the actual application was only made during the appearances before me on the 29th and the 30th November, prior to which the defendants had taken out the two summonses on the 30th August : one to strike out the indorsement on the writ, the other to strike out two of the plaintiffs for want of authority, and affidavits in support were filed. He relied on Turner v. McConnell, (1985)1 W. L. R. 899. That was a case where the defendant opposed an application for summary judgment under the Rules of the Supreme Court, Order 14, and it was held that he had taken a step in the proceedings by filing an affidavit showing cause why summary judgment should not be entered against them.

8. Mr Bunting, for the defendants, relying on Eagle Star Insurance Co. Ltd. v. Yuval Insurance Co. Ltd., (1974)1 Lloyds L. R. 357, submitted that the applications referred to, not being an affirmation of the correctness of the proceedings but a disaffirmation of them, did not amount to a "step" in the proceedings.

9. If I understood Mr Ho correctly, it seems that he was seeking to distinguish a summons as such from an "actual" application at the time of the hearing of the summons. With great respect, I find such a distinction spurious in that he ignores the provisions of Order 32, Rules of the Supreme Court. If an application is made by summons, which is all that is required by our rules, then it is before the court from the date it is filed so that the time it takes to come up for hearing is irrelevant in my opinion. I see no merit in this argument.

10. It is true that affirmations were filed in support, and it may suffice to refer to paragraph 4, which is identical, of the second and third affirmations of Mr Alexander David Morrison clearly stating that those two applications were made without prejudice to the application of the 1st defendant to stay.

11. The rationale for the decision in Turner is to be found at p.902 of the report, where Dillon, L. J. said:

"The next point that is clearly established by the authorities so far as this court is concerned is that the step in the action which will preclude an application for a stay for arbitration does not have to be the positive institution of an application to the court by the defendant; it is sufficient if the defendant concurs in an application to the court which is made by the plaintiff."

12. Turner was considered in Sam Yu Construction Co. v. Winning Godown Ltd. & Another (1987)1 H. K. L. R. 570, 575 where Barnett, Dy. J. (as he then was) said :

 

"The thrust of Turner is certainly against fine distinctions and constitutes a clear signal to a defendant to get on with a substantive application to stay. On the authority of this case I think that what Mr Mumford would like me to say is that virtually any action on the part of the defendant, other than acknowledging service and applying for a stay, will constitute a step in the proceedings....... In my view the acid test is whether a defendant has done something in the proceedings which shows he is submitting to the court's jurisdiction, rather than an arbitrator's to try the real issue between the parties. Whether the act is offensive or defensive is irrelevant. "

13. With respect I agree. In the case of Eagle star v. Yuval (supra), the plaintiffs issued a writ on which they indorsed a statement of claim. That indorsement was defective and the defendant applied to strike it out. Eagle reissued the statement of claim and took out summons under 0.14 of the Rules of the Supreme Court for summary judgment. Yuval resisted that summons and applied to stay the proceedings for arbitration. It being held that Yuval had taken a step in the proceedings and was debarred from applying to stay and there being no defence to the action, Eagle were entitled to the full amount claimed, Yuval appealed. Lord Denning, M. R., said at p. 361 :

 

"On those authorities, it seems to me that in order to deprive a defendant of his recourse to arbitration a 'step in the proceedings' must be one which impliedly affirms the correctness of the proceedings and the willingness of the defendant to go along with a determination by the Courts of law instead of arbitration.

 

Applying this principle, the defendants here were presented with a writ indorsed with a statement of claim which was very defective. They applied, quite properly, to strike it out. That was not an affirmation of the correctness of the proceedings. Quite the contrary. It was s disaffirmation of them. It was not a 'step in the proceedings' such as to debar the defendants from applying for a stay. "

14. With that judgment the other two members of the Court of Appeal agreed; Goff, L. J. and Shaw, L. J. doubting whether the proposition that a summons to strike out for want of particulars could never be a step in the action but were nevertheless of the opinion that on the facts it ought not to be so regarded in that case.

15. Likewise in Skopos Design Group Ltd. v. Homelife Nursing Ltd. [The Times, March 24 1988] May, L. J. is quoted as saying :

 

"Second, although some of the authorities were difficult to reconcile, in each case an objective approach had been adopted to determine whether a step had been taken. The test was whether the defendant had affirmed the institution of proceedings and indicated a willingness to go to law. "

16. Applying the same test, I am of the opinion that neither of those two applications of the defendants was such that it could possibly be said to amount to an "affirmation of the correctness" of these proceedings and neither is, in my view, a "step in the proceedings".

17. The parties to the Management Agreement of the 15th April, 1986 are the Ramada International Inc., a Delaware Corporation with offices in Hong Kong (the 1st defendant and the "operator") and Guilin Garden Hotel, a Chinese-foreign joint venture cooperative enterprise organised and existing under the laws of the People's Republic of China (the 3rd plaintiff and the "owner"). The 1st defendant as the operator was granted the right to operate the hotel under the name "Ramada Renaissance Hotel" for a term of an aggregate of 15 years on the terms and conditions set out in the Agreement. Article 20 is headed "Settlement of Disputes" and reads :

 

"20.1 If in the process of interpreting and carrying out this Agreement there arises any dispute between the parties, the parties shall make every effort to resolve them through mutual friendly consultation. If the dispute cannot be resolved through consultations, the matter shall be submitted for arbitration which will be conducted in Stockholm, Sweden, at the Arbitration Institute of Stockholm Chamber of Commerce in accordance with its arbitration rules. Arbitration shall be conducted in the English language. The arbitration award shall be final. The parties shall abide by the award. During the course of such consultation or arbitration, the parties shall continue to perform their respective obligations prescribed under the Agreement. "

18. Exhibited to the third affirmation of Mr Anthony Fung Tak-shing dated the 9th September are two letters "AF-1" and "AF-2", dated respectively 13th May and 25th May, 1988 from the 1st defendant repudiating the Management Agreement. The first two paragraphs of "AF-1" read :

 

"We refer to our letter dated December 1, 1987 requesting that the Owner provides Working Capital in the amount of US$450,000 by January 1, 1988 in order to meet the Hotel's operating expenses. We note that no Working Capital was deposited in the Hotel's Operating Account in response to our request. We also refer to our letter dated May 9, 1988 requesting the Owner pay to Ramada certain Reimburseable Expenses and accrued Royalty Fees, Management Fees and RINA Fees in the aggregate totalling US$280,640.50. None of these amounts have yet been paid.

 

We note that the Owner's failure to provide sufficient Working Capital after being requested to do so by the Operator and as required under Article 3.5 of the Management Agreement, and to pay Operator accrued Reimburseable Expenses and accrued Royalty Fees, Management Fees and RINA Fees after being requested to do so by Operator and as required under Article 9 of the Management Contract is a breach of the Management Agreement. Operator has the right under Article 12.4 of the Management Agreement to terminate the Management Agreement with cause by reason of Owner's breach, default or non-compliance with regard to any convenants contained in the Management Agreement. Should Owner fail to remedy fully the above breaches and defaults of, and acts of non-complince with, the Management Agreement within ten days of receipt of this notice, then pursuant to Article 12. 5 of the Management Agreement Operator is then entitled to terminate, without further notice, this Management Agreement with cause, and, if so, Owner shall then pay to Operator all accrued Management Fees, Royalty Fees and Reimburseable Expenses due under the Management Agreement, and in addition shall be required to make a Termination Payment of US$2,000,000 to Operatpor. "

Attached with the letter is an appendix setting out the Owner's other alleged breaches and defaults of, and non-complaince with, "numerous other express provisions and requirements" of the Articles of the Management Agreement. The first defendant requested the Owner "immediately to provide the Working Capital in the amount of US$450,000" and the other amounts in respect of the various expenses and fees, all totalling US$280,640.58; and the letter ends :

 

"Should Owner fail to comply fully and completely with the above requests within ten (10) days, Operator will be forced to terminate with cause the Management Agreement. "

19. The second letter - AF-2 - refers to the previous letter and states :

 

"Ten (10) days have now elapsed from the date of delivery of the abovementioned letter, and none of our requests contained therein have been satisfied. We therefore state and confirm that the Owner's monetary default is final and that the Management Agreement shall be terminated effective June 16th, 1988 (the 'Termination Date'). Please be advised that pursuant to Article 12.5 of the Management Agreement the Owner shall pay all accrued Management Fees, Royalty Fees, RINA Fees and Reimburseable Expenses due under the Management Agreement, now aggregating US$280,640.58 and in addition shall make a Termination Payment of US$2,000,000 to Operator. "

20. That was the repudiation which, in his third affirmation, Mr Fung said was accepted by the plaintiffs. In opposing the stay he referred to the Statement of Claim which set out the connection between the Management Agreement and the Loan Agreement. His affirmation reads :

 

"3.    The Statement of Claim herein was filed on 27th September, 1988. The Management Agreement entered into between the 3rd plaintiff and the 1st defendant, and the Loan Agreement entered into between the 1st plaintiff and the 2nd defendant were referred to therein forming the essential matters which gave rise to disputes and differences between the parties.

 

4.    ......

 

5.    As pointed out before, the Management Agreement and the Loan Agreement are closely connected. In fact, the entering into the Management Agreement was part and parcel of the arrangement to enter into the Loan Agreement.

 

6.    This is one of the reasons that any dispute arising from the Management Agreement or the Loan Agreement should be tried together and the connections between the 2 agreements are accurately reflected in the facts pleaded in the Statement of Claim herein. "

21. In paragraphs 7-11, Mr Fung mentions the proceedings started by the 2nd defendant against the 1st plaintiff in New York for breach of the Loan Agreement which have since been stayed by consent; an identical action commenced by the 2nd defendant against the 1st plaintiff and Mr Fung in Hong Kong being No. A5531 of 1988. The affirmation continues :

"12)    Since the Loan Agreement and the Management Agreement are so connected as mentioned above and since the 2nd defendant had already commenced an action for breach of the Loan Agreement against the 1st plaintiff and me in Hong Kong, and furthermore since all the parties involved are either in Hong Kong or China, Hong Kong will be a much more convenient forum.

 

13)    Therefore, even if it was correctly submitted on behalf of the 2nd defendant that the matters arising under the Management Agreement as they were agreed to be referred to arbitration under an arbitration agreement which was not a domestic agreement. Hong Kong will be a more convenient forum and the action shall be tried in Hong Kong.

 

14)    However, it cannot be correctly submitted on behalf of the 2nd defendant as mentioned above or of otherwise. "

22. Paragraph 15 goes on to reproduce Article 20.1, adding emphasis by underlining the words "carrying out" and the last sentence : "During the course of such consultation or arbitration, the parties shall continue to perform their respective obligations prescribed under this Agreement". The affirmation states :

16)    Article 20.1 clearly envisages that disputes shall be submitted to Stockholm for arbitration only if the parties choose to treat the Management Agreement as subsisting.

 

17)    As pleaded in the Statement of Claim, the 2nd defendant had terminated the Management Agreement, the 1st plaintiff accepted the same as a repudiation of the Management Agreement. The Management Agreement is therefore no longer in subs subsistance. For the reasons given, the Arbitration Ordinance is not applicable to the Management Agreement.............."

23. Mr Bunting is obviously correct when he says that section 6A(1) of the Arbitration Ordinance applies to any arbitration agreement not coming within the domestic arbitration agreement, and since foreign corporations are parties to the Management Agreement, the court has no discretion but to order stay unless any one or more of the grounds of exception stated therein applied. In the words of Brightman, J.in Lonrho v. Shell Petroleum Co. [The Times, 1st February, 1978]

24. Mr Bunting argued that paragraphs (3) to (13) of Mr Fung's affirmation were therefore irrelevant to this application. For the plaintiffs, Mr Ho submitted that in repudiating the Management Agreement, the 1st defendant had forfeited the benefit of the arbitration agreement. He relies on Jureidini v. National British and Irish Millers Insurance Co. Ltd., (1915) A. C. 499 (H. L.). His second argument is that where a contract has been frustrated by breach, not only does the contract come to an end, so also does the arbitration clause perish with it. He relies on Hirji Mulji & Others v. Cheong Yue Steamship Co. Ltd., (1926) A.C. 497 (P. C.).

25. Very rightly and properly Mr Ho cited also Heyman & Another v. Darwins, Ltd., (1942) A. C. 356 (H. L.) where both the cases cited by him earlier came under consideration. Explaining the ratio decidendi of Jurcidini, Viscount Simon L. C. pointed out that the speeches did not all give the same grounds for allowing the appeal, and said :

 

"Viscount Haldane L.C. who had during the argument referred to the above observation of Lord Shaw in the Johannesburg case, said:

 

'Now, my Lords, speaking for myself, when there is a repudiation which goes to the substance of the whole contract, I do not see how the person setting up that repudiation can be entitled to insist on a subordinate term of the contract still being enforced. '

 

By the person setting up the repudiation is meant the insurance company, which denied liability under the policy on the ground that the appellants had set fire to their own property, and it is not at all clear to me why, if the policy contained an arbitration clause covering all claims arising under the policy, it should not cover such a dispute. But the arbitration clause in the policy was not framed so widely."

26. After quoting from the other speeches, the learned Lord Chancellor said that the majority of the House in that case should be regarded as having decided the appeal on the second ground, namely, as Lord Parmoor had said expressly that "no difference had arisen as regards matters which could come for decision under the arbitration clause and that consequently the clause had no application". Of the dicta of Lord Haldane, L.C., Lord Macmillan said: "These dicta, in view of their high authority, are entitled to the most careful consideration, but with all respect I do not think they constitute pronouncements in law by this House such as to be binding on Your Lordships." Lord Wright referred to it as the "curious" case and said at p.386 : -

 

"It may be observed that this observation was solely that of Lord Haldane and was not concurred in by his colleagues and was not necessary to the ratio decidendi adopted by them. It may be simply another way of stating that the company by their conduct had waived the condition and disentitled them to rely on its non-fulfilment. "

 

And Lord Porter said at p.401 :-

 

"So far as concerns the other cases which seem to conflict with this view, I agree with the Lord Chancellor in thinking that the true ground of the decision in Jureidini v. National British and Irish Millers Insurance Co. Ltd. was the narrowness of the field of submission and the fact that no dispute had arisen on the only point submitted to arbitration. "

27. Mr Ho was however undeterred and, relying on London Street Tranways Co.Ltd. v. L.C.C., (1898) A.C.375, submitted that the decision in Jureidini upon a point of law was conclusive and binding on the House in subsequent cases. I do not think I need spend much time on this. Suffice it to say with great respect to learned counsel that the ratio decidendi in Jureidini clearly did not apply in the latter case where the sole question to be decided was whether an action started by the appellants should, on the application of the respondents, be stayed pursuant to s.4 of the Arbitration Act, 1889, in order that the matters in dispute between the parties be dealt with under the arbitration clause.

28. The question in Hirji Mulji's case (supra) arose on a charter party by which the respondents agreed to place their steamship at the disposal of the appellants on March 1, 1917, and the appellants agreed to employ her on specified terms for ten months from the date when she was delivered to them. The charter party contained a clause by which all disputes arising out of the contract were submitted to arbitration in Hong Kong. The ship was requisitioned by the Government before March 1, 1917, and was not released until February, 1919. The appellants then refused to take delivery of her. An arbitrator awarded the respondents damages for breach of contract, and they brought an action upon the award. It was held that there had been in 1917 a frustration of the charter party which forthwith brought to an end the whole contract, including the submission to arbitration, and that consequently the contract being executory, the arbitrator has no jurisdiction.

29. I need refer to two passages from the judgment of Lord Summer. At p. 505, he said :-

 

"The arbitration clause is but part of the contract and, unless it is couched in such terms as will except it out of the results, which follow from frustration, generally, it will come to an end too. This must be so, if the law is, that the legal effect of frustration is the immediate termination of the contract as to all matters and disputes which have not arisen. "

And at p.510 :-

"Though a party may exercise his right to treat the contract as at an end, as regards obligation de futuro, it remains alive for the purpose of vindicating rights already acquired under it on either side. So with frustration. Though the contract comes to an end on the happening of the event, rights and wrongs, which have already come into existence remain, and the contract remains too, for the purpose of giving effect to them.

 

No question of this sort arises here. The contract was wholly executory. "

30. That decision was obviously based on its peculiar facts which rendered the contract wholly executory. The facts in the instant case are different so that the question which did not arise there is a live issue here. It was not suggested that the Management Agreement was executory and keeping in mind the distinction between frustration by breach and true frustration as stated in para. 1628, Chitty on Contracts, 25th edn., the case of Hirji Mulji is clearly distinguishable. In the circumstances, I am of the opinion that in considering the effect of frustration by breach on the arbitration clause I should follow, as indeed I am bound to in terms of De Lasala v. De Lasala, (1979) H. K. L. R. 218 (P. C.), the decision in Heyman v. Darwins Ltd., where Viscount Simon L.C. said at p. 366 :-

 

"........While any opinion delivered by Lord Sumner must command the respect due to that great master of the law, I think the judgment in Hirji Mulji's case, so far as the effect of frustration of contract on an arbitration clause is concerned, must not be taken as having established a general rule. Ordinarily speaking, there seems no reason why a widely drawn arbitration clause should not embrace a dispute whether a party is discharged from future performance by frustration, whether the time for performance has already arrived or not. "

31. Looking at the arbitration agreement, it is manifest that it refers to "any dispute" arising in the process of interpreting and carrying out of the Management Agreement. Mr Bunting submitted that the last sentence of Article 20.1 meant that the obligations of the parties were not suspended while the consultation and arbitration were in progress. He said that the Article did not say, expressly or by necessary implication, that there could not be a reference after termination, more so when provision is made in the Management Agreement of certain obligations applicable in the post-termination period. He argued that the construction sought to be placed on it by Mr Fung in paragraph 16 of the affirmation would lead to a situation which he described As "bizarre" and could not be said to have been in the contemplation of the parties, in that a party in repudiatory breach could not rely on the arbitration clause simply because the other party treated it as not subsisting.

32. For his part, Mr Ho echoed his earlier submission based on the Hirji Mulji case that the last sentence clearly demonstrated in the context of the whole Article 20.1 that there could be no arbitration if the obligations of the parties to perform ceased with the termination of the main agreement.

33. In my judgment, learned counsel for the defendants is clearly right and I accept the interpretation he puts on Article 20.1 I find that the repudiation by the 1st defendant, which was accepted by the plaintiffs, did not abrogate the Management Agreement, and, in the words of Lord Macmillan  in Heyman v. Darwins Ltd. at p.374:

"It survives for the purpose of measuring the claims arising out of the breach, and the arbitration clause survives for determining the mode of their settlement. "

34. There was some mention in the affirmation of Mr Fung about the "connection" between the Management Agreement and the Loan Agreement, and to the convenience of litigating the disputes arising under both agreements in Hong Kong. I do not think, nor was it argued, that these are factors which could be said to render the arbitration clause inoperative.

35. I am of the opinion that the arbitration clause is couched in sufficiently wide terms to embrace the dispute whether there has been a frustration by breach under the Management Agreement, and that it falls within the ambit of the submission. The Arbitration Ordinance entrenches the rights of the defendant to have genuine disputes resolved by arbitration and the 1st defendant is entitled to stand on his rights.

36. The areas of dispute between the parties have been sufficiently identified in the two letters, "AF-1" and "AF-2", which include such issues as the fixing of the room rates which covers generally the O'Phee Agreement relating to the room rates pleaded in the statement of claim. I order that the claims set out in the proposed amendment to the indorsement on the writ in paras. 1 and 3(a)(i - vii) be stayed in terms of the submission in Article 20.1 of the Management Agreement. I shall hear the parties on the issue of costs.