WINBOND ELECTRONICS (HK) LTD v. ACHIEVA COMPONENTS CHINA LTD

DCCJ 5616 of 2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5616 OF 2006

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D E C I S I O N

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1. The Appellant claims against the Respondent for the price of electronic components sold and delivered pursuant to 2 Purchase Orders placed by the Respondent in July and August 2005 (“the Purchase Orders”, Hearing Bundle pages 47 and 51).

2. The Respondent succeeded in persuading a Master of the District Court to order stay of proceedings on the ground that the parties “by agreement agreed to arbitration the matter in respect of which this action is commenced” (Hearing Bundle page 177-1). The Appellant was also ordered to pay costs.

3. The Appellant appeals to this court. I allow the appeal. The Master’s orders are set aside. I make an order nisi that costs of this appeal and of the application before the Master be to the Appellant with Certificate for Counsel, such costs are to be taxed if not agreed.

4. I will explain my decision by first stating certain relevant legal principles which, as I understand it, are not in dispute. They are:

a)	It has to be demonstrated to the court by the applicant (for arbitration, the Respondent in this case) that there is a good prima facie case, or a plainly arguable case, that an arbitration clause or agreement exists between the parties;
b)	In considering whether the test has been satisfied, the court should look at the evidence in support of the contention first. If, cumulatively, that evidence is cogent and arguable, and not dubious or fanciful, then the test has been satisfied and
c)	If the court is satisfied and refers the matter for arbitration,

the “arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement” and, if necessary, take testimony from witnesses from both sides. A party dissatisfied with the arbitral tribunal’s ruling that it does have jurisdiction may refer the matter to the Court of First instance for final decision.

(Pacific Crown Engineering Ltd. v Hyundai Engineering & Construction Co. Ltd. (2003) 3 HKC 659 and the cases cited therein. For the principle in sub-paragraph c) above, see further Arbitration Ordinance (“the Ordinance”), Cap. 341, Section 13B and Schedule 5, Article 16 (1), (2) and (3), Article 6 and Section 34(4) of the Ordinance.)

5. Parties are apparently agreed that Section 2AC of the Ordinance is the governing provision in that unless the Respondent can bring its plea (of arbitration) within that Section, the claim by the Appellant should not be stayed. The relevant part of Section 2AC reads:

“	(1)	An agreement is not an arbitration agreement for the purposes of this Ordinance unless it is in writing.
	(2)	An agreement is in writing for the purposes of subsection (1) if-
		(a)	the agreement is in a document, whether signed by the parties or not; or
		(b)	… or
		(c)	although the agreement is not itself in writing, there is evidence in writing of the agreement; or
		(d)	the parties to the agreement agree otherwise than in writing by referring to terms that are in writing; or
		(e)	…; or
		(f)	…
	(3)	A reference in an agreement-
		(a)	to a written form of arbitration clause; or
		(b)	to a document containing an arbitration clause, constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement…
	(4)	…
	(5)	…      ”

6. Certain amendments were made to the Ordinance with effect from 1997. As a result, local cases decided before those amendments must be read with caution. Miss Lam, Counsel for the Appellant, referred to the case of H Smal Ltd. v Goldroyce Garment Ltd. (1994) 2 HKC 526, 529 where it was said that “There is no basis for arguing that the arbitration agreement can be established by a course of dealings or the conduct of the parties …unless there is a record whereby the defendant has in writing assented to the agreement to arbitrate.” In view of the present Section 2AC, what was there said or held is no longer the law - the arbitration agreement may now be established by a course of dealings or conduct of the parties provided there is reference to terms (of arbitration) that are in writing.

7. It is not in dispute that the Appellant and the Respondent are engaged in the electronics industry. The Appellant manufactures electronic components and the Defendant sells them as distributor. The parties entered into a Distributorship Agreement written in Chinese (“the Agreement”, Hearing Bundle pages 8 to 21 with English translation at pages 22 to 39). The Respondent’s case for stay of proceedings is based on or stems from the Agreement. It is apropos to recite here the provisions that require special attention:  

“	Clause 5 : Turnover
	1.	B should meet the annual sales target. During the first year of the Agreement, B should order not less than USD3 million worth of products from A at a wholesale price level.
	2.	B’s target sales for the second year after signing of this Agreement should be mutually agreed between both parties 30 days before the end of the date of the first year of the Agreement…
	Clause 19: Validity
	The validity of this Agreement is 12 months from 1 January 2004 to 31 December 2004. Both parties shall, 30 days before the expiry of this Agreement, agree in writing to renew this Agreement for one year in accordance with Clause 5 of this Agreement…
	Clause 23: Governing Law and Dispute Resolution
	1.	This Agreement shall be governed by and construed in accordance with the laws of Hong Kong.
	2.	Any claim or dispute arising out of, in connection with or relating to this Agreement, must first be resolved by the parties by mutual negotiation. If the dispute cannot be resolved by mutual negotiation, the dispute must be settled and resolved by the Hong Kong International Arbitration Centre…Such arbitration shall be conducted in Hong Kong and in Chinese. The awards by the arbitrator is (sic) final and binding to (sic) the parties.”
(“A” in the Agreement meant the Appellant and “B” the Respondent)

8. There are 2 limbs to the case of the Respondent: 1) the Agreement continued or was renewed and 2) the course of trading between the parties showed that the Purchase Orders incorporated the term for arbitration i.e. Clause 23.

9. Regarding the first limb, the thrust of the argument of Mr. Li (Counsel for the Respondent) was based on the fact that neither the Appellant nor the Respondent took any step to “30 days before the expiry of this Agreement, agree in writing to renew this Agreement for one year in accordance with Clause 5 of this Agreement” (Clause 19 of the Agreement, see paragraph 7 above). As I understood Mr. Li, he submitted that it was at least arguable that the parties had thus waived the requirement for entering into a further written agreement (to last 1 more year). The submission went on to say that there was thus automatic renewal. I find such an approach fanciful. The provision to renew is no more than an agreement to agree. It has no legal effect. In any case, my view is that if  parties do not take any step to renew then the only reasonable inference is that the Agreement will end by lapse of time on 31 December 2004 (unless earlier terminated under Clause 20) and with it the provision for arbitration (Clause 23). There is indeed no evidence before me to indicate otherwise. To accept Counsel’s submission will also mean perpetual automatic renewal of the Agreement (unless terminated under Clause 20 or by law). There is not even prima facie evidence to support such a scenario (see further paragraphs 14 and 15 below).

10. I refer to some of the Clauses under the Agreement. They are:

“	Clause 6 : Placing Order
	1.	B must on or before the 20th day of each month provide to A  a demand forecast for the coming 4 months. B shall order the goods in accordance with the demand forecast…
	Clause 11 : Daily Records
	B shall provide A with the following records on the specified period of time:
	1.	Weekly records:
		(i)	Weekly sales records: ...
		(ii)	Weekly storage records: …
	2.	Monthly records:
		(i)	Monthly sales records: …
		(ii)	Monthly storage records: …
		(iii)	Sales planning records: …
	3.	Annual Records:
		(i)	Annual review: …
		(ii)	Next year sales plan: …
		(iii)	Next year sales opportunity and challenge business plan.

There is nothing before me to indicate that, for example, the aforesaid Clauses 6 and 11 have been complied with for the period after 31 December 2004. This is added reason for concluding that the stance of automatic renewal of the Agreement is not tenable.

11. Regarding the second limb, the Respondent alleged that the “terms of business over the period from 2003 onwards between the Plaintiff and the Defendant did not change and the payment terms were always 20 days from the 1^st month…the subject Invoices under this claim comprise 5 invoices which were all on same terms and shows (sic) that nothing had changed in terms of the trade and dealing between the year 2003 when the parties started to do business together to way past 2005, of which these 5 claims are concerned” (see paragraph 8 of the 2^nd Affirmation of Lau Sher Yin filed on behalf of the Respondent (“the 2^nd Affirmation”), Hearing Bundle pages 67 to 68 and pages 79 to 105 for the relevant documentation). Mr. Li submitted that in each case the purchase orders (from the Respondent) stated wrongly that the terms of payment as “30 DAYS Cheque” and carriage/ delivery as “FOB HK” but the Appellant’s invoices would correct the information and state that which is consistent with the Agreement viz. payment terms as “20 DAYS FROM 1^st MONTH” and carriage/ delivery as “FOB Taiwan”. Mr. Li described this as the “course of trading” argument of the Respondent.

12. On the Respondent’s own version, the payment term of “20 DAY FROM 1^st MONTH” applied even in 2003 i.e. before the Agreement. I thus fail to see how it can be said that this payment term has specific reference to the Agreement. The invoice for 2003 at Hearing Bundle page 80 does not recite “FOB Taiwan”. The invoices for July 2004 and May 2005 at Hearing Bundle pages 83 and 87 respectively recite “FOB Hong Kong”. In any event, I consider the course of dealings relied on as tenuous reason for saying that the arbitration clause (in the Agreement) has been incorporated into transactions occurring after 31 December 2004. 

13. Other points were raised by Mr. Li in his written submission. Many of these were not pursued before me. I will simply say that these other points and those orally delivered by Mr. Li did not sway me in favour of the Respondent.

14. As an epilogue, I should refer to certain paragraphs in the 2^nd Affirmation (Hearing Bundle pages 64 to 170) which stated the following:

a)	“…the nature of this industry requires familiarity with the technical nature of the products concerned…Hence it is customary for this industry to resolve their disputes by arbitration  because of the requirements and special knowledge of this industry” (paragraph 14);
b)	“…it is usual that the parties will continue to do business along the same terms notwithstanding that the stipulated time frame of any particular contract would have lapsed or expired. This is especially because unless there had been any changes in the terms of dealings between the parties, they would continue to do business as usual as none of the terms had been changed. Although an agreement such as the Distributorship Agreement between the Plaintiff and the Defendant may have been allowed to lapse, this meant precisely that that (sic) they still carried on to do business under the same terms and if the terms did not change then it was not necessary to sign a new agreement” (paragraph 15);
c)	“It is customary practice between the Defendant and its supplier to have an arbitration clause contained in the agreements with its supplier…it is standard practice in doing business with the Defendant to expect that disputes would be resolved by arbitration” (paragraph 16); and
d)	“Arbitration is the preferred method of dispute resolution in this industry…” (paragraph 17).

15. The deponent of the 2^nd Affirmation merely identified himself as the Finance Manager of the Respondent. The scope of his work or duties at the Respondent was not explained. There was no information as to how long he had worked at the Respondent. There is no information as to the nature or extent of his experience in the electronics industry. I do not think it has been shown that the deponent is a proper candidate to state such matters as custom or trade practice of the electronics industry or business. In any event, I think Mr. Li accepted that the Ordinance governed the situation and that simply to assert custom or trade practice (of arbitration) would not suffice. The point of custom or trade practice was not pursued in court by Mr. Li in any way worth noting.

16. Although the threshold the Respondent has to meet is a low one viz. the Respondent merely has to show a good prima facie case or a plainly arguable one (see paragraph 4 a) above), the stay of proceedings cannot be obtained at the drop of a hat. For reasons herein, I allow the appeal and make the orders stated in paragraph 3 above.