LIM CHOON HOCK otherwise known as WILLIAM LIM AND ANOTHER v. HUNG KA HAI CLEMENT AND OTHERS

HCA 1282/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1282 OF 2016

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REASONS FOR DECISION

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Background

1. The Plaintiffs are partners of Deloitte China, and “Members” of Deloitte Touche Tohmatsu (Greater China) Holdings Limited (“DTT”), as defined under and pursuant to a Shareholders’ Agreement dated 26 November 2003 (“Agreement”). The Defendants are Members of the Governing Board (“Board”) constituted under and in accordance with the Agreement. 

2. On 16 May 2016, the Plaintiffs commenced these proceedings against the Defendants.  According to their Statement of Claim (“SOC”), dispute has arisen between the parties as to the findings and sanctions made by the Board against the Plaintiffs on 13 April 2016 and 29 April 2016 (“Sanctions”), and the Plaintiffs seek from the Court an order that such findings and Sanctions are void, have no effect and should be set aside, and that the Plaintiffs should be reinstated to their status as Members of DTT.

3. On 1 June 2016, the Defendants applied to stay these proceedings to arbitration, pursuant to the arbitration clause contained in the Agreement.  The Plaintiffs oppose such stay on the basis that they are entitled to maintain these proceedings, since they claim that the dispute resolution mechanism set out in the arbitration clause has been exhausted.

4. The parties are not in serious dispute that the principles applicable to the determination of the stay application is as set out in Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, as summarized by this Court in Bluegold Investment Holdings Ltd v Kwan Fun Calvin (unrep) HCA 1492/2015, 4 March 2016.  These do not need to be repeated here.

5. At the conclusion of the hearing of the stay application on 15 August 2016, I granted the stay sought by the Defendants, with costs to be paid by the Plaintiffs on an indemnity basis.  These are the reasons for my decision.

The arbitration agreement

6. The parties do not dispute that the Agreement contains an arbitration clause, in the following terms:

“8.12 Arbitration

If at any time any dispute shall arise under this Agreement between any Member (including any Outgoing Member) (Aggrieved Member) and any other party, or their respective personal representatives, in relation to any matter (except as set out in Section 6.2.2 of the Unit Allocation Scheme), such dispute shall first be referred, to the Chairman (or if he is the Aggrieved Member then it shall be referred direct to the Governing Board) who shall attempt to resolve such disputes to the satisfaction of the parties in dispute. If the matter is not so resolved within twenty one (21) clear Business Days of being referred to the Chairman, the Chairman shall refer such matter to the Governing Board. If such dispute shall not be resolved within twenty one (21) clear Business Days of being referred to the Governing Board, any party to the dispute may refer the matter for final resolution to arbitrationin accordance with and subject to the provisions of the Arbitration Ordinance (Cap 609) of the Laws of Hong Kong. The provisions of the Arbitration Ordinance Schedule 2 sections 1-7 shall apply. The Hong Kong International Arbitration Centre Domestic Arbitration Rules existing at the Effective Date shall apply to any arbitration instituted in accordance with this Section 8.12.” (Emphases added)

7. The Plaintiffs accept that there is an arbitration agreement.  They only claim that these proceedings should not be stayed, since the dispute had already been referred to the agreed dispute resolution mechanism under section 8.12, and that such mechanism has been exhausted.  According to the Plaintiffs, therefore, section 8.12 is not capable of being performed.  These arguments will be considered below.

The dispute

8. According to the submissions made by Mr Kim on behalf of the Plaintiffs (and paragraph 29 of his skeleton argument), the dispute between the parties is whether or not the Plaintiffs were in breach of section 5.4.6 of the Agreement, which restricts a Member from divulging, communicating or making use of any confidential information of or relating to DTT, received or obtained while a partner of DTT.

9. To determine whether or not there is a dispute, and the scope of the dispute between the parties, reference should be made to the SOC filed in the proceedings, in order to determine whether the claims formulated in the SOC and which are sought to be determined by the Court in the action commenced by the Plaintiffs fall within the scope of the arbitration clause in the Agreement, and should properly be stayed under s 20 (1) of the Arbitration Ordinance (Cap 609) (“Ordinance”).  It is of course to be borne in mind that the Court has no discretion under s 20 (1), if the action brought before the Court is one which is the subject of an arbitration agreement - unless the agreement is null and void, inoperative or incapable of being performed.

10. The applicant for stay has only to demonstrate that there is a prima facie case that the parties are bound by an arbitration clause, and unless the point is clear, the Court should not attempt to resolve the issue but should stay the matter in favor of arbitration (PCCW Global Ltd v Interactive Communications Services Ltd [2007] 1 HKLRD 309).

11. According to the SOC, the Plaintiffs claim that dispute had arisen between the Plaintiffs and the Defendants in relation to the Members’ votes and the poll results on a proposal*.  The Plaintiffs had questioned the 1^st Defendant about the validity of adopting a new voting formula for the voting and poll results*, after the vote had taken place.  The Plaintiffs apparently had sent some emails to other partners of the practice, and expressed their views on* the resolution purportedly passed.  The Plaintiffs further expressed concerns on the Board’s decision in November 2015 to recommend the extension of the 16^th Defendant’s tenure as CEO, and expressed their views on issues of the Board’s governance in their emails to other partners and Members.[*]

12. As a result, the Board made findings and imposed the Sanctions on the Plaintiffs, as communicated to the Plaintiffs by the Board’s letters dated 13 April 2016 and 29 April 2016 (“April Letters”).  In the 1^st letter of 13 April 2016, the Board informed the Plaintiffs that by their despatch of various emails to other partners, the Plaintiffs had acted in breach of their confidential obligations under section 5.4.6 of the Agreement, communicating highly sensitive and confidential information concerning the firm, which was irresponsible behavior unbefitting a Member of the firm.  The Plaintiffs were informed by the Board’s better of 13 April 2016 that they were reprimanded for their conduct, and warned to refrain from further breaches. 

13. In the 2^nd letter of 29 April 2016, the Plaintiffs were notified that as a result of their further communication of confidential information on 14 April 2016, the Board decided to impose a financial penalty of respectively $1.5 million and $450,000 on the 1^st and 2^nd Plaintiffs, and further, that they were suspended until 31 July 2016 from attending at the firm’s offices and undertaking any work of the firm, etc. 

14. The Plaintiffs claim in the SOC that the Agreement does not confer any disciplinary jurisdiction on the Board, such that the purported exercise by the Board in making the findings and Sanctions by the April Letters was ultra vires, of no effect, and alternatively voidable (paragraphs 20 and 33, SOC).  They further claim that members of the Board owed fiduciary and implied contractual duties, such that they had to exercise any discretion given to them under the Agreement reasonably, in good faith and with reasonable care.  In paragraphs 27 and 33 of the SOC, the Plaintiffs claim that the findings and Sanctions set out in the April Letters should be set aside in that the Plaintiffs had been deprived natural justice, were not given the opportunity to know and answer the charges made against them, that no reasonable tribunal could have made the findings and Sanctions in the April Letters, and that members of the Board had exercised their power for improper purposes, had taken into account improper or irrelevant considerations and had failed to act with reasonable care and skill.

15. On these bases, the Plaintiffs sought orders from the Court in these proceedings that the findings and Sanctions set out in the April Letters should be set aside, as being void and of no effect. 

16. On the Plaintiffs’ own pleaded case, the dispute between them and the Defendants in these proceedings is whether or not the Board had powers under the Agreement to impose the Sanctions against them, and whether these Sanctions and the findings made by the Board in the April Letters are void (for being ultra vires, made in breach of fiduciary duties, in contravention of rules of natural justice, etc) and should be set aside. 

17. Unless the claims made by the Plaintiffs in these proceedings, as to the Board’s lack of disciplinary powers under the Agreement, and that the Sanctions are void and of no effect, are unequivocally admitted, there is clearly a dispute between the Plaintiffs and the Defendants as to whether the Plaintiffs were in breach of their duties of confidentiality, and whether the Sanctions imposed by the Board on the Defendants are valid or should be set aside (Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, at 434; Guangdong Agriculture Co Ltd v Conagra International (Far East) Ltd [1993] 1 HKLR 113).  These disputes are clearly within the scope of the arbitration clause, which covers “any disputes” “in relation to any matter” under the Agreement, including therefore a dispute as to the powers of the Board under the Agreement and in particular section 1.45A of Schedule 5 to the Agreement, and whether the Plaintiffs were in breach of their duties under section 5.4.6 of the Agreement.

18. There is no merit in the Plaintiffs’ argument that the dispute between the parties had already been referred to the Chairman or the Board for resolution under section 8.12, and that the mechanism for dispute resolution thereunder was already exhausted.  Section 8.12 provides for disputes to be referred, first to the Chairman, who shall attempt to resolve the dispute “to the satisfaction of the parties in dispute”, and failing such resolution, to the Board, and if the dispute is still not resolved within the time specified, then to arbitration in accordance with the Ordinance “for final resolution”.

19. If the dispute contended by the Plaintiffs had been referred to the Chairman, and/or the Board, and if, as the Plaintiffs contend, the dispute was resolved by the Chairman or the Board by making the findings and imposing the Sanctions set out in the April Letters, such resolution is clearly not to the satisfaction of the Plaintiffs, who are manifestly disputing the validity of the Sanctions and the decisions made by the Board - as evidenced by the claims made in these proceedings and as set out in the SOC.  From the perspective of the Plaintiffs, since the claims made by the Board (as to the Plaintiffs being in breach of their duties of confidentiality under the Agreement and as to the Board’s entitlement to impose the Sanctions on the Plaintiffs) are not admitted by the Plaintiffs and are strenuously denied by them, there is a dispute in existence between the parties, and such dispute falls within the ambit of the arbitration clause in the Agreement, as one which relates to a matter under the Agreement.

20. To the extent that it is suggested that there had been an arbitration actually conducted and concluded by the Chairman or the Board, again, it is clear from the Defendants’ response to these proceedings and the evidence filed that this is not admitted by the Defendants.  There is a dispute as to that, and such dispute again is in relation to matters which arise under the Agreement, including the procedure under section 8.12 of the Agreement, and what dispute resolution procedure had actually taken place.

21. In the wider context, even in the course of one reference to arbitration, more than one dispute may arise, and unless all these disputes are resolved and decided by the tribunal, the arbitration cannot be said to have been terminated.  Further, one or more disputes may arise under the arbitration agreement between the same parties.  The fact that one dispute has been referred to arbitration cannot mean that the arbitration agreement has been performed, and cannot be further implemented. 

22. I find no basis to conclude that the arbitration agreement made between the Plaintiffs and the Defendants in section 8.12 of the Agreement cannot be performed, is inoperative, or has been discharged.

23. All the other matters raised by the Plaintiffs, as to whether or not they were entitled to circulate the emails amongst the partners, whether or not the Board had jurisdiction under Schedule 5 to the Agreement to discipline the Members, whether or not the Plaintiffs have suffered hardship as a result of the Sanctions, and whether the Sanctions are fair, go to the merits of the disputes between the parties, and are to be considered and decided by the arbitral tribunal.  Even if the affidavits sought to be adduced by the Plaintiffs were to be considered, they add nothing and are irrelevant to the Plaintiffs’ opposition to the stay application.

Conclusion

24. The Plaintiffs’ resistance to the application for stay of these proceedings to arbitration is entirely misconceived and totally without basis. There is no merit in their claim that the dispute resolution procedure under section 8.12 of the Agreement has been exhausted, when there are clearly residual disputes which have not been resolved by the Chairman or the Board to the satisfaction of the parties.  If the arbitration procedure had been exhausted as the Plaintiffs allege, their challenge to the decision under clause 8.12 should be made under the Ordinance and by reference to O 73 RHC.  Their institution of these proceedings seeking the relief they claim is contradictory to their own case.  Before the Plaintiffs’ commencement of these proceedings, the Defendants’ solicitors had issued letters stating that the disputes should be referred to arbitration, but these letters were all ignored by the Plaintiffs, without any justification.

25. For all the above reasons, I ordered the stay of these proceedings to arbitration in accordance with section 8.12 of the Agreement, and further ordered the Plaintiffs to pay the Defendants’ costs on an indemnity basis.