BIO CHEM TECHNOLOGY (HK) LTD v. RICH LEAF INTERNATIONAL (HK) LTD

HCA 476/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 476 OF 2017

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JUDGMENT

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PROCEDURAL BACKGROUND

1.  This action was commenced by writ of summons issued on 28 February 2017, subsequently amended on 29 March 2017.

2.  The plaintiff is Bio-Chem Technology (HK) Limited and the defendant is Rich Leaf International (HK) Limited.

3.  The plaintiff’s claim is for goods sold and delivered, being food additives, under various contracts between the parties. The material events giving rise to the dispute occurred during the latter half of 2013 up until June 2014.

4.  The defendant acknowledged service on 13 March 2017 and indicated an intention to contest the jurisdiction of the court and apply to stay the proceedings on the basis that the dispute should be submitted to arbitration.

5.  On 6 April the plaintiff filed a summons pursuant to Order 14, rule 1 of the Rules of the High Court (“RHC”) seeking final judgement and/or for judgement on admissions pursuant to Order 27, rule 3 of the RHC.

6.  On 12 April the defendant issued its own summons for a stay pursuant to Order 12, rule 8 of the RHC and section 20 of the Arbitration Ordinance (Cap 609).

7.  Both of these summonses were returnable on 8 May before Master Lai who made various orders as to the service of further evidence and adjourned the two summons’ for hearing before a High Court Judge; hence this hearing.

8.  It was accepted at the outset by both parties that I should hear the defendant’s summons first since if I was to find in the defendant’s favour, the plaintiff’s summons would be otiose.  The hearing proceeded therefore on this basis.

9.  Mr Hung appeared for the plaintiff and Mr Hui and Mr Wong appeared for the defendant.

THE STAY APPLICATION

10.  The defendant’s case is that it has demonstrated a prima facie arguable case that the parties are bound by an arbitration agreement.  On that basis it is submitted this court has no choice other than to stay the proceedings and refer the matter to arbitration.

11.  The plaintiff opposes the stay application on the grounds that the arbitration agreement is inoperative on the following bases:

(1) the claim is outside the ambit of the arbitration clause and/or;

(2) the defendant abandoned or waived reliance on the arbitration clause.

RELEVANT LEGAL PRINCIPLES

12.  The legal principles applicable to applications under Order 12, rule 8 of the RHC and section 20 of the Arbitration Ordinance (Cap 20) are clearly established and summarized in Hong Kong Civil Procedure 2017 Volume 3, U1/20 with supporting authorities I need not set out here.  I set out the relevant extracts from that text by way of context for what follows:

“ Section 20(1) of the Arbitration Ordinance gives effect to art.8 of the UNCITRAL Model Law. It sets out the basic principle that 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, refer the parties to arbitration. … Once the conditions of art.8 are satisfied, a stay of the legal action is mandatory: ….”

(Hong Kong Civil Procedure 2017U1/20/1)

“ For a court to refer the parties to arbitration under art.8(1), it is sufficient that the party requesting a stay of the proceedings can demonstrate that there is a prima facie case or plainly arguable case that the parties are bound by an arbitration agreement: ….

For a reference to arbitration by the court, the following elements must be present: (1) the clause in question must be an arbitration agreement; (2) the arbitration agreement must not be null and void, inoperative or incapable of being performed; (3) in reality there must be a dispute or difference between the parties; (4) the dispute or difference between the parties must be within the ambit of the arbitration agreement: ….”

(Hong Kong Civil Procedure 2017 U1/20/2)

13.  In the matter before me it is common ground that there is a dispute between the parties and similarly it is common ground that there is an arbitration clause in the contracts in question and there is no dispute as to its terms.

14.  The Arbitration clause in question reads:

“ Arbitration

All disputes in connection with this contract of the execution thereof shall be settled by negotiation.  In case no settlement can be reached the case in dispute shall then be submitted for arbitration in accordance with the Hong Kong Arbitration ordinance and with arbitration to take place in Hong Kong, the decision made by the commission shall be accepted as final and binding upon both parties.  The fees for the arbitration shall be borne by the losing party unless otherwise awarded by the arbitration commission.”

THE PARTIES’ SUBMISSIONS AND THE COURT’S FINDING

(1)     The claim is outside the ambit of the Arbitration Clause.

15.  The plaintiff submits that the Arbitration clause is limited to disputes in connection with the execution of the contract and that on the facts the plaintiff’s claim is a debt, which only becomes due and payable after the execution of the contract by delivery of the product to the defendant.

16.  This submission relies on a restricted reading of the Arbitration Clause and in particular the use of the word “of” in line 1 to narrow the scope of disputes covered to those connected to execution only.

17.  The defendant on the other hand submits that the word “of” is a typographical error and should read “or” which would be the more usual formulation in a standard arbitration clause.  In support of its arguments the affirmation of Li Qun dated 7 August 2017 filed on behalf of the defendant highlights a number of other typographical errors in the arbitration clause as well as in other parts of the contract.  The defendant submits that as these errors were the product of the plaintiff’s drafting, the plaintiff should not be able to rely on them to its advantage; it is submitted that under the contra proferentem rule any draft or ambiguity should be construed against the plaintiff.  The defendant further submits that in any event the words “contract of the execution thereof” simply refers to the performance of the contracts.  The defendant’s payment duty arose out of the contracts and in the defendant’s submission is clearly a matter relating to the performance of the contracts and therefore within the ambit of the Arbitration Clause.

18.  Finally the defendant submits that the parties as rational businessmen are presumed to have intended any dispute arising out of their relationship to be decided by the same tribunal; it makes no sense to adopt the plaintiff’s interpretation that performance in relation to shipment is governed by the arbitration clause whilst disputes regarding performance as they relate to payment are not.

19.  I accept the defendant’s submissions and am satisfied that the disputes the subject of the writ are within the ambit of the Arbitration Clause.  It seems to me to be clear that the parties intended the Arbitration Clause to apply to disputes between them arising out of their relationship under the contracts in question, and the contrary interpretation flies in the face of commercial sense: Klöckner Pentaplast GmbH v Advance Technology (HK) Co Ltd [2011] 4 HKLRD 262 at §10.

(2)     The defendant abandoned/waived reliance on the Arbitration Clause.

20.  The plaintiff here relies on a letter from the defendant dated 10 February 2017 in reply to a letter from the plaintiff’s solicitors dated 9 January 2017.  The letter in question is in the Chinese language and translations were provided for the hearing which were certified by the court translation service.  The relevant paragraphs in the letter are paragraphs 8 and 9 which I set out in full in accordance with the certified translation:

“ 8. We welcome your client’s position that they wanted to resolve the dispute through legal procedures. To be frank, our company has been waiting for this for a long time since only the law can restore the truth, and bring justice and fairness to small companies like us. Your client’s unilateral denial of the truth and their attempt to obscure and confuse facts will not be supported by the law.

9.Considering the many years of good cooperation with your client, our company is nonetheless grateful. Therefore, we have not replied to each of your legal letters in a formal manner. We sincerely hope that this matter may be properly resolved.  But of course, if your client insists on denying the cancellation of contract(s), our company consider that adjudication by legal means is the best way to resolve the dispute.”

Chinese version:

「 8、 对于贵所当事人要求通过法律程序解决问题的态度，我司表示欢迎。坦率而言，我司已经等待多时，因为只有法律才能还原事实真相、才能给我们这种小企业以公平、公正！贵所当事人单方面否认事实、混淆视听的做法是得不到法律支持的！

9、  念及与贵所当事人多年良好的合作，我司始终心怀感恩。因此对于贵所每份律师函的回复也都没有采取常规的文本格式。我司衷心希望此事能够得到妥善地解决。当然，如贵所当事人坚持否认取消合同的事实，那么我司也认为诉诸公堂将是解决当前纠纷的最佳方式。」

21.  The plaintiff takes issue with the translation of paragraph 9 in particular and suggested that a proper translation of the last sentence would make specific reference to a court of law and specifically that it should read:

“ …, our company also considers that resort to legal process in court is the best way to resolve the dispute.”

or

“ …, our company also considers that adjudication by court is the best way to resolve the dispute.”

22.  The relevant Chinese characters at issue are:

「 诉诸公堂」

23.  At the hearing I allowed Madame Woo Kit Fong, Janet to be cross-examined pursuant to a Notice served by the plaintiff under Practice Direction 10.2.  I was persuaded to do so because a question of the proper translation of the Chinese characters in question was clearly important to one of the plaintiff’s submissions.  Madame Woo’s evidence was that when she had first been asked to certify a translation of the letter in question she had been provided with different versions of translations prepared by the plaintiff and defendant respectively.  She explained that with a desire to be helpful to the court she had produced a version of her own which largely adopted the syntax and style of the defendant’s translation which she considered preferable. At that time she had no idea of the significance the parties might attach to the particular characters which now form the basis for one of the plaintiff’s submissions.  When she received the notice to attend for cross-examination she asked for the background materials to prepare herself, understood that the focus was the Chinese characters I have referred to and produced to the court an alternative formal translation of the sentence containing the characters in question which was confirmed by two leading dictionaries on which she placed reliance, namely:

“ …, in that case, our company also considers resorting to a law court/tribunal will be the best means to resolve the present dispute.”

* 公堂 = Law court; tribunal

24.  Mr Fung’s submission was that there should be greater focus on the historic meaning of the characters which placed more significance on a court than the modern understanding of a tribunal.  Madame Woo did not resile from her translation, nor did she resile from the general accuracy of heroriginal translation.  Furthermore she did not accept the plaintiff’s contention put to her that a reverse translation of the words used in her first translation would necessarily mean the exclusion of the Chinese characters at the heart of the debate.  I found Madame Woo to be a straightforward and reliable witness doing her best to assist the court, and I accept her evidence as to the meaning of the Chinese characters not least because of her candor in recognizing that they could be translated, and therefore to my mind understood, in more than one way.  I can offer no personal insight into this debate and need therefore to rely on the translations before the Court, neither of which, as I say, Madame Woo resiled from.

25.  Mr Fung in aid of his argument that the characters, the translation of which he disputes and which formed part of an exchange of correspondence between the parties and/or their solicitors, properly translated amounted to a waiver, prayed in aid the well-known case of Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and specifically what Lord Hoffmann said at page 912, namely:

“ Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the backgroundknowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

It is significant however that that sentence ends with the words “at the time of the contract” since that case was specifically about the interpretation of contractual terms and I accept the defendant’s submission that it was not applicable to letters written by laymen especially when as in this case the defendant was, as Mr Lok conceded, in an emotional state.

26.  The defendant relied on the proposition that unless the party resisting arbitration has “overwhelming evidence” of an unequivocal waiver, a stay in favour of arbitration should be ordered.  To do otherwise it was submitted would be to usurp the function of the arbitration tribunal, which is empowered by Article 16.1 of the UNCITRAL Model Law to rule on its own jurisdiction including any objection as to the existence or validity of the arbitration agreements and as to whether disputes had arisen concerning the contracts: Paladin Agricultural Ltd & another v The Excelsior Hotel (Hong Kong) Ltd [2001] 2 HKC 215.

27.  Echoing the words of Burrell J in Paladin at 222C I do not find the evidence in support of the abandonment/waiver argument to be overwhelming.  Put simply the defendant has succeeded in showing that, prima facie, a valid arbitration clause exists between the parties and I do not believe there was an unequivocal agreement to terminate it.

28.  I would note that to the extent that acceptance of abandonment is a requirement I saw no evidence on the part of the plaintiff that they had interpreted the correspondence in this way beyond their conduct in starting these proceedings. It will have become clear to them immediately on receipt of the defendant’s acknowledgment of service that this was an issue between them.

29.  For the above reasons I am satisfied that a stay of proceeding is justified.  I accordingly make an order in the term of the defendant’s summons issued on 12 April 2017.

COSTS

30.  At the end of the hearing I heard the parties on costs.  The defendant’s submission was that costs should follow the event and if I was to find in their favour they should get the costs not only of this summons but also the abortive costs associated with the summons for final judgement and/or judgement on admissions, which I adjourned pending this decision.  The plaintiff’s submission was that even in relation to this summons I should make a cost order nisi, and that if I were to find for the defendant the question of the costs of the adjourned summons should be reserved for a separate hearing.

31.  There was no dispute between the parties that there was an arbitration clause in the contracts between them and having satisfied myself that the defendant has established good grounds that the action be stayed and referred to arbitration, it follows in my judgement that the plaintiff should pay the defendant’s costs with a certificate for two counsel. I also consider that those costs should be payable immediately.

32.  As to the costs of the adjourned summons, this was not of course formally heard but, given my decision and in light of the submissions I heard on costs which impliedly accepted that the plaintiff’s summons depended on the plaintiff succeeding on this application, I make an order dismissing the plaintiff’s adjourned summons and ordering that the costs should also be payable immediately by the plaintiff to the defendant.  I note in this connection that the plaintiff’s summons was issued after the defendant’s acknowledgement of service at a time therefore when the plaintiff was well aware there was going to be a challenge to the jurisdiction of the Court.