WINGTECH GROUP (HONG KONG) LTD v. TAT CHUN PRINTED CIRCUIT BOARD CO LTD

CACV 223/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 223 OF 2014

(ON APPEAL FROM ACTION NO. HCCT 33 OF 2013)

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REASONS FOR JUDGMENT

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Hon Chu JA (giving the Reasons for Judgment of the Court):

1.  This is the respondent’s appeal from the judgment of Chow J (“the Judge”) handed down on 17 September 2014 (“the Judgment”), whereby he refused to set aside the order of Mimmie Chan J dated 17 September 2013, granting leave to the applicant to enforce an arbitral award made by a tribunal of the Jiaxing Arbitration Commission, No. 024 of 2012, dated 6 June 2013 (“the Award”) against the respondent. Leave to appeal against the Judgement was granted by the Judge.

2.  At the conclusion of the hearing, we dismissed the appeal with costs to the applicant.  Our reasons appear below.

Background

3.  The factual background of this case is not in dispute.  They have been set out in §§3 to16 of the Judgment, which we gratefully adopt as follows:

“3. The applicant is a member of the Wingtech Group which manufactures mobile phones.

4. The respondent is a manufacturer of printed circuit boards, a component required for the manufacture of mobile phones.

5. The business relationship between the Wingtech Group and the respondent commenced in around 2008. Due to a change in the identity of the contracting party within the Wingtech Group, towards the end of 2010 the respondent and the applicant began to negotiate a new master agreement to govern their future transactions for the supply of printed circuit boards by the respondent to the applicant.

6. A written confirmation entitled “產品加工業務有關事項確認書＂(“the Confirmation”) setting out some mutually agreed terms relating to the supply of printed circuit boards by the respondent to the applicant was signed by the respondent on 30 November 2010 and the applicant on 7 December 2010. It is not necessary for me to recite the detailed terms of the Confirmation, save to note that it covers matters such as the mode of transmission of purchase orders, the place of delivery of goods, the settling of accounts, and the method and terms of payment. There is no provision in the Confirmation relating to the mode of dispute resolution.

7. Between December 2010 and February 2011, the applicant placed five purchase orders (“the 5 Purchase Orders”) with the respondent for the purchase of (inter alia) a total of 250,000 pieces of what is referred to in the evidence as “8118 Boards” (the Goods”), to be delivered between December and March 2011.

8. According to the respondent, the Goods were duly delivered to the applicant, with a substantial quantity thereof being delivered on or before 28 March 2011.

9. In the meantime, the parties were in the course of negotiating the terms of the master agreement. There are some disputes on the evidence as to whether the terms of the master agreement had been agreed by 23 November 2010, and on the date on which the respondent signed the master agreement (as distinct from the annexures to the master agreement which were signed by the respondent in December 2010), but there is no dispute that the applicant did not sign the master agreement until 28 March 2011 (“the Master Agreement”).

10. The Master Agreement is a detailed document setting out the terms and conditions governing the supply of goods by the respondent to the applicant. Clause 18.2 of the Master Agreement provides that all disputes arising out of the implementation of, or relating to, the Master Agreement shall be resolved by friendly discussion, failing which they shall be submitted to the Jiaxing Arbitration Commission for arbitration.

11. In around July or August 2011, the applicant raised a complaint regarding the quality of the Goods supplied by the respondent and claimed loss and damage against the respondent resulting from the defective goods supplied by the respondent to the applicant. Apparently the dispute between the parties could not be resolved by friendly discussion. In around March 2012, the applicant submitted the dispute to the Jiaxing Arbitration Commission for arbitration in accordance with Clause 18.2 of the Master Agreement.

12. The respondent challenged the jurisdiction of the arbitral tribunal, contending that the arbitration agreement contained in Clause 18.2 of the Master Agreement had no application to the dispute relating to the quality of the Goods supplied under the 5 Purchase Orders because the relevant transactions were entered into prior to the making of the Master Agreement. By the Award, the arbitral tribunal rejected the respondent’s jurisdictional challenge, and found in favour of the applicant on its claim and ordered the respondent to pay the applicant the sum of US$1,873,387 by way of compensation as well as RMB71,178 being the respondent’s share of the arbitration fee.

13. On 17 September 2013, Mimmie Chan J made the Enforcement Order granting leave to the applicant to enforce the Award in Hong Kong. It is also provided in the Enforcement Order that the respondent may apply to set it aside within 14 days of the service of the order.

14. On 7 October 2013, the respondent took out the present summons seeking to set aside the Enforcement Order.

15. On 25 October 2013, the respondent applied to the Jiaxing Intermediate People’s Court to set aside the Award on (inter alia) the ground that the dispute between the parties did not fall within the scope of the arbitration agreement contained in Clause 18.2 of the Master Agreement and hence the arbitral tribunal did not have jurisdiction over the dispute.

16.  By a judgment of the Jiaxing Intermediate People’s Court, No 18 of 2013, dated 3 June 2014, the Jiaxing Intermediate People’s Court rejected the respondent’s challenge against the jurisdiction of the arbitral tribunal and dismissed the respondent’s application to set aside the Award.”

The Judgment

4.  It was common ground before the Judge that none of the 5 Purchase Orders had referred to the Master Agreement, as it had yet to be signed as at the date of the 5 Purchase Orders.  The question before the Judge was whether the applicant and the respondent intended that the arbitration clause in Clause 18.2 of the Master Agreement would govern not only purchase orders entered into on or after the making of the Master Agreement, but also purchase orders entered into prior to that date.  The answer to the question depends on the construction of the Master Agreement.

5.  The Judge answered the question in the affirmative and gave his reasons as follows (§22 of the Judgment):

“22(1) At the time of the making of the 5 Purchase Orders, the parties were in the course of negotiating a master agreement which was intended to have general application and contain detailed terms and conditions for the purpose of regulating all the transactions to be entered into between them consequent upon a change in the identity in the contracting party within the Wingtech Group.

(2) The Master Agreement eventually entered into by the parties was such an agreement.

(3) Clause 1 of the Master Agreement expressly provides that any purchase order separately signed by the parties and the Master Agreement shall constitute a single or complete sale and purchase agreement.

(4) Clause 17.5 of the Master Agreement further expressly provides that in the event that there should be any inconsistencies between the Master Agreement and any memoranda, contracts, agreements, purchase orders, etc. signed by the parties prior to the coming into effect of the Master Agreement, the former shall prevail.  Mr Hui submits that this clause begs the question of whether any particular prior purchase order would be subject to or governed by the Master Agreement.  That may be so, but it seems to me that this clause represented or reflected a clear, common, intention of the parties that the Master Agreement was to govern not only purchase orders entered into on or after to the date of the agreement but also purchase orders entered into prior to that date.”

6.  Having arrived at the above conclusion, the Judge considered it was not necessary to rule on the applicant’s argument that the respondent was bound by the judgment of the Jiaxing Intermediate People’s Court by reason of the doctrine of res judicata or issue estoppel such that it would not be open to the respondent to contend that the dispute relating to the quality of the Goods supplied under the 5 Purchase Orders fell outside the scope of the arbitration clause of the Master Agreement.  The Judge pointed out, however, that he was bound by the Court of Appeal’s judgment in Lam Chit Man v. Cheung Shun Lin [2001-2003] HKCLRT 243, in accordance with which the judgment of the Jiaxing Intermediate People’s Court would not be final and conclusive for the purposes of recognition and enforcement under Hong Kong law, hence the doctrine of res judicata and issue estoppel would have no application.

The appeal

7.  The respondent advanced two principal grounds of appeal. The first is that the Judge erred in his construction of the Master Agreement and in holding that the parties intended the Master Agreement to govern the 5 Purchase Orders.  The second is that the Judge erred in §22(1) of the Judgment to refer to the parties’ subjective intention during the negotiation of the Master Agreement in ascertaining the intention of the parties and for the purpose of construction of the Master Agreement.  

8.  At the hearing, Mr. Wong SC for the respondent, accepted that the appeal would stand or fall with the determination of the first ground relating to the proper construction of the Master Agreement.

9.  The applicant filed a Respondent’s Notice raising several additional grounds (including the application of the res judicata doctrine) to support the Judge’s decision.  For reasons that will be explained below, it is not necessary for us to deal with the Respondent’s Notice in this appeal.

Discussion

10.  The central issue in this appeal concerns the proper construction of the Master Agreement.  The legal principles relating to the construction of written agreement are well known and not at all controversial.  As the learned editor writes in Chitty on Contracts, Vol 1 (32^nd Edition) at §13-043: 

“The task of construing a written agreement has been said to be that of ascertaining the ‘common intention of the parties’ to the agreement. But this may be misleading, since it is clear that the agreement must be interpreted objectively: the question is not what one or other of the parties meant or understood by the words used but rather what a reasonable person in the position of the parties would have understood the words to mean. In Investors Compensation Scheme Ltd v West Bromwich Building Society Lord Hoffmann said:

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

The words of the agreement must be construed as they stand.  That is to say the meaning of the document or of a particular part of it is to be sought in the document itself: ‘[o]ne must consider the meaning of the words used, not what one may guess to be the intention of the parties.’  However, this is not to say that the meaning of the words in a written document must be ascertained by reference to the words of the document alone.  The courts will, in principle, look at all the circumstances surrounding the making of the contract and available to the parties (usually referred to as the ‘factual matrix’ or ‘available background’) which would assist in determining how the language of the document would have been understood by a reasonable person in their position.”

11.  We agree with the Judge’s conclusion that, as a matter of construction, the parties have intended that the arbitration clause in clause 18.2 of the Master Agreement would govern the 5 Purchase Orders.  This is evident from reading clause 1[1] , clause 2.1.4[2] and clause 17.5[3] of the Master Agreement together.  It is clear from clause 1 that the Master Agreement was intended to have general application and to govern the supply of goods between the parties.  The third paragraph expressly stated that purchase orders separately entered into between the parties shall form one entire agreement binding on the parties.  Clause 2.1.4 reiterated that purchase orders entered into between the parties shall form an integral part of the Master Agreement and shall be subject to the Master Agreement.   It further provided that the provisions in the Master Agreement shall apply to matters not specified in the purchase orders or in case of ambiguities.  Most importantly, clause 17.5 explicitly stated that in the event of conflict between the Master Agreement and memoranda, contracts, agreements, purchase orders, etc. signed by the parties prior to the coming into effect of the Master Agreement, the Master Agreement shall prevail. 

12.  Clause 17.5 is a clear indication that the parties have contemplated the application of the provisions in the Master Agreement to purchase orders concluded before the Master Agreement came into effect.  While clauses 1 and 2.1.4 have not specifically referred to purchase orders entered into prior to the making of the Master Agreement, in the light of the clear intention evinced by clause 17.5, it is plain that the parties have intended the Master Agreement to apply to purchase orders concluded before the Master Agreement came into effect.  

13.  Mr. Wong sought to overcome the hurdle imposed by clause 17.5 by arguing that the Master Agreement would only apply to purchase orders that had yet to be performed as at the date of the Master Agreement, but not to purchase orders that had already been performed.  It was said that as there was no reason to differentiate between the provisions of the Master Agreement, so if all the provisions in the Master Agreement were construed to apply to purchase orders that had already been performed, this could give rise to absurd consequences in that the rights and obligations under those executed purchase orders could be varied retrospectively.  Mr Wong argued that this could not have been the intention of the parties, and that it was not open to the parties to retrospectively add more stringent terms to work that had already been done, citing in support the decisions in Consarc Design Ltd v. Hutch Investments Ltd [2002] PNLR 31 at §§35 and 35, and Grant & Anr v. Australian Temporary Fencing Pty Ltd (2003) 59 IPR 170 at §20.

14.  With respect, we are unable to accept this argument.  In the first place, this case and this appeal only concern whether the parties intended the arbitration clause in the Master Agreement to apply to the 5 Purchase Orders.  As a matter of law, a contract may be given retrospective effect especially where it has always been understood between the parties that their relations will be formalized in a contract to be concluded; retrospective effect occurs where this is intended by the parties: see for example Trollope & Colls Ltd v. Atomic Power Constructions Ltd [1963] 1 WLR 333 and Cyprotex Discovery Ltd v. University of Sheffield [2003] EWHC 760, (2003) 89 Con. L.R 109 at §§86-95. We are not dealing with the hypothetical case where the Master Agreement would vary the terms of, and alter the parties’ rights and obligations under the 5 Purchase Orders.  Nor are we construing an agreement so as to change retrospectively the scope of the work required to be done in the past, or to permit the agreement to give a new and different effect to an existing agreement as in the case of Consarc Design Ltd v. Hutch Investments Ltd, see §§27-35, and Grant & Anr v. Australian Temporary Fencing Pty Ltd, see §§16-23.

15.  In the present case, the purchase orders between the parties contained terms and conditions for specific transactions.  The Master Agreement, on the other hand, was a general agreement containing detailed terms and conditions for the purpose of regulating all the transactions between the parties.  Given that the effect of clauses 1 and 2.1.4 was to require the purchase orders and the Master Agreement to be read together, and the parties’ contemplation in clause 17.5 that the terms of the Master Agreement would apply to purchase orders made prior to the Master Agreement, the inference must be that the parties intended the arbitration clause in clause 18.2 to apply to the 5 Purchase Orders. 

16.  Further, even if there were to be conflict between the terms of the purchaser orders previously entered into by the parties and the provisions in the Master Agreement,[4] the clear intention of the parties as expressed in clause 17.5 was for the Master Agreement to prevail and the parties were bound by it.  It is relevant to note that when the 5 Purchase Orders were placed, the parties were negotiating the Master Agreement.  The 5 Purchase Orders were also annexed to the Master Agreement as Annex 1.[5]  The delivery to be made under the 5 Purchase Orders stretched over a period of time, and continued beyond the effective date of the Master Agreement.  There is, in these circumstances, no basis for differentiating between purchase orders that had been executed and those which were executory at the making of the Master Agreement, and to construe clause 17.5 or the Master Agreement as a whole to apply only to purchase orders not yet performed at the date of the Master Agreement.

17.  The respondent’s first ground of appeal is accordingly untenable.  This being the case, it is not necessary for us to consider the other ground relating to the Judge’s use of extrinsic materials in construing the Master Agreement.  In our view, the court would have come to the same conclusion on the parties’ intention without having to refer to any extrinsic materials.  We are further of the view that §22(1) of the Judgment in referring to the parties being in the course of negotiating a master agreement at the time of the making of the 5 Purchase Orders, was merely setting out the relevant factual matrix which the Judge is entitled to take into account in determining the meaning of the Master Agreement.

18.  As we have concluded that the respondent’s grounds of appeal cannot succeed, we do not find it necessary to deal with the matters raised by the applicant in the Respondent’s Notice, including the arguments relating to res judicata and issue estoppel. 

19.  For the reasons given above, we have dismissed the respondent’s appeal with costs to the applicant on indemnity basis, together with a certificate for two counsel.