XCHRX ORBITEL MOBILE COMMUNICATIONS LIMITED v. NOVATEL COMMUNICATIONS (FAR EAST) LIMITED

1995, No. A9014

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

____________

____________

________________________

REASONS FOR DECISION

________________________

1. The Plaintiff, Orbitel Mobile Communications Limited (Orbitel) claimed against the Defendant, NovAtel Communications (Far East) Limited (NovAtel) for a total sum of ￡1,434,959.96 being the balance of the price of goods sold and delivered and other services charge.

2. Orbitel seek summary judgment against NovAtel in respect of its claim.

3. NovAtel did not dispute the balance of the price of the goods sold and delivered and the services charge. NovAtel contended that they were entitled to set off against Orbitel's claim damages arising out of the overcharging, late deliveries and the supplies of faulty equipment by Orbitel.

4. NovAtel further contended that the written agreement dated the 8th of July 1994 (the OEM Agreement) under which the goods were supplied contained an arbitration clause to the effect that disputes between Orbitel and NovAtel should be referred to arbitration in London in accordance with the Rules of Conciliation and Arbitration of the ICC.

5. As the arbitration agreement is an international arbitration agreement within the definition of Article 1(3) of the UNCITRAL Model Law, NovAtel was entitled to refer the disputes to arbitration in London under Article 8 of the Model Law.

6. NovAtel therefor seek an order to stay the proceedings.

7. Mr. Shaw, on behalf of Orbitel conceded that the arbitration agreement between the parties was an international arbitration agreement within the meaning of the Arbitration Ordinance and that any claim should be referred to arbitration unless it had been admitted by the party against whom it was made.

8. Mr. Shaw contended that NovAtel had admitted the major part of the claim, almost ￡1 million. He further contended that the maximum set-off that NovAtel was entitled to would not exceed ￡320,000.00. In any event, the services charge claim of about ￡11,000.00 was independent of the OEM Agreement and therefore not subject to the arbitration agreement.

9. Mr. Shaw argued that the court should give summary judgment in favour of Orbitel in respect of the major part of its claim, including the claim for services charge and the balance could then be referred to arbitration in London.

10. NovAtel's complaints against Orbitel were threefold:

1. Overpricing: NovAtel claimed that it should be charged 10% less than the net net wholesale price of Orbitel in accordance with a formula in Appendix 4 of the OEM Agreement. But Orbitel had supplied similar goods to other customers at a price much below that charged of NovAtel. There was suggestion that Orbitel charged one customer as low as 300 French Franc per units as opposed to ￡285 to ￡300 charged of NovAtel.

2. Faulty equipment: NovAtel suggested that Orbitel had failed to provide adequate spare units as temporary replacement for units which required repairs. The claim under this heading had been quantified as about ￡140,000.00.

3. Late Deliveries: NovAtel claimed that Orbitel had been late in the delivery of a number of the units of the goods. The claim for such late deliveries had been quantified under the invoices Nos. 92509, 92387 and 92580 to be in the region of ￡86,000.00.

11. In support of the contention that NovAtel's set off could not exceed ￡320,000.00., Mr. Shaw suggested that the price formula in Appendix 4 of the OEM Agreement only applied to future purchase and not the initial purchase of 8,450 units for which the price had been fixed at ￡300. per unit. Further of the total number of 32,000 units supplied by Orbitel, only 15,245 units were sold to NovAtel and the balance sold to Simonsen with which Orbitel had a separate pricing agreement. Thus any price adjustment applied only to 15,245 units - 8,450 units, namely 6,795 units.

12. As NovAtel had complained the overprice in respect of 2,400 units to be ￡17.50 per units and 4395 units to be ￡30 per unit, the total claim of set off by NovAtel in respect of the allegation of overpricing could only amount to about ￡173,000.00.

13. Mr. Shaw suggested that the claim for late deliveries could not be sustained as the delay in question only related to sales to Simonsen and Simonsen had already set off such claim from amounts due to Orbitel.

14. As NovAtel's claim for faulty equipment was limited to about ￡140,000.00, the maximum amount of set off could not therefore exceed ￡320,000.00.

15. It is perhaps necessary to set out the price formula in Appendix 4 of the OEM Agreement in full as follows:

APPENDIX 4

DETERMINATION OF OEM PRICE/COST REDUCTION

1. ORBITEL and NOVATEL will work together to reduce the costs of the Handset and related accessories. Both parties will benefit proportionally from any cost reductions achieved.

2. The price to NOVATEL of the EQUIPMENT will be calculated in accordance with the following formula:-

P = (PO x .90)

Where P = price to NOVATEL

PO = ORBITEL's OEM handset price to NOVATEL based on ORBITEL's net net wholesale OEM price for standard ORBITEL pack (PPU 902) less all ACCESSORY costs included in its standard package, given that NOVATEL will not be purchasing ACCESSORIES from ORBITEL, Net net wholesale OEM price means lowest wholesale price less any incentives, rebates or discounts.

.90 = Factor that allows NOVATEL a price 10% lower than

3. It is accepted by both parties that over time the application of this formula may well result in ORBITEL achieving unacceptable profit margins on its sales to NOVATEL due to further price reductions which become necessary due to market trends. Therefore both parties shall when requested by ORBITEL, review the impact of price reductions on the above formula and effect a change thereto which ensures that ORBITEL will achieve acceptable margins in its sales to NOVATEL.

4. The Material Costs will be reviewed on a quarterly basis by both parties ad the price to NOVATEL will be adjusted whenever there is a movement in ORBITEL's best wholesale price or the Material Costs.

PRICES AND FORECASTS

Agreement:

The order for the first 3 months of this Initial Term of the Agreement shall be at the following prices:-

￡300 for standard pack configuration.

Other Prices

A separate price list shall be worked out between ORBITEL and NOVATEL for each of the following items:

- Repair of transceivers and other units

- Repair of separate boards

- Refurbishment of transceivers and other units

- Spare parts/units

- Accessories

- Ancillaries

- Training Courses

16. The price formula in Appendix 4 clearly anticipated downward adjustment of the price of the goods over time. The extent of such downward adjustment of price would depend on the market trends, in particular the net net wholesale price of the goods supplied by Orbitel.

17. It was obviously neither desirable nor necessary for the court to make any express finding on the true meaning and effect of the price formula in question in an interlocutory application of this nature. But the Appendix 4 of the OEM Agreements in my view was ambiguous as to whether the price formula only applied to the future delivery and not the initial delivery of over 8,000. units in the first three months.

18. There had been no indication that the price of the goods supplied to NovAtel was calculated in accordance with the formula in question. If the price had not been calculated in accordance with the formula, then adjustment would have to be made. The extent of the adjustment would depend on the net net wholesale price of Orbitel.

19. There had been no indication that the net net wholesale price had been used to determine the price to NovAtel. There had been no indication that such net net wholesale price had been made known to NovAtel at any stage at all.

20. If NovAtel was never made aware of the net net wholesale price of Orbitel, the downward adjustment of ￡17.50 or ￡30 per unit made by NovAtel would be of little value.

21. It was not possible to ascertain the net net wholesale price of Orbitel until after proper discovery was made. But if there was any substance in the allegation that Orbitel had supplied similar goods to other customers at a price as low as 300 French Francs per unit when the price paid by NovAtel ranged from ￡285 to ￡300 per unit, the downward adjustment of the price would be very significant, much more significant than what Mr. Shaw was prepared to admit even if his argument that the price formula only applied to the units supplied to NovAtel and not those supplied to Simonsen for which there was a separate price agreement, was correct.

22. The set off claimed by NovAtel could also inflated if there was any substance in the allegation that NovAtel had suffered consequential loss by reason of the failure on the part of Orbitel to properly adjust the price of the good, resulting in NovAtel's set back in the market.

23. In the light of Orbitel's attitude at some stage that the claim for liquidated damages arising out of the late deliveries should be on account of NovAtel, the argument of NovAtel that it should be entitled to such liquidated damages might not be absolutely unsustainable.

24. It would not be proper for me to express any definite view on the merit of the claim for set off by NovAtel. Suffice for me to say that NovAtel had an arguable case on an amount of set off much in excess of the figure of ￡320,000.00 suggested by Mr. Shaw.

25. Article 8 of the Model Law provides 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 not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed."

26. There are clear authorities to the effect that any disputes between parties who have agreed on arbitration should have the disputes resolved by arbitration unless an unequivocal admission has been made both as to liability and quantum. ( see the Judgments of Barnett J. in Guangdong Agriculture Co.Ltd v. Conagra International (Far East) Ltd. [1993] 113 and of Kaplan, J. in Joong and Shipping Co. Ltd. v. Choi Chong-sick and Anor. [1994] 1 HKLR 113.)

27. Mr. Shaw argued that NovAtel had admitted a major part of Orbitel's claim. Reference had been made to the following "admissions".

(1) As to ￡207,000.00 under the first letter of credit and ￡62,400.00 under the second letter of credit, Marlin, in response to a complaint that NovAtel had not paid said, "leave that with me and I will get it sorted out."

(2) As to ￡62,400.00 due under the second letter of credit, Lai of Communique which was part of NovAtel's group said, "We will pay you after clarifying what other discrepancies the documents have."

(3) As to the ￡207,000.00 under the first letter of credit, ￡62,400.00 under the second letter of credit and ￡427,500.00 under the third letter of credit, Marlin said, "Don't worry, you will get paid."

(4) As to the ￡427,500.00 under the fourth letter of credit, Mullins requested Orbitel to withdraw its payment request under the fourth letter of credit in favour of telegraphic transfer for this amount.

(5) As to the ￡278,100.00 under the fifth letter of credit, NovAtel admitted its liability in respect of the sum by requesting to set-off two Communique invoices against it.

28. I have considered carefully the circumstances in which the alleged admissions were allegedly made. Phrases such as "leave that with me and I will get it sorted out", "We will pay you after clarifying what other discrepancies the documents have' and "don't worry, you will get pay' were just casual remarks that enquiries would be made with regard to the claims for payment and if the claims were verified, payment would be made.

29. The reference to the telegraphic transfer was contained in a fax message from Mullins of NovAtel (U.K.) to Mr. Lukey of Orbitel. The suggestion was that Ada Tang of Communique would arrange for t.t. to the account of Orbitel if the payment request under the letter of credit were withdrawn by Orbitel. Mullin was indicating that he was just a messenger in the matter.

30. The request for set off was mentioned in a telex addressed to Orbitel's bank from Canadian Imperial Bank of Commerce, repeating what was said presumably on behalf of NovAtel.

31. In any event, when the alleged "admissions" were made, there was no indication that the makers of the "admissions" were aware of the alleged non-compliance with the pricing formula on the part of Orbitel in fixing the price of the goods supplied to NovAtel.

32. Further James Morris Lee of NovAtel had on or about the 11th of May 1995 made it clear to Mr. Lukey of Orbitel that the outstanding invoices of Orbitel would not be paid in view of NovAtel's claim against Orbitel.

33. There had not been, in my view the clear and unequivocal admission as to liability and quantum to bar NovAtel from exercising the contractual right to refer the disputes to arbitration in accordance with Article 8 of the Model Law.

34. The exact extent of NovAtel's claim for set-off was not known. But I tended to agree with Mr. Shaw's submission that it could not possibly be of a size as to completely extinguished Orbitel's claim. The suggestion of granting summary judgment in favour of Orbitel in respect of part of its claim was tempting.

35. But I could not ignore the fact that the parties had by the arbitration clause agreed on their chosen tribunal in case of dispute. The chosen tribunal must be allowed to resolve the disputes in the first instance, free from the intervention of the court.

36. I could not do any better than echoing the remarks by Barnett J. in the Guangdong Agriculture Co. Ltd. case (supra) at Page 124,

"I think it plain that the whole tenor of the Model Law is to restrict to a minimum the part which the Courts have to play when parties have agreed to arbitration. It is also plain, as I hope I have demonstrated, that the Courts are increasingly reluctant to become involved in disputes between parties to an arbitration agreement. That judicial reluctance, however, has been obstructed by the legislature which has left it open to the Courts to examine (often in some detail, I am afraid) the nature and extent of the dispute. That seem to be a wholly unsatisfactory state of affairs.

I am persuaded, therefore, that the proper construction of Article 8(1) is that a Court should refer to arbitration a claim which has not been admitted by the party against whom it is made. It will then be for the arbitrator to examine the merits on either side. This will provide the certainty which Mr. Smith seeks and avoid the type of situation deplored by Kaplan J. I have no doubt that in an appropriate case an arbitrator will swiftly make an interim award or indeed a full and final award upon the claimant showing that there is no real defence or answer to his claim or part thereof."

37. If Mr. Shaw was correct in his assertion that Orbitel's claim against NovAtel was as clear cut as he claimed, an award in respect of the claim or at least part of the claim could be obtained expeditiously from the arbitrator.

38. In my view, the only proper step to take is to refer Orbitel's claim to arbitration in London.

39. For completeness and in deference to Counsel's argument, I ought to deal with the issue arising out of the services charge as well.

40. Mr. Shaw suggested that such services charge arose out of a separate agreement between Orbitel and NovAtel, independent of the OEM Agreement.

41. Clause 14 of the OEM Agreement on Warranty Epidemic Failure and Product Safety provided the followings :-

14.1 NOVATEL shall be solely responsible for the provision of warranty cover to its customers on the products it supplies to them originally purchased from ORBITEL under this Agreement.

14.2 ORBITEL will provide NOVATEL with a pool of spare products to enable NOVATEL to swap out faulty units supplied to its customers. The extra stock of spare products to be supplied to NOVATEL will equate to one half percent .........................

14.3 PRODUCTS swapped out shall be returned to ORBITEL's Carlton site for repair or refurbishment via NOVATEL UK once a month. The costs of the repair or refurbishment will be charged to NOVATEL at a standard rate to be agreed from time to time. NOVATEL will the costs of returning the faulty units to ORBITEL and ORBITEL will pay the costs of resupply to NOVATEL.

42. Mr. Shaw argued that the obligation of Orbitel under the OEM Agreement was to do repair or refurbishment work. The invoices concerning the repair charges indicated that there was no default found and the works involved could not be performed under the OEM Agreement.

43. The invoices in question did not indicate the nature of the work performed by Orbitel. It was highly arguable that an examination revealing no fault could well be considered as refurbishment. I cannot ignore that the services charge was incurred by returning some of the units ordered under the OEM Agreement. The reasons for such return must be that it was considered necessary to either repair or refurbish such units. The fact that they were found to suffer no fault as a result of examination did not take them outside the ambit of clause 14.3 of the OEM Agreement.

44. Appendix 4 of the OEM Agreement provided that a separate price list shall be worked out for items including ancillaries.

45. The services charge in question at least must fall within the ancillaries items and must therefore be within the ambit of the OEM Agreement in question. To that extent. I accept Mr. Fok's submission that the 'agreement' made in Basingstoke on the 9th of November 1994 was simply as to the price to be charged in respect of such services under Appendix 4 of the OEM Agreement and not a separate agreement as such.

46. I am grateful to Counsel for their clear and helpful submissions. I am firmly of the view that the entire dispute between Orbitel and NovAtel should be referred to arbitration as agreed to by the parties.

47. I therefore make an order that all further proceedings in this action be stayed pursuant to Article 8, Fifth Schedule of the Arbitration Ordinance and that the matter be referred to arbitration in London in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce.

48. Orbitel's summons for summary judgment is dismissed.

49. I order Orbitel to pay NovAtel the costs of the action including the costs of the applications to be taxed if not agreed. The order on costs is an order nisi to be made absolute 14 days after the handing down of this decision.

(W. YEUNG)

Judge of the High Court