XCHRX HERCULES DATA COMM. CO. LTD. v. KOYWA COMMUNICATIONS LTD.

HCA4627/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4627 OF 2000

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D E C I S I O N

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There are two summons before the court. The plaintiff has issued an Order 14 summons seeking summary judgment for a sum of US$125,863 which it is alleged is the outstanding balance due to them from the defendant. The defendant has paid, so far, a sum of approximately US$5.5 million under the agreement between them. The defendant has issued a summons seeking a stay of all proceeding pending arbitration. The parties have agreed that the proper procedure for the court is to consider the stay application first.

The stay application involves three issues. Firstly, does the agreement between the parties contain an arbitration clause? Secondly, if so, is there a dispute between the parties which should be referred to arbitration? Thirdly, if there is a dispute is the arbitration clause null and void, inoperative or incapable of being performed?

In my judgment, the applicable law in answer to all these issues is clear and the result is that I must stay these proceedings. I do so with some reluctance because the outstanding balance due to the plaintiff represents just 2% of the contract sum and, at first blush, the plaintiff appears to have good grounds to support its claim. The consequence of the stay, however will be, unless the matter settles, that all the parties will have to go to Beijing for arbitration proceedings. Mr Alexander Wong, for the plaintiff, has valiantly but unsuccessfully sought to persuade the court that a line of judicial thinking which is contained either in authorities which predate the authorities which I follow or are contained in dissenting judgments are good law. There is no doubt that the authorities upon which he relies come from eminent sources in the higher courts of England and Hong Kong. However, in my judgment, the law which governs the issues in this application is clear and straightforward. Given certain circumstances, which do prevail in this case, the court has no discretion but to order a stay even though it involves 2% of the contract sum and may result in an expensive trip to Beijing. I now turn to each issue separately.

1. Is there an arbitration clause?

The defendant entered into a contract, in May 1997, with the Guangdong Machinery & Equipment Import & Export Group Corporation ("the Buyer") for sale and purchase of goods. There is no dispute that that contract contained a valid arbitration clause. On the same day, the defendant and the plaintiff, the actual supplier of the goods, entered into an agreement in writing which simply stated that their agreement was "totally back-to-back" with the main contract. The words "totally back-to-back" are printed on the agreement in bold heavy type. Mr Lam, for the defendant, relies on Astel-Peninger Joing Venture v. Argos Engineering& Heavy Industries Co. Ltd [1994] 3 HKC, the facts of which are in all material respects on all fours with our case. Kaplan J held :

"(1) On a proper construction of the final sentence of art 7(2) of the Uncitral Model Law, the meaning of 'a document containing an arbitration clause' was not limited to a document signed by the parties to the arbitration but could include a contract made between one party and a third party, a contract between two strangers to the arbitration or an unsigned standard form of contract. To restrict the meaning of these words to a contract between the two parties to the arbitration would be unworkable in commercial practice.

(2) In the light of the interpretation given to art 7(2) of the Model Law, the decision of the House of Lords in Thomas v Portsea Steamship Co Ltd [1912] AC 1 had no application to Hong Kong. The test for determining whether there had been incorporation by reference was one of construction, viz to ascertain the intentions of the parties when they entered into the contract by reference to the words they had used.

(3) It was quite clear from the actual words used in the sub-sub-contract that the parties intended to incorporate the arbitration clause in the assembly sub-contract. The plaintiff had had ample opportunity to consider the terms of the assembly sub-contract prior to making the sub-sub-contract but had taken no steps to object to the incorporation of the arbitration clause. The necessity to reject or modify some of the provisions of the arbitration clause to make it suitable for the purposes of the sub-sub-contract did not, of itself, displace the parties' intention."

The words in the agreement were clear and unambiguous and has the effect of incorporating all the terms of the main contract, including the arbitration clause. Mr Wong submits that because the defendant was merely the middleman, it cannot have been intended that the plaintiff and the defendant intended to bind themselves to an arbitration clause when the real transacting parties were the plaintiff and the buyer. I do not accede to this submission. The defendant had every opportunity to consider the terms of the agreement and would have been under no illusions as to their effect. There is no evidence that his intention was anything other than that which is plain from the words themselves.

On the first issue, I find that clause 16 of "the contract" binds the plaintiff and the defendant.

2. Is there a dispute for the purpose of arbitration proceedings?

The definition of "dispute" which I apply in these proceedings is that laid down by Bokhary JA in Tai Hing Cotton Mill Ltd v. Glencove Grain Rotterdum BV [1996] 1 HKC 363, Tai and Halki Shipping Corporation v. Sopex Oils Ltd [1998] 1 WLR 727 and Guangdong Agriculture Company Limited v. Conagra International (Far East) Limited [1993] 1 HKLR 113.

Firstly, Tai Hing Cotton :

"Under art 8(1) of the Model Law, the court was not concerned with investigating whether the defendant had an arguable basis for disputing the claim. If a claim was made against him in a matter which was the subject of an arbitration agreement and he did not admit the claim, then there was a dispute within the meaning of the article. If he sought a stay of the action, the court must grant a stay unless the plaintiff could show that the arbitration agreement was null and void, inoperative or incapable of being performed.

(2) In the present case, neither defendants admitted any part of the claim, and neither defendants had ever unequivocally admitted the right asserted by the plaintiff. Therefore, unless it was shown that the arbitration agreement was null and void, inoperative or incapable of being performed, the judge should have stayed the action and refused the plaintiff any relief therein.

......

An arbitrable dispute did not have to be an issue which had in fact to be disputable. It was the universal view that an arbitrable dispute would arise when an issue within the contract and the arbitration clause was denied or not admitted. ...."

Secondly, in Halki Shipping :

"Held, (1) that 'dispute' in respect of a matter which under an arbitration agreement was to be referred to arbitration was to be given its ordinary meaning and included any claim which the other party refused to admit or did not pay whether or not there was any answer to the claim in fact or the law."

Finally, Barnett J in Guangdon Agriculture quoting Templeman LJ in Elerine v. Klinger [1982] 1 WLR. "There is a dispute until the defendant admits that the sum is due and payable"

The definition of "dispute" is deliberately wide. It ensures that where parties have agreed to an arbitration clause, the arbitration procedure can, and should, commence at a very early stage without time consuming avenues being pursued within the context of conventional litigation.

In this case, "the dispute" upon which the defendant relies is contained in the affirmation of the defendant's director Simon Lam Chi Tak. The defendant's version of the dispute covers several pages and undoubtedly arises from the subject matter of the contract. Mr Wong, again valiantly but again unsuccessfully, has submitted that in fact the defence are raising new issues in the form of a cross claim. The position, however, is that the issues in dispute cannot realistically be separated from the subject matter of the contract and are therefore "in respect of matters referred to by the arbitration agreement". Referring to the arbitration clause, Mr Wong, submits that the dispute is not a "dispute arising from the execution of ... the contract". However the full clause is "all disputes arising from the execution or in connection with this contract ..." which clearly encompasses this dispute.

At the end of the day, the defendant's case may be shown to be without substance. However, once the court is satisfied about the mere existence of a dispute, there is no need to investigate the merits. That is for the arbitrator.

3. Is the arbitration clause null and void, inoperative or incapable of being performed?

In view of the court's findings, hitherto the answer to this question must be "No".

In view of the fact that the defendant's application for a stay has been successful, it follows that the plaintiff's Order 14 summons need not be heard. I make a costs order nisi on the stay application to the defendant and no order as to costs on the Order 14 summons.