PERMTEK LIMITED v. CHINA RESOURCES MACHINERY & EQUIPMENT COMPANY LIMITED

HIGH COURT ACTION No. 5350 OF 1987

HEADNOTE

IN THE HIGH COURT OF JUSTICE

HONG KONG

ACTION NO. 5350 OF 1987

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BETWEEN

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JUDGMENT

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1. This is an appeal from Master Chan who granted a stay to the Defendant of proceedings which the Plaintiffs had brought in this Court seeking damages against the Defendant for breach of contract. It is a short but interesting point and I am very grateful to Counsel for their concise submissions which have been given to me and the care which they have obviously taken with this case.

2. On the 10th September 1986, the Plaintiffs and the Defendants entered into a contract in writing whereby the Plaintiffs were sold for US$160,000.00 equipment for a water treatment plant; this is found in "NT-1", an exhibit to Mr. Norman Taylor's Affidavit. By condition 9, "The buyers shall open an irrevocable letter of credit of 100% contract value in favour of Permtek Ltd. before end of October 1986". In Clause 11(4), is found "The contract shall come into force beginning after receipt the L/C of the buyer."

3. There was also an arbitration clause; the material part reads: "All disputes in connection with this Contract or the execution thereof shall be settled by friendly negotiation. If no settlement can be reached, the case in dispute shall then be submitted for arbitration ......".

4. By the end of October 1986, no letter of credit had been opened by the buyers, and the      correspondence demonstrates that when pressed with this matter, the Defendants sought to rely on the provisions of Section 11(4). They said that as the contract does not come into force before the receipt of the letter of credit they were entitled to cancel the contract.

5. Furthermore, the Defendants assert in their affidavit that the dispute which they say should be referred to arbitration is the provision of Section 11(4) on the liability and obligations of the parties. It is clear in my judgment that Section 11(4) means precisely what it says. What the Defendants therefore want arbitrated is a dispute as to whether or not the contract has ever been entered into at all. The Defence, as I understand it, is a denial that there is any legal obligation on the Defendant because there was no contract between them; the event which would bring the parties into a legal relationship would only occur after receipt of the letter of credit.

6. Mr. Neoh, submits, however, that there is a contract between the parties, but it is a form of unilateral contract as defined by Lord Diplock in U.D.T. v. Eagle Aircraft Services Ltd. ⁽¹⁾ therefore the arbitration clause tapes effect.  My role, however, is to examine the Defence which is being nut forward and to say whether or not the Defendants are denying the existence of the contract because if they are, then there is no matter for the arbitrator to adjudicate upon. His jurisdiction comes from the agreement itself. In Hayman v. Darwins Ltd. ⁽²⁾ there are a number of passages in the speeches which support that proposition. At page 366, Viscount Simon says "If the dispute is whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission." Despite the ingenious argument put forward by Mr. Neoh, in my judgment, the matter is clear; once the Defendants deny the existence of the contract then they automatically deny the existence of the Arbitration Agreement. I have been reminded, however, that under the Ordinance this is a non-domestic arbitration agreement. By virtue of Section 6A(1) I must stay, unless I am satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred."

7. In my judgment, the speeches in the House of Lords demonstrate that the arbitrator obtains his jurisdiction from the arbitration agreement which is contained within this contract. It is not necessary for me to decide whether the denial of an arbitration agreement makes it null and void, or inoperative. The essence of Section 6(A) is that there is an agreement between the parties to go to arbitration. In my judgment, the provisions of Section 6(A) do not apply here; the Defendants are denying that there was any agreement concluded between them and the Plaintiffs, and they are therefore denying that they ever joined in a submission to arbitrate.

8. I, therefore, allow this appeal and remove the stay.

(1)    [1968] 1 WLR 74

(2)    [1942] AC 356