TAI-AO ALUMINIUM (TAISHAN) CO. LTD v. MAZE ALUMINIUM ENGINEERING CO LTD AND ANOTHER

HCA1916/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

ACTION NO. 1916 OF 2005

D E C I S I O N

Introduction

1.  This is an application by the 1st defendant to stay the part of this action as against it pursuant to section 6 of the Arbitration Ordinance, or alternatively, to stay such part of the action in favour of the courts in Taishan City, Guangdong, or in the final alternative, to stay such part of the action because this court has no jurisdiction over it.

2.  The plaintiff brings this action against the 1st defendant for payment of aluminium materials that were supplied by the plaintiff to the 1st defendant under various contracts and invoices over the period of March to November 2004.  The total sum claimed is US$560,461.41.  The plaintiff also sues the 2nd defendant pursuant to a guarantee given by him in favour of the plaintiff for up to HK$2 million of the 1st defendant’s indebtedness to the plaintiff.

Background

3.  The relevant contracts are all in Chinese and they contain two clauses which read:

“合約未盡事宜按《中華人民共和國合同法》之規定執行” (“clause 1”); and

“本合約的仲裁權屬賣方所在地方法院” (“clause 2”). 

They can be translated to mean:

“Matters in the contract that are not provided for exhaustively shall be implemented in accordance with the contract law of the People’s Republic of China” (“clause 1”); and

“The arbitration power of this contract belongs to the court(s) of the place where the seller is situated” (clause 2”).

Stay for arbitration

4.  The 1st defendant says that clause 2 is an arbitration clause and I should stay the action in favour of arbitration.  If the 1st defendant is right, there is no discretion for the court not to do so. 

5.  The plaintiff’s first point in answer to this is that clause 2 is void and unenforceable for uncertainty.  Mr Chow, counsel for the plaintiff, says that arbitration is done privately and not in the courts.  To require arbitration to be done in the courts at the place where the seller is situated makes clause 2 unintelligible and meaningless.  It is an internal inconsistency that cannot be cured by construction.  The plaintiff thus asks the court to excise clause 2 from the contract (see paragraph 8.15 of Interpretation of Contracts by Kim Lewison QC (2004)).

6.  Mr Chung, counsel for the defendant, argues that the drafter in fact should have meant arbitration at an institution in Guangdong Province where the plaintiff is situated.  If need be, Mr Chung submits, I should apply the contra proferentem rule as clauses 1 and 2 were drafted by the plaintiff.  I do not agree with the defendant’s submissions.  I do not think “the place where the seller is situated” should mean the large area of the Guangdong Province.  I think the place should be Taishan City of Guangdong Province as that is a distinct and well-known city having its own local government.

7.  If the drafter should have meant the arbitration commission of Guangdong Province, he would have said so rather than stating “the courts at the place where the seller is situated”.  Furthermore there is no evidence that there is any arbitration commission in Taishan City.  Arbitration commissions only exist in the capital of Beijing and the major commercial cities like Shanghai and Guangzhou. 

8.  I also cannot apply the contra proferentem rule as I simply cannot tell whether clause 2 requires the parties to settle their differences by private arbitration in the Taishan courts (which cannot be done), or arbitration at certain arbitration institute in Taishan or litigation in the Taishan courts.  I agree with the plaintiff that this clause is so uncertain that I cannot enforce it in any way.  I can only ignore it. 

9.  If I am wrong on this and I should construe the “court(s)” referred to in clause 2 to mean the Arbitration Commission, then the plaintiff still has a fallback position that there is no ground to stay this action.  The plaintiff refers me to Tommy C. P. Sze & Co. v Li & Fung (Trading) Ltd [2003] 1 HKC 418 at 425E to 426C on the correct approach in considering an application for stay in favour of arbitration.  Ma J (as he then was) said:

“The court’s approach in stay applications

18. It is of course crucial in any application for a stay (whether under section 6 of the Ordinance or Article 8 of the Model Law) that there exists an arbitration agreement.  By this is meant an agreement between the parties by which present or future disputes or differences between them are required to be resolved by the arbitral process.  The definition of “arbitration agreement” is contained in section 2 of the Ordinance, which in turn refers to Article 7 of the Model Law.  An agreement which does not compel parties to have disputes or differences resolved by arbitration is not an arbitration agreement for present purposes.  Where, for example, an option is given to the parties to go to arbitration if they so choose but with litigation in the courts being an available option as well, this is not truly an arbitration agreement.  There must be its element of compulsion in the agreement between the parties that any disputes or differences must be arbitration. 

19. Thus, the logical starting point of all applications for a stay must be: Is the clause in question an arbitration agreement?  (Question 1)  If the answer is No, a stay will not be granted. 

20. Next, the arbitration agreement (if there is one) must not be “null and void, inoperative or incapable of being performed”: see Article 8(1) of the Model Law.  The inquiry here is therefore: Is the arbitration agreement null and void, inoperative or incapable of being performed?  (Question 2)  If the answer is Yes, no stay can be ordered.

21. On the assumption that there exists an arbitration agreement and that it is capable of being performed, the next step is to discover whether in reality there does exist a dispute or difference between the parties.  If upon analysis no dispute or difference exists, there is nothing to refer to arbitration.  Here, the relevant question is: Is there in reality a dispute or difference between the parties?  (Question 3)  If the answer is No, no stay will be ordered.

22. Finally, even where a dispute or difference truly exists, it must be determined whether the arbitration agreement then covers the dispute or difference in question.  This involves first analysing the nature of the dispute or difference between the parties and then construing the arbitration agreement to see whether it comes within it.  The question here is therefore: Is the dispute or difference between the parties within the ambit of the arbitration agreement?  (Question 4)  If the answer is No, a stay will not be ordered.

23. I have set out the four questions that a court must generally deal with in stay applications.  It is of course open to the court to deal with the questions in whatever order seems efficient and one has to recognize the obvious fact but not all of these questions will be controversial in every case, but in my view they set out the logical and basic approach of the court.”

10.  The plaintiff says that clause 2 does not compel or require the parties to refer their disputes for resolution by arbitration.  It at most says that if parties want to settle their differences by arbitration, then the right to conduct the arbitration would vest in the courts in Taishan, but it does not compel the parties to arbitrate.  This clause is, therefore, not an arbitration agreement.

11.  The plaintiff further submits that there does not exist any dispute between the parties that needs arbitration.  One Miss Maria Ng, a director of the 1st defendant, has filed an affidavit in support of the 1st defendant’s application.  The plaintiff refers me to paragraph 12 of this affidavit where Miss Ng said:

“12.  In the past there are the following disputes between the Plaintiff and the 1st Defendant which are to be resolved: 

(1) Whether or not the actual quantities of materials supplied and delivered by the plaintiff to the 1st Defendant’s Shenzhen factory were identical to the ones invoiced by the Plaintiff;

(2) Whether or not there were defective materials supplied by the Plaintiff;

(3) Whether or not there was late delivery of materials by the Plaintiff.”

Thus Miss Ng merely referred to past disputes and not to existing disputes relating to the action.

12.  I am also referred to two letters in Chinese dated 18 March 2005 and 7 April 2005, both from the 1st defendant to the plaintiff and signed by the 2nd defendant.  The 1st defendant merely said in the letters that there were substantial sums outstanding from developers and project owners and it promised the plaintiff that it would pay the plaintiff as a matter of priority once it received these funds.  There was not a word of complaint in these letters.  The plaintiff thus says that the 1st defendant has failed to prove that there is any dispute which could be referred to arbitration.

13.  I must agree with the plaintiff on both points.  On the first point, there is indeed nothing in clause 2 which would require the parties to submit any dispute for arbitration.  It is not enough to constitute an arbitration agreement by merely providing that if there should be arbitration, it should be conducted by a certain institution.  On the second point, it is plain that there is no evidence of any existing dispute that could be referred to arbitration.  The application to stay in favour of arbitration therefore fails.

Forum non conveniens

14.  Though I have taken the view that the 1st defendant has shown no evidence of any existing dispute, I would still consider this second ground in case I am wrong.  There is no dispute on the law applicable to this application (see The Spiliada [1987] 1 AC 460 and The Adhiguna Meranti [1987] HKLR 904). 

15.  The first issue to be decided is whether the courts in Hong Kong are not the natural and appropriate forum to decide these disputes and there is another forum which is clearly and distinctly more appropriate.  If I should decide this point in favour of the plaintiff, I will dismiss the 1st defendant’s application.  However, if I should decide this in favour of the 1st defendant, I will go to the second issue.  The second issue is whether there is any legitimate personal or juridical advantage for the plaintiff to have the disputes resolved in the Hong Kong courts.  If I should decide this in favour of the 1st defendant as well, I will stay the further proceedings of the plaintiff’s claim.  If I should, however, decide this second issue in favour of the plaintiff, I would have to balance the advantages of having the disputes decided in a foreign venue against the disadvantages of depriving the plaintiff of the advantages.  If substantial justice will not be done to all parties in a foreign venue, I will dismiss the 1st defendant’s application. 

16.  The 1st defendant submits that clause 1 provided the governing law for the contracts to be the law of the Mainland. 

17.  The 1st defendant further says that the sales contracts were entered into between the 1st defendant and the plaintiff with the plaintiff being a company domiciled and carrying on business in Taishan, it will therefore be inconvenient and costly to call witnesses residing in the Mainland to come here to give evidence and to produce documentary evidence.  The 1st defendant says that it has to call its staff, who work in a Shenzhen factory of its subsidiary, to give evidence and there will be voluminous documents to produce given the long period during which the transactions had taken place.  The 1st defendant also says that it is difficult to procure travel documents for the Mainland witnesses to come here.  It was a Shenzhen factory of the subsidiary that dealt with the materials supplied by the plaintiff.  The 1st defendant thus argues that Hong Kong is not the natural or appropriate forum and the Mainland is clearly and distinctly more appropriate.

18.  The 1st defendant also submits that the plaintiff has not shown that it would lose any legitimate personal and juridical advantage if the trial should be in the Mainland. 

19.  The plaintiff, however, submits that the plaintiff’s goods, after processing in the Shenzhen factory, were sent to Hong Kong for use in various projects here.  The goods had to comply with the standards prevailing in Hong Kong.  If there should indeed be any complaint about the quality of the plaintiff’s goods, expert evidence would be more likely to be given by the Hong Kong experts who are familiar with our standards.  On any allegation of delay in delivery which resulted in loss, evidence of such loss would have to come from the developers and project owners in Hong Kong.  There would potentially be more witnesses from Hong Kong and more documentary evidence to be made available from Hong Kong.  Furthermore, all directors of the 1st defendant are in Hong Kong. 

20.  I also note that the 1st defendant has not referred to the nature of the disputes, the identity and number of witnesses, the reason why there should be voluminous documents and the quantity of such documents.

21.  I agree with the plaintiff’s submissions.  Even if the law of the Mainland should apply, there is no evidence that there will be any legal issue or that such issue cannot be dealt with in Hong Kong with the assistance of Chinese legal experts.  Deputy Judge Lam (as he then was) has said in First Laser Ltd. v Fujian Enterprises (Holdings) Co. Ltd. & Another HCA4414/2001:

“35. After all, evidence as to foreign law can be adduced if the court shall eventually conclude, after proper arguments on the matter, that a particular issue is to be decided by reference to foreign law.  It has not been suggested before me that there are complicated issues of PRC law which this court will find it too difficult to grapple with.”

I make the same observation here. 

22.  On juridical advantage, it is still very difficult to enforce any judgment given by the Mainland courts (see the latest decision from the Court of Appeal in 李佑榮 v 李瑞群 CACV 159/2004 (unreported)). 

23.  There is also the case against the 2nd defendant.  If the part of this case as against the 1st defendant is stayed, the plaintiff will have to start a fresh action against the 1st defendant in the Mainland and continue with this action here against the 2nd defendant.  As shown in the company search documents of the 1st defendant, the 2nd defendant is a local resident in possession of a Hong Kong identity card.  The need for the plaintiff to conduct two actions in different jurisdictions to prove the same facts is an additional prejudice to the plaintiff.  All in all I find that the courts in Hong Kong are the natural and appropriate forum to adjudicate this action and I do not accept the submissions of the 1st defendant.

Stay for lack of jurisdiction

24.  The 1st defendant submits in the alternative that the words “仲裁權” in clause 2 can be translated to mean “jurisdiction”.  It further submits that clause 2 can then be taken to be a clause conferring exclusive jurisdiction on the courts in the Mainland. 

25.  I have already held that clause 2 is too uncertain to be enforced.  In case I am wrong, I should also consider whether clause 2 is an exclusive jurisdiction clause.  I am referred to Yu Lap Man and Good First Investment Ltd. [1998] 1 HKC 726 in the Court of First Instance and [1999] 1 HKC 622 in the Court of Appeal.

26.  I bear in mind that in construing clause 2, the court should have regard to the construction of the agreements and the background and surrounding circumstances when the agreements were made.  The failure to specifically use the word “exclusive” was not fatal.  Furthermore, the burden is on the defendant to prove that the parties intended not only to submit to the jurisdiction of the courts of the Mainland, but also to exclude all other jurisdictions for the resolution of any disputes which might arise under the agreements.  The presence of a governing law clause also does not necessarily mean that the jurisdiction clause would have exclusive effect. 

27.  The plaintiff submits the following facts and asks me to conclude that clause 2 is not an exclusive jurisdiction clause.  The first matter to consider is that the 1st defendant, at all material times, was a company domiciled in Hong Kong and conducting its business in Hong Kong with all its directors and shareholders being Hong Kong residents.  Secondly, the sales agreements were entered into directly between the plaintiff and the 1st defendant and not with the 1st defendant’s factory in Shenzhen.  Thirdly, the contracts provided that the goods were to be delivered to the 1st defendant as the recipient and not its Shenzhen factory.  Fourthly, of the nine contracts, six of them were concluded in Hong Kong.  Fifthly, the goods supplied by the plaintiff were to be ultimately used in Hong Kong for installation in various projects.  The quality of the materials supplied by the plaintiff had to comply with the standards prevailing in Hong Kong.  Sixthly, the contract prices were payable by the 1st defendant to the plaintiff in either US dollars or Hong Kong dollars.  The plaintiff was in need of foreign currency to pay for its raw materials.  Seventhly, the 1st defendant has no assets in the Mainland.  It was, at all material times, generally known that there is difficulty to enforce in Hong Kong the judgments given by the courts of the Mainland. 

28.  Save the matter about the need to acquire foreign currency, I accept these submissions.  I agree that even if clause 2 is not void for uncertainty, it is, properly construed, still not an exclusive jurisdiction clause.  However, in case I am also wrong on this, I should consider the situation where clause 2 can be held to have conferred exclusive jurisdiction on the courts of the Mainland.

29.  Halsbury’s Laws of England 4th edition, 2001 re-issue, Vol. 1(1) paragraph 356 says:

“356. Foreign jurisdiction clause.

The court may stay proceedings in England where these are brought in breach of an agreement to refer disputes to the exclusive jurisdiction of a foreign tribunal.  The court is not bound to grant a stay but has a discretion whether to do so or not.  The conditions material to the exercise of the court’s discretion whether to grant a stay or not do not differ in substance from the exercise of the court’s discretion upon an application to set aside service of a claim form by reason of such a clause.  The factors relevant to the exercise of the discretion are also broadly similar to the criteria considered under adoption of forum non conveniens.  However the position is not precisely the same, for it is a prima facie rule that the parties should honour their agreement to refer disputes to the foreign tribunal, and, accordingly the burden is on the claimant, or in the case of a counterclaim, on the defendant, to show a strong cause for a stay to be refused. 

The following matters are relevant in considering the exercise of the discretion to stay: (1) in what country the evidence on the issues of fact is situated, or more readily available, and the effect of that on the relative convenience and expense of a trial as between the English and the foreign courts; (2) whether the law of the foreign court applies and, if so, whether it differs from English law in any material respects; (3) with what country either party is connected, and how closely; (4) whether the defendants genuinely desire trial in the foreign country, or are only seeking procedural advantages; and; (5) whether the claimants would be prejudiced by having to sue in the foreign court because they would: (a) be deprived of security for their claim; (b) be unable to enforce any judgment obtained; (c) be faced with a time bar not applicable in England; or (d) for political, racial, religious or other reasons be unlikely to get a fair trial.”

30.  Of these five matters, I am of the view that the place where the evidence exists may not be of significant importance because the 1st defendant has not shown the existence of any dispute.  However, if there should indeed be disputes, the evidence on the issues may well be in both Hong Kong and Shenzhen.  I have already accepted the plaintiff’s submissions that it is likely that there will be more pertinent evidence existing in Hong Kong and it may therefore be more convenient and less expensive to have a trial conducted here than in Taishan or in Shenzhen.  I have also dealt with the issue of Chinese law above. 

31.  On the connection of parties, the 1st defendant was incorporated here with all its directors and shareholders being local residents.  Its assets are here and it has no assets in the Mainland save its subsidiary in Shenzhen.  Its connections are obviously with Hong Kong rather than with Shenzhen or Taishan.  On whether the 1st defendant was merely seeking procedural advantages in asking for a stay, the lack of evidence of dispute would suggests so, though I would not place much reliance on this as there is no direct evidence on this.  On whether the plaintiff would be prejudiced if it is required to sue in the courts of the Mainland, I have already dealt with above the finality issue of judgments from the courts of the Mainland.  I have also referred to above the plaintiff’s case as against the 2nd defendant.

32.  In the premises, even if clause 2 can be construed to be an exclusive jurisdiction clause, justice requires me not to stay this part of the action as against the 1st defendant. 

33.  I therefore dismiss the 1st defendant’s application with costs.