YINGDE GASES INVESTMENT LTD v. SHIHLIEN CHINA HOLDING CO LTD

HCA 2059/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2059 OF 2012

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D E C I S I O N

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Background

1. The plaintiff is a company incorporated in the BVI, carrying on business in the investment, construction and supply of industrial gas facilities and the supply of industrial gases.  The defendant is a Hong Kong company, carrying on business in the manufacture and supply of soda ash and ammonium chloride for the production of glass.  Shilien Chemical Industrial Jiangsu Co (“Shilien”) is a company incorporated in the Mainland which is a wholly owned subsidiary of the defendant.

2. Taiwan Glass Industry Corporation (“Taiwan Glass”) is a glass manufacturer which is interested in establishing a gas plant in Huaian China (“Project”), which plant is to have air separation units (“Units”) and gasification facilities (“Facilities”) required for the production of gases and materials for its manufacture of glass. In August 2008, Taiwan Glass established the defendant in Hong Kong to carry out the Project.

3. As evidenced by a written Memorandum of Understanding in Chinese (“MOU”), the defendant agreed with the plaintiff on or about 29 August 2008 to set up a joint venture company (“JV Company”), and in equal shares to finance and manage Units and Facilities for use in the defendant’s Project in Huaian (“Joint Venture”).  Clause 2 of the MOU provides that the JV Company to be set up will supply industrial gases for the Project at the prices to be negotiated and fixed by the parties.  Under clause 3 of the MOU, the defendant undertook to accept the gases to be supplied by the JV Company, to sign a long-term gas supply agreement, and not to deal with other entities in relation to cooperation in the construction and operation of Units and Facilities, and also to refrain from engaging in the construction and operation of Units and Facilities, whether by itself or by its associated companies.

4. Pursuant to the MOU, the plaintiff and the defendant entered into another Chinese agreement dated 3 October 2008 (“Gas Supply Agreement”), whereby the parties agreed to set up a joint venture company for constructing a gas plant to supply gases to the defendant exclusively.  It was an express provision of the Gas Supply Agreement that, prior to the incorporation of the JV Company, the plaintiff would on behalf of the JV Company sign the Gas Supply Agreement with the defendant.

5. On 2 June 2009, Mr Sun acting on behalf of the plaintiff and Mr Lin acting on behalf of the defendant signed a Chinese joint venture agreement (“JV Agreement”), to provide for the setting up of the JV Company referred to in the MOU and the Gas Supply Agreement.  Clause 4 of the JV Agreement provides that the Chinese name of the JV Company would be Shilien Yingde Gases Jiangsu Company Limited, with an address in Huaian.  It is not disputed that the JV Company was incorporated on 19 June 2009, pursuant to clause 1 of the MOU and clause 4.2 of the JV Agreement.

6. The matters set out in paragraphs 3 to 5 above are as pleaded in the Statement of Claim filed in these proceedings instituted by the plaintiff against the defendant.  The plaintiff claims that the defendant acted in breach of the MOU, in negotiating and reaching an agreement with a third party, L’Air Liquide SA, for the construction and operation of Units and Facilities for the supply of gases to Shilien, without the knowledge and to the exclusion and detriment of the plaintiff and the JV Company.  The plaintiff further claims that the defendant is in breach of the JV Agreement, in failing to pay 40% of the capital of the JV Company in accordance with the JV Agreement. 

The different proceedings

7. The plaintiff instituted these proceedings in Hong Kong against the defendant in November 2012, to seek damages in respect of the defendant’s breach of the MOU.  Such damages are claimed to be the plaintiff’s loss of its 50% share of the profits which the JV Company would have made pursuant to the terms of the MOU and/or the Gas Supply Agreement (paragraph 19, Statement of Claim).  Further or alternatively, the plaintiff claims that the Gas Supply Agreement was never performed as a result of the defendant’s breaches of the JV Agreement, and seeks damages particularized to be the plaintiff’s loss of its 50% share of the profit which the JV Company would have made under the Gas Supply Agreement, or its contribution to the capital of the JV Company in the sum of US $8.3 million (paragraph 20, Statement of Claim).

8. This action is only one in a series of proceedings which have been issued as a result of the dispute which arose between the parties. 

9. On 28 October 2010, the plaintiff filed a petition in Beijing for arbitration by CIETAC (“Arbitration 72”).  The petition recited the MOU, the Gas Supply Agreement and the JV Agreement made between the parties.  In Arbitration 72, the plaintiff sought compensation of US $49.8 million from the defendant, alleging the defendant’s breach of the Gas Supply Agreement in refusing to allow the plaintiff’s personnel to enter the premises of the JV Company, and in co-operating with other gas supply companies without the plaintiff’s agreement. 

10. On 10 February 2012, CIETAC handed down its award in Arbitration 72, refusing the plaintiff’s claim for compensation.

11. The defendant had in turn issued a petition for arbitration by CIETAC Beijing (“Arbitration 230”), to seek clarification of the validity of the Gas Supply agreement.  After the award in Arbitration 72 was handed down, Arbitration 230 was withdrawn by the defendant.

12. On 25 April 2011, again before the award was issued in Arbitration 72, the defendant also commenced proceedings in the Huaian court (“1^st Huaian Action”), to seek a declaration that by virtue of clause 28.1 of the JV Agreement, the MOU had been replaced by the JV Agreement such that it had no legal effect.  The plaintiff disputed the jurisdiction of the Huaian court in the 1^st Huaian Action, claiming that the Shanghai court should have jurisdiction to hear the case under PRC law, as the plaintiff’s residence was in Shanghai.  The plaintiff’s challenge to jurisdiction was rejected by the Huaian Intermediate People’s Court on 17 June 2011, on the basis that Huaian was the place of performance of the JV Agreement.  The decision was upheld by the Jiangsu Higher People’s Court on 26 September 2011.

13. After the award in Arbitration 72 was handed down, the defendant considered that the disputes between the plaintiff and the defendant regarding the Project and the Joint Venture had come to an end, and accordingly withdrew the 1^st Huaian Litigation.

14. 9 months after CIETAC delivered its award in Arbitration 72, the plaintiff issued these proceedings in Hong Kong against the defendant.  The defendants accordingly revived the 1^st Huaian Litigation which it had withdrawn, by commencing Action No 0013 in Huaian (“2^nd Huaian Action”), seeking the same relief and on the same basis as the 1^st Huaian Action.  The plaintiff again challenged the jurisdiction of the Huaian court, on the basis that the subject matter is under litigation in Hong Kong.  Such challenge was rejected by the Huaian courts both at first instance and on appeal. 

15. On 15 October 2013, the Huaian Intermediate People’s Court delivered its decision in the 2^nd Huaian Action, holding that the issue of the validity of the MOU concerned disputes on the interpretation of clause 28.1 of the JV Agreement, and should accordingly be subject to CIETAC arbitration in accordance with clause 27.1 of the JV Agreement.

The applications

16. On 17 December 2012, the defendant applied by summons, pursuant to section 20 (1) of the Arbitration Ordinance (“Ordinance”), to stay all further proceedings in this action for arbitration, and alternatively, to stay all further proceedings on grounds of form non conveniens in favor of the Huaian court, or pending the outcome of the 2^nd Huaian Action.

17. The plaintiff in turn applied in these proceedings for an injunction to restrain the defendant from continuing the 2^nd Huaian Action, or from commencing any other litigation on the Mainland which covers the same or substantially the same subject matter of the 2^nd Huaian Action.

The arbitration clauses

18. The Gas Supply Agreement contains an arbitration clause.  Clause 12 of the Gas Supply Agreement reads as follows:

“For all disputes connected to this agreement, parties shall resolve through friendly negotiation. If negotiations fail, the parties agree to arbitrate. The arbitration authority shall be Beijing China International Trade Arbitration Commission. Award of the arbitration shall be the final determination of the dispute between the parties. The governing law of this agreement is PRC law.”

19. Clause 27 of the JV Agreement also provides for arbitration:

“27.1 Any dispute arising out of or is in connection with the interpretation, implementation, breach, termination or validity of the present agreement shall be first resolved by the parties by way of amicable negotiation and such negotiation shall be conducted within 60 days from the time the dispute was first raised.

27.2 If parties cannot resolve the dispute through negotiation pursuant to clause 27.1, either party shall be entitled to submit the dispute to China International Economic and Trade Arbitration Commission (“CIETAC”) in Beijing for arbitration. Arbitration shall be conducted according to the rules of CEITAC effective at the time of the arbitration.”

Whether the action should be stayed for arbitration

20. Article 8 of UNCITRAL Model Law applies by virtue of section 20 (1) of the Ordinance.  Under Article 8:

“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.”

21. The plaintiff argues that for there to be a stay under Article 8, the action before the court must be in the same subject matter of the arbitration agreement, and not merely related to or involved in the matter which is the subject of the arbitration agreement.  On behalf of the plaintiff, Mr Chan SC argued that the plaintiff’s claim in this action is for breach of the MOU, which does not contain any arbitration clause.  The fact that the defendant may, in the action, raise an issue relating to the interpretation of clause 28 .1 of the JV Agreement is insufficient to bring the plaintiff’s claim within the scope of Article 8.  According to the plaintiff, even if its claim in these proceedings for breach of clause 6.2 of the JV Agreement (for the defendant’s provision of capital) is covered by the arbitration clause in the JV Agreement, Article 8 does not contemplate a partial stay of the action for arbitration of that claim, and a stay of the entire action is not justified or permissible.

22. The essential issues in dispute for the purposes of the applications before the court are: what is the “matter which is the subject of an arbitration agreement”, and what is the claim or matter for determination in this action? When these “matters” have been identified, the court can then decide whether the claim or matter for determination in these proceedings is “in the matter” which is the subject of an arbitration agreement: in this case, clause 12 of the Gas Supply Agreement, and/or clause 27 of the JV Agreement.

23. The language contained in the relevant arbitration clauses in the Gas Supply Agreement and the JV Agreement has been held by the court to be wide in scope.  Clause 12 of the Gas Supply Agreement (“Clause 12”) refers to “all disputes connected to” or “concerning” the agreement （與本合同有關的所有爭議）.  Clause 27 of the JV Agreement (“Clause 27”) refers to “any dispute arising out of or is in connection with” the “interpretation, implementation, breach, termination or the validity” of the agreement （因本合同引起的任何爭議或與本合同解釋、實施、違約、終止或效力有關的任何爭議）.  In Getwick Engineers Limited v Pilecon Engineering Limited HCA 558/2002, unreported, 28 August 2002, Ma J (as he then was) held (in paragraph 23(2) of the judgment):

“Where the words ‘in connection with’ are used, while every contract must of course be construed in accordance with his ordinary and natural meaning (and arbitration agreements are no exception), it seems to me that they are wide in nature. They would in general cover all disputes other than one entirely unrelated to the transaction covered by the contract in question.” (Emphasis added)

24. The expression “in connection with” has been held to be wide enough to include a cause of action other than a contractual claim, such as a tortious claim (Xu Yi Hong v Chen Ming Han and Ors [2006] 4 HKC 633).

25. Ultimately, whether a dispute is in connection with or arose because of a contract is a question of fact, to be determined by examining all the circumstances of the case.

26. Considered as a whole and against the background of the circumstances of the case and the dealings between the relevant parties, it is clear that the Gas Supply Agreement governs the parties’ agreement for the JV Company’s supply of gases to the defendant, as part of the co-operation of the parties (including the plaintiff and the defendant) in the Joint Venture. The Gas Supply Agreement recites (in clause 1) the fact that it was entered into or established for the setting up of the JV Company by the plaintiff and the defendant for the construction of the plant to supply gases to the defendant:“本合同及其附件是因盈德氣體投資有限公司與實聯中國控股有限公司…組織合資公司以興建制氣廠（以下簡稱供氣方），向實聯供氣（以下簡稱生産用氣）而專門制定的”.The Gas Supply Agreement refers expressly to the plaintiff signing and performing (or implementing) the Gas Supply Agreement on behalf of the JV Company prior to its registration and formal operation.  Under clause 11 of the Gas Supply Agreement, the plaintiff was to transfer to the JV Company all the rights and obligations under the Gas Supply Agreement.  The parties agreed, by Clause 12, that all the disputes in connection with the Gas Supply Agreement (與本合同有關的所有爭議) are to be arbitrated.

27. There can be hardly any dispute that the JV Agreement governs the agreement between the plaintiff and the defendant for the setting up of the JV Company, the objects and constitution of the JV Company, and the parties’ rights, interests and obligations in relation to the JV Company.  The JV Agreement recites the Gas Supply Agreement entered into between the plaintiff and the defendant, their proposal to set up a joint venture company for the long-term supply of gases and services to the defendant’s Project in Huaian, and their joint investment in, and their setting up and operation of the joint venture enterprise.

28. Clause 27 sets out the parties’ agreement that any dispute arising out of or in connection with the interpretation, implementation, breach, termination or validity of the JV Agreement should be arbitrated.

29. The claims made by the plaintiff against the defendant in these proceedings are that the defendant acted in breach of the MOU, in contacting, entering into negotiations with and agreeing with a third party on the “construction and operation of” Units and Facilities for the supply of gases to the defendant, to the exclusion and detriment of the plaintiff and the JV Company.  The plaintiff further claims that the defendant failed to pay 40% of the registered capital of the JV Company in accordance with the JV Agreement, and that as a result of the defendant’s breaches of the JV Agreement, the Gas Supply Agreement was never performed and that the plaintiff has suffered loss and damage as a result, which damage is claimed to be the 50% share of the profit which the JV Company would have made under the Gas Supply Agreement.

30. The MOU does not contain any arbitration clause, but the defendant claims that the MOU has been replaced and superseded by the JV Agreement, by virtue of clause 28.1 of the JV Agreement. This provides that the JV Agreement is the only contract reached by the plaintiff and the defendant and that it “replaces” “all oral and written agreements, understanding and letters” between the plaintiff and the defendant concerning the matters of the JV Agreement.

31. Clause 12 and Clause 27 refer to “disputes”, and not “claims”, being arbitrated.  I agree with Mr Wong, SC that in the determination of (1) whether there is a dispute between the parties, and (2) the nature of the dispute, the court should consider not just the claim made by the plaintiff/claimant as can be seen from the Statement of Claim, but should also look at the affidavit evidence filed by the parties (and the Defence, if any is served).  Only then can the nature and scope of the dispute be identified, and as the cases have held, in the absence of an admission, a mere denial of liability or of the quantum of damages claimed is sufficient to enable the court to find a dispute to be in existence between the parties (Getwick Engineers Ltd v Pilecon Engineering Ltd HCA 558/2002, unreported, 28 August 2012).  This is the exercise conducted by the courts when called upon to consider whether a dispute between the parties falls within the ambit of an arbitration clause.  Indeed, unless and until the court considers either the defence or the evidence filed by the defendant, the court cannot begin to know what issues are in dispute and which require determination by the court in the action.  In First Laser Limited v Fujian Enterprises (Holdings) Co Ltd and Anr HCA 4414/2001, unreported, 5 February 2008, the court observed, in the context of determining the governing law:

“The issue of the case is determined by the pleadings of both parties, but very often, it is the defence which identifies the issue rather than the claim.”

32. According to the affidavit evidence filed on behalf of the defendant, it disputes whether the MOU was effectively executed by the parties, whether it had been replaced by the express terms of the JV Agreement such that it no longer has effect between the parties, and whether there is breach of the express and implied terms of the MOU as claimed by the plaintiff.  In relation to the JV Agreement, the defendant denies that there is a breach of clause 6.2 regarding the injection of capital, and in relation to the Gas Supply Agreement, the defendant denies that the plaintiff is entitled to sue in its own name and for its own benefit since it contracted expressly on behalf of the JV Company.

33. Clearly, there is a dispute between the plaintiff and the defendant with regard to the plaintiff’s claims made against the defendant in these proceedings.  The plaintiff’s claim of the defendant’s breach of clause 3.2 of the MOU cannot be maintained if the defendant succeeds in its claim that the MOU has been replaced and superseded by the JV Agreement, pursuant to clause 28.1 of the JV Agreement.  It is not correct that the plaintiff’s claim under the MOU is totally unaffected by the issues raised by the defendant in respect of the JV Agreement.  This is also apart from the further issue highlighted by the defendant, that the plaintiff’s claim of loss and damage sustained as a result of the breach of the MOU relies on and expressly pleads the fact that the plaintiff should have been entitled to, and has been deprived of, its 50% share of the profit which the JV Company would have made under the Gas Supply Agreement, such that the plaintiff’s claim under the MOU involves determination of the dispute under the Gas Supply Agreement and the JV Agreement, and an assessment of the profits that could have been made by the plaintiff under the JV Agreement.  As Mr Wong highlighted, the MOU is silent on the price and the quantity of the gas to be supplied by the JV Company to the defendant.

34. Clause 27 of the JV Agreement covers any dispute “arising out of” or “in connection with” the interpretation, implementation or validity of the JV Agreement.  The plaintiff’s claim against the defendant under the MOU depends on the construction and effect of clause 28.1 of the JV Agreement, and whether by the operation of clause 28.1, the MOU has been replaced by the detailed terms of the JV Agreement. 

35. At this stage, the court is only to consider the existence and nature of the dispute, and not to evaluate or determine the merits of the defence, or the issues raised by the defendant to the plaintiff’s claim (Getwick Engineers Limited v Pilecon Engineering Limited HCA 558/2002, unreported, 28 August 2002; Guangdong Agriculture Co Ltd v Conagra International (Far East) Ltd [1993] 1 HKLR 113).

36. An arbitration pursuant to the JV Agreement on the effect of clause 28.1 would decide the issues raised in these proceedings, as to whether the MOU continued to exist to enable the plaintiff to make claims against the defendant for breach of the express or implied provisions of the MOU and for damages for such breach.  T&N Ltd v Royal & Alliance PLC [2004] 1 Lloyds Report 102 relied upon by the plaintiff is distinguishable in this respect.

37. Read as a whole and in the context, as described in paragraphs 26 and 27 above, I consider that the MOU, the JV Agreement and the Gas Supply Agreement concern, and were made to govern, the agreement between the plaintiff and the defendant to establish a joint venture by setting up the JV Company and to operate and manage it, for the purpose and object of enabling the JV Company to supply gases to the defendant, for profit to be shared between the plaintiff and the defendant.  The JV Agreement and the Gas Supply Agreement were entered into pursuant to the express provisions of the MOU, which called for the setting up of a joint venture company between the plaintiff and the defendant (clause 1), and for the plaintiff to supply to the defendant a draft of the contract for the supply of gases by the joint venture company to be set up (clause 2.2).  The MOU, the JV Agreement and the Gas Supply Agreement may be separate, but they are connected and all relate to the matter of the joint venture between the plaintiff and the defendant for the supply of gases to the defendant’s Huaian Project.

38. In my view, the claims made by the plaintiff and the dispute between the parties in these proceedings similarly relate to and concern the matter of the joint venture between the plaintiff and the defendant, and their agreement as to the setting up and operation of the JV Company, for its eventual supply of gases to the defendant for its Huaian Project.  This action is brought “in the (same) matter” of the JV Agreement and the Gas Supply Agreement, and these agreements are governed by Clause 27 and Clause 12.  The arbitration agreements contained in Clause 27 and Clause 12 are on my construction wide enough to include the present dispute between the plaintiff and the defendant as to the interpretation of clause 28.1 of the JV Agreement, the implementation of the JV Agreement, and the alleged breaches and validity of the JV Agreement and the Gas Supply Agreement.  “In relation to” has been held to include disputes which “whilst not arising under the contract are related to or connected with it” (El Nasharty v J Sainsbury Plc [2004] 1 Lloyds Report 309).  It certainly cannot be said that the disputes between the parties in relation to the claims made in these proceedings are “entirely unrelated to the transaction covered by the (arbitration agreement) in question” (Getwick Engineers Limited v Pilecon Engineering Limited HCA 558/2002, unreported, 28 August 2002).  There is clearly a good prima facie case or plainly arguable case that an arbitration agreement is in existence and binding on the parties (Xu Yi Hong v Chen Ming Han and Ors [2006] 4 HKC 633), and it is hence for the arbitrator and not the court to determine the existence of the agreement as well as the scope of the arbitration. 

39. In PCCW Global Limited v Interactive Communications Service Limited [2007] HKLRD 309, the Court of Appeal pointed out that there is no provision in Hong Kong which is similar to Order 73 rules 6 (2) of the Rules of the Supreme Court in England, which rule provides that where a question arises as to whether an arbitration agreement has been concluded, or as to whether the dispute which is the subject matter of the proceedings falls within the terms of such agreement, the English court “may determine that question or give directions for its determination”.  At paragraphs 59 - 61 of his judgment, Tang VP observed:

“Since we are of the view that clause 11.3 provided for enforceable though permissive arbitration, the only remaining question is whether a billing dispute falls within the ambit or scope of clause 11.3.

It is important for the court not to usurp the function of the arbitrators, and unless the point is clear, the matter should be stayed for arbitration. In that respect, the absence of provisions similar to O73 r6 (2), is significant. In Hong Kong, we do not believe the court should attempt to resolve that issue, even though under article 16 (3) of the Model Law, the court has power to decide the question of jurisdiction after determination of the question by the arbitral tribunal as a preliminary question.

Only if it is clear that clause 11.3 does not cover billing disputes, should the court refuse a stay.”

Conclusion and orders

40. It cannot be said to be clear in this case that any part of the subject matter of this action falls outside the scope of Clause 27 of the JV Agreement and Clause 12 of the Gas Supply Agreement.  A stay of the entire action should accordingly be ordered. 

41. Having determined that the dispute in these proceedings concerning both the MOU and the JV Agreement should be stayed for arbitration under Clause 27 and Clause 12, it is not necessary for me to consider the issue of stay on the ground of forum non conveniens.

42. I will accordingly grant an order for stay in terms of paragraph 1 of the defendant’s summons issued on 17 December 2012.  In view of the stay, the plaintiff’s summons issued on 15 March 2013 is dismissed.  I will further grant an order nisi that the costs of both summonses and of the action are to be paid by the plaintiff to the defendant, to be taxed if not agreed, with certificate for counsel.