G v. S

HCCT 62/2020

[2021] HKCFI 1461

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 62 OF 2020

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D E C I S I O N

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1.  This is the application made by S to set aside the order made by this Court on 25 September 2020 (“Enforcement Order”), whereby leave was granted to G to enforce a CIETAC arbitral award dated 3 July 2020 (“Award”) made in favour of G in an arbitration between G as Applicant and S as Respondent on the Mainland (“Arbitration”). The Award ordered S to continue to perform its obligations under a Cooperation Agreement dated 1 October 2018 made between S and G (“2018 Agreement”) (“Specific Performance Order”); to bear the marketing costs of RMB 1,181,664.95 and US$161,211.03 incurred by G during the period of the parties’ cooperation (“Marketing Costs Order”); to provide G with EUR 890,833.27 worth of sample products or pay the equivalent amount to G (“Alternative Relief Order”); and to compensate and pay to G arbitration costs and fees (“Costs and Fees Order”).

2.  S’s application was made by its summons issued on 10 November 2020 (“Summons”), which was supported by an affidavit signed by Jacob Daniel Harding (“Harding Affidavit”) and exhibited to the affirmation of Sonny Payne filed on the same day as the Summons.  The Harding Affidavit states that the grounds relied upon for setting aside the Enforcement Order are that enforcement of the Specific Performance Order would be contrary to the public policy of Hong Kong, and that the Marketing Costs Order and the Alternative Relief Order were made outside the scope of the arbitration agreement between the parties, as there was no valid arbitration agreement that formed the basis of these orders in the Award.  It was also claimed that the Costs and Fees Order should likewise be set aside as it arose out of the other orders.

3.  As these are the only grounds specified in the Harding Affidavit filed at the time of the issue of the Summons, S’s application is confined to these stated grounds (KB v S, HCCT 13/2015 [2015] HKEC 2042, T v C HCCT 23/2015 [2016] HKEC 753).  Applications made under the Arbitration Ordinance (“Ordinance”) must be dealt with in a manner consistent with the objectives of finality and speedy resolution expressed in section 5 of the Ordinance.

Public policy

4.  It was argued on behalf of S that it would be contrary to public policy to enforce the Specific Performance Order, when S had after the date of the Award issued a fresh notice of termination of the 2018 Agreement, on grounds of G’s breaches of the 2018 Agreement which came to light only after the commencement of the Arbitration, and these claims had not been considered by the Tribunal in the Arbitration.  The gist of S’s argument is that to compel S to perform the 2018 Agreement would preclude it from relying on its lawful right to terminate the 2018 Agreement, and this is contrary to public policy particularly when the 2018 Agreement is a distributorship agreement and Hong Kong law would not compel parties to performance under a contract for personal services.

5.  S pointed out that G had on its part also commenced a new arbitration on the Mainland (“New Arbitration”) after the Award, in September 2020 (and amended in December 2020), to seek damages and loss of profits in respect of S’s breaches of the 2018 Agreement, instead of relying on the Specific Performance Order to compel S to continue to perform the 2018 Agreement.  To enforce the Specific Performance Order of the Award in Hong Kong would be inconsistent with the claims made and pursued by G under the New Arbitration.

6.  I reject the argument that the Specific Performance Order should be set aside as being contrary to public policy, simply because S purported to serve a new notice of termination of the 2018 Agreement after the date of the Award.  The Award does not by itself prohibit S from relying on new grounds to terminate the 2018 Agreement.  Whether S was entitled to terminate the 2018 Agreement on the basis of breaches not dealt with in the Arbitration, or on the basis of events after the date of the Award, or on any other basis, is a matter to be determined in accordance with the dispute resolution mechanism contained in the 2018 Agreement.  Even the fact that performance of the 2018 Agreement would be impossible is not a ground to set aside the Award (Xiamen Xinjingdi Group Ltd v Eton Properties Limited [2009] 4 HKLRD 353).

7.  G accepted that in view of S’s refusal to comply with the Award, and its purported service of notice of termination of the 2018 Agreement on 13 July 2020, it became impossible and of no practical value for G to continue its efforts in seeking specific performance of the 2018 Agreement under the Award.  G therefore decided to accept S’s repudiation of the 2018 Agreement, and amended the claims made in the New Arbitration, to seek loss of profits and damages as a result of S’s breach.

8.  At the hearing of the Summons, Counsel confirmed that G no longer seeks to enforce the Specific Performance Order under the Award, but will continue to seek leave to enforce the Marketing Costs Order, the Alternative Relief Order and the Costs and Fees Order.

9.  Section 84 of the Ordinance applies to enforcement of a Mainland award.  Section 84 (1) provides that an award is enforceable in the same manner as a judgment of the Court that has the same effect, with the leave of the court, and section 84 (2) provides that if leave is granted, the Court may enter judgment “in terms of the award”.  In the first instance decision of the Court in Xiamen v Eton Properties Limited and ors, HCCT 54/2007, 24 June 2008, Reyes J pointed out that there is nothing in the Arbitration Ordinance which ties the Court’s hand as to enforcing only part of an award where appropriate, and further, that the Court has a degree of flexibility in the deployment of the means of enforcement available to it.  In JJ Agro Industries (P) Ltd v Texuna International Ltd [1992] 2 HKLR 391, Kaplan J also held that the doctrine of severability of an award enables the Court to enforce such part of an award as is within its jurisdiction, and that it would be contrary to the spirit of the Arbitration Ordinance if enforcement were to be refused in respect of a severable part of an award which was not in issue.  A plaintiff is entitled to enforce a part of the award, even if another part of the award is objectionable or defective, so long as the good part is severable from the bad.

10.  In this case, G no longer seeks to enforce the Specific Performance Order and if leave for enforcement of the Award is granted, the Award may be enforced without the Specific Performance Order and judgment may be entered in terms of the Award without the Specific Performance Order.  The issue then is whether the Marketing Costs Order, the Alternative Relief Order and the Costs and Fees Order of the Award are defective in any way such that the order granting leave to enforce them should be set aside.

11.  On behalf of S, Mr Payne contended that it is not open to G now to enforce the Alternative Relief Order, or any other part of the Award, on the basis of the continued performance of the 2018 Agreement, when it has commenced the New Arbitration for loss and damages in respect of S’s alleged breach of the 2018 Agreement.  Mr Payne sought to rely on the decisions of the Court of Final Appeal and the Court of Appeal in Xiamen v Eton Properties Limited and ors FACV No 3 of 2019 and CACV 158/2012, 15 April 2016, but these decisions do not assist S in this case.  As Yuen JA explained in her judgment (at paragraphs 192‑194), the statutory process of applying for leave under the Arbitration Ordinance to enforce an arbitral award is an alternative form of proceeding to an action on the award, but because a judgment entered in the statutory process cannot co-exist with a judgment for damages in a common law action based on the implied promise to honour an award, an informed election had to be made by the plaintiff which had entered judgment on the award in the statutory process.  In this case, G applied and obtained leave to enforce the Award, but no judgment has yet been entered in Hong Kong.  Nor has G commenced proceedings in Hong Kong for S’s breach of the implied promise to abide by the Award.  The New Arbitration was commenced by G on the Mainland, and it is a matter of PRC law as to whether G was entitled to pursue its claims in the New Arbitration at the same time as seeking leave to enforce the Award as a judgment on the Mainland, if G had in fact done so.

12.  I can see nothing contrary to the fundamental conceptions of morality and justice, or offensive to this Court’s notions of justice, to enforce the Marketing Costs Order and the Alternative Relief Order of the Award in Hong Kong, without the Specific Performance Order.

Existence and scope of the arbitration agreement

13.  As to whether the Marketing Costs Order and the Alternative Relief Order were outside the scope of the arbitration agreement between G and S in respect of the 2018 Agreement, this was argued before and determined by the Tribunal.

14.  The arbitration clause in the 2018 Agreement provides for arbitration of “any dispute” which arises between the parties “out of or in relation to” the 2018 Agreement, including any dispute regarding its breach, termination or validity.  The Arbitration related to the parties’ dispute as to amounts claimed to be due and payable under the 2018 Agreement and alleged breach of the Agreement.  S argued that the marketing costs claimed to be due should be disputes which arose out of the earlier 2017 Agreement made between the parties, and S had disputed the jurisdiction of the Tribunal over these claims, pointing out that the 2017 Agreement provided for disputes to be settled by the courts of Hong Kong.

15.  The 2018 Agreement signed by the parties clearly acknowledged their intention to further expand the market for G’s distribution of S’s products in China and Asia, and recited that both parties agreed to terminate the 2017 Agreement.  The territory for G’s exclusive distribution of S’s products was expanded under the 2018 Agreement, from China as originally provided for under the 2017 Agreement to China including Hong Kong and Macau, South Korea and Japan.  The term specified in the 2017 Agreement, from 1 July 2017 until 30 June 2020, was revised in the 2018 Agreement to being from 1 October 2018 to 31 December 2023.  There were changes in the products specified, and in some of the detailed terms, but the structure of the agreements and the respective rights and obligations of the parties thereunder remained largely the same.

16.  As the Tribunal analyzed and pointed out in the Award, there was a high degree of continuity in the parties’ dealings under the 2 agreements, the supply, distribution and marketing of the products were continuous, and the parties did not change their mode of cooperation after the 2018 Agreement.  The 2018 Agreement was signed on 1 October 2018, when the 2017 Agreement was still in place.  Instead of providing that the 2017 Agreement would continue to be effective, the 2018 Agreement expressly stated that “both parties agreed to terminate the original agreement”.

17.  I agree on reviewing the 2018 Agreement that it was clear that the parties intended the 2018 Agreement to supersede and replace the 2017 Agreement, and to extend and expand the terms and scope of the parties’ cooperation.

18.  With regard to the dispute resolution clause in the 2017 Agreement, the tribunal pointed out that there were inconsistencies in the Chinese version and the English versions.  The Chinese version provides for HKIAC arbitration of disputes whereas the English version provides for disputes to be settled by the Hong Kong courts.  The 2017 Agreement has a general provision that in the event of a discrepancy between the English and the Chinese versions, the English version shall prevail.

19.  The Tribunal further pointed out that on the evidence, the parties had entered into a Supplemental Agreement on 1 May 2018 to supplement the terms of the 2017 Agreement, and that Supplemental Agreement expressly provided that it was an integral part of the 2017 Agreement and that in case of any conflicts with the 2017 Agreement, the Supplemental Agreement would govern.  The Supplemental Agreement contained an arbitration clause identical to that of the 2018 Agreement.

20.  On the evidence and on construing the 2017 and 2018 Agreements, I agree with the Tribunal’s finding that the parties had intended to arbitrate their disputes as to the amounts due and their rights and liabilities under their distributorship in accordance with the arbitration clause in the 2018 Agreement.  The dispute as to the marketing costs payable and the samples to be supplied clearly fell within the scope of the arbitration clause in the 2018 Agreement.

21.  There is nothing in my judgment which makes enforcement of the Marketing Costs Order and the Alternative Relief Order objectionable or unconscionable to the Court’s sense of justice.  Whether G succeeds in its claims for damages in the New Arbitration, notwithstanding the Marketing Costs Order and the Alternative Relief Order made in the Arbitration, is for the tribunal to decide in the New Arbitration.  If S contends that the Award in the Arbitration is contrary to PRC law, it is for the PRC Court to decide in its supervisory jurisdiction.

22.  S has not raised any other ground to support the setting aside of the Costs and Fees Order apart from the fact that it should stand or fall with the other orders under the Award.

Disposition

23.  The application to set aside the Enforcement Order is dismissed, with an order nisi for costs on indemnity basis, with certificate for one counsel.  Leave is granted to G to enforce the Marketing Costs Order, the Alternative Relief Order and the Costs and Fees Order under the Award.