KIN YAT INDUSTRIAL CO LTD v. MGA ENTERTAINMENT (HK) LTD

HCA1177/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1177 OF 2006

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REASONS  FOR  DECISION

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1. On 8 March 2007, I allowed the defendant’s application to stay the present proceedings for arbitration pursuant to section 6 of the Arbitration Ordinance, Cap. 341 (“the Ordinance”).

2. These are the reasons for my decision.

The parties

3. The plaintiff, a Hong Kong company, is a manufacturer of toy products.

4. The defendant, another Hong Kong company, is a wholly owned subsidiary of MGA Entertainment, Inc. (“MGA”).  MGA is a sizable toy company in the USA.  The defendant is its local agent providing services of, inter alia, sourcing, purchasing of toy and game devices in Hong Kong.

5. The plaintiff and the defendant had been doing business since the 1990s (1991 on the plaintiff’s case or 1999 on the defendant’s case).

The Manufacturing Agreement

6. In about March or April 2001, MGA and the plaintiff entered into a manufacturing agreement (“the Manufacturing Agreement”).  In essence, it set out the practice and the parties’ obligations for the manufacture of toy products by the plaintiff for MGA.

7. The following clauses of the Manufacturing Agreement are pertinent :

(1)     Clause 1.1 which provided that “Buyer” shall mean MGA and its duly authorized agent, the defendant;

(2)     Clause 12.1 under which the Agreement shall become effective as of 1 January 2000 and, unless extended by mutual agreement or earlier terminated, it shall expire on 31 December 2001.  I will call the period between 1 January 2000 and 31 December 2001 “the Effective Period” below;

(3)     Clause 14 which stipulated that “[any] and all disputes arising out of or in connection with the interpretation, performance or non-performance, or termination of this Agreement” shall be settled by negotiation, failing which by arbitration which shall take place in Hong Kong; and

(4)    Clause 15.3 which provided that that “[the] Agreement shall not be considered modified, altered, changed or amended in any respect unless in writing by a legal representative of each of the parties hereto.  No manager, employee or Authorised Representative of either party, unless empowered in writing by a legal representative of the respective party, has any authority to waive, alter or enlarge this Agreement or to make any new or substitute or different contract, representation or warranty.”

The present action

8. In June 2006, the plaintiff commenced the present action, claiming against the defendant for HK$2,061,279.31, being the value of materials purchased by the plaintiff for and on behalf of the defendant for manufacturing toy products pursuant to various purchase orders placed by the defendant for the period between 1991 and 2005 (“the Unused Materials”).

The arbitration proceedings

9. In September 2006, MGA and the defendant commenced arbitration proceedings against the plaintiff in connection with certain allegedly defective toy products manufactured by the plaintiff for MGA.  The claim is in the region of HK$4 million.

10. The plaintiff raised jurisdictional objections, which were rejected by the arbitrators.

11. The arbitration proceedings are continuing.

The main issues

12. Two mains issues arose out of counsel’s submissions :

(1)     whether there is an arbitration agreement covering the plaintiff’s claim herein; and

(2)     whether there is any dispute which can or shall be referred for arbitration.

13. I will consider them in turn.

Issue 1 — Any arbitration agreement?

14. The proper test is well-established : is there a prima facie or plainly arguable case that the parties were bound by an arbitration clause?  The onus is on the defendant to demonstrate that there is.  See Private Company ‘Triple V’ Inc v. Star (Universal) Co. Ltd & Anor [1995] 3 HKC 129, per Litton VP (as he then was) at 132D-E, H-I; Pacific Crown Engineering Ltd v. Hyundai Engineering and Construction Co. Ltd [1003] 3 HKC 659, per Burrell J at para.12 at 663B-C; PCCW Global Ltd v. Interactive Communications Services Ltd, CACV18/2006, 16 November 2006, per Tang JA (as he then was) and Barma J at paras.49-51.  See also New Sound Industries Ltd v Meliga (HK) Ltd, CACV63/2004, unreported, 11 January 2005, per Woo VP and Cheung JA at para.16.

15. Ms Tsang, appearing for the plaintiff, accepted that the Manufacturing Agreement forms the basis of an arbitration agreement between the plaintiff and MGA, under which the defendant may also take the benefit.  She also accepted that materials purchased by the plaintiff under the Manufacturing Agreement which ultimately had not been applied to toy products may be properly matters “arising out of or in connection with … the performance” of the Agreement within the meaning of the Arbitration Clause.  Thus, the existence of an arbitration agreement covering unused materials generally is not in issue.

16. Ms Tsang divided the plaintiff’s claims arising from the Unused Materials into three categories :

(1)     that which arose since 1991 and before the commencement of the Effective Period (“Category 1”);

(2)     that which arose within the Effective Period (“Category 2”); and

(3)     that which arose after the Effective Period (“Category 3”).

17. It should be noted that the plaintiff did not differentiate its claims in such a way in the Amended Statement of Claim.  And on the evidence before me, the quantum for each Category is unclear.

18. Ms Tsang first argued that the Manufacturing Agreement does not have any retrospective effect and cannot deal with the Unused Materials in Category 1.  However, she conceded, and rightly so in my view, that since the claim for Category 1 is time-barred any way, it is irrelevant for present purposes.

19. Ms Tsang then readily accepted that the Manufacturing Agreement covers the claim for Category 2 and that the defendant can take benefit of Clause 14.

20. Counsel’s debate really focused on Category 3.  Ms Tsang argued that the Effective Period had not been extended to cover the Unused Materials concerned in the absence of any extension in writing by the legal representative of the parties under Clause 15.3.  Thus Clause 14 does not cover Category 3.  Mr Chong, appearing for the defendant, argued that the parties had by conduct extended the Effective Period, thus extending the Manufacturing Agreement to the Unused Materials in Category 3.  Clause 14 therefore covers Category 3.

21. For the following reasons, I agree with Mr Chong and find that the defendant has established a prima facie case that there exists an arbitration agreement in the form of Clause 14 covering Category 3.

22. First, I am unable to accept Ms Tsang’s submission that “the mutual agreement” to extend the Effective Period under Clause 12.3 can only be in writing by the parties’ legal representative under Clause 15.3.  In my view, it is plainly arguable that on a fair reading, “the mutual agreement” in Clause 12.3 is not restricted in such a way and it includes the conduct of the parties.

23. Second, on the evidence before me, it is plainly arguable that the parties had by conduct extended the Effective Period to cover the Unused Materials in Category 3.  There are purchase contracts issued in 2003 and 2005, which presumably formed part of the purchase orders within the meaning of Clause 1.6 of the Manufacturing Agreement and which the plaintiff purported to rely on.  They made clear reference to the Manufacturing Agreement and expressly stated that the contract was subject to the terms and conditions thereof.   The letter before action issued by the plaintiff’s former solicitors dated 9 May 2005 referred to and relied on the Manufacturing Agreement to support the present claim.  Ms Tsang argued that the solicitors’ views were incorrect.  But it should be noted that the solicitors wrote the letter upon instruction of the plaintiff.  The reference to and reliance on the Manufacturing Agreement is not a result of legal advice alone.

24. Ms Tsang submitted that the conduct of the parties post-Effective Period is referable to either (1) the business practice of the parties since 1991 up to the time when the Manufacturing Agreement was entered into; or (2) the Manufacturing Agreement.  In my view, scenario (2) supports the proposition that there is at least an arguable case that the Effective Period had been extended by the parties’ conduct.

25. This disposed of Issue 1.

Issue 2 — Any dispute?

26. In Tommy CP Size & Co. v. Li & Fung (Trading) Ltd & Ors, Ma J (as he then was), after referring to a number of authorities, held at para.51 at 434C-D that a dispute will exist unless there is a clear and unequivocal admission not only of liability but also of quantum.

27. Ms Tsang argued that the defendant had made admission to the plaintiff’s claim and there is accordingly no dispute that needs to be referred to arbitration.  The proceedings should not be stayed : see Arbitration in Hong Kong : A Practical Guide, Sweet & Maxwell, 2003 Edn, paras.11-52 and 11.53.  I am unable to accept Ms Tsang’s submission.

28. First, Ms Tsang relied on the counting of the Unused Materials attended by the defendant’s representatives and record confirming the result of the counting prepared by them in November 2005.  But as rightly pointed out by Mr Chong, the attendance and the record can be quite neutral when all the evidence is considered in the round.

29. Second, the defendant has all along maintained that it is a mere local agent of MGA.  It should not be held liable personally.  This is supportable by the evidence which suggests that payments were all along settled by MGA directly with the plaintiff.

30. Third, as noted, the Amended Statement of Claim does not differentiate the quantum for each of Categories 1 to 3.  So there is plainly a dispute as to what exactly is recoverable by the plaintiff, even if it were to succeed in the action.

31. In these circumstances, I find that there is a dispute that can and should be referred to arbitration.

Domestic or international arbitration?

32. Finally, Ms Tsang took a procedural point.  She argued that Clause 14 creates an international arbitration agreement between MGA, a USA company and the plaintiff, a Hong Kong company, as defined in section 2(1) of the Ordinance, with reference to the meaning of “international” in Article 3(1) of the UNCITRAL Model Law (“the Model Law”).  Thus while the defendant may take benefit of the Arbitration Clause, it is not a party to the Manufacturing Agreement.  It cannot invoke section 6 of the Ordinance, which only applies to domestic arbitration, and not international arbitration.  The summons needs to be amended accordingly.

33. In my view, Ms Tsang’s submission is misconceived.  To use Ms Tsang’s own words, the defendant is taking the benefit of Clause 14 although it is not a party to the Manufacturing Agreement.  There is no suggestion that the plaintiff is not bound by Clause 14 vis-a-vis the defendant.  Since both the plaintiff and the defendant are Hong Kong companies, the arbitration agreement between and binding on them in the form of Clause 14 is plainly a domestic arbitration.  The defendant is correct in invoking section 6 of the Ordinance.

Conclusion

34. For the above reasons, I allow the defendant’s application and stay the present proceedings for arbitration under section 6 of the Ordinance.

35. Costs should follow the event.  I therefore order the plaintiff to pay the costs of the application, to be taxed if not agreed.