LS v. FL

REDACTED AND
AMENDED VERSION

HCA 561/2021

[2022] HKCFI 1050

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 561 OF 2021

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D E C I S I O N

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Background

1.  This is an application made by the Defendant to stay the proceedings instituted by the Plaintiff against it. The application is made by the Defendant’s summons issued on 28 May 2021 (“Summons”). The application is stated in the Summons to have been made under section 20 of the Arbitration Ordinance (“Ordinance”) and the inherent jurisdiction of the Court, on the stated ground that the subject matter of the proceedings is the subject of an arbitration agreement between the parties, and not any other ground.

2.  Under section 20 of the Ordinance, which applies Article 8 of the Model Law, “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”.

3.  The legal principles applicable to the determination of an application for stay made under section 20 of the Ordinance are clear and settled. They are as summarized in Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, and in PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, and will not be repeated here. The onus is on the applicant for stay to show that there is a prima facie or plainly arguable case that the parties are bound by an arbitration clause. The Court has no discretion since section 20 specifies that the court “shall” refer the parties to arbitration. Unless the point is clear, the action shall be stayed for the tribunal to decide whether it has jurisdiction over the dispute formulated and identified, as the Court is not to usurp the jurisdiction and power of the tribunal.

The claims made in these proceedings

4.  The Plaintiff is a trading company incorporated and carrying on business in Macau. The Defendant is a company incorporated in Hong Kong, and the importer and wholesaler of “F” and “D” milk powder and other related products.

5.  The Plaintiff and the Defendant are parties to a Distribution Agreement of 1 October 2015 (“Distribution Agreement”), whereby the Plaintiff was appointed as the Defendant’s non-exclusive authorized distributor for the resale of specified milk powder and related products (“Products”) to specified customers (“Customers”) in the specified territory of Macau. One of the Customers specified was “W”. Under the Distribution Agreement, the Plaintiff was to purchase Products from the Defendant at specified prices, and to sell and distribute the Products to the Customers in Macau. The Distribution Agreement provides for Hong Kong law to be the governing law, and for disputes or claims arising out of or relating to the Distribution Agreement, including the performance, breach or termination thereof, or any dispute regarding non-contractual obligations arising out of or relating to the Distribution Agreement to be referred to and finally resolved by arbitration in Hong Kong.

6.  The claims made by the Plaintiff in these proceedings are said to relate to an oral agreement made between the Plaintiff and the Defendant in about July 2020 (“2020 Agreement”). According to the Statement of Claim (“SOC”) filed, the Defendant requested the Plaintiff in July 2020, and the Plaintiff agreed, to look for a buyer or buyers of F infant milk powder (“Specified Products”), and to make the necessary arrangements to purchase the Specified Products from W in Hong Kong to sell same to these buyers. The Plaintiff claims that this was for the purpose of pushing up the declining sales of the Defendant’s products in Hong Kong.

7.  As pleaded in the SOC, the 2020 Agreement is evidenced by the Defendant’s emails to the Plaintiff in July and August 2020, by which the Defendant asked for the Plaintiff’s assistance for the “July display campaign” and the “August display campaign”, and agreed to pay supporting fees for the Plaintiff to arrange for buyers of the Specified Products from W in Hong Kong (“Supporting Fees”). The total amount of the Supporting Fees is HK$7,182,000, for the purchase of a total of 44,400 tins of the Specified Products at $275 per tin.

8.  The Plaintiff claims that it procured a buyer and made the arrangements to purchase the Specified Products from W in Hong Kong, as instructed by the Defendant, making payment to W for the Specified Products as directed. The Defendant did not pay the Supporting Fees, and the proceedings were instituted by the Plaintiff in April 2021 in respect of the Defendant’s breach of the 2020 Agreement, and for recovery of the Supporting Fees and interest thereon.

9.  The Defendant claims that what the Plaintiff referred to in the SOC as the 2020 Agreement was its request to the Plaintiff to support it in a stock clearing display campaign (“Campaign”). The Defendant claims that it had engaged the Plaintiff to carry out the Campaign pursuant to the Distribution Agreement, that there was no separate agreement for the Campaign, and that the only reason why the Plaintiff was engaged for the Campaign was because the Plaintiff was the non-exclusive authorized distributor of the Products under the Distribution Agreement. The Defendant’s case therefore is that the present dispute over the Supporting Fee arises out or relates to the Distribution Agreement and falls within the scope of the arbitration clause of the Distribution Agreement.

10.  The Defendant claims that apart from the Distribution Agreement, it had entered into another Distribution Agreement with a company known as WKH. Both WKH and the Plaintiff are under the control of Mr Wong (“Wong”) and the Defendant claims that it had treated the Plaintiff and WKH as one. The Distribution Agreement between the Defendant and WKH governs the terms for WKH to buy from the Defendant and then to distribute and resell milk powder and related products in Hong Kong (“WKH HK Agreement”). The terms and the products specified in the WKH HK Agreement are largely similar to those of the Distribution Agreement, save that there are substantially more than the 6 Customers specified in the Distribution Agreement, and the territory covered by the WKH HK Agreement is Hong Kong instead of Macau.

11.  There is no dispute, that both the Distribution Agreement and the WKH HK Agreement were terminated by the Defendant on 31 December 2020. The Defendant has commenced arbitration against the Plaintiff in Hong Kong pursuant to the arbitration clause in the Distribution Agreement, claiming various sums alleged to be due from the Plaintiff to it under and by virtue of the Products supplied under the Distribution Agreement. The Defendant indicated that it would be making cross-claims against the Plaintiff under the Distribution Agreement.

12.  The Defendant’s case is that it had contracted with the Plaintiff and WKH as one group of companies – using the Plaintiff for distribution of the Products in Macau, and WKH for distribution in Hong Kong, and had all along intended that all disputes between them, whether they arose from the business in Hong Kong or Macau, would be resolved by arbitration in Hong Kong, pursuant to the arbitration clauses in the agreements. It further claims that it was not necessary for the Plaintiff and the Defendant to separately enter into an agreement for the Campaign, or to agree on any other dispute resolution mechanism in respect of the Campaign, as it had intended that they would be dealt with under the same agreement and in the same manner. On the Defendant’s case, the Distribution Agreement and the 2020 Agreement are inter-dependent, and/or deal with the same subject matter, such that disputes arising under the 2020 Agreement should be dealt with in accordance with the arbitration clause in the Distribution Agreement.

13.  On review and construction of the terms of the Distribution Agreement, I cannot see that they are inter-dependent, or that they deal with the same subject matter.

14.  Under the Distribution Agreement, the Plaintiff as distributor was under the duty to purchase the Products from the Defendant only, for resale to Customers in Macau only.

15.  As the Plaintiff highlighted, it was prohibited under the Distribution Agreement from obtaining or purchasing any of the Products from any party other than the Defendant. Under the Distribution Agreement, the Plaintiff was not permitted to purchase the Specified Products, which are the subject matter of the 2020 Agreement, from W. Under the 2020 Agreement, that was precisely what the Plaintiff was instructed to do, specifically for the Campaign as opposed and contrary to the Distribution Agreement – ie to arrange for the purchase from W in Hong Kong of the Specified Products, and not to purchase same from the Defendant, despite the fact that the Specified Products were amongst the category of goods falling within the scope of the Products under the Distribution Agreement.

16.  Further, the Plaintiff was only authorized under the Distribution Agreement to purchase the Products for marketing and resale in Macau. Under the 2020 Agreement, it was engaged to arrange for the purchase by third parties of the Specified Products in Hong Kong.

17.  The Plaintiff was not required under the Campaign to purchase the Specified Products for marketing or resale in Macau pursuant to the Distribution Agreement. It was only required under the 2020 Agreement to arrange for third parties to buy the Specified Products, from W, in Hong Kong. The Plaintiff did not have to do any marketing of the Specified Products in Macau, as part of its duties under Clause 6 of the Distribution Agreement.

18.  Clearly, the Plaintiff’s procurement of purchases under the 2020 Agreement was entirely independent of, unrelated to and was apart from the Distribution Agreement. There was separate remuneration in the form of the Supporting Fees agreed, for work which was different to and independent of the performance of the Plaintiff’s duties under the Distribution Agreement. According to the Plaintiff, the 2020 Agreement was one under which the Plaintiff agreed to assist the Defendant to boost sales of its Products in Hong Kong, by helping the Defendant to find buyers of the Products in Hong Kong.

19.  There is only the bare assertion of the Defendant that the Plaintiff had been engaged to carry out the Campaign “pursuant to the Distribution Agreement”. There is no evidence to support this.

20.  The emails by which the Defendant’s engagement of the Plaintiff for the services to be carried out under the 2020 Agreement were totally silent as to the Distribution Agreement, or the relationship and connection between the 2 agreements, or the Plaintiff’s role under the Distribution Agreement. It did not refer to any of the terms of the Distribution Agreement nor to the Plaintiff’s duties thereunder.

21.  Nor was it necessary for the Plaintiff to carry out the Campaign in accordance with or in the performance of the Distribution Agreement. The services rendered for the Campaign had nothing to do with the services rendered by the Plaintiff under the Distribution Agreement, and were not dependent or connected with the Plaintiff’s services and performance under the Distribution Agreement. Nor can they be objectively seen to be necessitated by the Distribution Agreement. As set out above, the Specified Products were purchased in a different territory, from a different source and there is no evidence that the Plaintiff’s procurement of the purchases under the 2020 Agreement was included in the minimum sales it had to achieve under the Distribution Agreement, or was referred to or included in the business plan required to be submitted and agreed between the parties to the Distribution Agreement.

22.  The Defendant sought to rely on the fact that WKH was the distributor of the Products in Hong Kong, and that it did not matter to the Defendant whether the Plaintiff, or WKH, carried out the Campaign, because “for all practical purposes they were the same”, as the Plaintiff and WKH were “just the same group”.

23.  WKH and the Plaintiff are two separate legal entities, and the Defendant chose to enter into different agreements with the two entities in respect of the distributorship of the Products in different territories. I reject the suggestion that the two companies should be treated as the same, or that the different agreements made with the two different companies comprise an overall scheme.

24.  It is pertinent that each of the Distribution Agreement and the WHK HK Agreement has an entire agreement clause. Clause 17.4 of the Distribution Agreement states that the agreement sets out the entire understanding between the parties with respect to the matters contemplated by the agreement, and that the agreement shall not be modified or altered, except by an instrument duly signed by all parties. The same clause is contained in the WHK HK Agreement.

25.  There is no instrument in writing signed by the Plaintiff and the Defendant, which varied or modified in any way the express terms of the Distribution Agreement, that it should either extend to the duties of the Plaintiff under the emails of July and August 2020 evidencing the 2020 Agreement, or in any way alter the terms of the Distribution Agreement so far as the Plaintiff’s purchase of the Specified Products from W in Hong Kong is concerned, and/or provide that the Distribution Agreement should be read with or is connected with either the WHK HK Agreement, or the 2020 Agreement.

26.  In my judgment, it is clear that the subject matter of the 2020 Agreement is different to the subject matter of the Distribution Agreement containing the arbitration clause, and the dispute relating to the 2020 Agreement does not arise out of nor relate to the Distribution Agreement to be governed by the arbitration clause therein.

27.  Under section 19 of the Ordinance, an arbitration agreement must be in writing. The 2020 Agreement remained on the parties’ evidence an oral agreement. The emails evidencing the 2020 Agreement and the Campaign to which it relates made no reference to any other written document or agreement which contains an arbitration clause in a manner which makes the clause a part of the 2020 Agreement.

28.  Since my finding is that the Distribution Agreement and the 2020 Agreement dealt with separate subject matters, and are not connected in terms of the parties’ performance, I am not persuaded that the arbitration clause in the Distribution Agreement should be extended to disputes arising under the 2020 Agreement, on the application of the Fiona Trust principles as Counsel for the Defendant contended. The presumption in favour of arbitrability and the “one-stop” adjudication approach may be rebutted and would not be applicable in cases where the parties have entered into different but interlinked agreements, relating to different aspects of an overall, and often complex, commercial transaction. Where there are multiple related commercial agreements, each dealing with different aspects of the parties’ relationship and dealings, and each containing its own provision for expressed choices of jurisdiction, law and/or mode of dispute resolution, the proper test in ascertaining the parties’ intention on how the dispute should be dealt with is to identify the nature of the claim, and the agreement which has the closest connection with such dispute and claim (the agreement “at the centre of gravity of the dispute”, as referred to in Trust Risk Group SpA v Amtrust Europe Ltd [2017] 1 CLC 456, or at the “commercial centre of the transaction” in question, as referred to in paragraph 4.59 in Joseph on Jurisdiction And Arbitration Agreements And Their Enforcement, 6^th edition).

29.  In my view, the contract and relationship which has the closest connection with the current dispute over the Supporting Fees is the 2020 Agreement. That 2020 Agreement made no reference to any agreement to arbitrate. The disputes as to the Campaign and the Supporting Fees do not arise out of nor relate to the Distribution Agreement. Resolution of disputes arising under the 2020 Agreement does not necessitate determination of the issues in any dispute between the Plaintiff and the Defendant which may arise under the Distribution Agreement.

30.  The WKH HK Agreement is obviously and totally separate from and independent of the relationship, duties and performance of the 2020 Agreement between the Plaintiff and the Defendant, involving different parties altogether.

31.  Thus, even if I should apply the Fiona Trust principles as the Defendant argued, I am not satisfied that it can be said that the Plaintiff and the Defendant had intended that the arbitration clause in the Distribution Agreement should apply to the different subject matter of the 2020 Agreement.

Disposition

32.  For all the reasons set out above, I conclude that there is no prima facie or plainly arguable case of an arbitration agreement between the Plaintiff and the Defendant.

33.  As Counsel for the Plaintiff rightly pointed out, the Summons only sought a stay on the ground of an existing arbitration agreement between the Plaintiff and the Defendant. There is no application for a stay on any other ground, whether by reason of the existence of cross-claims (which are unrelated to the 2020 Agreement), or otherwise.

34.  The application for stay of the action is accordingly dismissed, with costs to the Plaintiff, with certificate for Counsel. The order nisi on costs shall be made absolute unless application for variation is made within 14 days.